As we are approaching the mid point of the year, we thought that we would set out our predictions (both good and bad) for the next 12 months. The majority of these are based on nothing more than gut feeling, so please do not hold us to them!
SRA Accounts Rules
- There will be at least one consultation on the Accounts Rules during 2016. Whilst the Solicitors Regulation Authority (SRA) will be prepared to revisit items such as the 14 day rule (and hopefully remove it completely), we predict that the requirements around client account reconciliations will not change significantly.
- The new Accounts Rules (now planned for Spring 2017) will be more outcomes focused. Expect much less detail, with more freedom to come up with your own internal policies and procedures on how best to deal with client money. The changes to the interest rules a few years ago will give you an idea of where we think we are heading.
- Practices will need to revisit their interest policies, either because Base Rates have increased or (more likely) because they have not. In our experience, most practices are still using a £20 de minimis limit when deciding whether to pay interest or not, and it is perhaps time for an increase.
- More guidance to come from the SRA on the role of the Reporting Accountant. Those of you that attended the Institute of Legal Finance and Management Annual Conference in November last year will have heard Andy Harris from our team discuss that the guidance currently issued is a good start, but more is needed to ensure consistency of auditing and reporting between different firms of accountants.
- Fewer Accountant’s Reports will be qualified under the new reporting regime. Where reports are qualified, the SRA will take them more seriously than before, as it will mean that client money is potentially at risk. It is more likely that the SRA will want to visit following a qualified report.
- The SRA Handbook is going to be reviewed, with a view to making it shorter and less prescriptive, although we do not expect any significant impact on the levels of compliance required for the majority of practices, at least in the short term.
- There will be less focus on financial stability. Many practices will not have heard from their Relationship Managers at the SRA for a while, and we suspect that contact will reduce even further. Whether that is the correct approach is another matter, as history shows us that more businesses fail coming out of a recession than during it.
- There will be greater focus on the threat of cybercrime. The SRA currently has a cybercrime section on its website, under Hot Topics, but we think that more will need to be done to help practices avoid being scammed.
- Succession will continue to be a huge issue for many practices. Many younger solicitors are keen to maintain a work-life balance, and are more hesitant about moving up to partner level. As a result, partners approaching retirement are finding it increasingly difficult to find successors within their own practices. This could lead to:
- (a) More consolidation of existing practices. We have seen a lot of this in our own client base here at Hazlewoods, and we expect it to continue.
- (b) More new practice start-ups. Although consolidations are up, so is the number of new practices. Over the last few months we have helped several new practice start-ups, including one Alternative Business Structure (ABS), and have been contacted by several solicitors considering setting up on their own.
- The number of ABSs will continue to rise, although mainly to allow key individuals in the practice or spouses of existing owners to become owners. We are not convinced that we are going to see a rush of further private equity investment in the legal sector.
- SRA turnaround times will continue to improve. To give them credit, the SRA seems to have worked really hard at improving the way it engages with consumers and the public. We recently helped a new practice start-up to obtain SRA approval in under three weeks, which was fantastic.
Practice Accounts / Finances
- A new accounting standard – Financial Reporting Standard 102 (FRS102) – is already impacting on larger LLPs and limited companies this year, and will affect everyone else next year. The main areas where we may see significant differences between existing Generally Accepted Accounting Practice (GAAP) and FRS 102 include work in progress (WIP) valuations for certain types of contingent work (more on this later in this Focus), the amortisation of goodwill, holiday pay accruals and the value of members’ / directors’ loans. Practices will need to review their members’ agreements, shareholders’ agreements and internal holiday procedures to assess and mitigate any potential impact.
- Cashflow will become increasingly challenging for many practices. Lots of practices are seeing increasing levels of WIP and debtors, as work flow continues to improve, but clients are taking longer to pay. This, combined with large tax bills on 2014 and 2015 profits, is putting pressure on already tight office bank balances.
Banks / Insurers
- Owners of practices with unrated professional indemnity insurance providers are more likely to be asked to provide personal guarantees on bank borrowings, as banks become increasingly concerned about the amounts of cash tied up in WIP and debtors, and the potential impact of a cybercrime attack.
- The SRA will remove the need for practices that are looking to switch regulators from the SRA to obtain run-off PI cover. This might open the door for some practices to look elsewhere.
- Finally, professional indemnity insurers will review their standard terms and conditions relating to cybercrime. We would not be surprised to see a change to terms, requiring additional levels of cover to be taken out to insure against a potential attack.
As we said at the start, most of these are purely guesswork, so it will be interesting to revisit them at the end of the year.
A version of this article appeared in the January/February 2016 edition of the ILFM’s Legal Abacus magazine.