Steve Carter reviews the impact of the Access to Justice Act and argues that it has forced firms to assess the way they manage their finances


The changes brought about by the Access to Justice Act 1999 have been momentous.



Over the past few years, personal injury lawyers have been castigated in the press as heinous ambulance-chasers, been required to take on all the risks of winning and losing cases using conditional fee agreements, been forced to find the finance to run this unique type of business, and then, if they actually manage to do all of this successfully, they find opponents using the indemnity principle to stop them getting paid.



Many people outside claimant litigation fail to appreciate the overwhelming changes forced on firms over the last few years and, as a result, the increasing strain on solicitors' finances. This includes banks and external advisers who do not specialise in this area. In today's business environment, raising practice finance is essential - but it can be tricky.



It cannot be assumed that banks are rushing to lend in this sector, as the new claimant litigation business models confuses them. Firms will have some difficulty convincing most bank managers that theirs is a sound and low-risk proposition, especially when solicitors explain that, not only do they take on the full risk of the case winning or losing, but there is also a risk that they might not even get paid when they win.



If those bank managers have not yet heard rumours about the case of Garrett and its impact, they will have heard something about the endless satellite litigation causing untold damage to otherwise good firms.



Forecasting for a litigation business is complex and involves factors outside a law firm's control. My experience suggests that most banks assume that a law firm's accounts can be trusted to show an accurate picture of its assets and the profits made in the previous year. However, depending on the accounting policies adopted, it is relatively easy to interpret a profitable firm as a loss-maker with no assets and vice versa.



Often net spending or generating cash has been the sole guide for many as to performance and profitability. Consequently, I am often asked by bankers or law firm partners to advise on whether a department that has been sucking the business dry of money should be closed, given more money or re-structured. The litigation partners believe it is profitable, yet the accounts do not reflect this.



Weak management structure is another problem for those wishing to raise finance. Most litigators are trained to maximise clients' damages. What they almost universally do not have is business management training - and banks are concerned by that gap in knowledge. However, this can usually be overcome by getting the right expert external advisers in the areas where a law firm is weak.



To be successful in today's business environment, good management and strong reporting systems should be a primary consideration. Not least because law firms are battling against highly trained and incredibly wealthy opponents whose sole interest is in seeing claimant solicitors get as little as possible. For example, Norwich Union is part of Aviva, which made more than £1.2 billion profits last year. It is probably bigger than all the personal injury claimant law firms in the UK together.



To secure finance in the future, law firms need to be well organised, have good systems that monitor and report actual performance, and have advisers who really understand their business. They must be able to explain not only how good they are at winning cases, but also how successful they are at managing profitable businesses.



Steve Carter is a committee member of the solicitors group of the Institute of Chartered Accountants in England and Wales and senior partner of Liverpool-based GLF Carter Richards