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Jean-Yves Gilg

Editor, Solicitors Journal

A big issue for small firms

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A big issue for small firms

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Succession and exit planning is key to maintaining a firm's viability pending sale and to avoiding regulatory fallout, advises Deborah Sullivan

According to statistics from the Solicitors Regulation Authority (SRA), sole practitioners accounted for 26 per cent of solicitors' firms in April 2016. This article explores why retirement and succession planning should be high on their agenda by outlining some of the key regulatory obligations, risks, and professional indemnity insurance (PII) implications involved.

Operating against a backdrop of fierce competition for work, a number of sole practitioners are positioning themselves to pass on their business to new owners; others simply want to retire. Succession and exit planning is key to maintaining a firm's viability pending sale and to avoiding regulatory fallout.

What if you are not planning to sell up or retire any time soon? Unexpected events also intervene to close practices. While by no means unique to small firms, possible emergencies affecting key individuals, such as disciplinary action, bankruptcy, illness, and death, are a particular threat to their continuation and demand a detailed contingency plan. What will happen if, for whatever reason, the compliance officers for legal practice (COLP) or for finance and administration (COFA) cannot fulfil their roles? Sole practitioners should nominate someone to deal
with their business if they are incapacitated or die, not least to avoid an intervention by the SRA and the associated costs being borne by them or their estate.

Exit plan

The practical and commercial imperatives for retirement
and succession planning are underpinned by the profession's regulatory framework. Principle 8 and outcome 10.13 of the
SRA Code of Conduct require solicitors to run their businesses 'effectively and in accordance with proper governance and sound financial and risk management principles' and to effect any closure in an orderly and transparent fashion. The SRA expects firms to have an exit plan that will enable them to be wound down in an orderly manner or taken over by new owners.

Failure to plan properly can lead to disciplinary action, an intervention, and exposure to
an ombudsman's decision in respect of poor service received by clients. It follows that early planning can save time, money, and reputational damage further down the line.

A plan for an orderly closedown will usually address the following issues:

  • How clients will be informed;

  • Who else needs to be notified (including the SRA);

  • How active matters will be transferred to a successor firm or another firm;

  • How run-off PII cover will be obtained and paid for; and

  • How closed files will be dealt with and the return of monies paid on account.

The Law Society's practice note dated 22 March 2016 provides a detailed checklist.

Client consent

The transfer of files, in particular, can create thorny issues. Transferring files to another firm before clients have consented carries significant risks, including breach of trust and breach of confidentiality.

Clients must be informed of a change in ownership before it occurs, in accordance with principles 4 and 5 of the Code of Conduct (i.e. the obligations to act in clients' best interests and to provide them with a proper standard of service). Clients should be able to make an informed choice about whether to instruct the successor firm.
If the new firm is SRA regulated and authorised, practitioners can set a deadline for clients to indicate whether or not they want to transfer to it; upon its expiry, the relevant file can then be transferred. However, if
the new firm will not be SRA regulated, explicit, informed client consent is required to transfer their files and money. Such clients would also need to be made aware that the file will not be worked on absent their consent. When closing a practice, clients should be given enough notice to instruct another firm.

The PII implications of a firm's possible closure also require careful thought and advance financial planning. Do you have a plan in place to fund your firm's run-off premium?

Practitioners should discuss their plans to close with their professional indemnity insurer. If there is no successor firm, run-off cover must be purchased for six years from the date that the current policy would have expired. The Law Society's PII retirement calculator can be used to calculate the likely cost but it should also be set out in a firm's PII policy.

If there is a successor practice, claims made after the firm's closure will be dealt with by the new firm's qualifying insurer unless run-off cover has been obtained for the prior practice before succession. A discussion needs to be had between the previous and the successor firm as to whether run-off cover will be purchased and, if so, who will foot the bill.

Reluctance to engage in retirement and succession planning is understandable but ill advised, and only leads to more problems in the long run. Planning is a must, not only from a regulatory and commercial perspective but also for your peace of mind. SJ

Deborah Sullivan is an associate in the professional risk team at Weightmans

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