The Ministry of Justice has announced a review of the way the £2bn legal aid budget is delivered which could see separate civil and criminal funds run by different bodies.

The review came as legal aid lawyers warned that firms providing social welfare work are at risk of collapse because of the ‘artificial’ way work is being distributed by the Legal Services Commission.

Legal aid minister Lord Bach has appointed Sir Ian Magee, a former permanent secretary at the Department for Constitutional Affairs, to look at ways of optimising value for money in the way legal aid is administered.

Bach said: ‘The time is right to review the channels through which legal aid is delivered. It’s 10 years since the LSC was established and there has been considerable change in the type of legal aid and services people want.’

He told the Gazette he was ‘ruling nothing out and nothing in’. However, he said he would be surprised if the LSC ceased to exist, but said it could work alongside another body, with one administering the criminal budget, and the other the civil budget. The two budgets could be ringfenced.

An LSC spokesman said it would be working closely with Sir Ian to inform his review. Law Society president Robert Heslett said the legal aid system needed to be ‘reviewed urgently’. He added that the Society is conducting a review of access to justice, and it would be engaging with Magee’s review.

Meanwhile, Chancery Lane has warned that the LSC’s policy of capping the number of new social welfare cases or ‘matter starts’ that a firm can take on could cause some firms to collapse.

Richard Miller, Law Society head of legal aid, said he had been receiving calls from solicitors who had already exceeded their annual allocation of new social welfare matter starts, particularly in the Midlands.

Firms will not receive their next allocation until the new civil contract next October. Miller said firms could be forced to lay off staff or close departments and will be experiencing major cashflow problems ‘that could be fatal’.

‘The overall effect will damage the supply of social welfare advice to vulnerable clients, to which Lord Bach has shown so much commitment,’ he said.

Nicola Mackintosh of legal aid firm Mackintosh Duncan questioned why the LSC was ‘artificially limiting the number of clients who can get access to justice’ by allocating firms only a set number of new cases.

The LSC spokesman said it would look to reallocate any surplus matter starts from firms not likely to use all of theirs, but its budget was reaching its limit and it could not expand the overall number of cases.