Can't see the wood for the trees

News that City firms have posted record financial results showing profitable growth averaging around 7 per cent has urged some commentators to believe that the future for the whole of the legal profession is exactly the same.

Just as we have a huge disparity between the increases in the value of London property to the rest of the country, we see a similar issue between City and regional law firms.

This does not necessarily mean that being a top 100 law firm means you are safe from the challenges ahead.

There is no doubt that smaller and mid-tier practices have enjoyed significant increases in new instructions over the past six months, mainly due to the housing demand and government-supported mortgage schemes. Many have seen an increase of up to 30 per cent in new instructions.

Does this mean that the profession can breathe a huge sigh of relief and assume that everything will go back to the way we were before 2008?

Conveyancing

Sadly not; recruiting new
staff, particularly those with conveyancing experience,
is very difficult and places
even more of a burden on overworked partners. This in turn could have greater consequences for those firms seeking competitive professional indemnity renewals in October.

If conveyancing represents
20 to 25 per cent of a law firm’s business, and they do not have systems and processes in place to manage risk, then they may not even get a professional indemnity insurance quote if they have a poor claims history.

Conversely, if a firm exceeds over 70 per cent of its turnover from conveyancing, then they are considered a specialist practice and should enjoy lower premiums subject to their
track record.

But what are the challenges that are facing the profession?

First, we will see an increase in interest rates. Although modest to begin with, it will certainly slow down the housing market – this could well happen by October this year. The Basel 3 reforms due to take effect in January 2015 could have an impact as banks will have to significantly increase their capital requirements, and
client account deposits could
be treated as Type A accounts. Therefore banks could be penalised for holding client account monies, let alone paying interest on them.

Legal aid

Legal aid budgets will continue to be slashed in upcoming years; the £320m worth of cuts seen in 2013 is set to increase year on year. The government
is looking to cut £1bn from the criminal legal aid budget and reduce the number of firms from 1,600 current providers to just 400. Where do 1,200 small law firms providing criminal legal aid go?

We are still observing the impact of the referral fee ban
on personal injury firms and are awaiting the outcome of the forensic investigation into the changing of the words ‘referral fee’ to ‘marketing fee,’ and how firms will react to this.

Access to working capital
to fund personal injury and clinical injury cases is becoming increasingly difficult, hence
the growth in new business structures.

There are still 2,000 to 3,000 firms that are financially unstable. Perhaps that is why many firms have either been in merger talks and many still are, but the risks of getting it wrong can outweigh the opportunity.

There are many other challenges but there are fundamental changes ahead that no short-term increase in turnover will solve. We have to address these underlying issues before the profession can take advantage of the increased demand for legal services.

If firms fall into the trap of overtrading, then finding access to additional working capital will prove difficult but not impossible with the right strategy and business plan. Dropping unprofitable services and focusing on lucrative work means clients become the solution for firms. Papering over the cracks of a profession in need of reform is simply not good enough. SJ

Viv Williams is CEO of 360 Legal Group