Posted by Laura Spooner, practice management and compliance associate at Legal Futures Associate LexisPSL
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:
- Failure to comply with regulatory requirements leading to intervention and/or disciplinary action (the costs of which the SRA will seek to recover from you);
- Inadequate arrangements for file transfer and the consequent likelihood of claims for breach of confidentiality or negligence;
- Claims of poor service leading to complaints to the Legal Ombudsman;
- Insufficient funds to deal with the immediate and ongoing costs of closure;
- Insufficient funds to cover tax liabilities; and
- The challenge of securing affordable run-off PII cover, including the cost of your excess
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:
- Who’s responsible for invoking the plan, ie who sets a date for pressing the ‘off’ switch;
- Notifying relevant parties – good idea to start with the SRA then staff, clients, the bank, next of kin…;
- What you do with current matters – hint: those with undischarged undertakings, impending critical dates or outstanding claims or complaints should catch your attention first;
- What you do with the money – SRA Accounts Rules 2011 at the ready;
- Insurance – think PII in particular;
- Facilities, ie your premises, IT, correspondence, etc;
- What to do with undertakings – don’t forget you remain liable for undertakings given by you or your staff even after the firm closes;
- Records management – you also remain liable for records and documents in your possession;
- Your general risk management processes – think critical dates, complaints and claims, and
- Current and ongoing trusteeships.
Are we done yet?
Not quite. Your plan also needs to include the steps you must take immediately after closure, including:
- Ensuring telephone callers and visitors to your offices and website are notified of your closure;
- Considering the risk of holding yourself out as a practising solicitor after closure, eg in relation to letterheads, e-mail signatures, continuing to work, etc; and
- What you’ll do with money received post closure.
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 suite of guidance and tools, so take a deep breath, steady yourself and put your plan together now (then relax and enjoy your practice!).