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Legal sector leaders warn MoJ plans to take client interest could force firm closures
Criticism is mounting over proposals by the Ministry of Justice to redirect interest earned on solicitors’ client accounts, amid warnings that the measures could push hundreds of law firms into financial difficulty.
The proposals form part of a consultation on the interest on lawyers’ client accounts scheme, opened this week by the lord chancellor, David Lammy. Under the plan, 50 percent of the interest generated on individual client accounts would be paid into the Ministry of Justice central account, rising to 75 percent for pooled client accounts.
Speaking at the launch of the consultation, Lammy said that what he described as “unearned income” should be invested in strengthening the justice system. He added that law firms benefit when the justice system is strong and should therefore contribute to its resilience.
The proposals have prompted sharp criticism from across the legal sector. One legal business specialist warned that the scheme could prove counterproductive and unworkable, while the Law Society cautioned that high street firms would be particularly exposed. Conveyancing practices are considered especially vulnerable due to their reliance on client account interest.
Concerns centre on the scale of income at stake. Data submitted to a consultation by the Solicitors Regulation Authority last year suggested that between five and ten percent of UK law firms could face financial failure or serious financial consequences without income from client interest. At the upper estimate, this equates to around 900 firms.
The same data indicated that in at least five percent of firms, more than 80 percent of profits in 2024 were derived from interest income. Findings from the Law Society’s most recent Financial Benchmarking Survey showed that average interest receipts had risen sharply to around £500,000 per firm.
Andrew Allen, partner and head of the legal sector at PKF Francis Clark and chair of the survey working group, described the proposals as a “backdoor tax raid”. He said the scheme would increase fees, cost jobs and lead to firm closures.
Allen cited benchmarking data from NatWest indicating that for half of law firms, interest profits represented at least 21 percent of overall profits, rising to more than 35 percent for a quarter of firms. For up to ten percent of firms, interest income accounted for more than half of profits.
He also warned that firms might restructure banking arrangements to avoid earning interest on client funds, instead securing favourable charges or borrowing terms. Such behaviour, he argued, would undermine the scheme’s ability to raise revenue.
Further criticism has focused on the destination of the funds. Unlike comparable schemes overseas, the money would not be earmarked for specific projects. Under current SRA Accounts Rules, clients are entitled to a fair rate of interest on their money, and the regulator has previously stated that it sees no good reason why clients should not receive all of the interest earned.
Source : Law Gazette