Journalists are far too willing to bandy the term ‘crisis’ around, using it to label everything from a few cancelled trains to an Arsenal defeat. But how else to describe the impending financial troubles about to hit the legal profession?
I say profession quite deliberately. So far you may have run your firm in profit: you may have adapted for the changes to personal injury and legal aid; you may have avoided signing sky-high tenancy agreements at the height of the boom; you may have seen off the increased competition from new entrants to the market.
But even if you’re one of the good guys – especially if you’re one of the good guys – the fallout from the collapse of law firms will ultimately hit your pocket.
Make no mistake: Cobbetts, Atteys and Blakemores are the tip of the iceberg. According to the SRA, the regulator is supervising 56 firms that are in danger of intervention, mostly due to financial difficulties. Intervention means they cannot be allowed to hold client files anymore and there is little chance that another firm will come forward to buy them (Cobbetts was bought by DWF, but there was no intervention).
The cost to the profession is staggering. In the first three months of this year, the SRA has spent £2.2m in securing live and active files of failed firms. To put that figure into context, in the whole of 2012, the total cost of the 37 required interventions was £1.16m.
To intervene at Yorkshire firm Atteys, an average-sized firm of 140 staff, cost an estimated £1m. If just half of the at-risk firms meet the same fate, the SRA could have spent its entire annual budget on interventions.
The regulator has limited options. It can plead with struggling firms to lift their heads out of the sand and put ‘rainy day’ money aside to negate the cost of intervention. But if they’re already struggling, this is hardly likely to appeal.
The SRA can, and should, look again at its intervention policy. Is it really necessary to intervene in every case and if so, why are the costs so high? Could dead files not be destroyed earlier, for example?
It is interesting to note that intervention services are outsourced to Capita, and the profession deserves to know what value for money this arrangement is delivering.
At present the cost is borne by administration budgets, but there is a very real chance that it could be passed on to the compensation fund – which is, of course, funded by solicitors and their firms. We then risk creating a vicious circle where firms that are solvent are placed under financial strain covering for other firms that have already gone bust.
The SRA is going to be swamped in the coming months as the reality of mixing a regulated profession with the brutality of business comes home to roost.
Even if your firm survives, it’s ultimately going to cost you.
John Hyde is a Gazette reporter
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