You are here

International law firms at risk of 'group contagion'

SRA ‘most concerned’ about conglomerate business structures  

13 November 2013

Add comment

By Manju Manglani, Editor (@ManjuManglani)

International law firms and those with complex business structures are at risk of group contagion, the Solicitors Regulation Authority for England and Wales (SRA) has warned.

In its paper Catching a chill: law firms and risks of group contagion, which forms part of its updated risk outlook for autumn 2013 report, the regulator notes that firms within groups are at risk of both direct and indirect contagion.

“We are most concerned about the potential for group contagion with conglomerate and larger corporate structures,” the SRA says in its paper.

It adds in its report: “We do not wish to inhibit law firms from making use of different types of business structure. We only see this as a risk where excessive use of complexity is used to reduce transparency between the firm and its clients and regulator.”

The regulator says that group contagion is particularly relevant to large conglomerate structures that contain several firms and entities within a single group, but that firms in any type of group structure could be at risk.

“Group contagion is a risk that is relatively new to the legal services market, but is one that is well-known from other markets,” it says in its paper.

“Direct contagion involves a financial shock to one firm in the group spreading through the rest of the structure through direct financial links.

“Indirect contagion involves outsiders reacting to an event at one firm in the group, with impacts on the rest of the structure. The most common manifestation of this is reputational harm.”

The SRA suggests that ‘firewalls’ be adopted between members of a group in order to “prevent or mitigate shocks that could spread through the overall business” following exposure to financial and reputation risks.

However, it notes that, where a single brand is used throughout the group, a firewall will not be effective against indirect contagion.

Categorised in:

Risk & Compliance