Ministry of Justice proposes significant reforms to lawyers' client account interest

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Last year, the SRA consulted on the future of client money. Whilst significant changes to firms’ ability to hold client money have been paused (for now), the Ministry of Justice (MoJ) has now launched its own consultation on a scheme intended to raise funds through a portion of the interest earned on client money.

Interest on Lawyers’ Client Accounts Scheme (ILCA)

The Government is proposing to introduce an Interest on Lawyers’ Client Accounts Scheme (ILCA), which could see up to 75% of interest on pooled client accounts be remitted to the government, together with 50% of interest on individual client accounts.

This proposal, which would introduce significant changes for law firms, is intended to support the justice system.

The consultation document makes reference to 94% of firms that considered that the removal of client interest would have little to no impact on their firm.

Financial impact of interest on client money

The figure of 94% is inconsistent with the financial impact that we have observed. At Armstrong Watson, we have seen an increase in the income generated from client money interest in recent years. As interest rates have increased, so too has the amount of net profit generated from client money interest.

Our most recent benchmarking report noted an increase in net profits of 6% between FY23 and FY24. This was driven mainly by client money interest receipts. For some firms, interest received accounted for between 10-15% of net profit for the year, potentially creating an over-reliance on such income.

The Ministry of Justice’s figure is based on research from 2024, which surveyed 604 legal service providers. Given that there are around 9,000 law firms in England & Wales, this is a sample of circa 7% of all firms. Not only is this a low proportion of total firms, it is also uncertain whether the respondents are representative of the sector as a whole.

Proposals for interest on client money

The MoJ considers that the interest income on client monies is “unearned income” and that this could be directed towards support of justice services rather than being received by law firms.

The method of collecting the interest is also under consideration, and both automatic remittance direct from banks, or manual transfers from firms, are being considered. This could potentially add significantly to the administrative burden faced by law firms and could increase costs to consumers of legal services.

The MoJ points to precedent, with several other jurisdictions (including Australia, Canada, France and the US) operating similar schemes.

Firms urged to respond before consultation deadline

Given the implications of the removal of client interest, we would recommend that firms submit responses to ensure their views are heard. The consultation, which is open until 9th February 2026, is seeking views on a number of areas, including:

• - Whether the 75%/50% remittance rates are appropriate
• - How frequently interest should be remitted
• - What the impact on clients would be (particularly those with large or long-term balances)

Whilst the consultation document is a lengthy read, the changes proposed are highly significant. We suggest careful consideration before submitting a response – this is a chance to impact policy that will have a significant impact on law firm finances.

Administrative burden and consumer impact

Although it is clear that firms are currently generating higher than usual returns on client account interest, it is worth considering the following:

Firstly, these are historically high returns due to high interest rates. Firms will receive more modest returns once rates decrease. One justification put forward for the retention of interest by firms is that this funds the operation of firms’ client accounts. If the majority of interest is remitted to the government, how will firms fund client account operations in future?

Secondly, and more importantly to consumers, firms are not using client money interest solely to maintain high profit levels. The additional income received is often used to maintain competitive fee levels. If firms cannot retain the interest on client account interest, will charge out rates and fee levels increase? If the complexity associated with accounting for client money interest increases further, this will potentially increase fees further. What if firms need to employ more staff to process transactions?

For these reasons, we feel that the proposed changes are not in the interest of consumers or firms.