ILCA Explained: What the MoJ’s Interest Proposal Means for Firms and Clients

It seems that just as the legal sector gets a breather from one regulatory consultation, another lands on the desk. This time it’s the Ministry of Justice (MoJ) with a proposal that could fundamentally shift the financial and operational landscape for law firms in England and Wales: the Interest on Lawyers’ Client Accounts Scheme (ILCA).

The consultation, which you can find here, proposes a move that has been common in jurisdictions like the US and Australia for years but is a major departure for the UK, being that the vast majority of interest earned by solicitors on client funds is to be paid to government.

The deadline for responses is very short, the consultation was released in early January and was only open until 9 February, though this has now been extended to 9 March.

The MoJ wants to take a significant cut of the interest generated on funds held in client accounts:

• 75% of interest from pooled (general) client accounts
• 50% of interest from individual (designated) client accounts

To be clear, these percentages are not of funds that have not been paid to clients; this is on all interest.

The inclusion of individual accounts is not common to other schemes. Whilst I can understand the MoJ’s logic, that excluding them would create a loophole. Realistically, where designated accounts are used all of the interest is being paid to the clients, 50% of it being taken away is a loss to the client and not the law firm.

In a similar vein, the MoJ’s research from 2024 states that 33% of providers always remit all interest from pooled client accounts. In these situations, it seems that the clients are directly going to lose out on receiving this interest.

The proposal describes the interest as ‘unearned income’.

Personally, I think this phrasing overlooks the reality. For many firms, especially high street and mid-sized practices, this interest isn’t just a bonus at the end of the year but it offsets the costs of running the client account and ultimately keeps fees lower.

The consultation also quotes that 94% of firms would see little to no impact. This is not my experience, while I can accept that firms will find a way to survive, the only way they see no impact is if fees rise broadly in line with the lost interest, not great for their clients, and let’s not forget that this is the general public. Taxpayers are the ones that will ultimately fund this.

Looking past the financial impact, the consultation indicates that banks will need to change the client money accounts they offer too, with the interest rates available on client accounts being comparable with other interest-bearing accounts. Law firms I work with will agree that the rate they get on their instant access client funds is not typically at a similar level to other instant access savings accounts. I’m not sure how this will work.

I do also wonder whether the MoJ checked with their colleagues at HMRC, as let’s not forget the interest gets taxed, so that means HMRC would be losing out by 25%, 40% or even 45% of tax as that interest is suddenly disappearing to the MoJ!

Unlike similar schemes overseas, the MoJ is not currently planning to ringfence this money specifically for legal aid or access to justice. Instead, it would go into the general justice budget.

If this goes ahead, firms will need to be very clear in their client engagement letters about how interest is handled. You don’t want to be in a position where a client is surprised to find half their expected interest has gone to the Treasury.

The 9^th March deadline is just around the corner so I’d strongly recommend looking at your client account balances from the last 12 months and doing a stress test. What would your P&L look like if 75% of that interest disappeared?

Please take the time to feed back to the consultation, the more pushback the MoJ receives, the less likely this becomes a reality. The email address is Additionalfundingconsultation@justice.gov.uk