Portion of interest

When the Ministry of Justice (MoJ) launched its consultation on the proposed Interest on Lawyers’ Client Accounts (ILCA) scheme, the reaction across the legal sector was immediate, vocal and unusually unified. Many firms are still processing the scheme’s implications, but one sentiment has been clear from the start: something about these proposals does not add up.

At its core, the proposed ILCA scheme requires firms to remit a large percentage of client account interest to the government: 75% from pooled client accounts and 50% from individual accounts, regardless of the client’s domicile or the structure of the firm. 

It’s easy to see why the consultation has been extended, and why “strong views” hardly begin to capture the mood. But to understand the depth of concern, we need to unpack what the MoJ is proposing, why it claims this reform is needed, and why so many in the legal sector simply aren’t convinced. 

A contested narrative?

The MoJ’s justification for the scheme rests largely on the idea that client account interest is “unearned income”. It’s not hard to see why this language has triggered irritation and, in some places, anger. Yes, interest isn’t generated through fee-earning activity. But to suggest it is unearned glosses over the substantial regulatory burden firms carry as custodians of client money.

Every compliance professional understands that running a client account is hard work: complex reconciliations, granular record-keeping, strict adherence to regulator rules, and significant exposure to both operational risk and regulatory enforcement action. The notion that this is a passive income stream is a simplistic characterisation that does not reflect operational reality.

The MoJ’s second argument is that the legal sector should “contribute more to the justice system”. A laudable aim in principle, but the absence of ringfencing this money for specific access to justice projects is raising eyebrows everywhere. Without clear assurances that the remitted interest will directly support the justice system, many fear the funds will simply disappear into a Treasury black hole.

Let’s be clear: anything that leads to greater costs for firms – be that increased overheads or reduced profit – ultimately results in higher fees and/or firm closures. Neither of these aid access to justice. 

Use of data

If the MoJ’s narrative is controversial, its use of data (or lack thereof?) is even more contentious. Central to its case is a 2024 research piece in which 604 legal service providers were surveyed. According to the summary:

• 92% said they did not rely on interest from client accounts for sustainability, and
• 94% said losing interest income would have little or no impact.

On paper, these statistics appear devastating to the sector’s counter-arguments. In reality, professionals across the country have reacted with incredulity for one simple reason: these numbers don’t reflect lived experience.

Firms, especially those operating in legal aid, probate, personal injury, or areas that require holding significant client funds, are adamant that interest income plays a meaningful role in keeping the lights on as well as being beneficial for clients. More importantly, the survey appears not to have accounted for the administrative cost of calculating, splitting, tracking and remitting interest under the new scheme or the burden of changing client account providers to one that can satisfy the requirements of the proposed new scheme. Even firms for whom interest income is relatively small will feel the operational impacts acutely.

This disconnect between the MoJ’s data and sector-wide experience is one of the most significant fault lines in the debate.

Doing the maths

Let’s strip this back to basic arithmetic. Suppose your pooled client account earns a fairly typical rate of around 4% (and that’s generous). If your firm pays out interest to clients at a level equivalent to around 1%, under these proposals – a three-quarters payment to the government – you could easily find yourself subsidising either the client or the MoJ. 

Either way, the arrangement begins to resemble a quasi-tax on holding client money. For the public, who are directly affected by this and whose input has not been sought, and for firms with slim margins or heavy compliance burdens, this tax will be painful.

Hidden administrative burdens

Calculating interest sounds simple on the surface. For firms actually doing it, it’s anything but. The proposals potentially introduce multiple layers of operational complexity, including:

• Daily interest calculation for pooled accounts
• Different calculations for individual accounts
• Application of a 75/25 or 50/50 split
• Overlaying the regulator-specific interest rules 
• Tracking exceptions and de minimis thresholds
• Reconciling remittance discrepancies, and
• Ensuring all outputs remain regulator-compliant.

For compliance and finance teams, this isn’t just an incremental change: it’s a complete recalibration of how client accounts operate and the role interest on client money plays. 

This isn’t modernisation, and nor is it about access to justice. It’s bureaucracy. And expensive bureaucracy at that.

Regulators are not aligned – and this matters

The legal sector already juggles differing approaches to client account interest:

• The Solicitors Regulation Authority (SRA) expects firms to pay a “fair sum” (they set their own threshold, often between £20 and £50, above which interest is paid to the client).
• The Chartered Institute of Legal Executives (CILEX) regulation uses a “proper proportion” standard with its own de minimis threshold. 
• The Council for Licensed Conveyancers (CLC) and the Institute of Chartered Accountants in England and Wales (ICAEW) require all interest to be passed to clients unless otherwise agreed.

The ILCA scheme does nothing to reconcile these differences: in fact, it multiplies them. Firms regulated by different bodies, or mixed-practice firms with multiple regulatory obligations, will face significant complexity in calculating and justifying interest distributions.

The SRA’s own response to the consultation signals a possible change in their position if these proposals are implemented. Rules 7.1 and 7.2 of the SRA Accounts Rules regarding interest would need revisiting. It seems likely that no element of the interest will be permitted to be retained by the firm if they are SRA regulated, subject to a de minimus allowance. The balance after the apportionment under the ILCA scheme would need to be returned to the client. Whether the other regulators will fall into alignment remains to be seen. 

More concerning is the SRA’s advance warning that any new arrangement which involves them would need to be funded – both the set up and ongoing costs. This means a rise in fees paid by firms. Currently, there is no quantification because the proposals lack detail but anything requiring new IT systems, data collection and enforcement isn’t going to be cheap.

Rather than creating clarity, the MoJ’s proposal introduces more fragmentation where the opposite is needed, and risks giving rise to unintended workarounds to avoid such a burden.

