Category Archives: Legal Updates

Are you aware of the new statements required under the Modern Slavery Act 2015?

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Having received the regular newsletter from HRC Law, it occurred to me that I wasn’t aware of this new requirement and wondered whether our clients and friends of PM+M were also unaware. As finance professionals, your PM+M team cannot advise you on the law but we should raise the issue and build awareness.

Jane Wilkinson, a solicitor at HRC advised that if your organisation supplies goods or services and carries on (part of) a business in the UK it will have to publish an annual slavery and human trafficking statement (the Statement) for each financial year ending on or after 31 March 2016, if its global turnover exceeds the £36 million threshold.  This threshold includes the turnover of subsidiary undertakings too, so it’s not as huge a number as it first sounds.

The Statement must disclose what steps the organisation has taken to ensure that human trafficking is not taking place in any of its supply chains or its business; or state that it has taken no such steps (with the latter approach being a potential PR disaster!).  Home Office Guidance outlines what should be included in the Statement and HRC Law can provide further support and guidance.

Even if you’re below the turnover threshold, it’s probable that (some of) your customers and suppliers will be caught by the requirement to produce and publish a Statement.  As you will form part of their supply chain, they’ll be looking to you for assurances about your practices, procedures and supply chains.  Thinking about this and preparing accordingly could help you to outshine your competitors and stay ahead of the game.

So, from PM+M’s point of view, this isn’t a case of this won’t ever impact our clients – it very well could and it very likely already is.

Helen Clayton – Corporate Services Partner 

SRA re-issues its warning about investment schemes

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The Solicitors Regulation Authority (“SRA”) has reissued its warning about high-yield investment schemes. The warning notice can be found here.

The intention of this notice is to remind law firms about the potential risks associated with being involved with such schemes. These schemes have been around for many years and are becoming more and more sophisticated. The SRA plans to issue more guidance soon for the purpose of highlighting the risks to the public.

The background to all of this is that risks are high where law firms are approached to be involved in order to add credibility to an investment scheme. This can, for some potential investors, add a degree of security that the investment is safe and valid, when clearly it should do no such thing.  Where law firms are being asked to act as a bank, doing so would be a breach of the SRA Accounts Rules.  Rule 14.5 of the current Rules states that a law firm MUST NOT provide banking facilities through a client account.  Therefore, any client bank account transactions must relate to an underlying transaction or to a service being provided in line with the law firm’s normal regulated activities.

If you are approached, whether as a law firm or an individual, and the returns seem amazing or the deal just sounds odd, it’s probably too good to be true.  Stick to your gut feel and do not get involved.

Stick to providing legal services as you know best and comply with the your Handbook and Rules. Further opinions on the proposed changes have been published on The Law Society Gazette and can be found here.

Legal Update

shutterstock_299616494There have been, and continue to be, a significant number of factors impacting the legal profession.  Whilst not all factors will have an impact on every firm a number will, and will do so at any one time, making the running of a law firm to be a continuous challenge.  Even for the growing and historically profitable firms, current and future regulatory changes, for example, could turn the good old days into more of a concern.

Partner and board meeting agendas should be focusing on these challenges, deciding on the actions, with responsibilities and timescales assigned.  If a law firm does not currently operate in a corporate vehicle, it does not necessarily need to incorporate but the partners need to start treating it as a corporate entity; it is a business after all.

With such significant change and more on the horizon, is the legal profession in unprecedented times?  Is it really the case that never before has there been so many stakeholders in a law firm?  I would argue not; however I do agree that stakeholders’ priorities and areas of focus may have changed.

Partners
Remuneration, partnership politics and succession are emotionally charged.  Every firm must have a partnership or shareholder agreement that is reviewed on a regular basis.

Clients
Clients have a strong influence on the growth and profitability of a firm, not to mention its cash flow.  Fee pressures and service demands continue to reduce margins.  A firm’s focus on who does what type of work is critical to ensuring a quality but efficient service. Technology should play a significant part in achieving this.  Further, quality not only applies to the legal advice given but the management of the case too.

Funders
Funders are wiser to the profession and the number of lines of lending that there can be into any one firm.

Funders want to understand the firm’s strategy, business model, financial forecasts, markets and succession plans to name but a few to assess the financial viability of providing funds. Whether the debt is serviceable is a key question together with is it core debt or a true working capital and therefore a fluctuating requirement.

Insurers
The insurers are key stakeholders in any type of personal injury firm, whether acting for defendants or claimants.  The SRA, another key stakeholder of course, is currently undertaking a review to assess the impact of recent legislation on the profession.

Insurers will be stakeholders in all firms due to the requirement to have professional indemnity insurance.  Current consultations to bring PI policies into line with the Insurance Act will raise the standard of disclosures being made to insurers; improper declarations are a breach of the Code of Conduct.

