On looking to the future

The Solicitors’ Regulation Authority (“SRA”) has issued a consultation, which closed on 21st September 2016, focused on providing more flexibility in the profession whilst still ensuring protection for clients.

There are two aspects which interest me most as an adviser to the legal profession; first, the potential impact of qualified solicitors providing certain legal services through an unregulated practice and secondly, the proposed change to the definition of ‘client money’ within the Accounts Rules. I have discussed these two areas with a number of lawyers and I do not stand alone in the concerns I raise below.

Unregulated firms

The proposals provide for solicitors to be able to work in a non-regulated firm. The rationale for this is to increase the choice of where and how legal services are sourced. What’s more, it provides greater flexibility for solicitors and the ability for firms to be innovative and to become increasingly competitive. All of these are, in my view, great reasons.

All solicitors, as individuals, will be governed by a Code of Conduct including expected standards and behaviours. For regulated firms, there will also be a separate Code of Conduct. For unregulated firms, there won’t be.

My understanding is that unregulated firms will not need to comply with the Accounts Rules, which are designed to protect client money. Unregulated firms will not be able to use ‘solicitor’ in their name and they will not contribute to the Compensation Fund. I do wonder what the impact on professional indemnity insurance will be.

My concern is whether there will be clarity for clients on the differences and potential impacts for engaging with a solicitor in a regulated firm compared to an unregulated one. In situations where high quality legal services are provided without a hitch, there probably won’t be an issue. However, consider a situation that’s not so straightforward.

Thinking also about the increasingly competitive environment in the profession, I wonder how this will impact sole practitioners and small firms in holding their own against further price pressures as unregulated firms will be able to deliver legal services on a lower cost base.

Accounts Rules

The current SRA Accounts Rules have applied since 2011 and are detailed and prescriptive, ensuring that client money, and hence the client, is protected. Long established firms have developed systems and processes to meet the requirements of the Rules and my understanding is that this is working. Where it doesn’t work so well is for firms that are not on top of their game when it comes to risk management and compliance.

I wonder therefore whether such firms, who are readily compliant with the existing Rules, will welcome the proposed change, which is designed to make the Rules less prescriptive.

I am not against changing the rules. My concern is the protection of the profession, the client and other stakeholders – in fact, all connected parties.

My main worry is the proposed change to the definition of ‘client money’. Currently, where clients pay upfront for legal services to be delivered, these monies must be banked into a client bank account and kept separate from the firm’s own money until such a time as the bill has been raised. Under the new proposals, these upfront monies will be banked into the firm’s own bank account.

Whilst this doesn’t seem unreasonable when you compare it to other professions or to other services due to be provided, my concern lies with those firms that have been or continue to struggle financially.

Being able to bank these funds into their own bank account could mask the true working capital requirement of the law firm. Following many years of witnessing law firm failures due to a lack of strong working capital discipline, this does worry me. Firms will be afforded more flexibility in managing their banking and other lending facilities and covenants, which is not in the interests of the client, the firm or indeed the bank.

Further, funds received for unpaid counsel fees must also be banked into a client account. The proposal is for such funds to be also banked into an office account. Again, masking the true cash position of the firm is a significant issue for me, not to mention what cash flow problems could do to the relationship between the law firm and counsel, for example. Will counsel change their approach and wish to invoice clients directly?

It really does muddy the waters in my view. Management and leadership teams in law firms will need to be mindful of what is really their money to reinvest in the firm and what is due to be paid out to third parties. Lenders, advisers and other stakeholders will need to be vigilant in understanding the true cash position of a firm.

I will wait to read the responses to the consultation and, ultimately, for the changes to be implemented, ensuring that, as an adviser to the legal profession, I can assist law firms to ensure their working capital is strictly managed.

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