Posted by Neil Rose, Editor, Legal Futures
Money for old rope: do solicitors have a moral entitlement to client account interest?
When then shadow justice minister Henry Bellingham last year floated the idea that some client account interest should be applied to the legal aid fund rather than solicitors’ pockets, some thought it one of the barmier suggestions of ways to supplement public funding. But even though Mr Bellingham has moved on, the idea has not, as proved by this week’s legal aid green paper.
On the face of the two options put forward, it would surely be far easier simply to make it a professional requirement that solicitors hand over the interest they have gained (clients will retain their interest come what may); creating a single government bank account sounds fraught with administrative difficulties. But solicitors will undoubtedly lobby for the latter because the green paper says one option is to allow them to retain the interest they would have earned, while the legal aid fund benefits from the extra interest earned by pooling this money. The green paper says this could be voluntary or compulsory – it is hard to see a voluntary scheme really working, dare one suggest.
This is a proposal that will strike fear into the heart of many small law firms. At least until interest rates dropped to rock bottom, there was no shortage of stories about firms propped up by client account interest; for other firms, even if it wasn’t the difference between keeping the doors open and not, interest could still produce more income than any single client. And big firms appreciate the benefits too, sometimes using it to offset their borrowings. Only a few, such as Allen & Overy, have donated interest to pro bono charities. Looked at objectively, however, there is a decent argument to be had over solicitors’ moral entitlement to profiting in this way.
My understanding is that during his time in office, the former Attorney General, Lord Goldsmith, had his eyes on client account interest as a source of pro bono funding but was told in no uncertain terms that solicitors would simply not wear it. Now, with the greater imperative of supplementing the legal aid fund, they may have no choice. Perhaps the knowledge that this deeply unpopular proposal was coming was why the Law Society pre-empted the green paper by calling for higher tax on alcohol sales, with the money going to legal aid and other criminal justice agencies. It is an idea that has thus far gained no traction.
The impact assessment issued with the green paper was far from satisfactory. Aside from the fact that the government has no idea how much money we are talking about (but there are surely many billions held in client accounts every year), you wonder how long officials spent thinking about the impact. “Some firms may decide to pass on any lost income from these proposals to their clients through higher charges,” it says. “However, this risk has not been quantified at this stage and is expected to be minimal.” Where is the justification for such a sweeping assumption? If only in return for providing what they see as a free banking service, law firms may very well build in some extra charge to their fees.
This is a solution that looks neat but in reality will be far less so. What impact, for example, will it have on the market for solicitors’ banking services? No point trying to tempt solicitors in with extra interest if it’s just going straight to the Treasury. And if the Council of Mortgage Lenders is successful in its bid to find an alternative method of transferring funds between banks to reduce their exposure to fraudulent lawyers, then the money at stake will be far less.
This leads to the really big picture. It would do the profession the world of good if a way could be found in this day and age to do without client account at all (or at least as much as possible). Think how much smaller the Solicitors Regulation Authority, and how much cheaper the practising certificate fee, would be without it. Now that is a trade-off solicitors may be keener on.
If there is an administrative cost on firms and/or banks in calculating and paying the interest over to government, won’t banks/firms simply agree to zero interest client accounts?