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Closing down your practice: regulatory requirements

1 October 2013

Legal status

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

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.

1 Introduction

1.1 Who should read this practice note?

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 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 PII practice note.

2 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). Abandoning a practice can lead to:

  • disciplinary action
  • an intervention, which is likely to prove costly to you, and
  • 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).

2.1 Reasons for closing down or selling your practice

It is important to plan well ahead when closing or selling your practice. This will allow you to organise an orderly closedown and deal with outstanding issues such as client matters, client money, insurance and other administrative functions.

2.1.1 Disciplinary action or bankruptcy

There are cases where disciplinary action or bankruptcy, leading to suspension of a practising certificate, can force firms to close. It will not be possible for a firm to continue offering legal services to the public, even where there is another qualified solicitor within the firm. This has been a particular problem for sole practitioners as loss of a practising certificate means they are no longer entitled to be recognised sole practitioners. In the SRA Handbook, the SRA has extended powers to withdraw authorisation from firms, preventing them from offering legal services to the public, which may also become an issue for larger firms.

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

2.1.2 Failure to secure PII

In some cases, failure to secure professional indemnity insurance (PII) will mean a firm will close down. Again, it is important in these situations for you to close down your firm in an orderly fashion.

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 and cessation period covered by their last insurer. Firms must plan for orderly closure by the end of the 90 days.

2.1.3 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 have contingency plans 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.

The SRA has information available on its website on 'Closing down your practice' specifically for sole practitioners.

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

2.2 Informing clients

2.2.1 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. If this is not possible you may consider arranging for another SRA regulated firm to take on any remaining clients. However, you should ensure that clients are aware that they are free to instruct any firm. You may wish to set a deadline for the client to contact you about their decision so that you can transfer the files to the nominated firm.

If you have been struck off, or your practising certificate has been suspended, you must inform clients and explain how their matters will be affected eg whether they will need to instruct a new solicitor.

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.

2.2.2 Selling your practice

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

  • acting in your clients' best interests (principle 4), and
  • 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' eg 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.

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.

New firms now need to be authorised. This is likely to be a more onerous process than the previous process for recognition. 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.

2.3 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 must also inform the SRA of the planned closure date and where remaining client files and documents will be stored. You must ensure that the SRA is made aware of the name of the firm, practising address and any trading names you use.

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.

If you cease to practise you must inform the SRA within seven days and provide the SRA with a contact address (regulation 15 of the SRA Practising Regulations 2011).

2.3.1 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 and FAQs 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. If a practice ceases to have a compliance officer, it 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)

2.4 Professional indemnity insurance

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 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 emailing professionalindemnity@sra.org.uk or by calling 01527 504487.

2.4.1 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.

2.4.2 Run-off at the end of the cessation period

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

2.5 Informing other parties

The SRA has created a list of other parties who you should inform. You should inform the bank of your plans and also if you have been struck off or suspended.

2.6 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, and
  • accounting to clients

Money that remains after the closure must be dealt with in accordance with accounts rules. Rule 20 of the SRA Accounts Rules 2011 sets out what you will need to do if clients are untraceable.

If you continue to hold client money you must deliver annual accountant's reports. In some cases it may be possible to apply to the SRA for a waiver from this requirement. A final accountant's report must be delivered within six months of ceasing to hold money.

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

2.7 Notepaper, emails etc

Once your firm has closed, your notepaper, emails etc should reflect the fact that the firm has closed. Similarly, it should be made clear to those calling the office that the firm has now closed.

2.8 Undertakings

Sole practitioners or managers of firms remain responsible for any undertakings given by your 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.

In certain cases, where you cannot fulfil an undertaking because it is dependent on the recipient completing certain actions which have not occurred you can ask the SRA to get involved. It will ask the recipient to take those actions within a certain timeframe or it will not consider a complaint with regards to the undertaking. You should contact the Risk Assessment and Designation Centre (RADC), Solicitors Regulation Authority, Ipsley Court, Berrington Close, Redditch, B98 0TD regarding such requests.

2.9 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. There is more information in our practice note on retention of files. 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.

2.10 Confidentiality

You must consider confidentiality when transferring client matters or storing files.

2.11 Fraud

Solicitors' firms make attractive targets for criminals as they provide ideal vehicles to launder money and to commit fraud. If you plan to sell your firm you should carry out due diligence on any potential buyer.

2.12 Financial difficulties

If an insolvency event occurs, you may need to notify the SRA. See more about reporting requirements.

If you are declared bankrupt your practising certificate will automatically be suspended though you can apply to the SRA to have this suspension lifted. Once suspension occurs you will not be able to practise.

If an administrative receiver, administrator or liquidator is appointed in relation to your firm they will need to be a solicitor, to ensure your duties to clients continue to be met. You must inform the SRA and your insurers of the appointment.

2.13 Law Society support

The Law Society continues to look for ways to assist its members in considering potential exit strategies and options if they find themselves in the position of looking to retire without being able to afford run-off cover. Our Risk and Compliance Service may be able to help.

There is also a closing down webinar available for purchase from the CPD Centre.

3 More information

3.1 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 email practiceadvice@lawsociety.org.uk

3.2 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.

3.3 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 email consulting@lawsociety.org.uk.

Find out more about our consultancy services

4 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

2007 Code - Solicitors' Code of Conduct 2007

OFR - Outcomes-focused regulation

SRA - Solicitors Regulation Authority

IB - indicative behaviour

ARP - assigned risks pool

MTC - minimum terms and conditions

SIIR - SRA Indemnity Insurance Rules 2011 (as amended from time to time)

PII - professional indemnity insurance

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