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Closing down your practice: regulatory requirements

22 March 2016

What is the issue?

This practice note outlines the regulatory requirements to consider when closing down your practice. There are numerous actions that need to be taken when closing down a firm and doing so will require forward planning. The process for closing a practice differs depending on whether or not there is a successor practice in place. For further information about the successor practice rules consult the Law Society's Professional Indemnity Insurance (PII) practice note.

Legal status

This practice note is the Law Society's view of good practice in this area. It is not legal advice.

Practice notes are issued by the Law Society for the use and benefit of its members. They represent the Law Society's view of good practice in a particular area. They are not intended to be the only standard of good practice that solicitors can follow. You are not required to follow them, but doing so will make it easier to account to oversight bodies for your actions.

Practice notes are not legal advice, nor do they necessarily provide a defence to complaints of misconduct or of inadequate professional service. While care has been taken to ensure that they are accurate, up to date and useful, the Law Society will not accept any legal liability in relation to them.

For queries or comments on this practice note contact the Law Society's Practice Advice Service.

Professional conduct

The following sections of the SRA Handbook are relevant to this issue:

SRA Principles

There are ten mandatory principles which apply to all those the SRA regulates and to all aspects of practice. The principles can be found in the SRA Handbook.

The principles apply to solicitors or managers of authorised bodies who are practising from an office outside the UK. They also apply if you are a lawyer-controlled body practising from an office outside the UK.

Terminology

Must - A specific requirement in legislation or of a principle, rule, outcome or other mandatory provision in the SRA Handbook. You must comply, unless there are specific exemptions or defences provided for in relevant legislation or the SRA Handbook.

Should

  • Outside of a regulatory context, good practice for most situations in the Law Society's view
  • In the case of the SRA Handbook, an indicative behaviour or other non-mandatory provision (such as may be set out in notes or guidance).

These may not be the only means of complying with legislative or regulatory requirements and there may be situations where the suggested route is not the best possible route to meet the needs of your client. However, if you do not follow the suggested route, you should be able to justify to oversight bodies why the alternative approach you have taken is appropriate, either for your practice, or in the particular retainer.

May - A non-exhaustive list of options for meeting your obligations or running your practice. Which option you choose is determined by the profile of the individual practice, client or retainer. You may be required to justify why this was an appropriate option to oversight bodies.

SRA Code - SRA Code of Conduct 2011

SRA - Solicitors Regulation Authority

IB - indicative behaviour

MTC - minimum terms and conditions

PII - professional indemnity insurance

The Law Society also provides a full glossary of other terms used throughout this practice note

1 Introduction

1.1 Who should read this practice note?

All solicitors who are involved in the management of their practice, in particular, the Compliance Officer for Legal Practice (COLP). Firms should have a plan in place for the possibility of closing down in the future, even if there are no plans to close down at present.

Solicitors who are considering closing down their practice and want to know about the regulatory requirements they will have to consider.

1.2 What is the issue?

This practice note outlines the regulatory requirements relating to closing down a practice. There are numerous actions that need to be taken when closing down a firm and doing so will require forward planning. The process for closing a practice differs depending on whether or not there is a successor practice in place. For further information about the successor practice rules, consult the Professional Indemnity Insurance (PII) practice note.

2 Planning to close down your practice

Whether or not your firm is considering closing down, you should have a plan in place for when the practice might close in the future.

Outcome 7.2 of the SRA Code requires that 'you have effective systems and controls in place to achieve and comply with all the Principles, rules and outcomes and other requirements of the Handbook, where applicable'.

Outcome 7.3 requires that you ' identify, monitor and manage risks to compliance with all the Principles, rules and outcomes and other requirements of the Handbook, if applicable to you, and take steps to address issues identified'.

It should be part of your firm's risk management procedures to have a plan in place for an orderly closedown and to deal with outstanding issues such as client matters, client money, insurance and other administrative functions.

This may be particularly important for sole practitioners, where disciplinary action or long term incapacity could force the closure of the practice.

In your plan for firm closure, you may wish to consider:

  • how clients will be informed of the closure
  • who else needs to be notified of the closure
  • how active matters will be transferred to a successor firm/ another firm
  • dealing with client files (archiving closed files is one of the highest costs of closure)
  • returning money on account to clients
  • run-off professional indemnity insurance cover and how this will be paid for (usually two to three times the firm's annual premium)

3 Reasons for closing down or selling your practice

3.1 Disciplinary action or bankruptcy

There are cases where disciplinary action or bankruptcy, leading to suspension of a practising certificate, can force firms to close. This would clearly be the case for sole practitioners as loss of a practising certificate means they are no longer entitled to be recognised sole practitioners. The SRA has powers to withdraw authorisation from firms, preventing them from offering legal services to the public.

