Deal agreed: Now tell the SRA
Law firms will have to notify the Solicitors Regulation Authority (SRA) after signing heads of terms on a merger or acquisition, the regulator has proposed.
Firms will also have to notify it if they start holding client money.
The consultation issued today is the latest stage in the SRA’s consumer protection review, which it said had identified the need “to collect different and more timely information from firms in certain circumstances to help spot and target risks”.
This would support the “more intelligence-led, proactive supervisory regulatory model” that the SRA is developing under chief executive Sarah Rapson.
Currently, firms are obliged to notify the SRA of material changes to information they have previously provided.
But it does not specify in detail what changes should be notified. “In practice, we are often not told of changes that we may consider material in the context of protecting client money at the time that they happen,” the SRA said.
It wants to introduce a rule to require firms to notify events that the SRA will prescribe from time to time.
The first two will be pre-notification of M&A and beginning to hold or receive client money.
The consultation said it would also shortly be consulting on proposals “relating to the notification of third-party litigation funding”.
Prescribed notification will be for events “that are important for helping identify risks and act on them”.
Failure to notify will initially be punished by fixed financial penalties.
The SRA said M&A “can significantly change the profile of a firm and therefore its risk profile”, although it stressed that this was not about requiring approval of any deal.
The dangers included “risks arising from business models or incentives that are misaligned with client interests” – such as where “firms expand into areas of law or adopt financing arrangements that incentivise high volumes of cases or rapid growth without sufficient regard to client outcomes” – or “poorly executed change or expansion beyond a firm’s capacity and capability”.
The SRA added: “In the extreme merger and acquisition activity might enable or help to conceal misconduct.”
The regulator has been criticised for the lack of oversight of Axiom DWFM’s acquisitions of Ince & Co and Plexus Law, which quickly collapsed.
Reaching heads of terms or equivalent would be the “notifiable event” but given that the period between that and completion can vary, the SRA is asking whether it should also require notification at least 30 days prior to the deal completing, if practical, and how it should approach instances where there has to be a quick sale.
The parties would have to tell the SRA their turnover, client money held, breakdown of practice areas, recent M&A history, and “an indication of the structure after the proposed merger or acquisition”.
“We may engage with the relevant parties further and ask for additional information as appropriate.”
But the SRA stressed that the main purpose was to help it “track activity and changing patterns in the market”.
It explained: “Over time, this will make us better able to identify market developments that may require pro-active regulatory action and/or engagement with other regulators and bodies if they indicate cross sector or wider public policy issues.”
Aileen Armstrong, SRA executive director for strategy and policy, said: “Our focus is on gaining earlier visibility of potential risk. Having the right information at the right time is important to help us to proactively identify risks earlier and, if necessary, act on them to prevent harm, including the loss of client money.”
The consultation follows the SRA’s announcement [1] earlier this month on new rules requiring all firms holding client money to submit accountants reports to the SRA and separating law firm managers who can “unilaterally” make decisions from compliance officer roles in all but the smallest firms.