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Living the Eye Life – January 2023

Is Your House in Order?

It is now the start of 2023 and at home, attention often turns to tidying the house and packing up the tree, including decorations such as tinsel, fairy lights and Xmas cards. There’s often confusion and debate about the right time to get the house in order and things packed away.  At time of this publication the answer should be ‘last week!’

Identifying the risks and vulnerabilities that a law firm faces & making sure they are compliant with regulatory obligations, are a few of the things that we at Financial Eye do really well for other businesses (our customers!) but there are things we ourselves find challenging in our own business due to the fact that the investment of time required to do this takes away from our availability to carry out paid-for client work. Trust me, I know how easy it is to put my own business tasks at the bottom of my daily to-do list; it’s easy to think that as long as the business is functioning successfully now, that these jobs don’t need to be a priority. But my question to you is this – if not now, when?

Things may be going satisfactorily in your business at the moment, but what have you been doing to help avoid things like regulatory scrutiny, and what are you doing to ‘future-proof’ your business against the risks you will likely face?

It’s ok to ask for help but it’s even better to avoid falling behind.  Too often we are called in to fix the issue’s pushed aside and usually because the regulator has come knocking or because the auditor had to report you.  One common issue amongst law firms is the accumulation of residual balances over a number of years.  This is of course a housekeeping issue and frowned upon by fee earners everywhere as they would rather just focus on fee earning, and so they should be!  However, the SRA have zero tolerance in the mishandling of client money, especially when there is no longer any legal reason to hold it.  Tasks such as this requires time and attention, couple this with future fee earning and an array of other things, means a lot of plates spinning which could lead to ‘fee earner burnout’.

In the spring of last year, we were called in to help at a large Law firm based in Leeds.  An initial health check uncovered a number of typical issue’s faced by firms across the UK.  Amongst other things ‘residual balances’ had spiralled out of control totalling £1.1m, which needed to be addressed immediately from a regulatory/compliance standpoint.   Also, our file reviews uncovered many end-to-end failures in processes, and we could see disparity amongst fee earner performances with no obvious signs as to why.  We also came to realise that several staff were suffering from burn out, and those affected eventually became an issue for HR.  This was not good for the firm’s staff’s wellbeing, nor for the regulator to see.  We wanted to get to the root causes and to identify and address the issues in the right way, and so we began our work.   Our bespoke programmes were designed for these very reasons, to not only address the problems by tackling the core issues, but to identify future exposure to risk and safeguard against them.

9 months on and we now have an MD much happier with the firm’s overall health position, who can now focus on growth and look to the future instead of dwelling on the past.  Also, an Accounts Team that is clear and without anxiety around financial compliance, in control of the numbers, and able to work more efficiently. And just as importantly, a workforce which is happier and now proving to be a more productive workplace as a result.

Our advice is to handle risk through a compliance focus ahead of time. It is better to identify your sources of risk, put in controls and minimise the chances of the danger emerging at all, instead of engaging with risk on a reactive basis with weak policies and more cumbersome training.  Weak policy you say? Well, when was the last time you reviewed and updated your policy? We have reviewed many accounting policies and collaboratively with partners made the necessary adjustments to fit our ever-changing environment.

Staying on top of compliance’ is a challenge all Law firms face, it featured in the UK Law society’s ‘Top 10 biggest challenges facing the legal profession in 2022’!  Did you pay proper attention to it in 2022?  Will you pay attention now in 2023 before it could potentially get out of control?  So, tell me – are your Xmas decorations still up?

Ali Hassan

Risk & Compliance Consultant – Financial Eye

Ali is our forensic expert and is known as 2.5 due to his expertise in helping firms deal with Residual Balances. He has an accomplished commercial banking background, having worked within several of the UK’s largest commercial banks.

After joining Financial Eye, he has been extremely instrumental in keeping Solicitor firms on the right side of the Regulator.