Government Plan to Seize Law Firm Client Account Interest Faces Fierce Opposition
Justice Secretary and Deputy Prime Minister David Lammy has ignited a firestorm of controversy with a government proposal to appropriate interest earned on law firms' client accounts. The Ministry of Justice recently launched a consultation on establishing an Interest on Lawyers' Client Account Scheme (ILCA), a move described by critics as a "brazen attempt" to confiscate law firms' cash.
Lammy's Justification for the Controversial Scheme
In his foreword to the consultation document, Lord Chancellor Lammy positioned the scheme as "a way for the legal sector to contribute more to the justice system it relies on." He emphasised that "law firms thrive when the system is strong," suggesting the legal profession should financially support the infrastructure that enables its operations. The proposal would see a proportion of interest earned on client accounts across England and Wales, including third-party managed accounts, redirected to government coffers.
The government is actively considering whether to include individual client accounts within the scheme's scope to prevent potential loopholes. This comes as law firms have generated substantial revenue from this source, particularly during recent periods of elevated interest rates. According to data from Taha & Co, UK firms earned over £350 million from client account interest in 2024 alone.
Legal Sector Warns of Catastrophic Consequences
The proposal has triggered immediate warnings from across the legal profession about potentially devastating impacts, particularly on mid-tier firms. Nick Leale, partner at CM Murray, cautioned that "the removal of that income will inevitably lead to reduced investment and reduced openings for promotion to partnership."
Hywel Pegler, head of professional and business services at RSM UK, elaborated on the potential fallout, stating the proposal "could have a significant impact on firms that have historically generated large associated interest income from clients' money held." He explained that firms might need to increase prices and reconsider capital arrangements, potentially leading to "the closure of some high-street firms that are unable to sufficiently absorb the cost of these changes."
The Law Society has echoed these concerns, with President Mark Evans stating that if implemented, the scheme could result in firm closures, increased fees, and negative impacts on clients. "We'll be responding to the consultation, and we need to hear from our members," Evans confirmed.
Broader Context of Justice System Underfunding
This controversial proposal emerges against a backdrop of chronic underfunding in the criminal justice system, which has become Lammy's primary focus. The Justice Secretary has previously suggested radical measures to address systemic backlogs, including scrapping some jury trials—a proposal that has already faced widespread condemnation across the legal and political spectrum.
The ILCA scheme represents Lammy's latest attempt to secure additional funding for the beleaguered justice system, but it has encountered fierce resistance from the very sector it aims to support. As the consultation period progresses, the legal profession is mobilising to challenge what many perceive as an unprecedented government intervention into law firm finances.
