Legal Business Blogs

Tough on the high street – 153 law firms enter last chance saloon after failing to gain cover

In further evidence of the intense pressure facing small practices, the Solicitors Regulation Authority (SRA) today (31 October) announced that 153 law firms are at threat of closure after having failed to secure professional indemnity insurance (PII) cover.

Under the new PII arrangements – introduced this year to replace the old assigned risks pool – these solicitor firms will now enter a 60-day ‘cessation period’ in which firms can only deal with existing instructions while they seek an insurer. Those failing to gain cover by 29 December will be required to close.

The regulator had been notified of 226 law firms that wished to invoke the 90-day ‘extended policy period’, having failed to secure insurance cover by the deadline of 1 October. Seventy three firms went on to gain cover before the end of the first phase of the 90-day period, which ended yesterday (30 October). This leaves the remaining 153 firms in an effective ‘last chance saloon’ professionally.

While the number may seem high, George Bull, chair of the professional practices group at Baker Tilly, said that many suspected the number would be higher and that the real concern lies with those firms which have acquired cover using loans from high-interest lenders.

‘It’s been a common practice for years for firms to borrow to pay their PII premium but in a difficult economy and with the SRA placing great emphasis on financial stability, any firm thinking of borrowing on special terms really needs to think twice because it really raises questions about the whole sustainability of the business.’

Bull added: ‘Law firms have traditionally been funded by partner capital and bank debt. When extra debt needs to be taken on for PII or VAT – for which sometimes people borrow even though clients may already have paid them – there are financial stability issues going on behind the 153 number which are going to be far more difficult and far more important.’

The numbers should be a wake-up call to firms who rely too heavily on debt concluded Bull.

The news comes as a tough commercial market continues to batter small and medium-sized law firms, with 2013 seeing several major law firm insolvencies including Cobbetts and Challinors. Pressure to gain cover has been increased by the withdrawal from the market of insurance provider Berliner, which left more than 1,000 firms hunting for cover.

Prior to the new PII arrangements, which came into play on 1 October 2013, firms entered the assigned risk pool. This was one of the last changes to be made as part of the review of the client financial protection arrangements designed to ensure the market for professional indemnity insurance remained competitive.