Law firm closures fall during Covid but support scheme abuses emerge

Pandemic: Covid card not played as much as expected

Law firm closures and interventions have fallen during the pandemic, but it has had negative effects too, such as abuse of government funding schemes, the Solicitors Regulation Authority (SRA) has revealed.

Speaking at yesterday’s Institute of Legal Finance & Management (ILFM) virtual annual conference, Sean Hankin, the SRA’s head of forensic investigation and intelligence, said that – to the regulator’s surprise – it has not seen evidence of widespread financial instability as a result of Covid.

Instead, firm closures and interventions actually reduced compared to previous years and the SRA has not seen a spike in the level of complaints and reports.

However, while the pandemic had produced some positive side-effects, such as law firms making use of the flexibility in the Standards & Regulations, as well as greater adoption of technology, his team has also been investigation a wide range of misconduct.

This included firms using staff pension contributions to keep themselves afloat, reports of abuse of the furlough scheme and bounce back loans, firms not maintaining their client accounting records because they were offsite, breakdowns in “effective supervision” because of remote working, and “far more opportunities for cybercrime”.

Mr Hankin said fewer firms that expected had “used the Covid card to delay an investigation or frustrate what we’re trying to do”, adding that excuses about staff absences and not being able to access offices were now less effective.

At the same time, Mr Hankin acknowledged that may be “time delays” in matters coming to its attention, with supervision failures in particular potentially taking years to uncover.

Qualified accountant’s reports, meanwhile, continued to highlight significant problems with residual balances and firms offering banking facilities, he added.

Mr Hankin also revealed that only 33 firms were currently operating third-party managed accounts (TPMAs), around half of the number a year ago.

He speculated that a lack of competition in the market – with Shieldpay the main player – was one of the reasons for the low take-up.

Speaking in a subsequent panel discussion, former ILFM chair Richard Hill – the chief executive of London law firm Stepien Lake – suggested there was a widespread lack of understanding about how TPMAs work.

Darren Whelan, the ILFM’s director of education and development, added that he was aware of one provider that required client due diligence checks significantly greater than those that law firms have to undertake under money laundering rules, which were also discouraging take-up.

Separately, Mr Hankin signalled a softening of the SRA’s position on whether law firms could recharge to clients the cost of negative interest rates.

Last year, ILFM chair Ian Johnson urged law firms to change their retainers so they could charge clients for holding their money, given the possibility of negative interest rates. However, the SRA indicated it might not allow firms to do this, although no final decision was made.

The panel yesterday acknowledged that the possibility of negative sterling interest rates had receded but said they have already become a reality with Euro-denominated accounts and other currencies.

Neither the SRA nor the Law Society have issued guidance, although the Law Society of Ireland has said firms can recharge the cost.

Mr Hankin said the regulator was “holding fire” for now but confirmed there was no prohibition on charging the client.

“The main thing is to be transparent with clients, either at outset at matter or when it becomes an issue,” he said. “You’d have to make sure it was properly classified in the bill as well and that the firm wasn’t looking to make any profit itself.”

Mr Johnson described this as a “good, pragmatic approach”.

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