Disciplinary action and bankruptcy are often foreseeable events and you should, where possible, make contingency arrangements to close or sell the practice before these events occur. Failure to do so is likely to lead to an intervention which will be costly to you and disruptive to clients and those involved with the firm. You must take into account the outcomes in chapter 7, on 'Management of your business', in the SRA Code and should consider the following IB:

IB (7.3) Identifying and monitoring financial, operational and business continuity risks including complaints, credit risks and exposure, claims under legislation relating to such matters such as data protection, IT failures and abuses, and damages to offices.

3.2 Failure to secure PII

Firms have a continuing obligation to ensure they have qualifying insurance in place at all times or face closure. Firms have 30 days from expiry of the last policy (Extended Indemnity Period) to secure cover, followed by a 60 day Cessation Period to close down, in which they cannot take on new work.

In this situation, the SRA can extract undertakings from firms to organise their closure in a very short timeframe. If they fail to do so, the firm can be accused of not managing an effective close down and sanctioned for failing to comply with an undertaking. It is therefore imperative that the firm has a plan in place for closing down.

3.3 Loss of legal aid contract

Your firm may be forced to close down due to the loss of income caused by reduced legal aid work.

3.4 Illness, death and other emergencies

Other reasons, such as illness or death, may also result in the closure of a practice. It is important, particularly for sole practitioners, to consider what will happen in the event of retirement, and have contingency plans in place in case of long-term incapacity or death. While there is no explicit requirement to this effect in the SRA Code, chapter 7 includes the following IB:

IB (7.4) making arrangements for the continuation of your firm in the event of absences and emergencies, for example holiday or sick leave, with the minimum interruption to clients' business.

Sole practitioners should nominate someone to deal with their practice in the event of death/incapacity. You will want to avoid a situation in which the SRA will intervene and the associated costs being borne by the deceased's estate.

You should also consider seeking advice from your insurance broker about whether there are any additional insurance products available to assist in these circumstances.

4 Closing down your practice

You must close down your firm in an orderly and transparent fashion (chapter 10 of the SRA Code, outcome 10.13). Failure to close down the practice in an appropriate way that puts client protection or the reputation of the profession at risk, can lead to:

  • disciplinary action
  • an intervention, which is likely to prove costly to you, both financially and reputationally
  • where clients have received poor service, an ombudsman's decision against you

It is important that you inform the relevant authorities and deal with all relevant client matters. It is equally important that you do not continue to provide services to clients once your firm ceases or is sold (unless it is through another regulated entity).

4.1 Informing clients

4.1.1 Closing your practice

You must inform clients if you are closing your practice. You should try to give your clients enough notice so that they can instruct another firm, and should ensure that clients are aware that they are free to instruct any firm. If you hold client money, you will need the client's informed consent to transfer the money.

If obtaining client consent is not possible due to an urgent need to transfer files (eg a risk that the office will be repossessed and files removed), you may consider arranging for another SRA regulated firm to take on any remaining clients. Transferring files to another firm before clients have given consent carries significant risks, including breach of trust, breach of confidentiality, and possibly causing a serious complaint if the new firm has a conflict or the client would not want to instruct them. The new firm will need to contact clients urgently and seek consent properly.

You should identify any work in progress or retainers that have not been closed. After the firm has closed, you should be careful not to practise or be held out as practising through the firm when tying up loose ends for clients. If you do practise once your PII has expired, this work will not be covered by your run-off cover.

You should inform former clients who might be affected by the closure, eg those you hold papers for or have appointed you as an executor in your professional capacity. If you have been acting as a personal representative or trustee you must consider whether you can continue to act in a professional or personal capacity.

4.1.2 Selling your practice

You must inform clients of the change in ownership before it occurs to ensure you comply with the following principles of the SRA Code:

  • acting in your clients' best interests (principle 4)
  • providing them with a proper standard of service (principle 5)

You should provide clients with information to allow them to make an informed choice about whether they continue to instruct the 'new firm' (ie the firm once it has changed ownership).

If the new firm will be SRA regulated, you can seek your clients' instructions as to whether they want to transfer to the new firm. If you wish, you can set a deadline for clients to respond, after which you may transfer the file to the new firm. New firms must be authorised.

Although pre-authorisation can be applied for in the event of a planned closure, if there is likely to be a gap before the new firm is authorised you must inform clients of their options (eg instructing an alternative solicitor).

