The controversial move, possibly to be contained in an autumn Green Paper, would sweep away the 46-year-old 'demand-led' scheme under which lawyers claim back fees from the Government, and would provoke stiff opposition from legal organisations and the Opposition parties.
Lord Mackay also plans to clamp down on the granting of legal aid to wealthy defendants, after examining the papers in a fraud case in the summer involving Jawad Hashim, former president of the Arab Monetary Fund. He took a similar step following the conviction last month of 11 well-to-do young Nigerians in a pounds 1m social security fraud.
The Lord Chancellor was disturbed by the length of time that proceedings over an alleged pounds 34m fraud against Mr Hashim were taking, and at the pounds 2m of legal fees clocked up at that point. Mr Hashim, a former aide to President Saddam Hussein of Iraq, was getting legal aid despite living in an expensive Buckinghamshire mansion.
In the case of the social security fraud, the court heard that many of the defendants were sons and daughters of tribal chiefs and in one case of a retired chief justice. Mostly British public school-educated, they lived in style, wore designer clothes and shopped in Harrods food hall.
The Lord Chancellor's Department yesterday described as 'not unhelpful' suggestions from the Law Society, the solicitors' professional body, which include a proposal for valuable homes to be taken into account when assessing legal aid.
No moves are afoot, however, to prevent foreigners whose assets are abroad from receiving legal aid.
More controversial in the long run will be proposals being studied by Lord Mackay for limiting the spiralling legal aid budget, currently pounds 1.4bn, by channelling legal aid applications through a new breed of middlemen, 'fundholders for justice', based loosely on NHS GP fundholders.
The suggestions, floated in a Social Market Foundation paper in July, have been drawn up by Tony Holland, a former Law Society president and two Bristol University academics, Gwyn Bevan, a health economist and Martin Partington, professor of law.
All three were members of a secret legal services group advising the department on the fundamental review, and their idea proved to be the only significant change to emerge from it.
Legal aid spending came in below its estimate last year and is likely to do so again this year. While representing only a tiny fraction of public spending, legal aid is one of the fastest growing areas, with expenditure increasing five- fold since 1979.
Amid rumours of some scepticism within his department, Lord Mackay was yesterday said to be 'taking very seriously' the idea of fundholders - not necessarily lawyers used to employing traditional legal services - seeking the most cost-effective means of access to justice in civil legal aid and magistrates' court criminal legal aid. It is in line with Lord Mackay's belief that many disputes do not call for the services of lawyers.
Leading article, page 11