Financial advisers to the legal sector have warned of twin dangers threatening to undermine law firm stability in 2015 – with the potential to cause more closures.
Steve Billot, managing director at Duff & Phelps, a specialist in restructuring for high street practices, told the Gazette that firms should brace themselves for the unintended consequences of banking reform in January.
That is when, under the Basel III regulation, banks will be expected to bolster their reserves to match firms’ client account balances to cope with any possible run.
The impact on law firms – many of which rely on interest from client balances – could be substantial, according to Billot, as banks pass on costs.
‘Banks have to put aside billions of pounds to match the assets of client balances. It has thrown a real question as to the interpretation of client account balances and how lenders will treat them,’ he said.
‘Lawyers will no longer receive preferential interest rates on deposits, and in turn will no longer benefit from lower interest rates on loans they take out from lenders.’
Billot said many firms have client account balances that far exceed their turnover and earned ‘substantial’ returns from the interest.
‘Firms have to be aware of this problem. You don’t want to have a budget on 1 January that relies on interest from client accounts.’
Meanwhile, Peter Noyce, head of professional services at accountants Menzies, told the Gazette that he fears firms have not saved enough to see off trouble in 2015 arising from the way they dealt with new tax rules governing LLPs.
To comply with new rules designed to combat tax avoidance by ‘disguised employees’ of LLPs, many salaried partners protected their self-employed status by injecting capital in the LLP.
Noyce said the worry is that too many firms used this windfall to sustain unviable business models and poor working capital management. ‘If that is the case, the 2014 summer of discontent has simply been put off for 12 months,’ he said.