So when will the regulator intervene?

Squeezed SRA thinks twice about intervening when firms face bankruptcy

That the small to mid-tier law firm sector is feeling the pinch hardly stops the presses, but financial constraints are arguably putting clients at risk as the profession’s policeman has to weigh up the cost implications of potential interventions when practices are in trouble.

Drama around Birmingham’s Challinors threw the issue into stark relief last week, when the 13-partner firm filed a High Court notice of intention to appoint administrators in the wake of “financial difficulties”. But apart from highlighting wider woes in the high street sector the saga flags concerns around the regulatory approach to firms on the brink of going bust.

Figures from the Solicitors Regulation Authority (SRA) show intervention costs rocketing, shattering the 2013 forecast budget by nearly 70 per cent. Lawyers familiar with SRA processes fear that in a bid to keep a lid on costs it could be hamstrung in conducting all the interventions it ideally should initiate.

As speculation engulfed Challinors the SRA was adamant it did not need to intervene as the firm’s partners were positioning for a sale and “client interests were not at risk”. Yet if the prospect of a major regional high street player going under doesn’t get the regulator into its panda car, what does it take for an intervention?

An SRA spokesman points to two significant triggers. The first is “financial pressure forcing otherwise honest solicitors to undertake dishonest actions in a bid to keep their business afloat”; while the second centres on the ability to pay wages and keep creditors on board so none pull the plug on office infrastructure.

Fiona Simpson, a special counsel at Withers – who, until 2009, acted for the SRA in interventions – explains: “If the firm can be sold in fairly short order and is capable of carrying on for its clients until it is sold, the SRA takes the view there is theoretically no risk to the client.

“If the firm has financial issues but hopes it can be sold, I can see why the SRA would think it is in its own interest, and in the clients’ interest, for that sale to go ahead without an intervention.”