SRA may ban law firms from profiting off client money interest, triggering cashflow concerns across sector
Law firms across England and Wales could be plunged into financial uncertainty if regulators decide to strip them of a crucial income stream—the interest earned on client money.
Emma Abbotts, accounts manager at Prime Accountants Group in the West Midlands, issued the stark warning following internal reviews of law firm finances. She said some practices were becoming overly reliant on interest accrued from client accounts, using it to prop up cashflow and artificially inflate profits.
“The issue is bigger than many realise,” Abbotts said. “We’re seeing firms reporting themselves as profitable from legal services, but when you strip away interest income from client money, the numbers tell a very different story.”
At present, Solicitors Regulation Authority (SRA) rules state that solicitors must pay clients a “fair” sum of interest earned on their funds. However, the definition of “fair” is vague, leaving room for broad interpretation. With rising interest rates over the past two years, the sums involved are no longer negligible—and that’s prompted the regulator to step in.
The SRA, which opened a consultation on the issue last year, has raised concerns that law firms may be exploiting client money for financial gain. It argues that any interest generated should rightly go back to the client, and that legal businesses should fund themselves through fees—not bank interest.
“We consider that it is likely to be in the client’s best interest to receive all the interest from their money,” the regulator stated. “Firms should reflect their true operating costs through the fees that they charge.”
But this position has triggered pushback from legal professionals. A benchmarking survey by the Law Society found that more than 20% of profit per equity partner came from interest on client accounts. In effect, a sizable portion of law firm profitability may hinge on this income.
Embed from Getty ImagesAbbotts warned that firms now face the real possibility of a rule change that could hit their bottom line hard. “Some solicitors rely on this interest as a significant cashflow aid and contribution to profitability. If this is removed, it could make things harder financially for the firm,” she said.
The consultation has sparked a broader debate across the sector. LawNet, a network representing law firms, said the SRA was missing key context. From 2008 to 2022, interest rates hovered close to zero, meaning firms earned little to nothing on client funds. The recent spike in rates, it argued, has helped practices cope with soaring compliance and operational costs without passing the burden onto clients.
“There is no rationale for removing interest on client accounts as an income source,” said Chris Marston, chief executive of LawNet. “It’s irrelevant in an era of low interest rates—which has been the picture for much of the past two decades.”
Marston also warned that eliminating this source of revenue could force firms to raise legal fees, ultimately harming the very consumers the SRA aims to protect.
With no final decision yet made, Abbotts urged law firms to begin preparing for change. “They must start making contingency plans,” she advised. “If the regulator acts, the financial buffer many firms rely on could vanish overnight.”
As the SRA weighs its options, the sector watches closely—aware that a seemingly technical regulatory tweak could send shockwaves through the business models of hundreds of firms.
