It all goes very quiet at the SRA board meetings when the subject of interventions comes up. Director Richard Collins updated the situation yesterday with the solemnity of a radio announcer reading out the names of kittens who have died that day.
In short, this year has been the game-changer the regulators have feared since the economy crashed. Now the banks have woken up to the uncertainty in the legal market, firms are starting to implode – with dire consequences for those firms with their heads still above water.
Law firms are no ordinary businesses. They’re keepers of valuable documents that can’t be thrown into a skip with the fax machine. The SRA has to do something to protect clients. The only question is what?
We all like to bash the SRA, but realistically it’s in a desperate position here.
The figures are stark: the SRA is expected to be saddled with £7m extra costs this year through interventions. This is not even the worst-case scenario – if a firm the size of Cobbetts needs help, we can expect that figure to double.
Clearly, doing nothing is not an option. Someone has to find new homes for live files and securely destroy those that have closed. There is room for reform here, with the regulator currently obliged to keep files for up to seven years even if, as in one recent case, they were already 20 years old.
One possibility is a one-off levy against firms to cover the 2013 deficit. On my rough calculations that would mean each firm paying roughly £700 towards helping the SRA clear up others’ mess. I can just imagine the reaction from practitioners about that.
And anyway, these kind of one-off levies are merely a sticking plaster. Collins himself predicted that 2014 looks like being no better for the legal profession, so would there need to be another cash call next year?
The SRA’s answer is to shift responsibility to the compensation fund, where there is room to manoeuvre and cover the excess costs. The change is subject to a six-week consultation period, but this has ‘done deal’ written all over it.
This may be the best option, but it feels instinctively wrong. The Compensation Fund is designed to protect clients, to pay them back when a dodgy solicitor has run off with their money.
Interventions are similarly intended to protect the consumer, but this will look to the public like law firms being bailed out with money allocated for their clients. Robbing Peter to pay Peter’s financially unstable solicitor, if you like.
As a short-term measure, we can hold our nose and let it through, but there are long-term questions to address. Should firms be compelled to reveal their financial troubles earlier, giving the SRA more scope for non-intervention action?
Will the SRA look again at the costs of intervention agents, which outweigh the costs of file archiving? It should be incumbent on the regulator to explain what value for money this arrangement is providing.
And ultimately, what sanctions are in place to make sure those responsible for a firm’s failure cannot escape with their pockets full? The first cash call in future must be on managing partners, not the compensation fund - and if they will not contribute to the costs of interventions, they should not be allowed to practise.
John Hyde is a Gazette reporter
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