In a number of recent surveys it is apparent that most Legal Practices are in a better position financially now that they were before March 2020 but will this last?
Government support and funding, furloughing staff, closing offices and general cost reduction has meant that although the turnover is down so are all costs. However much of that support that has now gone in 2021.
As we approach the 1st October P.I. renewal date for approximately 70% of the profession, we are seeing a considerable hardening in professional indemnity premiums for those firms reliant on property transactions. A number of firms with a poor claims history have already been informed that their insurer does not intend to offer terms. Premiums have risen by an average of 30% per year for the last two years. A small firm with no claims history has seen premiums rise from 7K to 56K and has the dilemma of deciding to pay the run-off and close at circa 21K now or pay the increased premium and be facing a run -off premium of 160K next year.
Many firms are undecided on what the future holds for their practice – they are at a crossroads and have to decide which direction to take. Traditional law firm practices are not run (generally) by professional business people and are hoping that the challenges they are facing will simply go away. The financial aspects and governance of many law firms leaves a lot to be desired and many are managed by non-experienced COLPs and COFAs. An essential part of this process is file reviews and deciding what needs to be reported to the regulator – there are many examples where this does not happen and could well be a ticking time bomb for the practice. With many employees working from home supervision has been difficult for those practices that do not have robust IT.
Ensuring your law firm is fit for purpose makes you appear more of an attractive option to any purchaser and any breaches will come to light during the due diligence process in any event. How many law firms actually document and record their decision making process to ensure they do not fall foul of the Companies Act and could be accused of wrongful trading? The regulator is moving towards treating law firms, whatever their structure, as businesses and therefore subject to Company Law.
We also have to address the increasing competition coming from accountants, financial services and other non-regulated businesses that do not carry the cost of regulation on their shoulders.
As a law firm facing numerous challenges please consider the following:
- Are you considering acquiring, or looking to merge and do you have a succession problem?
- How have you adapted to AI, technology and home working and do you need all your current office space?
- Are there areas of work that are becoming unviable and do you become a niche practice?
We are seeing a growing trend towards consolidation of the profession and many practices should decide what direction to go in sooner rather than later. Sadly, a number of firms that have not addressed the above issues will find it increasingly difficult to find a suitable exit route.