The material below does not form part of the SRA Handbook.
Go to Q&A – Outsourcing or read on for information about financial staibility.
[Published 22 April 2013; updated 10 May 2013]
The SRA Principles regulate the conduct of solicitors and their employees, registered European lawyers, recognised bodies and their managers and employees, and licensed bodies and their managers and employees.
Principle 8 requires you to "run your business or carry out your role in the business effectively and in accordance with proper governance and sound financial and risk management principles". Whether you are a partner, manager or an employee, everyone has a part to play in ensuring your business is well run for the benefit of your clients.
The Handbook provides further detail about complying with Principle 8 in Chapter 7, "You and Your Business". This includes 10 mandatory outcomes and four indicative behaviours about ensuring proper checks and balances are in place for effective scrutiny of your firm's finances.
Specifically, Outcome 7.4 states that you "maintain systems and controls for monitoring the financial stability of your firm and risks to money and assets entrusted to you by clients and others, and you take steps to address issues identified".
Quite apart from your professional obligations, you need to be very careful not to trade while insolvent. The SRA may well require you to obtain formal advice on your position. There could also be very serious consequences if you mislead others, such as lenders, about your financial position. Once your firm is in financial difficulty, you face serious risks and need to act with complete propriety.
Managing your firm's finances
Many law firms run their finances very effectively but some are still too focused on work volume rather than profitability. Some firms suffer from key people trying to hold the difficult balance between running a business and earning fees.
As the legal services market continues to diversify and different models for business are developed, the way firms run their finances may vary markedly.
However, there are a number of things all firms need to consider to keep proper control of their finances.
The SRA's Risk Index provides an overview of risks posed to the regulatory objectives set out in the Legal Services Act 2007. The first section of the index looks at firm viability and structure, and firms should in the first instance assess themselves against these risks.
We have used our experience with firms that have suffered severe financial difficulties to draw up a list of good behaviours to aim for and poor behaviours to avoid. These lists are not exhaustive.
- Drawings exceeding net profits
- High borrowing to net asset ratios
- Increasing firm indebtedness by maintaining drawing levels
- Firms controlled by an "inner circle" of senior management
- Key financial information not shared with "rank and file" partners
- Payments made to partners irrespective of "cash at the bank"
- All net profits drawn, no "reserve capital pot" retained
- Short-term borrowings to fund partners' tax bills
- VAT receipts used as "cash received" resulting in further borrowings to fund VAT due to HMRC
- Partners out of touch with office account bank balances
- Heavy dependence on high overdraft borrowings
- All partners regularly receive full financial information including office account bank balances
- Drawings are linked to cash collection targets and do not exceed net profits
- Provision is made to fund partners' tax from income received
- A capital element is retained from profit, and a capital reserve account built up
- Premises costs are contained
- Profitability levels are tested and unprofitable work is (properly) dropped
If you are concerned about your firm's financial position
The legal services market is facing financially challenging times and your financial stability monitoring may lead you to the conclusion that there are serious problems.
If this is the case, then your first port of call may be your assigned member of our Supervision team. They will talk through your problems from a regulatory perspective and consider what can be done. Bear in mind that the SRA's concern is to protect clients and the wider public interest and we cannot provide legal or financial advice.
If you need to get in touch, please contact us.
The Law Society has also produced help and advice for firms. Alternatively, you may wish to contact your regional Law Society manager.
Other sources of help include the following:
When the forecast isn't good
The SRA regulates in the public interest and our priority will always be to safeguard the client interests, their money and files. This will be the aim of any engagement through our Supervision or Regulatory Management functions.
It may well be that your business needs to close in an orderly way. That may be best for your clients, for others who deal with you such as the court or other parties to transactions—and for you.
See our information on closing down your practice. Our Professional Ethics Guidance team can advise further if you have any questions.
When firms cannot or will not wind down their firm in an orderly manner, then we may have to intervene. We take possession of client files, and all money is legally vested in us. Intervened practitioners can be liable for the costs of an intervention.
