Peaking interest

In the light of developments on the wider economic front, the £440m cuts proposed in the government's green paper on legal aid was not entirely unexpected. But some surprise may have been registered at the suggestion that one of the means by which the Ministry of Justice might supplement the dwindling legal aid provision is to grab the money which solicitors are able to earn from their client accounts.

A number of commonwealth legal jurisdictions have already adopted similar proposals, and, while these are not popular, they have been accepted. UK ministers have also mooted the idea on a number of occasions over the previous 15 years, though the response from the profession and the Law Society has been consistent: 'Don't try it, this is a step too far.'

However, the new government, in its determination to reduce expenditure, seems to be prepared to confront the naysayers head on '“ though it appears to have no clear idea how much money might currently be held in client accounts or how much would be likely to become available to legal aid as a result of implementing the proposal.

Unpopular proposals

The ministry made two alternative proposals as to what it might do. The first was for solicitors to hold client accounts as at present but be required to remit any money that does not have to be paid to clients to the government annually. The second was that there might be a centrally-run bank account which would hold client money, pay clients 'a fair sum' in lieu of interest, and keep the surplus to bolster legal aid. Failure to comply on the part of solicitors would be a grave disciplinary offence. Neither option is going to be terribly popular with solicitors and the administrative costs would be significant, particularly for the second option.

Almost all firms of solicitors in the UK have client accounts. They can keep any interest accumulated which does not technically belong to the client. As interest rates have reduced this source of income has become less significant, though in some fields, such as property work, it has represented as much as ten per cent of total income.

Client accounts permit transactions to be expedited and the work of many solicitors would be made more complex and time-consuming in their absence. However, these are the factors which also give rise to regulatory issues, and the most obvious savings which would be made by abandoning client accounts would be in regulation.

The majority of the interventions made by the SRA into solicitors' practices involve serious breaches of the Accounts Rules. In 2009, the SRA commenced 537 new investigations using its large team of forensic investigators, more than half of which concerned financial irregularities. The SRA's Practice Standards Unit inspects over 800 firms each year and client account problems are part of its wider brief. Many of the SRA's staff are concerned in a variety of ways with problems resulting from client account misuse. The Solicitors' Compensation Fund picks up the tab where there is dishonesty, a great deal of which would be much more difficult to perpetrate without the convenience of client accounts. Similarly, solicitors' insurance costs are partly reflective of the same problem.

Prime targets

In the European context, the UK profession is unusual in having client accounts, and their availability, coupled with the UK's role as the prominent European financial centre, makes solicitors prime targets for criminals from all over the world, either as fronts for money laundering or as instruments for more elaborate criminal schemes or scams.

There are now 120,000 solicitors with practising certificates in England and Wales, so every £1m saved by the Law Society/SRA in not needing to police client accounts saves just over £8 per certificate. It is difficult to estimate the extent to which the cost of the SRA could be reduced but it would be surprising if it were not by at least 30 per cent. Indemnity and compensation fund contributions would reduce significantly, and white collar law-related crime would fall.

Such considerations might cause solicitors to wonder whether they really need client accounts and might not be rather better off if they were abolished. They might even wish to thank the government for proffering the suggestion.