Experts in Business Advisory for the Legal Sector...

Living the Eye Life – February 2022

So here I am, sitting in a restaurant in Manchester. A client of Financial Eye has decided to reward us with a slap-up meal in a fancy restaurant in Spinningfields. And very nice it is too. But the thing that I can’t fail to notice is that it is packed. It is only 7pm and there isn’t a spare table to be had. As if I didn’t need any more convincing, things look very much like getting back to normal to me. Which also feels quite odd given some of our more recent experiences visiting law firms up and down the country.

Covid has been awful for all of us. I don’t know anybody who hasn’t suffered on a personal level. It has also been particularly hard on many businesses including many of our clients. Sure there are firms that have put on a brave face and adapted to new remote working practices. But this has been difficult for many individuals and from what we have seen, it has led to many errors being made in finance departments. These includes payments being released for the wrong amounts, or payments being sent to incorrect bank accounts and even duplicate payments being made. All of these ultimately end up being a breach of the Accounts Rules and which will need reporting to the SRA. The additional pressure this is placing on staff working within law firms is beginning to take its toll. We have spoken to many legal cashiers who have complained that they are simply not provided with sufficient resources to carry out their roles effectively. Management needs to address this before there is a catastrophic error that leads to a big hole in their client account which they will then be forced to remedy from their own cash. We have received a few of these calls this year already and they are not pretty.

One practical measure that firms can put in place is to document their processes and procedures for setting up and making payment from client account. The pre-covid rules will have undoubtedly changed. The new processes should be reviewed and where necessary tightened up to prevent further errors being made. The firm should then update their accounting policy so that the revised processes can be tested on a regular basis to ensure they are being adhered to. They should include COFA matter file reviews to support the reviews currently being undertaken by the COLP.

One other area that should also be addressed is residual balances. We have heard anecdotally that 25% of AR1’s are now being qualified for a failure to deal properly with residual balances and a further 25% will be qualified if no progress is made over the next 12 months. We have been busily assisting firms to achieve this before your reporting accountant and the regulator begin to take an interest. With so much change going on in the way firms operate, this is an area that needs prioritising before it becomes a major issue.

2022 looks set to be a tough year for many smaller firms, some of whom will begin to see a decrease in revenue. This may lead to redundancies and in some cases the firm will be required to close. One thing we have noticed already this year is an increasing number of smaller firms looking to merge or put themselves up for sale. The consolidation of the legal sector is something that was being discussed pre-pandemic, but which is now gaining real traction. Believe it or not, a firm’s failure to stay on top of its residual balances will have a real impact on whether a firm will be able to merge or sell. An acquiring firm will not wish to take on the sins of its father. It will want to see a firm that is well run and who takes its compliance obligations seriously.

One other major factor struggling firms need to factor in is the ever-increasing cost of professional indemnity insurance. Many firms are already dreading the October PI renewal, traditionally the month when many firms will seek revised terms. With this in mind they should already be seeking early engagement with a broker that has access to all of the PI market. It’s worth bearing in mind that your current insurer might not like some of the areas of law you currently practice and so all firms need to shop around to see whether they can obtain better terms elsewhere. Insurers will of course also be looking at your claims history to determine whether you can be perceived as a good risk. But by engaging early they will have an opportunity to see what other measures you have put in place to lessen the risk of new claims arising. It really is time you started updating your business plans and cashflow forecasts so that you are able to demonstrate your long-term financial viability. This exercise will undoubtedly throw up a range of issues that must be addressed if the firm is to continue providing legal services to its clients into 2023.

So back to Manchester. It is so heartening to see firms inviting us back in to discuss many of the issues raised above. A few have returned to handshakes; others are still fist pumping or banging elbows or indulging in air-shakes. Whatever your preference is it doesn’t matter as long as you are comfortable.  A number of legal conferences are opening up too. The ILFM has been holding some fantastic online conferences that have provided invaluable help to its members. Maybe one day in the future they will hold one we can actually attend in person. Who knows but if everyone is happy with the virtual conference, so be it. As I said earlier, whatever makes everyone comfortable is the right way to go.

David Thorpe

Director – Financial Eye

14th February 2022