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Do you ever think about the end?

Do you have a closed sign to put up? [1]

Do you have a closed sign to put up?

Posted by Laura Spooner, practice management and compliance associate at Legal Futures Associate LexisPSL [2]

We all know that effective risk management is a cornerstone of the SRA Handbook 2011. You’re expected to take a risk-based approach to compliance and managing your business, but who knew this extends to planning for your firm’s failure?

“What?” I hear you bellow, while frantically clicking through page after page of the SRA website. “Where does the Handbook say all this?” In this blog, I will guide you over this particularly uncomfortable regulatory hurdle.

Firm closure plan – do I HAVE to?

Well, yes, probably.

SRA O(10.13) touches on it: once you’re aware that your firm will cease to practise, you must affect the orderly and transparent wind-down of activities, including informing the SRA before the firm closes.

Then IB(10.4) and (10.9) say you should promptly notify the SRA if you become aware that your business may not be financially viable to continue trading as a going concern, and have appropriate arrangements for the orderly transfer of clients’ property to another authorised body if your firm closes.

But nothing so far says you must have a firm closure plan – we need to dig a little deeper.

If you do some really clever clicking you’ll eventually find SRA Form FA1, otherwise known as Firm Authorisation application form – a 30-page treat which just about stops short of asking for your inside leg measurement and weight to the nearest kilo. It asks applicants to consider procedural risks, one being the risk of disorderly closure, ie the risk that the firm fails to close in a proper and orderly manner.

Form FA1 goes onto give helpful examples of how a firm might get this wrong: failure to inform clients that the firm is closing, and failure to secure client files.

Applicants are then asked to assess and record the likeliness of this risk occurring (presumably the SRA will prioritise applicants who feel the risk is highly likely) and state the controls they have in place to mitigate that risk. I’m afraid this suggests to me that the SRA assumes firms will have a system or plan for orderly closure. Of course, devising a plan to organise for an orderly closure of your practice is the best way of mitigating the significant risks a closure creates.

Form FA1 is for new firms (traditional and ABS) but it’s a clear indicator of the SRA’s expectations for all firms.

What are the risks (and why should I care)?

The risks that should most concern you are:

Let’s put some numbers around this. There were 51 SRA interventions in 2014 costing around £7m, which is £137,000 per firm on top of all the other costs associated with closure. Remember, what the SRA cannot recoup from the partners of intervened firms will be taken from your contributions to the Compensation Fund.

The stuff of nightmares!

So I’ve got your attention?

You’ve found a piece of paper and you’ve written ‘Firm closure plan’ at the top, underlined twice, and now you’re chewing your pen.

Allow me to make some suggestions. There are several things you should think about covering in your plan, both for before closure and immediately after, including:

Are we done yet?

Not quite. Your plan also needs to include the steps you must take immediately after closure, including:

You should also think about future funds you’ll need to meet closure costs including accountant reports, redundancies, PII run-off cover, etc.

Here to help

Although the steps you need to take to close your practice properly aren’t difficult, there are a lot of them and they’re often depressing, invariably time-consuming and unfortunately all necessary. If you don’t take the right steps you run the risk of an SRA intervention which could torpedo your reputation and cost you and your partners personally a lot of money.

We have launched a Firm closure plan [3] suite of guidance and tools, so take a deep breath, steady yourself and put your plan together now (then relax and enjoy your practice!).