Legal Aid reforms challenge client account interest

The Ministry of Justice has issued a consultation paper called “Proposals for Reform of Legal Aid in England and Wales”.  The consultation proposes two potential changes to use money held on client account to fund Legal Aid.  This is a serious threat because even though conveyancers are not getting the interest that they did it is still helping many stay afloat and the proposals seem unfair in principle.
In the Executive Summary the consultation paper explains that the Ministry of Justice is seeking a real reduction in its budget of 23% or nearly £2Bn with a proposal to make cuts in Legal Aid to contribute to £350M of this target.
In section 9 of the consultation the paper proposes two alternative sources of funding that would impact on conveyancers.
The first proposal is to allow solicitors to continue to hold clients’ money but they would be asked or required to remit the interest not required to be paid to clients to the Government to fund legal aid.
Clients would still be entitled to money in designated accounts and where interest exceeds the £20 rule and or where certain amounts of money are held for certain periods (see p.129 of the consultation paper).
The second proposal would create a central Government client account where all client account money would be held.    The idea is that the pooling of funds would enable the account to earn a higher interest rate and the Government would skim the extra interest from the account.
Brendan O’Brien of Breeze and Wyles stated 
In essence, this is possible if unpalatable as demonstrated in Australia where this type of change took place in the 60s. Many of the 10,000 or so solicitor’s practices rely heavily on the income generated from clients’ account interest. Additionally, most solicitor-lender-client relationships are based on interest forming part of the negotiation process.
The loss of this revenue stream will be passed on to the client in its entirety making every transaction handled by a solicitors firm more expensive. The direct impact of the changes is that the private client will fund the publicly funded client.
One major concern is the wording used in section 9.4 of the report where in the first part reference is made to “Legal Profession” and then in the second part reference to “Solicitors”. The drafting of this section might lead the reader to believe that only the solicitor’s profession is to be targeted when more interest is earned by percentage of income by Licensed Conveyancers. It is essential that there is clarity around this issue. Is this a problem for the wider legal profession or solely for solicitors
Whilst these proposals may seem to help the Government meet its budget proposals it seems to over look a number of issues.
1)    The proposals do not clearly differentiate between solicitors and other legal professionals.  It is unclear whether this impacts just solicitors or licensed conveyancers as well.
2)    The proposals do not seem to recognise that lawyers are businesses.  Why should a property business pay more towards the legal aid budget than a printers or any other type of business.  This is a hidden and disproportionate tax.
3)    There appears to be no understanding of the complexity of the money transmission system on a busy completions day and risk associated with moving to a centralised client account.
We would welcome your views.
The consulation paper can be found at http://www.justice.gov.uk/consultations/legal-aid-reform-151110.htm and remains open until the 14th February 2011.
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