Potential implications for you if we intervene into your firm
Q&A – Outsourcing
[Published 10 October 2011]
Q1. Outcomes 7.9 and 7.10 in the SRA Code of Conduct contain provisions on outsourcing. What is outsourcing?
A. Outsourcing is not defined in the Handbook, but Outcomes 7.9 and 7.10 are aimed at firms or in-house solicitors who use a third party to undertake work that the firm or in-house solicitor would normally do themselves and for which the firm or in-house solicitor remains responsible. It is important that when firms outsource work this does not affect our ability to regulate the firm's activities and that clients remain fully protected.
Q2. I outsource a number of activities, what sort of activities are caught by outcome 7.10?
A. Outcome 7.10 refers to the outsourcing of 'legal activities or any operational functions that are critical to the delivery of any legal activities'. Legal activities are defined in the glossary to the Handbook and include the provision of legal advice or assistance, or representation in connection with the application of the law or resolution of legal disputes. Outcome 7.9 prohibits the outsourcing of reserved legal activities to a person who is not authorised to conduct such activities (since to conduct unauthorised reserved legal activities is unlawful).
Q3. Can you provide examples of activities which would be caught by outcome 7.10?
A. This list is not exhaustive, but the following are examples of the type of activities which, if outsourced, would be caught by Outcome 7.10:
- activities which would normally be conducted by a paralegal
- initial drafting of contracts
- legal secretarial services - digital dictation to an outsourced secretarial service for word-processing or typing
- document review
- Companies House filing
- due diligence, for example in connection with the purchase of a company
- IT functions which support the delivery of legal activities
- business process outsourcing
Q4. What about when I instruct counsel - is this not caught by the outsourcing provisions in the Handbook?
A. The outsourcing provisions in the Code apply when you outsource work that you could have conducted and do not apply when you use a specialist service to assist with the provision of legal services to a client, for example instructing counsel, medical experts, tax experts or accountancy services.
Q5. Outcome 7.10(b) requires me to ensure that my contractual arrangements with a third party allow the SRA to obtain information from that third party? When does this provision take effect?
A. Outcome 7.10(b), like the rest of the Code, will come into force on 10 August 2011 in respect of ABS and 6 October 2011 for all other purposes. We would therefore expect all new outsourcing agreements to contain provisions that meet this outcome by 6 October 2011. In relation to existing outsourcing agreements, we are unlikely to take action against firms before 6 April 2012 purely on the basis that an agreement does not include specific terms to meet this outcome. However, we would expect you to have taken reasonable steps to ensure that the SRA can obtain access to relevant information if necessary, bearing in mind that Principle 7 requires you to deal with your regulator in an open, timely and co-operative manner. This could mean, for example, ensuring that the party with whom you have the agreement is aware of your professional obligations and that you keep adequate records relating to outsourced matters.
Q6. I am thinking of entering into an outsourcing arrangement. What should I consider?
A. (i) Your clients
- Is it in your client's interests to outsource?
- Informing clients of your arrangements and the risks attached
- Obtaining clients consent and if necessary informed consent
- Billing appropriately
- Do not rubber stamp, take ownership of the outsourced work
(ii) Assess the risks
Outsourcing carries specific risks which you need to consider before making the decision to outsource, and manage throughout the term of the outsourcing and not simply at the outset. This diagram should assist you to identify and manage these risks.
(iii) The third party should be reputable so consider due diligence:
- investigate the background of the third party company
- review the ethical standards of those who perform the work
- obtain references of the company
- be aware of qualifications of the individuals carrying out the work
- what are their systems for conflict checking?
- what are their systems for protecting client confidentiality?
- Informing clients as to what activities are outsourced and the risks attached
- If the third party is based overseas, are there different laws or ethical standards which may be relevant?
(iv) Your arrangements with the third party
- must not compromise your independence and integrity;
- must not breach the outcomes in chapter 12 (separate businesses) of the SRA Code of Conduct