M&A: SRA may require more information to help manage risks
There are “reasons to be cautious” around the Solicitors Regulation Authority (SRA) becoming more involved when law firms go through mergers and acquisitions (M&A), it said yesterday.
“We have heard some concerns that additional requirements or checks are unnecessary and may have negative consequences, such as putting off investors, or delaying time critical acquisitions so that the acquisition does not happen,” said a consultation on protecting client money, one of three published following the consumer protection review.
It said any additional due diligence – which may come in the form of requiring more information, rather than active approval of a deal – would focus on identifying features “that may indicate regulatory risk”, such as capacity and capability to take on new areas of work, to integrate systems and processes and to have adequate controls in place given the new firm profile.
“This may include considerations around governance and financing. We would not be concerned with commercial choices and considerations beyond this.”
SRA chief executive Paul Philip indicated last week that he was not in favour of broad control over M&A and the consultation seems to back this up.
“The majority of the 100 or so mergers and acquisitions that happen each year do not result in regulatory breaches or substantive issues requiring us to act or intervene,” it said.
“Our inspections have found no systemic risks with acquisitions per se. They have highlighted specific risk factors at which we may best target our oversight in a way that adequately protects client money.”
Last month’s Legal Services Board-commissioned review into the SRA’s handling of Axiom Ince recommended it have a process to triage acquisitions, and to scrutinise those which appear to pose the greatest potential risk to consumers and public interest. This sparked concerns that any changes could inhibit M&A activity.
The consultation identified as a problem information that was currently only collected at the initial authorisation stage and/or annually thereafter, such as changing structure and governance arrangements and entering new practice areas, whether through acquisition or otherwise.
One possibility was requiring firms to inform the SRA of certain changes prior to or within a specified period after a deal so that it could ask questions or perhaps require ‘out of cycle’ accountants’ reports.
It acknowledged the need for proportionality, such as only notifying a new practice area where turnover reached a certain level, or specifying areas of law where notification was required.
“For example, we have recently issued a warning notice about representation on high volume financial service claims.
“We could require firms intending to begin providing services in this area to notify us so that we can satisfy ourselves that they have read and understood this warning notice and have the necessary processes and procedures in place to ensure compliance with our requirements.”
There are “reasons to be cautious” about this and the SRA wanted “to avoid unintended consequences. Changes in business model and profile, including through acquisitions, are natural responses by operators in any competitive and dynamic marketplace and there are often benefits to consumers.”
While the SRA has heard some concerns about the impact of additional requirements or checks, “other stakeholders raised doubts that our involvement would be disproportionately onerous or necessarily delay a transaction”.
The consultation also looked to crack down on the misuse of dormant law firms. “We are aware of dormant firms being advertised for sale with the value of the sale being described as the SRA authorisation itself…
“A buyer might purchase that authorised firm and would not need to apply to the SRA for any further authorisation.”
They have also been used by failing legal service businesses to leave behind debt and other liabilities. “While we can and do take action in these situations to manage risks that may be posed to clients, this takes place after the dormant firm has already been acquired.”
The consultation suggested a provision to revoke authorisation where an authorised body has not provided legal services within 12 months (primarily evidenced by reporting zero turnover) without a legitimate reason.
As trailed last week, the consultation looked at reintroducing the requirement for all firms to deliver an annual accountant’s report, even if unqualifed.
Between 2018 and 2023, the number of qualified accountants’ reports decreased by around 58%, which “suggests that some firms are not commissioning a report at all or are not sending their qualified reports to us”.
Alternatives would be an annual declaration for reporting accountants to confirm they have provided a report and declare whether it was qualified, or an annual declaration for firms.
The SRA will also investigate whether to require firms to change their reporting accountant periodically, to help safeguard their independence.
The consultation outlined concerns about the more than 25% of non-sole practitioner firms where a single manager/owner also held all the compliance roles.
“We think that we must address the risks associated with an individual having significant power and control within a firm also holding the key compliance roles.
“Therefore, we propose that any manager (including owner managers) who can unilaterally make management decisions on behalf of the firm that impact on the receipt, retention and distribution of client money should not be able to hold a key COLP or COFA role within the firm.”
But this could be difficult for sole practitioner and very small firms and the consultation asked for alternatives, such as “the external commissioning of compliance roles or enhanced independent audit of relevant decisions and activity”.
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