If the new firm will not be SRA regulated, you must explain who the regulator will be, what their status is, the implications for client protections and duties owed to clients. You must have explicit consent to transfer clients’ files and money to the new firm. If clients do not consent, you may need to continue to hold on to their files and monies within the client account. Clients should be made aware that you will not be able to continue to work on their matters without that consent.

4.2 Informing the SRA

You must inform the SRA of your intention for the firm to cease practising and consider the outcomes in chapter 10 on 'You and your regulator' of the SRA Code, particularly outcome (10.13):

Outcome (10.13) Once you are aware that your firm will cease to practise, you effect the orderly and transparent wind-down of activities, including informing the SRA before the firm closes

You can inform the SRA by contacting your firm's SRA supervisor, or by email, marked for the attention of the regulatory notifications team. The notification should include:

  • the date on which the firm will cease to practice
  • the reason for closure
  • a request to revoke your firm's authorisation or your recognition as a sole practitioner from the date of closure
  • where remaining client files and documents will be stored
  • the name of the firm, practising address and any trading names you use

You should also notify the SRA when all matters have been dealt with and the firm is fully closed.

Any firm that is regulated by the SRA and is buying your firm must inform the SRA as this is likely to be considered a material change to relevant information about the firm. You must also inform the SRA of any material changes to relevant information about you. This includes you moving to a new firm. This is outlined in chapter 10 of the SRA Code:

Outcome (10.3) You notify the SRA promptly of any material changes to relevant information about you including serious financial difficulty, action taken against you by another regulator and serious failure to comply with or achieve the Principles, rules, outcomes and other requirements of the Handbook.

4.3 Compliance officers

The SRA Authorisation Rules outline the requirements for the roles of compliance officer for legal practice (COLP) and compliance officer for finance and administration (COFA). See our practice note on compliance officers for more detailed information about these roles.

You should consider contingency planning if, for whatever reason, a compliance officer cannot fulfil their role and you or your firm have to manage in their absence. The COLP and COFA will be instrumental in the planning of, and actions required to, close down the practice. If your practice ceases to have a compliance officer, you will need to do the following (either immediately or within seven days):

  • inform the SRA
  • designate another manager or employee to replace its previous compliance officer, and
  • make an application to the SRA for temporary emergency approval of a compliance officer, as appropriate (rule 18 of the SRA Authorisation Rules) followed by a permanent application if appropriate

4.4 Professional indemnity insurers

You must discuss your plan to close with your indemnity insurer. You must inform your insurer if you have been suspended, struck off or there has been an insolvency event. If there is no successor practice, you must purchase run-off cover for six years from the date that your current policy would have expired. The cost of run-off cover is set out in your PII policy. Read the Law Society's advice on run-off cover.

If you have failed to renew your PII, you must inform your insurer on cover at the time your firm ceases within five business days.

There is no longer an assigned risks pool for firms unable to obtain insurance on the open market. Instead, firms will enter into an extended indemnity period (EIP) and cessation period (CP) covered by the last insurer. Read the Law Society's advice on the extended indemnity period.

Firms must plan for orderly closure by the end of the 90 days. You must also notify the SRA within five business days that you have entered the EIP, and also if you have entered the CP, by email. During the 60-day CP, you are not permitted to take on new work but are permitted to continue to work for existing clients while closing your business in an orderly manner.

You can continue to try to secure PII cover to avoid closure before the 60 days' CP are up.

If there is a successor practice, claims made after the closure of the practice will be dealt with by the new practice's qualifying insurer unless you have elected to secure run-off cover for the prior practice prior to succession.

A successor practice is defined in the minimum terms and conditions (MTC) in the SRA Indemnity Insurance Rules. For further information see the Law Society's PII practice note. The SRA can provide further guidance on this issue and can be contacted by email or by calling 0370 606 2555.

4.4.1 Cost of run-off

If you are considering closing your practice, you should consider the PII implications, particularly the cost of run-off cover.

The cost of MTC run-off is linked to a firm's annual premium and is typically between two or three times a firm's annual premium. You can calculate costs with the Law Society's PII retirement calculator.

4.4.2 Run-off at the end of the cessation period

If the firm closes on or before the expiry of the cessation period, the firm must be provided run-off cover by its insurer for six years incepting with effect on and from the start of the extended indemnity period.

More information about run-off cover

4.5 Informing staff

You will need to consider issues such a redundancy, references and ensuring that there are sufficient staff to assist you in effecting an orderly closure.

4.6 Informing other parties

You should inform the bank of your plans and also if you have been struck off or suspended.

