Regulatory compliance back in spotlight with launch of client account interest consultation
The Ministry of Justice has issued a new consultation for a proposed Interest Lawyers’ Client Account Scheme (ILCA). The proposed scheme would see a proportion of interest earned via client accounts in England and Wales remitted to the government, providing a potentially significant source of funding for the UK justice system.
Commenting on the consultation announcement, Hywel Pegler, Head of Professional and Business Services at RSM UK, said: “The proposed ILCA scheme marks a potentially seismic shift for the legal sector. The scheme would aim to offer a ‘middle ground’ between existing international approaches to the same issue, applying to client funds held in both pooled and individual accounts. The aim and principle is to ensure these funds are utilised to support and strengthen a sustainable justice system, offering a much-needed injection of investment.
“However, the ILCA could have a significant impact on firms who have historically generated large associated interest income from clients’ money held. To address this potential shortfall, firms may need to increase prices, consider their capital and banking arrangements, and it could even lead to the closure of some high-street firms that are unable to sufficiently absorb the cost of these changes. Coming hot off the heels of the Autumn Budget uncertainty, it marks a major curveball for the legal sector just as it was breathing a sigh of relief.
“The legal sector itself is also dealing with increased scrutiny on compliance and due diligence, partly fuelled by the rising presence of Private Equity (PE). As more and more legal firms look to engage with PE, these types of risks are being thrown into the spotlight, and use of client funds are of paramount importance.
“It’s crucial that firms across the sector take time to consider the potential implications of the consultation and ensure they are adequately prepared for any future changes. This means modelling out the proposals and exploring what this could mean from a profit and loss perspective, how it might impact funding requirements, tax obligations and regulatory compliance. Whilst these proposals are still in the consultation phase; a proactive approach is the best way to mitigate any potential disruption and ensure resilience across business operations in the long term.”