Third-party managed accounts

Some have suggested that moving wholesale to third-party managed accounts (TPMAs) would sidestep the client account interest problem (as well as the other well-documented conversations surrounding law firms holding client money). But this argument ignores several realities:

• TPMA providers typically retain the interest under current arrangements – so the money isn’t going to clients, law firms or to fund access to justice.
• Extending the ILCA scheme to TPMAs, as the MoJ proposes, creates a new point of tension between Financial Conduct Authority regulation, SRA / CILEX / CLC obligations and reserved activity requirements.
• The administrative complexity doesn’t disappear but simply shifts to a provider whose systems were never designed to handle the MoJ’s proposed framework.

In other words, TPMAs are not a shortcut: they are a detour into a different regulatory maze. 

International comparisons

The MoJ leans heavily on international interest-remittance models, but omits two crucial facts:

• most overseas models (save for France) have provisions for an opt-out, and
• most remit 100% of interest, avoiding the split-calculation burden.

By contrast, the ILCA proposal offers no opt-out and imposes a percentage split that creates significant new administrative overheads. The comparison, therefore, is not like-for-like. The MoJ is borrowing the headline of overseas schemes while disregarding the mechanisms that make them workable.

Who will be hit the hardest?

Before we talk about firms or work types, we must be clear that these proposals materially affect clients. Many clients currently benefit from the interest generated on client accounts, either directly via what they receive or in relation to the wider way in which interest on client accounts contributes to law firm overheads. 

While the entire profession would feel the impact, certain categories of firms are likely to suffer disproportionately.

Probate practices

These firms routinely hold substantial funds for extended periods. A forced reduction in interest income, combined with administrative burdens, will materially affect clients and beneficiaries. It could also give rise to executors looking to create their own workarounds when it comes to who holds the estate funds, which creates significant risks.

Firms managing catastrophic injury awards

Where long-term, high-value funds must be protected for vulnerable clients, is it right that they lose the benefit of interest accrued, while also footing the bill for the rising costs of managing these accounts?

Legal aid providers

Already on the financial brink, many firms rely on client account interest arising from private work to cross-subsidise their legal aid work. It would be more than ironic if a policy designed to “support the justice system” ended up further eroding access to justice. A significant reduction in legal aid providers would be nothing short of catastrophic for the most vulnerable in society.

Firms already on thin margins

Some smaller practices rely on client account interest to stay in the black. Removing or reducing this income risks pushing borderline practices into instability, shrinking consumer choice and reducing sector diversity. Rural and high street practices could well be hit hardest by changes such as these, leaving pockets of the population without in-person access to law firms.

The ILCA scheme could, quite unintentionally, accelerate consolidation and private equity influence (it’s rumoured that they are already changing their approach when it comes to the multiplier they apply to client account interest), and the hollowing out of smaller practices. This could have serious consequences for the sector for years to come. 

Banks, systems and confidentiality

The scheme would require banks to offer ILCA-compliant accounts. Yet it remains unclear:

• whether banks can or will develop the required functionality
• whether they will charge firms more for compliant accounts, and
• how many providers will actually offer them, and with what conditions?

A reduction in banking options is a serious concern for firms already struggling to maintain compliant accounts in a tightening anti-money laundering and risk management environment.

Then there are confidentiality issues. The idea of automatic remittance – meaning the interest is collected directly by the government – is intended to address concerns relating to the administrative burden. However, how this sits alongside confidentiality obligations, both in relation to automatic remittance and audit information sharing, does not appear to have been explored.

Structural weakness in parts of the sector

There’s an uncomfortable truth beneath all this: some firms do rely heavily on client account interest to create the illusion of profitability. This has implications when it comes to the public’s trust and confidence in the sector. 

The Law Society’s financial benchmarking survey in 2025 provided useful data on how client account interest distorts figures relating to median profit per equity partner. It is clear, and I think widely accepted, that relying on this income for growth – or to put you into the black – is neither wise nor sustainable. 

Some of the figures being generated around these conversations (in excess of £7m in one firm’s case) are undeniably concerning. Such optics, from the public’s point of view, aren’t good. 

But acknowledging this reality does not mean that the ILCA approach is justified or effective. Addressing structural financial weakness requires nuanced policy, not blunt-force fiscal extraction and increased operational burdens. 

Reform without evidence-based foundations

After stepping back, scrutinising the consultation and assessing sector responses, the central problem crystallises: the MoJ has not provided sufficient modelling, data or forecasting to demonstrate that the benefits of the ILCA scheme outweigh its costs (and when I say costs, I don’t just mean in financial terms).

We’re being asked to accept hypotheticals. Worse, we’re being asked to trust that a scheme with inconsistent international parallels, ambiguous administrative demands and unmeasured risks will somehow improve the justice system.

For a sector built on evidence, analysis and accountability, that’s indeed a hard sell.

Where do we go from here?

No one in the legal sector denies the need for reform: improved transparency and more consistent regulatory frameworks would be widely welcomed. What the sector can’t continue to do is lurch from one scandal relating to client money to another. 

But any reform must be:

• protective of access to justice
• data-driven
• operationally realistic
• regulator-aligned
• proportionate, and
• developed transparently and collaboratively.

The ILCA consultation, in its current form, doesn’t meet these standards. It raises more questions than it answers, and risks creating more problems than it solves. 

More concerningly for the profession, many feel that these proposals are a fait accompli. And the sector is already both drained and fatigued – not only from battling issues on multiple fronts, but also from fighting ones that don’t seem to be based on a fundamental understanding of the sector and its needs. 

Call this a policy idea in search of justification, call it naïve, call it lazy, call it performative. But whatever your view, I’m struggling to find anyone who thinks that it benefits access to justice.