The increased risk City firms are accepting on behalf of clients could put some in danger of collapsing, research commissioned by the Solicitors Regulation Authority has revealed.

The study by the University of Birmingham and consultancy Claire Legal shows that clients are increasingly expecting their legal advisers to accept more risk, either through more sophisticated outside counsel guidelines, panel arrangements or engagement terms.

Such risk transfers are presented to firms as ‘non-negotiable’ and include making firms responsible for tax advice, an expectation that firms will check their client is not breaching sanctions, and providing anti-corruption undertakings.

A number of the 53 lawyers interviewed as part of the study said that ‘softness’ in the personal indemnity insurance market, driven by capacity, is ‘fuelling the perception of the profession as having deep pockets’.

The study warns that this perception could create systemic risk in the legal profession, which could lead to significant liability, the risk of some firms collapsing and ultimately undermine the strength of the profession on the international stage.

City firms in general are under increasing pressure from their clients, the report says. 

The pressure is in part evidenced by restrictions clients are imposing on firms over who they can act for. Some lawyers interviewed claimed that contractual provisions are being used strategically by some clients to deny claimants representation from top-tier firms.

‘It was suggested to us by a minority of our interviewees that law firms may be appointed to panels, and made to sign ‘no sue clauses’, where the client has little or no intention of giving that firm work,’ the study says.

Many lawyers interviewed for the report revealed that the balance of power had shifted from firms to clients, with major corporations and financial institutions trying to impose their own terms of engagement. Three-quarter of those interviewed said they were forced to accept more challenging terms with little room for discussion. 

The research also found that firms had a poor understanding of independence, suggesting they were not independent from clients nor did their clients expect them to be.

It found a number of ‘structural pressures’ on firms’ independence. The ‘most worrisome’ was third parties, most commonly borrowers, chosing which law firms act for other parties on their deals.

Crispin Passmore, executive director for policy at the SRA said: ‘We seem to be seeing real pressure on law firms from clients, which makes it all the more important that the professional principles of independence and ethical practices remain at the heart of solicitors’ decision-making.’