Just when you thought you could put your consultation-response pen down, another one arrives with an even shorter deadline than the FCA AML supervision one which closed on Christmas Eve!
This one is equally important to respond to given it proposes significant changes to the client account interest law firms can retain.
Action
The deadline for responding is 9th February (less than 5 weeks from publication!), so get your skates on if you have any thoughts on the impact this is likely to have on your firm. Real-world firm experiences of client account interest and the impact its removal will have is vital to this consultation. There are 34 specific questions asked by the MOJ as part of the consultation, but don’t let this put you off simply submitting your thoughts/ concerns if you don’t want to answer them all. The email address to use is: additionalfundingconsultation@justice.gov.uk
Headline proposals
- The Ministry of Justice (MOJ) would claim 75% of firms’ client account interest for its central justice system funds. (It is worth noting that the MOJ is seeking views on whether they should set the percentage at 90-100% rather than 75%!). Although such schemes around the world are generally aimed at supporting access to justice initiatives, such as pro-bono work and legal education, the MOJ does not propose earmarking these funds for specific access to justice projects at present (although it may do in the future).
- The 25% balance would be left for firms to pay a ‘fair sum’ of interest to clients as per the current SRA Accounts Rules.
- The MOJ claim on individually named client accounts (often used for larger, longer-term work, such as probate, property or corporate transactions, because they can generate more interest for clients) would be limited to 50%.
- Third party managed accounts would also be captured by the scheme.
- The scheme would only apply to client funds in relation to reserved legal activities, although the MOJ is seeking views on whether to extend it to non-reserved activities. (More Mazur headaches on the way?)
The Law Society has already expressed its initial concerns about the proposals, full details of which can be found here, and is planning to respond in full in due course. They are also urging members to submit their own responses.
Concerns
- Despite the “access to justice” spin on schemes of this nature, ironically, legal aid firms (which are arguably the most supportive of access to justice initiatives) are likely to be the most negatively impacted by the loss of client-interest income on private work, which they are often reliant on to sustain the legally aided work which is so vital for access to justice in this country.
- Will this initiative lead to a further reduction in general government legal aid funding, which is already woefully small?
- The impact on non-legal aid high street firms is also likely to be significant. Whilst firms may not necessarily be ‘reliant’ on client account interest to keep afloat, many firms will use it to keep down administrative costs. As the Law Society has commented, without it, fees will very likely increase, impacting clients and access to justice, and potentially even leading to firm closures, particularly given the double whammy of new regulatory burdens in relation to AML supervision (the move to the FCA) and tax adviser registration, not to mention additional administrative costs of dealing with any new MOJ scheme.
- On the issue of whether or not firms are reliant on client account interest, there appears to be conflicting evidence. The MOJ’s 2024 research states that most firms are not reliant on, and would not miss, client account interest, whereas last year we were advised by the SRA that law firms needed to “wean themselves off” it, with concerns about over-reliance (as we reported in our April 2025 compliance update).
- In complying with the scheme and sharing information with the MOJ, thorny issues in relation to client confidentiality are likely to arise, leading to more time and expense for firms managing those concerns.
Please do have a read of the consultation and respond by the 9th February deadline if you can.