Weathering the storm

In their efforts to remain viable during the recession, many firms are adopting a much more aggressive approach, particularly in relation to marketing and the containment of costs. If not managed carefully and ethically, this could create serious risks to both clients and firms.

The Solicitors Regulation Authority (SRA) already has to cope with a sharp increase in work. We anticipate that the number of practices we will have to close down because of serious regulatory concerns will exceed 100 this year – the highest since 2001. It is conceivable that the number could even climb to be the highest since the early 1990s. Inevitably, this will ultimately translate into increased contributions to the Compensation Fund.

We recognise that most solicitors are committed to operate ethically, regardless of the pressures they are under. It might help these practitioners if I highlight the areas they should watch carefully in order to stay on the right side of the regulatory line during these difficult times.

The SRA’s Practice Standards Unit (PSU), which visits around 1,120 firms a year, is concerned that as firms make staff redundant, there will be fewer people left to carry out the necessary compliance tasks within the office. The principal focus will be getting costs in. This is liable to mean that compliance will take a back seat. My strong advice is to ensure that compliance with the Solicitors’ Code of Conduct (the Code) and the practice and accounts rules remains high on your agenda, come what may.

In a tougher commercial environment, some firms will expect fewer people to produce more work. There is liable to be less supervision of staff because fee-earners will be under more pressure for billable hours. Over-worked people are a regulatory risk. They are liable to take short cuts and may be tempted to mislead clients about the progress of their matters. I am confident it will avoid a lot of problems if fee-earners make a deliberate effort to maintain proper levels of supervision and ensure that the demands placed on staff are realistic.

We are also concerned that as firms merge to weather the financial storm, or firms are taken over (as successor practices), we may find more difficulties in ‘nominal account’ with monies from the old practice that is then difficult to return to clients, usually because of inadequate record keeping.

If you have to close your practice, whether because of retirement, financial difficulties or insolvency, it is important to do so in an orderly manner and to comply with the various regulatory requirements. These are primarily for the protection of clients.

It is imperative that you give them as much notice as possible of your intended closure date, so they can instruct another firm. If you arrange for another firm to take over their matters because time is short, it is important to explain that they can instruct this firm or any other. It is also good practice (and can avoid lot of inconvenience later) to contact any former clients who might be affected, for instance, those who have appointed you as executor or for whom you hold documents, such as wills or title deeds.

A summary of the relevant rules of conduct and regulatory requirements is at http://www.sra.org.uk/solicitors/code-of-conduct/guidance/1626.article

The PSU is concerned that financial pressures may make firms more likely to retain undisclosed commissions and make secret profits. By secret profits I mean, for instance, marking up the cost of something paid on behalf of the client, but still describing it as a disbursement. This is sometimes done with telegraphic transfer fees and conveyancing searches. The taking of secret profits is an offence under the Fraud Act 2006, as well as contravening the Code.

Some firms, understandably anxious to acquire work, may be willing to accept it from introducers with whom they would not normally want to do business. I emphasise that firms that repeatedly flout the rules should expect a robust response from the SRA.

A recession-related issue that is currently causing concern is claims introducers who make misleading claims to the public about the chances of getting debts written off. We have warned solicitors not to accept business from such introducers. (For guidance, see http://www.sra.org.uk/solicitors/code-of-conduct/guidance/2636.article )

The SRA is aware that some solicitors, especially in the conveyancing sector, have sought to provide services in other specialisms. Provided they do so having ensured that they have the appropriate level of expertise and competence – a sensible thing to do. However, rule 2.01 makes it clear that you should refuse to act or cease acting for a client if you lack the competence to deal with the matter.

There has been an increase in calls to the Professional Ethics Helpline from solicitors who are concerned about bankruptcy and its effect on practising certificates. Bankruptcy automatically suspends the practising certificate and, in the case of a sole practitioner, will mean the closure of the firm, if necessary by means of intervention. However, there are situations where a practising certificate can be re-instated by the SRA. Application for this to happen can be made even before the formal declaration of bankruptcy.

My strong advice to solicitors anticipating bankruptcy is not to delay seeking advice and help. The SRA Professional Ethics Helpline is open Mon-Fri 9am-5pm on 0870 606 2577 or email professional.ethics@sra.org.uk

If you do not want to initially talk to the SRA, I suggest you call the Solicitors Assistance Scheme, which offers advice on insolvency and also redundancy (020 7117 8811).

Warning cards to help you and your staff to avoid becoming involved in improper financial arrangements have also recently been issued, see: http://www.sra.org.uk/solicitors/code-of-conduct/guidance.page#warning

Colin Quinney is director, Investigation and Inspection Regulation Response at the Solicitors Regulation Authority. He can be contacted at colin.quinney@sra.org.uk