The Solicitors Regulation Authority (SRA) is biting off more than it can chew by trying to deal with the financial stability of law firms, the Law Society chief executive has suggested.
In an interview with Legal Futures, Des Hudson said regulators should not create “unrealistic expectations of what regulation should do”, arguing that the priority should be to protect client money.
Asked whether he had confidence in the SRA’s ability to judge law firms’ financial stability, Mr Hudson said: “Can I answer that in a slightly different way? Do I have confidence in a regulator’s ability to judge the financial stability of every participant in the market – no, I don’t… I’m not making a point about the SRA. I’m making a point about the art or science of regulation – I don’t see how regulators can micro-manage to that degree of accuracy.”
To say there are 160 law firms about which it is particularly concerned – as the SRA has done – would require a broader picture of the state of all 10,800 law firms, Mr Hudson said.
“What you may do instead is set yourself a series of objectives and a horizon that is deliverable that is practicable and you make sure that people are not creating unrealistic expectations of what regulation can do.
“And I would come back in that instance to say that what I’ve got to do is protect client money. That’s what I can practicably do at the moment. If I have a firm that is then making a reporting disclosure to me under the new rules… do I have a risk to client money? And if I’ve got 100 firms telling me they’ve had a disadvantageous change to our financial circumstances, what you would do is decide do any of those changed circumstances represent a risk to client money.
“Where there is a risk to client money, I will work with those firms. With the rest of them, if I can offer advice or guidance or palliative care I will but I will set my focus on protecting client money.”
Looking at the competition facing traditional law firms, Mr Hudson said that “being scared is probably no bad thing”. For him, a key question that firms need to be able to answer is how they are going to generate clients in the future. “You are competing against very well-resourced big brands that are picking off, quite legitimately, commoditisable, systemisable activities [and that] is something that’s going to be hard to compete with.”
This links to the referral fee ban, a policy he originally opposed when voted for by the Law Society council but has now come to agree with: “I don’t believe that buying and selling cases is acting in the long-term interests of users of legal services.”
It is also important to separate out the elements of work that are essentially administrative, and handle them as efficiently as possible, while charging for those elements where lawyers can add value, he said: “If you want to charge lawyers’ fees for administrative services, you going to have a problem.”
It is unlikely, Mr Hudson said, that by 2020 there will be the near-11,000 law firms that currently exist, but that does not mean there will be substantially fewer. “The example I would quote there is that British Gas is still the dominant player in [its] market. So where you’ve got massive, massive change to a market, which is of long-standing, the changes don’t happen overnight.”
“There are some firms who are perhaps a little sleepy in terms of the business of law. There are equally some outstandingly smart, innovative firms, and being smart and innovative isn’t a preserve of being big.”
Mr Hudson suggested that one problem is that lawyers work so hard for their clients that they are unable to devote enough time to their own interests. “In Scotland they call it the cobbler’s bairns – the cobbler’s children are always the ones with the holes in their shoes because he’s spending all of his time looking after his paying customers…
“I do think the Law Society has a role – not in saying ‘thou shalt do this’ or giving people the answer, but trying to provide information, to build awareness, to share good ideas and best practices.”
The interview will conclude tomorrow by looking at the work and role of the Law Society