SRA response

Response to Ministry of Justice consultation

Published on 10 March 2026

Interest on Lawyers' Client Accounts Scheme: Funding for a sustainable justice system

1. The Solicitors Regulation Authority (SRA) is the largest regulator of legal services in England and Wales, regulating solicitors and law firms. Our purpose is to drive confidence and trust in legal services. We work to protect members of the public, support the rule of law and the administration of justice. We focus on the issues that can transform legal services, making sure the profession delivers the high standard of service that the public expects and deserves.
2. In this response, we consider the how the proposals of the Ministry of Justice (MoJ) to implement an Interest on Lawyers Client Account (ILCA) scheme, may interact with our Rules and regulatory processes, highlighting areas of alignment, as well as points where amendments may be necessary if the proposals were to be implemented. We have drawn on insights from our 2024 consultation, 'Client Money in Legal Services', which sought views across the solicitors' profession on approaches to the handing of client money, and the interest accrued on client accounts.
3. We welcome the discussions we have had with MoJ officials as this proposal has been developed, including as to whether it is envisaged that the SRA would have a role in the administration of any aspect of a future ILCA scheme. We look forward to continuing these conversations, and to opportunities to provide further advice, following this consultation as proposals develop further. Through this engagement we can share our expertise on the current regulations and how any potential changes may affect the profession and the wider legal services sector.

SRA's regulatory arrangements for interest on client accounts

4. The SRA's Standards and Regulations set out what we expect our regulated community to achieve and observe for the benefit of their clients and in the public interest. Within this, the SRA Accounts Rule 7 details our expectations of firms and practitioners regarding the payment of interest to their clients:

• Rule 7.1: Requires firms to account to clients or third parties for a 'fair sum' of interest on money held on their behalf. Firms are expected to apply professional judgement to determine what a fair sum is and must be transparent about their calculation.
• Rule 7.2: Allows firms to agree an alternative arrangement for handling interest accrued on money held for a client, but only where the client has given informed, written consent.

5. We currently collect data annually from firms on the amount of money they have held in client accounts over the preceding reporting period. We do not, however, collect data on the amount of interest accrued on these accounts, the proportion of this interest that is returned to client, or the basis on which this is done so. As evidenced in Accounts Rule 7, we set expectations as to how firms should approach the question of interest accrued on monies held for clients, but we are not prescriptive with regards the actions they should take.
6. Given the SRA's existing regulatory framework with respect to client money, we support the MoJ's proposal that the remaining interest on client accounts, following the remittance of a portion under an ILCA scheme, should continue to be subject to our existing regulation. We consider that this will provide consistency and clarity for the profession Should an ILCA scheme be implemented, we will review these arrangements, and if required, will make amendments to ensure compliance and consumer protection.

SRA's Client Money in Legal Services consultation

7. Our 2024 consultation, Client Money in Legal Services, considered how client money is handled across the profession, and if changes to our regulatory approach were needed to ensure clients are appropriately protected.
8. Part 1 of the consultation considered how we could strengthen the checks and balances on firms that hold client money, and explored whether a longer-term shift in the model for holding client money may be required. We sought views on whether firms should continue to hold client money at all, and on potential alternative arrangements such as the use of Third-Party Managed Accounts.
9. Part 1 also considered changes to Accounts Rule 7. We had identified concerns that allowing firms to retain interest generated on client money could create incentives that are not aligned with clients' best interests, such as holding monies for longer than is necessary. We also highlighted concerns around transparency and communication to clients as to their rights with respect to interest accrued to client accounts. We noted prior representations from firms that money from interest payments allowed costs to be kept down, thereby improving access to legal services.
10. We noted that we had not heard compelling evidence as to how firms retaining interest on client accounts is in the consumer's interest, and that it is likely to be in the client's best interest to receive all interest accrued to money held by solicitors on their behalf, and for firms to reflect their true operating costs through fees.
11. Our research showed that in several other regulated sectors and international jurisdictions firms are either not permitted to earn interest on client money or the interest is directed toward public or consumer benefit, such as funding free legal services or legal education. We considered whether a similar model could be adopted within our framework, but concluded that this would mean that clients would not receive (all) the interest accrued on their funds.
12. Overall, we considered it difficult to justify a position in which firms are able to retain interest accrued from client money. Our consultation therefore proposed removing the ability for firms to retain interest on client accounts, subject to a de minimis allowance.
13. We also consulted on Accounts Rule 2.3(c), which allows firms and clients to agree that money be held outside a client account. We sought views on whether this Rule should be removed as we were concerned that this gave firms too much flexibility, potentially prioritising their own interests over those of their clients who in turn have fewer protections for money held outside of a client account, where it is held in trust for the client.

