Coronavirus and the recession: the impact on solicitors and law firms and the support available

Linda Lee
Linda LeeRadcliffes Le Brasseur

Linda Lee looks at the financial issues solicitors and law firms are now facing as a result of the coronavirus pandemic and the resulting recession, combined with the uncertainty of Brexit and the challenge of PII renewal. She highlights the areas you may need to consider and explains how the Law Society can help.

Solicitor working on finances

A century ago, solicitors were facing rebuilding the profession after the biggest series of catastrophes ever to impact on this country, and indeed the world. When the First World War broke out in 1914, there were around 15,000 solicitors. At the end of the war, a tenth of all solicitors and a third of all articled clerks (now known as trainee solicitors) had been killed.

The end of the war was followed by the Spanish flu epidemic. We don’t know how many solicitors died as a result, but it is estimated that between 20 and 40 million people died worldwide and the flu was most deadly for people aged 20 to 40. The world was then plunged into recession.

A hundred years later and the profession is again in turmoil. A pandemic is wreaking havoc around the world, causing a global recession, and in our small corner, we also face the uncertainties of Brexit and a hardening professional indemnity insurance (PII) market.

For some firms, times will be hard, but they will find new ways of working and trade through. The Law Society has information to help on coronavirus, business management and closure and merger

There will be firms that cannot afford the renewal premium for PII, or do not wish to access government loans or to trade through the years of recession that lie ahead. As a consequence, partners, solicitors and others will lose their jobs.

Impact on employment

We now face a dilemma the polar opposite to that of 100 years ago. At that time there were too few qualified men (women had only just been permitted to practise under the Sex Disqualification (Removal) Act 1919 but very few had the opportunity).

As at June 2020, there were 202,265 solicitors on the roll of which 149,621 had practising certificates (based on SRA data). It seems unlikely that in a recession there will be employment or easily available employment in the law for all solicitors.

It is also likely that trainees and apprentices will be amongst those who (although not technically made redundant) will find their contracts terminated.

For those very close to qualification, it may be possible for the SRA to grant a waiver that will permit them to qualify. See the SRA’s guidance on applying for a waiver.

It is to be hoped that firms that are secure will consider taking on trainees and apprentices who have already started their training contract elsewhere. Government help may soon be announced to assist with the cost of employing trainees (who are also classified as apprentices) and thus enable them to qualify.

PII cover

Where partners believe their firms can be salvaged, it is important that they keep close control of all aspects of their finances and are realistic about assessing the point at which it is prudent to close so that they can ensure an orderly wind-down.

If they cannot save their firms, it is important that they do not risk disciplinary action that could prevent them continuing to earn a living as solicitors.

There are some firms that will not be able to obtain PII either at a price they can afford or at all. If at 1 October, they do not have cover, they have five days to notify the SRA, as set out in the SRA’s guidance on PII.

Once firms notify the SRA, they will go into the extended indemnity period under their existing policy. This is made up of a 30-day extended policy period (EPP) and then a 60-day cessation period (CP). During these periods indemnity cover is provided by the last-named insurer for the firm.

The firm can use this time to secure insurance, however, after 30 days it cannot take on any new business.

As a result of the pandemic, the SRA has announced that it may be possible to continue to take on new business beyond the 30 day period and to extend the CP beyond 60 days, with the agreement of insurers, if firms apply for and are granted a waiver by the SRA. See the SRA’s information on applying for a waiver.

Once a firm enters into the CP it must be taking steps to close down.

The SRA will discover if anyone has failed to notify it when it conducts its reconciliation process once the October renewal date for practising certificates has passed.

Mergers and paying the run-off premium

If a firm cannot obtain PII or an extension of its current cover, the firm will have to either close, or merge with another firm. In either case it is likely that paying the run-off premium will be unavoidable.

It is increasingly unusual for a firm willing to merge to agree to be a ‘successor practice’ (see the definition in the SRA minimum terms and conditions of PII). Usually it will insist that the old firm must pay run-off. This protects the ongoing business from claims from the merged firm.

Although the run-off premium under current policies is commonly between two and three and a half times the last premium (for basic level of cover), it may be possible where partners genuinely have difficulty in meeting the payment to negotiate instalment terms with insurers.

Alternative structures

Some partners in firms (and solicitors finding themselves redundant) are looking at the new structures available to see if there are viable alternatives enabling them to continue to practise and offer services having where relevant put their existing firm into run-off.

One option is to become employed as a solicitor in a limited company not regulated by the SRA. This may be attractive where they are not carrying out reserved work, as they are not required to hold PII at the minimum level of the minimum terms and conditions. Alternative cover with lower policy premiums may be available.

Other partners are considering putting their firms into run-off, thus taking advantage of lower premiums paid in 2019, and then continuing their career as freelancers.

In that case there remains an obligation under section 5.6 of the Code of Conduct for Solicitors, where freelance solicitors or employed solicitors undertake reserved activity work, to hold an adequate and appropriate level of cover.

As a freelancer, a solicitor can carry out reserved activities (if they are more than three years qualified) but cannot be in partnership, a limited company or have employees. See the practice note on freelance solicitors for more information.

However, if solicitors become freelancers, they need to give thought to how to manage an exit and to discharge the liabilities of that new business in due course.

Regulatory considerations

From a regulatory perspective, options that involve putting the firm into run-off trigger a number of important considerations. These include client consent to transfer work to a new entity, closing off client account and dealing with residual balances, the return of deeds and storage of the records of former clients.

The SRA must be given notice. It has prepared guidance on closing down your practice.

You can also get help by contacting its Professional Ethics Helpline on 0370 606 2577 or email professional.ethics@sra.org.uk.

For firms that wish to carry out conveyancing and probate, an alternative that could avoid the need to put the firm into run-off may be to become licensed through the Council for Licensed Conveyancers. The annual insurance premiums will include an element for run-off cover each year and overall premiums may be less expensive.

This will not give authorisation for the practice of litigation or for a mixed practice. The position regarding run-off insurance for former litigation clients would need to be clarified.

Help from the Law Society

Whatever the difficulties facing individuals and firms, help and advice are at hand.

The Law Society has formed a taskforce from members of its specialist regulatory committees (insurance, standards & ethics and regulatory processes), to update and add to the Law Society’s core list of advice with practice notes, mergers events and articles, and to make the SRA aware of the issues it needs to tackle.

If there are areas you would like the taskforce to give guidance on or to lobby the SRA about, email us.

For guidance to support you and your firm, see the Law Society’s information on:

Advice and support is also available from the Law Society’s pastoral care helpline, open 9am to 5pm Monday to Friday, on 020 7320 5797.

LawCare promotes and supports good mental health and wellbeing in the legal community.

SBA The Solicitors’ Charity may be able to assist with financial support for solicitors and their families and can provide financial support and advice whilst retraining in other disciplines.

For advice on regulatory, disciplinary and employment matters, you can contact the expert volunteers of the Solicitors Assistance Scheme.

See details of all our helplines and other support services

David Lloyd George, a solicitor and the prime minister in 1920, said: “there are times you need the courage to take a great leap; you can't cross a chasm in two small jumps”.

That is true but crossing a chasm or facing any difficulty is always easier when you have help, support and a good plan. The Law Society is here to help.