Desperate firms turn to 'non-mainstream' lenders

The SRA has warned today that firms with financial difficulties are "increasingly turning to non-mainstream lenders" in their battle to balance the books.

The regulator warned last week that it may ban practices from using unrated indemnity insurers following the collapse of Latvian insurer Balva.

Earlier this month, at an SRA board meeting in London, it emerged that around 30 of the top 200 law firms had entered 'intensive engagement' with the SRA over serious financial difficulties. In total, 160 firms were said to be in serious financial difficulties, including eight at immediate risk.

In its Risk Outlook 2013, the regulator described the financial difficulties facing law firms as "the most significant current risk to our regulatory objectives."

In particular, the SRA said: "As firms' financial positions deteriorate, we are finding that they are increasingly turning to non-mainstream lenders.

"This can exacerbate financial difficulties by exposing law firms to high rates of interest and restrictive loan conditions.

"We are also alert to potential risk that a non-mainstream lender may exercise significant influence in the firm that amounts to a pre-emptive ABS arrangement."

According to the Risk Outlook, the SRA was currently engaging with 51 firms with a high likelihood of intervention and had identified 2,000 with an 'increased susceptibility'.

The regulator said the "drivers of financial difficulty" were diverse, and included changes to the personal injury and legal aid sectors.

However, financial difficulty was a "major issue across all sizes of firm and types of work" was confined to specific sectors.

The SRA said that along with financial difficulty, dishonest misuse of client money or assets was a high priority risk.

Over the last five years, 30 per cent of all interventions involved suspected dishonesty and nearly half included breaches of the accounts rules.

The regulator said the number of ‘receipts’ or information received reporting concern about dishonesty had almost doubled in two years, from 649 in 2011 to 1,107 in 2012.

"Receipts for 2013 reflect this increased trend with 285 receipts received between January and March."

Poor financial performance and cash flow problems were often present, the regulator said, where the risk of dishonesty materialised.

"Financial pressure might not relate just to the firm. There are many examples of managers and employees with unmanageable levels of personal debt also resorting to accessing money from a client account."

In an interview with Solicitors Journal last week, SRA director of risk Andrew Garbutt said although it was clear that some firms "were not reacting" to the ban on personal injury referral fees, there was not "a significant number" of complaints from other law firms.