The cost of law firm failures is being felt across the solicitors’ profession. The Gazette reported recently that the unprecedented bill for the Solicitors Regulation Authority (SRA) intervening in failing firms means that we will all have to pay an extra £23 each towards the compensation fund in the coming year. The well-managed firms pay for the failed ones and a solution to this dichotomy is needed.

In the short term, there is no realistic alternative, but the SRA urgently needs to adopt a new approach to interventions which is both outcomes-focused and commercial. There’s no reason why the regulator cannot be commercial where it is in the best interests of clients.

Many failed law firms have personal injury (PI) work and I expect more failures are likely. What I have seen is that many firms do not have the requisite skills to risk assess PI cases, leading to under-settlement and risk of negligence claims. PI firms with work in progress lock up that may not have the experience to set cashflow forecasts and stage billing can turn into financial difficulties and failure.

A recent Gazette article highlighted the costs and pressure associated with interventions and set out the strategic and operational challenges faced by SRA intervening firms. Most worryingly of all, it stated that the cost of intervening in Atteys was likely to be £1m. One wonders if this cost could have been reduced or even avoided. With the costs and risk associated with an intervention, it surely has to be the choice of last resort?

Pre-intervention, when a firm is in financial crisis, the partners or bank may retain accountants to look at the sale of part of the business to raise urgently needed cash. My experience of PI cases being sold in this way often results in cases being sold at undervalue to assist in salvaging a failing law firm for a couple of weeks or months. Outcomes-focused regulation (OFR) and clients’ needs may not be the top priority.

How is this process regulated in terms of the drivers to pre-intervention financial deals? Are accountants and banks working within OFR?

Fresh approach

Intervention is a drastic step – as well as a costly one – and it is welcome that the SRA is looking at changes such as reducing archiving requirements. But I think the regulator needs to look afresh at how it deals with failed law firms with a more proactive approach.

My approach would have OFR at its core, with the costs of failed law firms being shared by key stakeholders within new levels of governance and regulation with commerciality underpinning the process.

The stakeholders include the firm itself, the bank, the professional indemnity insurer, any ‘purchasing’ law firms and the SRA.

A new SRA intervention panel is needed. Rather than just having solicitors who take over the files as happens now, it would be a multi-disciplinary group of people, such as solicitors who understand regulation and compliance for law firms; solicitors specialising in law firms in turnaround/sale/purchase; and expert accountancy/insolvency practitioners.

The panel would be called into action when the SRA became aware that a firm was in financial distress. This would be the ‘intervention lite’ stage. They would devise a strategy of measures that was OFR compliant and report to the SRA in a bid to avoid full intervention.

Any law firm in financial distress must have compliance and governance at its core. If the panel judged that the firm’s compliance officers were unable to deal with this alone, a team from the panel would be put in place, reporting to the law firm and all key stakeholders throughout the process.

Best value

A fresh approach would seek to avoid intervention and provide law firms with specialist support. If sale of whole or part of a firm were required, the panel would ensure that best value is achieved for clients and the firm itself. What happens with live cases is always a major issue in intervention, and if they were to be purchased, the panel would ensure they are sold for the best price and in the best interests of the clients.

To date what we have tended to see is an asset-stripping approach that sells the most valuable and lucrative work at low cost and leaves the closed and unattractive files with the SRA.

I propose that purchasing firms should take the rough with the smooth. Not only would they have to prove their ability to take on these clients in terms of expertise, compliance and their own financial stability, but they also take a representative proportion of closed files to ease the burden on the intervention costs.

The profession would embrace this. If there are businesses with pockets deep enough to buy cases at distressed value to turn a profit, surely they should also take some of the ‘pain’ in the closed cases and assist in funding the intervention costs? In addition, higher sale values could go some way to ameliorating the cost to the SRA.

In some situations, full intervention will still be required but by working with firms to solve their problems or at least organise an orderly OFR disposal of the business, these can be kept to a minimum.

Lesley Graves is the managing director of Citadel Law