Mergers: SRA should look for red flags
The Solicitors Regulation Authority (SRA) must pay “immediate attention” to weaknesses in its authorisation process for new law firms in the wake of the Axiom Ince collapse, the Law Society has argued.
It also urged the regulator not to impose restrictions or phase out completely the use of client accounts by solicitors.
Responding to the discussion paper for the SRA’s consumer protection review, the society said member experience suggested that, over recent years, the authorisation procedure for law firms had “become easier” and it was “timely, in light of the Axiom Ince case and other recent interventions”, for this to be reviewed.
When there was an “element of doubt”, the SRA could ask for business plans, projected cash flow, or money laundering risk assessments or seek specialist input from an accountant to help identify “red flags”.
In the case of Axiom Ince, which bought the larger practices of Ince Gordon Dadds and Plexus Legal in April and July 2023, “as no members of either practice became members of Axiom Ince, no SRA approval or clearance was required”.
The society said: “This appears to be a serious lacuna in the SRA’s risk management process and authorisation process which needs immediate attention.
“More information about both a firm being taken over and the acquiring firm ought to be provided to the SRA before any takeover can proceed.
“Reverse takeovers, i.e. small firms taking over larger firms, should also trigger red flags for the regulator to consider the proposed takeover in greater detail.”
The SRA should consider bringing in “external support”, such as a panel of lawyers with expertise in running their own businesses, or auditors with expertise in spotting financial risk to help scrutinise the financial viability of new firms or mergers and acquisitions.
On client account – which the SRA has hinted it could look to phase out – Law Society president Nick Emmerson said: “The ability to handle client money is an important difference between solicitors as regulated professionals and unregulated services providers.”
Client accounts were “a fundamental tool for the efficient and effective delivery of many types of legal services”.
In its response, the society said third-party managed accounts (TPMAs) had existed for at least five years, but “the low level of take-up indicates that they are not popular, economic, or practicable” – SRA figures indicated that only 33 firms were currently using them.
To reduce risks, the society said the SRA should consider introducing a system where all law firms were required to submit accountants’ reports.
The response also argued against restricting access to the SRA Compensation Fund or reducing the maximum cap for single claims from £2m.
“Phasing out the compensation fund would not only remove this important protection but would also undermine public confidence in the profession.
“The compensation fund is fundamental to the delivery of legal services both in protecting consumers and in differentiating regulated providers from the non-regulated sector and must be retained.”
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