This week, my sense is that firms will draw breath and be in a position to review their financial arrangements to determine how they will cope. There is no end in sight so we must plan for the long term. The Government has announced various measures that will assist but these may not prevent immediate cash flow problems.
The SRA has issued one Coronavirus update so far. In contrast, and understandably as the representative body, the Law Society has been showering us with advice and information. It has really come into its own and reminds us that it is staffed by many qualified solicitors and that it has access via its specialist committees to a vast repository of knowledge and experience.
The SRA’s recent update makes no reference to financial issues. However, the obligation to report financial difficulty to the SRA is yet another task that firms should not overlook during this crisis.
The duty to inform the SRA appears within the Code for Firms at Rule 3.6 where firms are required to “notify the SRA promptly of any indicators of serious financial difficulty relating to you”.
There is no definition within the current Regulations of what is meant by “serious financial difficulty” As ever, a quick look at the earlier Codes assists. Indicative behaviour 10.3 under the 2011 Code provides examples of serious financial difficulty as being “an inability to pay your professional indemnity insurance premiums or rent or salaries or breach of bank covenants”. All of the above may apply to certain firms during these difficult times.
Interestingly, under the 2007 Code (Rule 20.06), the duty to report financial problems was not confined to your own firm. It was a more general obligation and required a report to be made where you “had reason to believe that a firm was in serious financial difficulty which could put the public at risk”.
The 2007 guidance stated quite fairly that it would “depend upon the circumstances” and that the test was whether a firm’s financial difficulties presented a risk to clients or to others. An inability to pay staff or professional indemnity insurance premiums would of course fall into this category in normal times but in the present climate the timing and extent of any report to the SRA may vary.
The effect of notifying the SRA of serious financial difficulty has usually been be for an SRA Investigation Officer (or two) to visit the firm to question the partners and to inspect the accounts. The SRA would then expect a regular update on the financial health of the firm. At present a personal visit to the firm by the SRA will not be on the cards. One can expect that there will be a significant number of firms who have financial difficulties. The SRA will be overwhelmed. It will need to adopt a more enlightened approach.
The SRA in last week’s guidance committed to a pragmatic and proportionate approach to enforcement and “to distinguishing between people who are trying to do the right thing, and those who are not”.
Whilst this stance is reassuring, the profession cannot be complacent. If the worst happens, then firms should remember the duty to report to the SRA and make a conscious decision as to when and what to report. They also need to document clearly the approach that has been taken.
In the dog days to come, firms should also take this opportunity to review the structure of their businesses. Pause and think about whether you need the overheads of office accommodation and branch offices; non-fee earning staff and less profitable work. We may learn something positive from this crisis after all to help us with the future prosperity of our businesses but in the meantime stay safe.