Surviving the Regulatory and Economic Challenges of 2019

The legal world is not getting any easier for law firms, or for those individuals involved in the legal sector. Regulators are becoming increasingly “engaged” with firms, lawyers have increasing personal liability and politicians have ensured that we have sufficient uncertainty as to what the economic future holds. So here are some tips on how to get through 2019. There are a few topics on the horizon for the coming 12 months which you should have on your Risk Index. Hopefully none of these will come as a shock to you, but you might want to make sure you and your firm have a plan in place for them.

New Solicitors Accounts Rules
Despite being referred to universally as SAR 2018, these are expected to come in to force in the first half of 2019. There will be 13 new rules as opposed to 52 currently and they are based on principles rather than the prescriptive nature of the current regime. However, if you are compliant with the 2011 rules now very little needs to change and by and large ‘adopting’ current rules will ensure your firm is meeting the requirements, but:

  • some changes are necessary
  • written policies and procedures will be required
  • some ‘adjustments’ are allowed
  • ensure you have an accounting and control manual

This was confirmed by Andrew Allen of PKF at the ILFM conference in November, along with the promise that there will be some guidance notes issued which are currently being written by Darren Whelan, the ILFM Chair

Common Client Account issues
At their conference in December, the SRA Head of Forensic Investigation and Intelligence, Sean Hankin discussed the 4 main areas of transgression that they come across during their engagement with firms. These are:

1) Failing to deal properly with Residual Balances.

Firms need to have good housekeeping in place. He stressed the need for firms to

  • admit you have Residual Balances
  • quantify these balances
  • inform the SRA that you have them
  • make a plan and deal with them
  • monitor them on an ongoing basis

There are some simple strategies that firms can put in place to avoid getting into hot water with the Regulator and it does tend to be an exercise that finds cash for the firm as there are often unbilled/recovered fees

2) Reconciliations

Too many firms fail to maintain proper 3-way reconciliations. Sometimes they are not signed by people with sufficient understanding of what the reconciliation means. Also, once a reconciliation is completed the firm still needs to deal with the reconciliation items rather than just rolling them forward

3) Providing banking facilities
Many firms are falling foul of the current Rule 14.5 and are allowing clients to use their Client Account as a bank account. There is some good guidance out there now but at Financial Eye, we interact a lot with the SRA on a confidential no-names basis on behalf of firms to ensure that they are not deemed to be breaching this rule. With the current focus on Money Laundering this issue crops up frequently. If in doubt, check it out

4) Unidentifiable monies received
Increasingly firms are receiving monies in to their Client Account which is unidentified. Unfortunately, it is no longer satisfactory to just send back these funds, you need to satisfy all AML checks which can be quite difficult. This is a growing problem and we don’t expect this to go away anytime soon.

VAT on disbursements/expenses/recharges
Every firm involved in conveyancing had to deal with the repercussions of the Brabners LLP v HMRC First-tier Tax Tribunal decision during 2018. One of the first responses to this decision was that the Law Society took down from their website their long-standing guidance note on VAT. At the ILFM conference in November 2018, Darren Whelan revealed that the Law Society are working on a new guidance note in this area so watch this space.

Making Tax Digital
Are you ready for the changes in VAT reporting that are coming in April 2019? This affects not only law firms but every VAT registered business in the UK

Price & Service Transparency
Whilst this came into force in December last year many firms are waiting to see how this unfolds during 2019. Are you already compliant?

Direct impact of Brexit on your firm
Unless you are directly involved with a vast pan-European client base, the effects of Brexit are likely to come from the impact on the UK economy. Have you thought about how you will respond to a drop-in fee-income or a loss of key clients? How will this impact on dividends or partner drawings?

Succession
All law firms need to have a succession plan in place. It is never too early, even if there is no intention to exit in the next 5 years. Jane Allan, the SRA’s Ethics Team Manager spoke on this matter at the SRA conference and specifically on the need to plan, save and talk. You need to think about the following:

  • put a contingency plan in place including wills and POA for sole practices
  • mid and larger firms also need to plan for exit and succession
  • retirement – how and when is this going to be achieved for which partners
  • how to identify the best purchaser/successor practice
    rather than just the one your accountant knows
  • have you considered the alternative to sale and costs of an orderly closure? These include PI run-off at 2.5 to 4 times annual premium, storage of records, winding-up costs, dealing with employees and redundancy, exiting leases and more
  • financial difficulties – a managed closure is far better than an intervention

Obviously, the SRA approach is based on not leaving them to clear up the mess of a disorderly closure and with proper planning, this outcome is entirely avoidable. Financial Eye and Ortus Group have helped many firms put together and execute a successful plan for handing over the business and realising proper value.

Clearly 2019 promises to be another challenging year so if you want any help with your plan or to discuss any of the topics above, please feel free to get in touch with us. Good luck!

Colin White, Ortus Group. colin.white@ortusgroup.com
Nigel Wilson, Financial Eye. nwilson@financialeye.net
David Thorpe, Financial Eye. dthorpe@financialeye.net