Solicitors Regulation Authority (SRA)
As the profession’s current regulator, the SRA continues to evolve in his practices, focus and areas of attention.  Regular access of the SRA website provides insight into these areas and provides guidance on managing risk – a significant consideration to all stakeholders.

Competitors
Understanding competitors’ ambitions is key in challenging a law firm’s own strategy to ensure that it can continue to differentiate itself, whether in services or markets, client or geography.  Fee pressures can drive down the market rate of fees being charged; being proactive in this area will secure clients providing the quality of service matches the initial proactivity.

Transactional activity continues to take place in the profession, which changes the competitive landscape.  Firms converting to an Alternative Business Structure is likely to be a result of the firm seeking to differentiate itself.

Employees
Retention of talent in a declining market is difficult in being able to satisfy their demands; retention in a growing market, which the legal profession continues to be, is also difficult where firms are able to make snap decisions, where cash flow allows, to recruit the talent for the present and the future success of a firm.

In conclusion, whilst this list is by no means exhaustive, a law firm’s strategy cannot ignore a stakeholder group.  It is not the case that the partners are the only stakeholders.  Law firm succession should be on all partner meeting agendas; every stakeholder will have an impact.

Helen Clayton – Head of Corporate Services

The Rise & Fall Of The Interest Rate – Why A Review Of Client Bank Accounts May Be Overdue

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Without giving away my age, when I was born, the base rate stood at 5%. When I left school, it had risen to almost 15% and then when I left university, it had fallen back down to almost 5%.  We are all acutely aware that the base rate has been at 0.5% since March 2009, a timeframe of over 7 years.

Thinking about those days where interest rates were much higher, law firms were in an enviable position of being able to make a profit and generate cash flow from the interest earned on client funds held in general client bank accounts. For some law firms, this created an additional layer of profit for sharing amongst the partners of the day or for re-investment back into the firm; for other law firms, it masked the true profitability of delivering legal services and no doubt created financial pressures as the recession hit in 2008/09 and the demand for legal services fell and changed.

It has been the case that law firms have not been able to generate the same levels of profits from bank interest for many years now and I wonder whether there has been some complacency about checking whether the best deal in the marketplace is still being obtained. The rules remain in place of where client money can be banked and how it must be ring fenced from monies belonging to the firm itself; however, there are numerous options and providers of client bank accounts.

I would encourage a regular review of the client bank accounts being used to ensure that law firms are able to take advantage of any preferential rates. There is no shame in making the money work harder. Where interest becomes payable to a client under the rules, it can also generate a better return for the client depending on your interest policy  – which incidentally should be in writing. Surely this can only be a good thing in providing legal services in a day and age where competition and pressure on margin is ever increasing.

Helen Clayton – Head of Corporate Services & Legal Specialist 

Utilisation Rates Should Be A Key Focus For All Law Firms

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A recent survey by NatWest showed that the average profit per equity partner in a law firm had increased to £111,000, an increase of £4,000 from the prior year.  Much of this increase has been achieved through an improvement in rates, either through stronger pricing or improved recovery rates.

However, the hours recorded by fee earners remained flat. The average fee earner’s day consists of 4.4 hours being chargeable, which results in an average of 1000 chargeable hours per annum, leaving 700 hours being spent on non-chargeable activity (excluding holidays). I wonder whether law firms are actually looking at utilisation and profit or whether the focus remains on driving improved fee income through recruitment and price.

Increasing utilisation rates, ensuring these are billable of course, drives an increase in fee income which feeds straight into profit, enhancing profit per partner.  Assuming a recovered rate of £100 per hour and a fee earner group of 30 people delivering an additional half an hour chargeable a day, this equates to £345,000 of additional fee income and profit in one year.  The maths is easy; the challenge is unravelling what else goes on in each fee earner’s day to understand where that extra half an hour, or more, of chargeable time can come from. Does it come down to an under-recording of time or is work being done outside of the scope of initial engagement terms that is not being recorded and therefore not being recovered from the client through additional fees? Or are fee earners in comfort zones of recording the 4.4 hours per day as they just have not been challenged on this before? I believe that the setting of chargeable hour budgets does not lend itself to effective practice management; a balance of fee earner KPIs including billable (and recoverable) utilisation is more appropriate.

Additional profit, which in turn is additional cash, can only make life easier; for example, investment in technology, restructuring bank and other debt through earlier repayment of facilities thereby reducing interest costs, ability to better remunerate key employees not to mention attracting new talent to the firm through increasing profitability.

A focus on utilisation is a no brainer in improving productivity, fee income and profitability thereby helping to reduce the pressure of the day to day financial management of a law firm. It can deliver a higher performance and reward culture without impacting on work-life balance.

Helen Clayton – Head of Corporate Services