Managing the risks involved in mergers and acquisitions – SRA and consumer protection

The Solicitors Regulation Authority (SRA) has recently launched a consultation with the aim of better protecting consumers, or clients, of law firms.

The consultation, triggered by the collapse of Axiom Ince, is wide ranging looking at both the SRA’s compensation fund and how similar collapses of law firms might be prevented.

In doing so, it asks for responses addressing three separate areas of risk:

• Managing the risks associated with the failure of firms resulting from poor trading results or cashflow.
• Managing the risks involved in mergers and acquisitions.
• Ways to ensure the protection of client money.

We have a strong and growing practice of solicitors firms across London and the South East and has contributed to that consultation.

In the first article we touched on the management of the risks associated with the failure of firms resulting from poor trading results or cashflow.

In this, the second of three articles, we discuss the management risks involved in mergers and acquisitions

Managing the risks involved in mergers and acquisitions

We have attended and participated in many roundtable events where this consultation has been discussed at length. A lot of the focus has been on rapidly expanding law firms reliant on M&A’s and consolidations, and how the risks can be mitigated.

The SRA are proposing to ‘look at the sustainability of ownership models and corporate structures in the legal sector, and whether some carry more inherent risk.’, as well as considering enforcing increased transparency around structure. We would suggest that once the risk of ownership models have been considered, these could again be utilised as part of a traffic light system for categorising the risk of each firm.

The SRA could also consider a more regimented process in relation to mergers and acquisitions. For instance, the Financial Conduct Authority (FCA) require that they must be notified ahead of any change in control. This process gives the FCA 60 working days to consider the proposal and make any relevant enquiries. Adopting a similar process for firms regulated by the SRA would give the regulator an opportunity to undertake due diligence work and safeguard clients in situations where a proposed change to ownership structure could carry higher risks.

Having undertaken due diligence work ourselves on behalf of a number of law firm clients undertaking mergers and acquisitions, we have created a schedule a work which we would expect to be completed ahead of the process being completed, paying specific attention to systems and procedures relating to compliance and the protection of client money. This would include, as a minimum, reviews the of three-way reconciliations and evaluation of KPIs and general performance indicators in the periods up to the proposed completion date. Furthermore, the actual acquirer should be looking at the behaviours within the target law firm, as well as the styles of law being undertaken.

We would suggest that such due diligence work should be considered compulsory and shared with the SRA before any mergers or acquisitions take place, to evidence that the acquiring law firm has considered the impact of, and is effectively planning for, the change in organisation structure. This may also include business plans and cashflow forecasting reports. If such a system were to become a mandatory part of the merger/ acquisition process, this would provide additional reassurance to clients and consumers that client money is protected despite changes to organisational structures.

If you would like to learn more about how these proposed changes may impact your firm, or need expert guidance on managing M&A risks, please contact us.