The Ministry of Justice has launched a major consultation on the introduction of an Interest on Lawyers’ Client Accounts Scheme (ILCA) in England and Wales. If implemented, this would mark one of the most significant changes to the handling of client money in decades.
While the policy goal is clear—redirecting “unearned” client account interest into the justice system—the compliance, operational, and financial implications for law firms are far from trivial.
This article explains what ILCA is, why it is being proposed, and—crucially—the likely phases of impact for UK law firms, from consultation through to full regulatory compliance
What Is ILCA in Simple Terms?
Under the Government’s proposal:
- A proportion of interest earned on lawyers’ client accounts would be paid to Government
- This would apply to:
- Pooled client accounts
- Individual client accounts
- Potentially Third Party Managed Accounts (TPMAs)
- Firms would no longer retain full discretion over interest generated on client money
- Funds raised would support the courts, legal aid, and the wider justice system
This model mirrors long-standing schemes in jurisdictions such as France, the US, Canada, and Australia, where client account interest is routinely treated as a public justice resource rather than firm income.
Why This Matters for UK Law Firms
Although Ministry of Justice research suggests that most firms are not financially reliant on client account interest, ILCA represents a structural compliance change, not just a financial one.
It will affect:
- Client account arrangements
- Banking relationships
- Client engagement letters
- COLP/COFA oversight
- Regulatory reporting
- Internal controls and audits
In short: ILCA is less about revenue loss and more about governance, systems, and risk management.
The Likely Phases of ILCA Impact on UK Law Firms
Phase 1: Consultation & Strategic Awareness (Now – Pre-Legislation)
What’s happening
- Government is gathering evidence and sector feedback
- No legal obligations yet
- Scope, rates, and mechanics are still adjustable
What law firms should do
- Monitor consultation outcomes closely
- Engage via representative bodies (Law Society, CLC, CILEX, Bar Council)
- Identify:
- How much interest your firm currently generates
- Which accounts are pooled vs individual
- Use of TPMAs
- Flag legal aid exposure if your firm cross-subsidises work via interest
Compliance takeaway
This is the window to influence design. Silence now may mean rigidity later.
Phase 2: Policy Finalisation & Regulatory Alignment
What’s likely to happen
- Government publishes final ILCA framework
- Amendments required to:
- SRA Accounts Rules (or parallel regulator rules)
- FCA-aligned expectations for TPMAs
- Clarification on:
- Rates (e.g. 75% pooled / 50% individual)
- Accounts in scope
- Treatment of remaining interest
What law firms should prepare for
- Divergence between regulators may narrow
- “Fair sum” interest discretion will exist only after ILCA deductions
- Increased scrutiny on firms that:
- Use individual accounts extensively
- Route funds into TPMAs to avoid pooled interest capture
Compliance takeaway
ILCA will sit above existing client interest rules, not replace them.
Phase 3: Banking & Systems Transition
What’s likely to change
Firms may be required to use only client accounts that meet ILCA criteria, including:
- Daily interest calculation
- Comparable market rates
- Ability to automatically remit interest to a scheme administrator
- Enhanced reporting access
Operational impacts
- Some banks may not offer compliant accounts
- Firms may need to:
- Switch banking providers
- Migrate client accounts
- Update accounting software
- TPMA providers may redesign products—or exit the market
Compliance risks
- Non-compliant accounts = regulatory breach
- Manual interest transfers increase error and audit risk
Compliance takeaway
ILCA compliance will likely become a bank selection issue, not just a finance issue.
Phase 4: Policy, Client Communication & Contract Updates
Required firm-level changes
- Update:
- Client care letters
- Terms of business
- Interest disclosure wording
- Explain clearly:
- Why interest is being deducted
- What portion (if any) the client receives
- That deductions are statutory, not firm-driven
Client risk
- High-value probate, conveyancing, and corporate clients may question:
- Loss of interest
- Transparency
- Fairness
Compliance takeaway
Poor client communication could turn a statutory scheme into a complaints issue.
Phase 5: Ongoing Monitoring, Enforcement & Audit
What ongoing compliance may look like
- Scheme administrator (likely MoJ initially) monitors:
- Interest flows
- Account structures
- Avoidance patterns
- Enforcement may involve:
- Financial penalties
- Regulatory referrals
- Existing accountant reports and COFA reviews may be leveraged
New risk areas
- Misclassification of accounts
- Failure to remit correct interest proportions
- Inconsistent treatment across departments
- TPMA opacity
Compliance takeaway
ILCA will likely become a standing item on COFA reports, risk registers, and internal audits.
Key Risk Areas for Law Firms to Watch
- Legal aid firms: loss of cross-subsidy may affect sustainability
- Conveyancing-heavy practices: disproportionate impact
- High-value transactional work: client sensitivity to interest loss
- TPMA reliance: possible regulatory tightening
- Small firms: thinner margins + system change costs
Final Thoughts: A Cultural Shift in Client Money Handling
ILCA is not merely a funding mechanism—it reflects a policy shift in how client account interest is perceived:
Not as firm income, but as a justice system asset.
For UK law firms, success under ILCA will depend less on resisting the scheme and more on:
- Early preparation
- Strong compliance governance
- Transparent client communication
- Smart banking and systems choices
The firms that adapt early will face fewer shocks when ILCA moves from consultation to compliance reality.
: What the Government’s Proposal Could Mean for UK Law Firms){kind=link}