Staying Out of Financial Difficulty

Following our article in March addressing the issues raised by the identification of three key financial warning signs that the SRA will use to assess firms’ financial stability, the SRA has now announced that it has identified 150 firms it deems to be in ‘very serious financial difficulty’.

Reporting on the Managing Partner COLP and COFA conference in April, the Solicitors’ Journal quoted SRA executive director, Samantha Barrass, as saying that firms need to act quickly when encountering financial difficulty – including ‘removing or suspending individuals who may have failed to act with integrity’.

Barrass went on to underline that the SRA will not tolerate ‘the reckless trading of firms into insolvency’, and that action would be taken including referral to the Solicitors Disciplinary Tribunal, and even placing conditions on the practising certificates of individual solicitors who have exacerbated financial problems at one firm, to prevent them from moving to another.

No More Business as Usual

It is clear that the SRA intends to take a hard line on firms that continue to operate a ‘business as usual’ policy when they are experiencing severe financial problems, because of the impact that the continued trading of insolvent firms will have on lending and premiums in the rest of the profession. This only serves to highlight the pressure on firms to maintain sufficient levels of profitability and cash buffers – pressure not only from lenders and suppliers, but now from the profession’s regulatory body.

The obvious conclusion is that firms must do everything they can to stay clear of the financial problems that are leading to increasing numbers of insolvencies throughout the market. This clearly comes down, in large part, to the financial disciplines we have long advocated – keeping a strong handle on WIP and debtors, and minimising fixed costs.

However, what is also clear is that the behaviour of individuals within the firm will be coming under increasing scrutiny, and that firms (especially those SME law firms that rely on a few key people) can no longer afford to carry those who do not adhere to strict financial disciplines. The bottom line is that individuals who behave irresponsibly could be costing their firm its independence.

Beyond Compliance

In this context, the role of the COFA or COLP is crucial. However, beyond the compliance issue there is also the broader question of financial standards. The point that the behaviour of individuals has a very direct impact on the firm’s performance is not limited to regulatory issues, and firms should take the opportunity to ensure that all fee-earners are held to account for their financial performance.

This means, as we have argued for some years, that firms should employ ‘standards’ not only for chargeable time, but for billing and the collection of debts. Remuneration should be directly linked to financial performance, and heads of departments should be responsible for the performance of their own area.

This is no longer simply a question of how much the partners can take home each month; it is now a question of the firm’s survival – and that is more important than any individual.