SRA wants heads-up from firms before mergers and acquisitions go through

Law firms may have to tell the regulator in advance that they are planning a merger as part of new rules concerning early detection of potential issues in fast-growing firms. 

The Solicitors Regulation Authority today opened a consultation asking whether it should get the power to require firms to notify it that a merger or acquisition is being contemplated. The proposal is that this information should be shared when a deal reaches the heads of term stage or equivalent.

The SRA has had to deal with the costly fallout from accumulator firms such as Axiom Ince and PM Law going out of business with client money missing. There is a sense that more information is needed before mergers are completed so the regulator can make earlier decisions about possible risks down the line.

The SRA stressed that this is a notification and not an approval process.

Under the proposed changes, law firms would also be required to notify the SRA when they start holding or receiving client money, or merge with, or acquire, other firms.

Aileen Armstrong, executive director of strategy and policy, said: ‘Our focus is on gaining earlier visibility of potential risk. Having the right information at the right time is important to help us to proactively identify risks earlier and, if necessary, act on them to prevent harm, including the loss of client money.

‘The proposed new notification requirements will help set the foundation for this. We are initially targeting two areas where stakeholders agree there should be greater visibility of changes in real time: law firms acquiring other firms and firms starting to hold client money. We urge stakeholders to engage with us on our proposals for achieving this.’

In the consultation, the SRA states its continued belief there is a strong case for considering ‘fundamental, transformational reforms’ to the model of holding client money and how the profession pays for redress. But it admits these are complex issues that cannot be quickly resolved, so more immediate measures are currently taking priority.

This includes improving oversight of firms that significantly change their profile as a result of sales, mergers and acquisitions. A further consultation is expected soon on how law firms notify the SRA about the use of third-party litigation funding.

Sarah Rapson, SRA chief executive, has set out previously how the organisation needs to move towards a more intelligence-led, proactive supervision model. But the SRA admits there are gaps in its knowledge of the sector because it asks for information only at initial authorisation stage or during annual returns.

There is also an admission that the SRA has failed historically to strategically gather data for the purpose of understanding risk patterns, identifying risk characteristics or assessing any changes in the risk profile of a firm.

At the moment, firms must notify the SRA within 28 days if it is closing as a result of merger or acquisition. If the merger results in new owners then that must also be communicated to the SRA. But the regulator currently has no requirement for firms to notify it ahead of a likely merger or acquisition, nor does it ask for information to form a risk assessment related to the transaction.

As part of new notification requirements, firms would have to disclose the turnover of the acquiring and target firm, the value of client money held by the acquiring and target firms, a breakdown of the areas of law practised by the acquiring and target firms, expected completion date and the number of acquisitions by the acquiring and target firm within the last 24 months. The SRA will also want to know the proposed structure after the merger is completed.

The consultation, which closes on 17 August, also asks whether the SRA should apply fixed penalties to firms that do not comply with the new notification requirements.