Up to 100 other 'Challinors' at risk of collapse

Five per cent of firms contacted as part of the Solicitors Regulation Authority's financial stability programme have shown indicators serious enough to warrant action, it has emerged, including, in one case, a shortage of more than £500,000.

Of these 2,000 firms contacted as part of the programme, five per cent required "immediate and in-depth engagement", Samantha Barrass (pictured) said after today's SRA Regulatory Risk Committee meeting.

Barrass said the firms in question were a cause for concern because of the dual combination of the seriousness of the financial indicators and of the likely impact on the market if they were to collapse - typically, a large local or regional firm, such as the now-defunct Challinors, in seriously poor financial health.

The former 17-partner firm entered into administration in July and was broken up on 23 August, with various local firms taking over most of its work in progress and teams.

She said the number was worrying but that the regulator had the resources to address the issue, before adding that the matter would have been different if it had been ten per cent of firms in this situation.

The programme, started in August, involved analysing financial information provided by 2,000 firms, 700 of which were already under active supervision by the SRA; the remaining 1,300 were contacted by email with a request to supply detailed financial information.

The committee heard from SRA head of legal policy Carol Westrop how several firms, including large ones, had been "very naïve in their financial arrangements".

She said the engagement programme had unveiled numerous problems including "the refusal or inability to accept the existence of serious financial and management problems", which also caused "a failure to plan properly for addressing them whether by restructuring, sale or orderly closure."

In many instances it appeared that the problems stemmed from one individual.

"Over-dominant senior partners or sometimes chief executives cause both strategic failure by the firm but also a refusal to accept how serious the situation in the firm has become," she said.

At the opposite end where well-run firms, which tended to have a high-quality financial director or equivalent.

Firms in difficulty which engaged at an early stage and were prepared to recognise errors or misconduct were also more likely to benefit and mitigate the regulator's concerns.

Of greater concern, Westrop said, was the extent to which some firms had lied about their financial circumstances, whether outright or by omission, in particular with their banks.

"The temptation to be economical with the truth with funders is a very serious risk in view of the implications for the integrity of the individuals involved," she said.

Committee chair Cindy Leslie suggested one key challenge for the regulator was whether firms were able to engage at all, or whether they simply wouldn't, asking what tools were available to have any effect on the latter.

Westrop said imposing conditions on authorisation or licences was usually the most effective, as "it concentrates their minds on the sort of action needed."

Board member Moni Mannings added that while the SRA had come across naivety in the context of financial stability, "anything that suggests a lack of integrity is serious".

"It has nothing to do with financial stability and is simply not acceptable," said the Olswang partner.