Consultation responses

14. Our published summary of responses to the consultation highlighted a range of views. Several key themes emerged that we believe are directly relevant to the scope of this consultation, particularly regarding the potential impact on firms and access to justice, which the MoJ may wish to consider further as it develops its approach.

Impacts of removing the ability to accrue and retain interest

• Increased cost of legal services
  Many respondents anticipated that consumers would face higher legal fees, as firms would likely seek to recover additional administrative costs and offset any loss of income resulting from changes to the treatment of interest.
• Increased financial pressure, particularly to small firms
  Respondents raised concerns over the consequences for firms' cash flows, particularly small firms, and feared that a loss or reduction of this revenue stream could lead to financial instability or firm failure. Loss of such firms may limit access to legal services. Some also suggested that such changes would incentivise firms to work with corporate clients instead of consumers, reducing consumer choice.
• Administrative burden and complexity
  Responses frequently pointed to increased and complex administrative work, stating that managing interest at an individual client level would create operational burdens that would disproportionately affect smaller firms.

Approaches to apportionment of interest

15. Responses showed that there are wide variations in how a 'fair sum' is interpreted across the profession. The most common approach to apportionment is a de minimus method - an approach akin to that required by SRA rules before the introduction of our Standards and Regulations in 2019 - while other firms returned to clients the difference between the interest rate paid on the client account and what would be available to the client via a personal account. A few entered into individual contractual arrangements with clients. The majority of the legal sector respondents disagreed with the proposal to prevent firms from retaining interest on client accounts, subject to a de minimus threshold.

Removal of Accounts Rule 2.3(c)

16. Whilst there was some support for this proposal, there was also strong opposition, with concerns raised about the potential adverse impacts on certain consumers, and the risk of reducing the attractiveness of the fixed fee market. In lights of these concerns, and as confirmed in December 2025, we have decided not to proceed with this proposal.

Our current position

17. In December 2025, we confirmed that in view of the range of responses to our consultation, we would, in the immediate term, progress three key areas to strengthen our current regime. We will return to wider matters concerning client money – including whether it is right that solicitors hold client money as well as consequential questions as to the management of interest accrued on client money accounts - as important but longer-term potential reforms, once we have improved our current arrangements. Any further consideration will take account of the outcomes of the MoJ's present consultation, alongside our ongoing engagement with our regulated community and wider stakeholders

Interaction of the proposed ILCA scheme with SRA Regulatory Objectives and Rules

Regulatory Objectives

18. The SRA has nine regulatory objectives which guide all our activities including the setting of standards, monitoring performance and taking proportionate, risk-based enforcement action. These objectives ensure that our work protects the public interest, supports the rule of law, promotes consumer protection and access to justice, and upholds confidence in the legal profession.
19. We would welcome continued discussion with the MoJ on how any potential role for the SRA within the ILCA scheme would align with our statutory regulatory remit, ensuring we can identify where the scheme may interact with existing regulatory responsibilities and continue to support them effectively.