You may also need to contact some or all of the organisations listed below to inform them of the closure of your practice:

  • Accountants
  • Anyone using your office as a registered address
  • Counsel's chambers
  • Court offices
  • Crown Prosecution Service / police
  • Directories – professional / telephone
  • HMRC
  • Information Commissioner (data protection)
  • Introducers with whom you have an arrangement
  • Landlord
  • Land Registry / Land Charges Registry (re current matters)
  • Legal Aid Agency
  • Local authority
  • London Gazette/ newspaper
  • Mortgage lenders where you are on the panel
  • Other solicitors firms / professionals with whom you are professionally engaged
  • Service providers

4.7 Client accounts

If you are closing down you should where possible transfer all client money out of client accounts by:

  • paying disbursements
  • billing for outstanding costs
  • accounting to clients
  • transferring client monies to a new firm where the client has requested or consented to the transfer

Money that remains after the closure must be dealt with in accordance with the SRA Accounts Rules. The practice note on residual client balances sets out what you will need to do if clients are untraceable.

A final accountant's report must be delivered within six months of ceasing to hold money. Where you only hold a small amount of client money, it may be possible to apply to the SRA for a waiver from this requirement.

If your practice is being sold, the new owner must set up new client accounts that are distinguishable from the ones held by you.

4.8 Notepaper, emails etc

Once your firm has closed, your notepaper, emails, website, etc, should reflect the fact that the firm has closed. Similarly, it should be made clear to those calling or visiting the office that the firm has now closed. If you do not hold a practising certificate , you should refer to yourself as 'non- practising'.

4.9 Undertakings

Sole practitioners or managers of firms remain responsible for any undertakings given by the firm even after it has closed. You should therefore seek to discharge any undertakings where possible. If you are unable to discharge an undertaking you may be able to transfer responsibility for carrying out the undertaking to another firm. However, you remain liable unless the recipient releases you from the undertaking.

4.10 Records and documents

The SRA requires you to keep certain records for defined periods, for instance:

There may also be records that would be helpful to keep in case an issue arises at a later date, eg agreements relating to financial arrangements with an introducer or evidence of a client's consent to you retaining commission.

There may also be legal requirements to keep documents, eg VAT records.

You must consider what to do with client files. See our practice note on retention of files for further information. You should remember that some of the papers in the file belong to the client and therefore you may not be able to destroy them. If your firm is being sold the new owner may agree to store the files. If you are closing down you should where possible hand them back to the client. Where the client is untraceable, you may in some cases be able to destroy the file if you have reserved the right to do so. In other cases, you may need to arrange suitable storage for the files.

You must inform the SRA about the location of the files.

4.11 Confidentiality

It is a key legal and regulatory requirement is to ensure that clients' confidentiality is protected. This duty continues after conclusion of your client's matter. You must consider confidentiality when transferring client matters or storing files.

The SRA has provided further guidance on confidentiality requirements in relation to mergers or acquisitions of practices.

4.12 Fraud

Solicitors' firms make attractive targets for criminals as they provide ideal vehicles to launder money and to commit fraud. The sale of a firm could be a particular target for fraudsters due to the large amounts of money that could be transferred. If you plan to sell your firm you should carry out due diligence on any potential buyer.

4.13 Financial difficulties

If the firm is in financial difficulty, you must contact the SRA. See more about reporting requirements.

If you are declared bankrupt your practising certificate will automatically be suspended and you will not be able to practice. You can apply to the SRA to have this suspension lifted. If you know you are likely to be adjudged bankrupt, you can apply in advance for the suspension to be lifted on the same day it is suspended. However, bear in mind it may well be reinstated subject to conditions. The rules of bankruptcy also mean that you will not be able to run a business.

You must inform the SRA and your insurers of the appointment of an administrative receiver, administrator or liquidator.

5 More information

5.1 Practice Advice Service

The Law Society provides support for solicitors on a wide range of areas of practice. Practice Advice can be contacted on 020 7320 5675 from 09:00 to 17:00 on weekdays or by email.

5.2 Professional ethics helpline

The Solicitors Regulation Authority's professional ethics helpline for advice on conduct issues.

The SRA has also published guidance on closing down.

5.3 Law Society Consulting

If you require further support, Law Society Consulting can help. We offer expert and confidential support and guidance, including face-to-face consultancy on risk and compliance and finance and accounting. Please contact us on 020 7316 5655, or by email.

Find out more about our consultancy services

5.4 Solicitors' Assurance Scheme

Confidential advice on a range of issues, including financial problems, visit the Solicitors' Assurance Scheme.

5.5 Lawcare

For pastoral support on matters such as stress, depression or health issues, employment options, visit Lawcare.

5.6 Lawcare

If your reasons for closing down are financial, or you are facing the possibility of being struck off or suspended, your local Law Society may be able to assist in providing you with details of firms interested in a merger, buying your practice, or taking on existing client matters.

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