The Solicitors Regulation Authority (SRA) is keeping a close eye on the growing number of law firm consolidators because of particular risks they raise – including being a vehicle for criminals.
Sean Hankin, its head of forensic investigations and intelligence, told last week’s Institute of Legal Finance & Management conference in London that “we’ve seen sometimes firms being taken over and consolidated, and sometimes that can be by [what another speaker called] ‘baddies’”.
He continued: “We can have organised crime groups infiltrating firms and getting into their client account. It can be a really good source of illegitimate funds for them.”
Speaking afterwards to Legal Futures, he stressed that being targeted by crime gangs was not a widespread problem – indeed, he had one particular example in mind – but warned solicitors that “if someone is looking to take over your firm, you need to be very mindful of who those people may be”.
Mr Hankin said: “We’ve had other firms where there’s not necessarily a criminal element but they’ve been taken over in a haphazard way. They’ve not consolidated properly, they’ve still worked independently, and the controls haven’t been in place.
“And then things have just gone wrong as a result of that. Those firms have ended up collapsing. In some of those cases, we’ve had to take regulatory action in order to protect clients’ interests.”
He said the SRA was taking a particular interest in consolidator, or what he called “accumulator”, firms.
“We are mindful of the red flags that there may be in a firm that may be growing quickly or acquiring a number of different firms over a short period of time and what the regulatory impact and risks could be.”
Mr Hankin acknowledged that there were “often good reasons for firms to consolidate” – such as spreading the cost of insurance premiums and back-office operations – and it was not the SRA’s job to second-guess business decisions, even if they went wrong.
“But sometimes law firms are attractive because of the money they hold on client account… We intervened in one firm where it was targeted for its client account.”
Another approach the SRA has seen is firms in one specialism, such as personal injury, being approached to lend their name to another, like a conveyancing practice, and share the profits.
“If you’re a manager of that firm, you’ve still got to make sure you understand the risks, what the work is and that you can supervise it properly,” Mr Hankin warned.
He went on: “If you were approached by someone to take over your firm, you need to be very careful about checking the credentials of those people and what their involvement would be…
“If you’re still a manager of that firm, you need to make sure you’re mindful of [your] responsibilities going forward – that things like client account are still dealt with in a sacrosanct way and that you don’t just step aside and hand over the running of the firm.”
Mr Hankin said the SRA’s focus was on ensuring mergers or closures were done in an orderly way to protect clients’ interests.
He advised consolidators to ensure they did not grow so quickly that they could not exercise their supervisory functions properly or have adequate reporting in place.
Consolidators tended still to be individual firms operating under a single umbrella. Key questions, Mr Hankin said, included: “Who’s in control? Who’s making the decisions that would affect the viability of the firm going forward?”