The Solicitors Regulation Authority has urged struggling firms to establish a contingency plan for insolvency, as the cost to the profession of interventions increases.
The regulator has committed £2.2m to interventions in failed law firms in the first quarter of 2013 – almost £1m more than it spent on interventions for the whole of 2012. After intervening in 30 firms last year, the regulator is currently in talks with 56 firms where intervention is possible.
At its board meeting last week, the SRA warned that financial pressures on some firms will intensify as lenders become reluctant to provide more capital. Civil justice reform, personal injury fee cuts and commitments to expensive premises could put many practices under renewed strain.
It has also emerged that any added costs burden from increased interventions could be passed on to the compensation fund, resulting in higher contributions from firms and individual solicitors.
Executive director Samantha Barrass said at-risk firms needed an ‘early wake-up call’.
‘A contingency plan is needed sooner rather than later so that firms get to grips with the situation and do not let it drag out to the bitter end,’ she said.
‘If a firm is reacting when it is bordering on insolvent or has gone out to market, that reduces the potential impact on clients and the financial impact on intervention costs.’
The SRA said intervention – partially outsourced to Capita – is a ‘last resort’ and used only where there is a risk to clients. Interventions last week into failed firms Atteys and Blakemores have had ‘very significant resource implications’, with total costs estimated to rise to £1.8m.
The regulator said costs were so high because of the need to secure live files and archive or shred closed files. In the case of Midlands firm Blakemores, at the point of intervention there were 4,000 live matters, 130,000 dead files and 5,000 deeds.
The regulator responded to criticism that it had not intervened at national firm Cobbetts, which endured several months of financial problems before being bought in a pre-pack administration deal by DWF.
Relationship manager Samantha Palmer said: ‘We identified Cobbetts was in financial difficulties and it was moved to intervention supervision. Had an intervention been required, we estimate costs were in the region of £6m.
‘We’re now investigating events with regard to a follow-up of any conduct issues arising.’
The SRA said it had uncovered examples of poor behaviour at firms that were struggling financially, with drawings exceeding net profits and debt increased to ensure partners were paid in full.
At some firms, VAT received was being used to pay off tax bills and there was a heavy dependence on high overdrafts.
Key financial information was not shared with ‘rank-and-file’ partners, and many of them were ‘out of touch’ with office account bank balances.
While the SRA will use the compensation fund to meet some or all of its short-term intervention costs, the authority said it will look to change behaviour in the longer term.
Public enforcement action may be taken in individual cases to educate and to deter others from risking the interests of clients.
The SRA may also seek wider powers to direct managers short of intervention and force firms to ringfence capital funds for the costs of winding down.
The regulator will seek to change the rules regarding the length and cost of closed file storage.
With regard to pre-pack administrations, the SRA said it was ‘highly aware’ of the perception that members were protected at the expense of creditors and it would review its policy for the process.
Meanwhile, the Law Society has indicated it may be time for a fresh approach to paying for intervention agents to mitigate the financial impact on the profession.
At present, intervention agents are paid for taking over files, but chief executive Desmond Hudson suggested firms might actually pay a fee for the work or do it for nothing.
The prospect of assuming the handling of ‘5,000 or 10,000 files’ involving wills and title deeds where people need to be traced could prove attractive, Hudson suggested.