The Future of Client Money Interest

So many questions but is the MOJ’s solution the right answer?

The debate over the treatment of interest earned on client money continues to gather momentum. Following scrutiny by the Solicitors Regulation Authority last year, the proposed Ministry of Justice (MoJ) reforms, outlined in the Pye Tait Research Report, would materially alter how interest on lawyers’ client accounts is allocated.

The MoJ has opened a consultation, running until 9^th February 2026, on proposals to change the treatment of interest earned on client funds. The proposals would see:

• 75% of interest earned on pooled client accounts, and

• 50% of interest earned on designated client accounts

redirected to the government. Law firms would retain the remaining interest and would be expected the share whatever is left with their clients.

The MoJ has cited comparable arrangements in jurisdictions such as the United States and Canada, where interest on client funds is used to support legal aid and access-to-justice initiatives. However, unlike those schemes, the UK proposals do not include any requirement for the diverted funds to be ringfenced for a specific purpose. Instead, the government intends to retain discretion to allocate the funds across the justice system as it sees fit.

Why this matters

These proposals represent a substantive shift rather than a technical adjustment. They would affect how client money is held, the protections available to clients, and the financial and operational position of law firms across the sector.

Impact on Clients

• Client interests and safeguards: Removing interest from clients is likely to change behaviour. In practice, there is a real risk that clients or executors may seek alternative ways of holding funds in order to preserve interest, including informal or personal arrangements that lack the safeguards of regulated client accounts. This would expose clients—particularly vulnerable individuals such as personal injury claimants and estate beneficiaries—to increased financial and conduct risk. Even relatively small amounts of interest can be significant for these groups, and the loss of that income may result in tangible detriment.

• Professional duties and trust: The proposals sit uncomfortably alongside solicitors’ fundamental duty to act in their clients’ best interests. Redirecting client money to the state is likely to create tension in the solicitor–client relationship, increase the risk of complaints or disputes, and place firms in the difficult position of justifying outcomes that are clearly disadvantageous to their clients. Over time, this may undermine confidence in solicitors and in the profession more broadly.

• Impact on transactions and legal work: Clients may attempt to minimise the impact of interest diversion by delaying transfers or restructuring transactions, increasing the risk of delay, failed completions, or exposure to banking disruption. There is also a risk that work involving the holding of funds may be diverted into unregulated or non-reserved areas, reducing consumer protection and regulatory oversight.

Impact on Law Firms

• Operational pressure

High street banks do not have a product to simplify the retention of interest, especially when we take into consideration individual de-minimis levels operated per matter. This means the law firm will be unfairly penalised to administer the scheme. Change in process will require a rewrite of the SRA Account Rules and reporting accountants are the only independent source that could reasonably verify the deductions have been made in accordance with scheme rules. This would increase cost associated with client money audits.

• Financial pressure

Holding client money is not cost-neutral. Firms incur significant expense in relation to insurance, compliance, systems, staffing, training, and audit requirements. Client account interest has historically helped to offset these costs. Reducing or removing that income, while introducing additional administrative complexity, is likely to place further financial strain on firms and may ultimately result in higher fees for clients. This impact will be felt across the profession, regardless of firm size or practice area.

• Regulatory Burden

Regulation made difficult is regulation not followed.

Make your voice heard

This consultation will directly inform future policy. Its outcome will be shaped by the quality and breadth of responses received from those with practical experience of managing client money.

Law firms are well placed to explain how these proposals would operate in practice and to articulate their real-world consequences for clients, firms, and the wider justice system.

If this issue affects your practice, engagement is essential.

These proposals are not simply about additional regulation or rising overheads. They have clear financial implications for clients and structural implications for the profession. It is important that the Ministry of Justice fully understands those consequences before any changes are implemented. The Law Society has raised their concerns however it is more important for the MOJ to hear from firms impacted by the proposals.

Respond via this link: https://consult.justice.gov.uk/digital-communications/interest-lawyers-client-accounts-scheme/consultation/intro/