The SRA has identified at least 1,200 firms – more than 10% of the total number – with evidence of financial difficulty after a mass survey of at-risk sectors.
Over the summer the regulator emailed around 1,300 firms reliant on areas such as personal injury and legal aid to ask for details about their financial situation.
Firms had been identified on the basis that they face significant funding cuts through government reforms of civil litigation.
The SRA found around half of the 1,000 firms that responded to the email to be demonstrating indicators of financial difficulty. They will join the 700 firms already being ‘actively supervised’ by the regulator and can expect to be contacted again in the coming weeks.
Around 500 have did not score at all on any of the financial indicators, suggesting no evidence of difficulties, and have been informed they face no further contact.
In an update sent by the SRA today, the authority said it will use the information to gain a better understanding of issues affecting firms.
Mike Haley, SRA director of supervision, said: ‘We contacted these firms not because we know they are experiencing financial difficulties, but to build our understanding of the current position so that we can target our resources at those who most need our help.
‘Engaging with firms at the earliest opportunity is the best thing to do, and this will allow us to know where we need to do this.
‘We’ve already had numerous examples of better outcomes for firms and clients when firms in financial difficulty have come to us. By surveying firms in this way, we are able to make our approach even more risk-based, and hopefully avoid the disruption caused by intervention.’
Data requested focused on such things as net profit (at the last financial year end), total borrowings, and highest and lowest bank balances for each of the last three months.
Those being contacted included around 500 ‘high impact’ firms, which would have a significant impact on the market and high intervention cost if they were to fail.
Firms were given until 3 September to respond to the survey, with around 300 failing to meet that deadline. Those that have still failed to provide requested information will be encouraged to provide it until potential enforcement action is taken.
Haley added: ‘We rely on firms to look for help as soon as possible, such as talking to us through our supervision function or seeking other forms of assistance, such as professional advice or contacting their Law Society regional manager.
‘Sadly, some firms refuse to acknowledge that they are in financial trouble until it is too late, which causes problems for clients, and can also lead to investigations into conduct.’
More SRA information on financial management of a firm is available here.