SRA Rules

20. We envisage that the introduction of an ILCA scheme would require us to revisit the concept of “fair sum” (Rule 7.1) to determine whether the concept remains viable under an ILCA scheme as the amount of remaining interest would be significantly reduced. We may need to consider whether firms should continue to exercise professional judgement in determining 'fair sum' or, for instance, whether all remaining interest after remittance under ILCA should be returned to the client, subject to a de-minimis allowance.
21. We may need to reconsider the suitability of rule 7.2 to ensure transparency for consumers given that any alternative arrangement for the payment of interest to the client would need to adhere to the ILCA scheme, reducing the amount of interest available to consumers under such arrangements.
22. In addition, we may have to review whether it remains appropriate to maintain Rule 2.3(c), given that the option for firms to enter into arrangements to hold money outside of a client account could have the potential to deliver outcomes that do not align with the intention of the ILCA scheme.

Potential resource implications on the SRA

23. We have previously discussed with the MoJ the data that the SRA collects with regards client money and note that the MoJ may consider whether it would be appropriate for the SRA to have a role in the ongoing administration of any ILCA scheme introduced, particularly with regard to monitoring, enforcement and sanctions arrangements. We therefore take this opportunity to set out, at high level, what the potential implications may be for the SRA of any such role. We do so by reflecting on our experiences from implementing other statutory changes which have necessitated new or amended processes within the organisation, and changes to how we interact with, and our requirements of, the profession. We note that these considerations are made without the benefit of detail of the monitoring, enforcement and sanctions arrangements, or any form of role definition, so as such are illustrative only at this stage.

Potential cost implications

24. Any new arrangements will likely incur costs which would need to be funded. This would include both upfront implementation costs and the ongoing management of the arrangements. We would anticipate incurring implementation costs for resourcing the management of a major project; designing and creating new IT systems or data collection arrangements and communicating the impact of these changes to the profession. Ongoing management would include activities such as any additional data collection and analysis and legal enforcement activity. As the SRA is funded solely by individuals' and firms' practicing certificate fees, considerations would be needed as to whether these may need to rise to reflect any new operational requirements. We therefore aim to work closely with the MoJ as these proposals are refined and as potential costs are quantified both to understand the implications for the SRA, and to help to reduce these costs wherever possible.

Collection and sharing of data

25. Should the MoJ determine that it wishes the SRA to collect data on interest accrued on client accounts, and to share this with the MoJ, we would need to be clear how this fits with our regulatory remit. Both the purpose for which the data is to be used, and the level of detail required, would need to be clear. This would help ensure that the data collection is proportionate, transparent and relevant to any role the SRA may have in supporting the operation of the ILCA scheme.
26. There are additional considerations if the data collected were to be shared on a consistent basis beyond the SRA, e.g. with the MoJ. The nature of the data may mean that the interest earned on client accounts could make individual firms – specifically the largest ones – identifiable. Interest accrued on client accounts may also constitute commercially sensitive information for firms. We expect that any data sharing between the SRA and MoJ would therefore need to be underpinned by a data‑sharing agreement. Clear governance arrangements would be required to set out who can access the data, for what purposes, and subject to what safeguards, including compliance with data protection and confidentiality obligations.

Further implications

27. As the MoJ refines the design of the scheme and its operational requirements, we anticipate that further interactions with our regulatory framework may emerge, for instance the treatment of interest with respect to our Compensation Fund (a fund of last resort), and the application of the ILCA framework to monies held in our Statutory Trust Fund following interventions into firms

Conclusion

28. We look forward to continuing to work collaboratively with the MoJ as these proposals develop. Given the potential for wider operational impacts, we would encourage the MoJ to consider the implications we have outlined throughout this response as part of its ongoing policy development. We stand ready to support the MoJ's consideration of the operational implications of this matter, including by sharing our understanding of the current regulations and how changes may affect the profession for instance as part of any Regulatory or Equality Impact Assessment.
29. We are committed to sharing our insight, supporting further analysis, and working together on future arrangements that maintains the rule of law, ensures public trust and confidence in the profession and supports the sector's contribution to economic growth.

Solicitors Regulation Authority

March 2026