Like buses, consultations on how law firms deal with interest generated on client account seem to come one after the other. The SRA were wringing their hands about it last year, and now the Ministry of Justice has joined the party. So what’s going on?
The Ministry of Justice has launched a consultation (closing on 6 February) to ask for views on genuinely sweeping proposals to reform the holding and use of client interest. In brief, the main headlines are:
- 75% of interest earned on pooled client accounts and
- 50% of interest on individual client account
would be diverted to the government. The remainder would be for the firm to determine a “fair” policy for handling.
The MoJ is likening this to schemes in countries such as the US and Canada, where interest on client account is used to bolster legal aid schemes and therefore has the moral justification of improving access to justice. However, the MoJ proposal is clear that the funds will not be earmarked for anything specific. Rather, they claim that allowing flexibility will allow it to be directed to the “areas of greatest need” within the justice system. The cynic wonders who would determine the area of great need.
Have your say
As ever, the consultation is lengthy, detailed and technical. In our view, the MoJ needs to understand the view from the “client account coalface” – from law firms who would have to deal with this proposal, and who are best-placed to comment on what impact this will have on them and on their clients.
We are submitting a response and ask for your insight into the day-to-day impact the MoJ’s proposals could have.
Please use the form here to jot down your thoughts – they don’t have to be polished, and all comments will be anonymised.
Food for thought includes:
- Client best interests and protections
- Could this encourage clients to explore riskier ways of holding client money – perhaps informal arrangements between parties? Can you think of examples where this might happen (for example, a family executor suggesting to beneficiaries that they hold estate funds in their own bank account to avoid the loss of interest? What would be the consequences of a naïve or indeed unscrupulous executor?)
- Could solicitors be tempted to suggest to the client that they should manage the money outside of client account? What are the risks for the client associated with this?
- What is the real-world impact on clients who would lose out on their interest? How about potentially vulnerable clients, for example the personal injury claimant or the estate beneficiary? Can you give some specific examples of situations where it is clearly not in the best interests of the client for them to lose out on the interest?
- How does this align with our core principles, especially acting in the client’s best interests? How does it uphold our other duties, like protecting the interests of consumers and ensuring access to justice (both of which are Legal Services Act regulatory objectives)?
- Solicitor-client relationships
- Could this move damage the trust placed in solicitors by their clients?
- Might clients complain or raise difficulties about this? What is the cost of dealing with that?
- What impact would this have on our ability to uphold public trust and confidence in the solicitors’ profession?
- Impact on matters and transactions
- Might clients be tempted to circumvent the diversion of interest, perhaps by sending funds for transaction at the eleventh hour?
- What would be the impact on transactions if so – and how disastrous would it be if the bank went offline?
- Could work be driven into the unregulated or unreserved sectors to avoid money going to the government?
- Operational
- What are the costs to you of holding client money, in terms of insurance, resourcing, tech systems, training? Does your generation of interest support this?
- Is income generation an important revenue stream for your firm?
- Do you believe that this scheme (both the costs associated with it, and the loss of income) would drive up fees for the client?
- Can firms really bear yet another regulatory and administrative burden and cost?
- Is liaising with yet another body going to be a nail in a coffin for smaller firms or firms with a specific profile?
- Alternatives
- Do you have any other ideas for how client interest should be treated? Should firms be allowed to keep any of it?
….or any other thoughts that you have.
Please take a few minutes to send us your thoughts. This change could be truly monumental for the legal profession and for our clients.
The ramifications aren’t just about increased costs and administrative burdens on firms: ultimately, the person who is going to lose out is the client. It’s up to us to stand up for them, as well as for ourselves in the profession, and tell the MoJ what the impacts of this change could be.
We encourage you to submit your own consultation response directly to the MoJ if you have strong feelings about the proposals.
