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150 UK law firms in 'very significant financial difficulty'

COLPs and COFAs not required to report non-material breaches

19 April 2013

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By Manju Manglani, Editor (@ManjuManglani)

Around 150 UK law firms are “experiencing very significant financial difficulty,” according to Samantha Barrass, executive director at the Solicitors Regulation Authority.

Speaking at Managing Partner’s COLP and COFA conference in London yesterday, Barrass said firms need to act quickly when they get into financial difficulty, including “removing or suspending individuals who may have failed to act with integrity”.

Barrass also said that the regulator has adapted its approach to remove "burdensome" reporting requirements on law firms’ compliance officers.

“An important part of our approach is ensuring that COLPs and COFAs have maximum flexibility to carry out their duties in a way that best fits their business.

“Our approach is not to set unnecessarily prescriptive and burdensome tasks that don’t work in the public interest, and it is for this reason we recently announced our decision not to require recognised bodies to report non-material breaches, although they will still need to be recorded.”

Reckless trading

Barrass warned that the regulator “will not tolerate the reckless trading of firms into insolvency and, where this happens, we will pursue enforcement action under Principle 8, including referral to the Solicitors Disciplinary Tribunal where appropriate.

“We will also look to other actions, such as conditions on individuals’ practising certificates designed to prevent those individuals responsible for exacerbating difficulties at one firm to simply move to another without any consequences.”

Barrass went on: “Yes we are taking a hard line on this, and our actions reflect the risks. We believe there need to be strong deterrents for those putting the interests of their clients at risk and imposing costs on the rest of the profession.

“In particular, we fundamentally do not think it is right that firms that are run responsibly, diligently and effectively pick up the tab for those that aren’t – which is what happens when firms in financial difficulty do not do all they can to ensure an orderly wind-down.”

Referral fee ban

Barrass also warned that regulator would take “appropriate action” against firms that decided to take a ‘wait and see’ approach to the referral fee ban, and made no effort to change non-compliant practices.

She said a website that offered to find solicitors for members of the public would be caught by the ban if it gave firms “potential client information”, rather than simply forwarding their details to consumers.

Barrass said she was concerned that joint marketing schemes could be used “unintentionally or deliberately” to hide payment of prohibited referral fees.

“Simply re-badging an arrangement with, for example, a claims management company as a joint marketing scheme on the basis that the CMC does some advertising, and possibly changing the charging structure from a payment per case to a lump sum, will not be enough.

“We expect firms to be able to demonstrate that the payments they make can be justified on the basis of the services they are receiving (be that marketing or any other service).

“We will be looking at the substance of the arrangement rather than just how it is labelled.”

A recent survey found that nearly a fifth of specialist personal injury law firms in the northwest of England are considering closing down. Seventy-five firms said profitability will drop by 50 per cent as a result of the Jackson reforms coming into effect on 1 April.

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Finance Risk & Compliance