Thirty of top 200 on SRA list of financially unstable firms

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13 June 2013

Barrass: successful communication

Around 30 of the top 200 law firms in England and Wales are under intensive supervision from the Solicitors Regulation Authority (SRA) because of fears about their financial stability, it emerged yesterday.

The board of the SRA heard that in all 160 law firms across England and Wales are in “intensive engagement” with the authority’s supervision function over financial stability, of which 20% are so-called ‘high-impact’ firms – those in the top 200 or so.

Of the 160, eight have been judged as being at an “immediate risk” of collapse. It is not clear whether any high-impact firms are among them.

SRA executive director Samantha Barrass told the board that a further 2,000 law firms face an assessment over their stability. She emphasised that there is no suggestion that any of these firms are in financial distress, but they fit the profile of practices that may be facing difficulties, such as personal injury firms which were heavily reliant on paying referral fees before April’s ban, or legal aid firms suffering from government cuts.

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Some 400 of these firms are already in “active engagement” with the SRA, Ms Barrass said, while the rest are to be asked to submit relevant financial information – such as drawings against turnover and net profit – via a secure web portal that the authority is developing and about to pilot with 50 firms.

This work will identify those firms that the supervision team “will need to spend more time with”, she explained.

Other work around financial stability includes considering whether to provide more guidance on principle 8 of the SRA Handbook – “You must run your business or carry out your role in the business effectively and in accordance with proper governance and sound financial and risk management principles” – and making more use of conditions on either individuals or firms.

Legal and enforcement director David Middleton added that his team is looking closely at conditions as an alternative to intervention.

Ms Barrass said the SRA was “seeing success” from its communication to the profession over financial stability, with some firms changing their behaviour as a result.

Asked about the impact of banks’ attitude to lending to solicitors, Ms Barrass warned firms that they need to be “more prepared for less financing from banks” to pay their tax bills.

“Having said that, we have seen some odd decisions to keep on lending where the [supervision] team have fallen over with surprise at the decision of a bank to provide ongoing finance,” she added.

Meanwhile, the SRA board approved payment of the unexpectedly high cost of interventions this year from the compensation fund.

It also approved an overall reduction in the cost of regulation next year. The SRA’s budget for 2014 – including compensation fund contributions – is set to be £70.8m, down from £75.9m this year.

In 2013, SRA costs accounted for 52% of the income received by the Law Society through practising fees. The rest was made up of the levies to pay for the Legal Services Board, Legal Ombudsman and Solicitors Disciplinary Tribunal, and the sum that goes to the Law Society for its representative work as allowed by the ‘permitted purposes’ provision of the Legal Services Act 2007.

Included in the budget for 2014 is an amount to increase the headcount in the supervision team by 20 to 123.

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