SRA gets tough on firms 'trading recklessly into insolvency'

Regulator pledges to work with firms to avoid collapse as it confirms a 'no mercy' policy against irresponsible solicitors

Solicitors running their firms into collapse despite known financial difficulties will be prosecuted by the SRA and have restrictions placed on their practising certificates, Antony Townsend has warned.

"As a result of financial pressures some firms have adopted worrying practices such as significant levels of borrowings over and above the value of the firm, no reduction in partners' drawings and no reserves left in the business," the chief executive said.

Such behaviours were more likely to result in severe financial problems and firms failing in a disorderly way, he said, before adding that the regulator would "pursue firms who trade recklessly into insolvency", including tribunal referral for breach of the rules on sound financial management.

The SRA will also seek to impose conditions on solicitors' practising certificates "to prevent individuals responsible for the difficulties at one firm simply moving on to other to wreak similar havoc", he told the audience at CLT's COLPs and COFAs conference yesterday.

Townsend's comments are the latest in a series of warnings to the sector after a string of high profile closures earlier this year that could threaten the regulator's own financial stability.

In March the SRA closed down Yorkshire-based Atteys, a firm which had both Lexcel accreditation and CQS membership, and Birmingham-headquartered Blakemores, one of the first firms to convert to LPD, bringing in non-lawyer managers as partners.

The cost of these two interventions alone reached £1.8m - £200,000 more than the whole of the previous year's £1.16m intervention budget, prompting the regulator to suggest that the cost of interventions should no longer be part of its budget but instead be moved to the Compensation Fund.

Townsend said that while the SRA had set up a dedicated interventions team with the introduction of outcomes-focused regulation, the regulator's resources were limited and had to be targeted.

The SRA's policy is now to contact firms it has identified as being "high impact" or in a sector where there is greater financial pressure, such as personal injury, and work with those at risk to help them to either revert to financial stability or proceed to orderly wind down.

Townsend said the new policy was "already paying dividends", with a number of firms originally placed in the red risk category for financial stability reduced to amber.