Editor's blog | Sub-primes for lawyers

It is nearly lunchtime on 13 March at the Solicitors Regulation Authority’s City offices. Halfway through the regulator’s monthly board meeting, policy director Richard Collins reveals that before the first quarter of 2013 is even over, the SRA is about to spend £1.8m, more than its total annual intervention budget, dealing with the aftermaths of the collapse of two large regional firms, Atteys and Blakemores. This estimate, together with a few thousands of pounds spent on smaller interventions, also represents 10 per cent of the SRA’s annual operating budget. As the news sinks in that the regulator could be running out of cash, Collins shares additional observations about the profession’s general health. Other firms are under the equivalent of intensive care, he says, undermining the regulator’s financial position further to the point that the profession itself may ultimately have to pick up the rising costs of interventions.

If that weren’t enough, relationship manager Samantha Palmer came up with more bad news. Bankers and lenders were increasingly reporting concerns over risk management in the legal services sector and reducing their exposure, she told the board. Some firms had no reserve capital or borrowed to pay their VAT bill while partners took short-term loans to meet their tax liabilities.

It was the legal profession’s sub-prime moment. Atteys and Blakemores were its Lehman Brothers, left to fold; others would shortly follow, inevitably. Meanwhile the SRA, too important to fail, would have to be shored up somehow, in an RBS-style bail out.

In a more affluent, optimistic past, the sector could have absorbed excess lawyers made redundant after a firm closed down. Not anymore. The cuts to legal aid, the stagnant property market and the impact of the Jackson reforms make it even less likely.

In the meantime, only few days later, less than one mile up the road, justice secretary Chris Grayling extolled the benefits of our legal system for multinational companies and its contribution to Britain’s economy. The lord chancellor spoke at the launch of TheCityUK’s Legal Service 2013 report, a document proudly brimming with statistics that most high street lawyers will find difficult to relate to. The legal services sector, it says, provides 340,000 jobs, contributes 1.6 per cent of GDP and generates a trade surplus of £3.4bn. It was a reminder of how the other half live.

Having closed down courts, slashed the legal aid budget, and pushed through questionable costs reforms, the government was renewing its call to multinational corporations to come to England to resolve their disputes. We were being taken one step further towards the privatisation of the legal justice system, where courts are not so much a service as a profit centre. There is nothing wrong with selling high-value legal services on the global market, but lawyers in the 10,000 small firms outside the City will rightly ask themselves if the government has forgotten about them and their contribution to the local economy.