Impact of Covid-19 - updated August 2022
Despite the constant threat of new variants and fluctuating case numbers, we are adapting to living with the Covid-19 pandemic with a feeling of returning to normal. Whilst this is fantastic news, it does not necessarily mean the end to the issues that have arisen. Some are common to businesses of all types, but some are unique to the legal sector and here we focus on those specifics.
Below are the latest topical COVID-19 related issues for the legal sector:
Impact on the profession
Recent data from various sources suggests that the legal sector in the UK has remained fairly stable throughout the pandemic. It is clear that there are some areas of the law which have suffered, but the general trends in numbers of regulated lawyers seen prior to the pandemic have continued and there is no significant change.
Data from the SRA shows that the number of England & Wales regulated firms has continued to fall, reducing by 2.4% in the year to 31 October 2021 (from 10,107 to 9,860). The number of regulated Scottish firms has remained more stable, only falling from 1,134 to 1,120.
Returning to the office
Anecdotally, the majority of firms have now returned to the office, with people in an office environment roughly 3 days per week. Some individuals have become accustomed to working from home and in response to encouragement to return to the office, they have chosen alternative remote employment or have joined one of the many growing virtual/platform firms instead.
It will now be interesting to see the effectiveness of arrangements put in place by firms regarding office/home/hybrid working and any new balance being struck. Our blog from May 2021 on what our breakfast briefing attendees would like and expect to happen can be found here.
Impact by work-type:
Conveyancing and Property
Conveyancing departments have reported huge growth in workloads since the housing market re-opened and with the temporary changes to stamp duty.
Today’s Conveyancer reported in August 2022 that asking prices for houses are reducing for the first time in 2022 even though buyer numbers are a fifth higher than pre-pandemic levels, although they are starting to fall. A RICS survey also published in August 2022 highlighted that buyers are changing from the initial boom after the pandemic – they are more cautious and much more sensitive to the wider world issues (rising prices, increasing interest rates and job insecurity), all issues which are likely to impact the housing market..
The upturn in demand also means that the recruitment market for conveyancers is buoyant with jobs advertised increasing.
Although the initial feeling after the re-opening of the market was one of positivity, it has not been without issues - there have been problems obtaining mortgages and delays with lenders lengthening transactions (by up to 8 weeks), causing a risk of missing completion before the end of the stamp duty holiday. Congestion in terms of capacity for estate agents as well as services such as removers are also taking their toll. The Law Society has reported that they are aware of the pressure that conveyancers are under, working late into the evening and at weekends to ensure transactions are progressing. It is key for client expectations to be managed and they are aware of the many factors which could delay a transaction which are outside the control of the conveyancer.
The longer-term impact of COVID-19 re general economic and employment factors on conveyancing demand once this potentially short-lived upturn has run its course is still to be seen. Added to that, we have the impact of rising interest rates and the cost of living crisis to contend with. Pricing in conveyancing should be altered to meet the peaks and troughs in demand, and so the opportunity from the current peak should not be missed, although it should be noted that there has been some negative press surrounding fees being quoted for conveyancing transactions recently.
Family
Family law is one area where work continued from the instructions in hand at the outbreak of the pandemic and with increasing family tensions since then, albeit at a slower rate of completing such work with it taking longer to obtain court hearings and the financial options being more difficult - given the impact on housing/house prices/pensions/the stock market.
We did not see the usual January bounce in family instructions this year, most probably because the effect of families being together is now much more widespread through the year rather than in holiday pockets. There is the potential for family work to surge in the future, as the strain of spending weeks together, along with financial pressures, become too much.
The changes in the use of technology forced by the social distancing requirements allowed continued access to family justice, but reports of issues are starting to increase. Remote hearings are tiring and can be more drawn out than face to face hearings with some parties feeling that they are not able to adequately state their case through the phone or webcam, and any opportunities to negotiate have to be much more structured leading to judges having to make tough decisions.
Employment
Employment lawyers saw a surge in enquiries from both employers and employees since the start of the coronavirus pandemic. Not all of that work was chargeable or recoverable in fee income terms.
The expected increase in demand for employment law services due to the winding down of the CJRS scheme has not materialised with redundancies thankfully at lower levels than expected. What is certain though, is that there will still be further difficult decisions regarding employees to come with some businesses previously enjoying government support now starting to run into trouble, which will result in increased work in this area.
We would suggest that where such work is chargeable, full invoices should be raised in advance and payment secured before commencing.
Commercial and Corporate
In the first lockdown, this practice area was the second-worst hit after property with many firms reporting a significant drop in new enquiries and pausing of instructions on the majority of matters. The issue was both current transactions not completing, and a lack of new instructions jeopardising the pipeline of work with so much future uncertainty. In fact, the start of 2020 saw the slowest rate of deal making for seven years. The reduced pipeline continued to adversely impact fee income up until late Summer 2020, as transactional work was impacted by business confidence remaining low due to wider economic uncertainty.
We did start to see some pick up in the M&A market from the end of Summer 2020, and particularly leading up to the most recent budget. However, we are likely to see a number of peaks and troughs in transactional demand as we go forward from here due to the continuing future uncertainty with the global recession, new emerging variants of the virus and lockdowns, and potential tax changes.
The expected increase in insolvency cases is now starting to materialise due to the end of support from the government.
Similarly, with the support from government ending, distress market activity has started to increase, as has investment from private equity looking to capitalise where possible.
Private Client
Understandably this is one area that has thrived, with some firms reporting a four-fold increase in enquiries and instructions, especially around wills, power of attorney, trusts and tax planning. Although the length of time to obtain probate has increased, creating cash flow issues for firms as a result.
Litigation, Personal Injury, Clinical Negligence and Court of Protection
These cases tend to be long running and were largely unaffected at the outset of the pandemic, although matters slowed as response times from the other side, insurance companies etc slowed down as everyone adapted to home working and Court redress was potentially removed/delayed.
The Official Injury Claim portal was introduced in May 2021. The Ministry of Justice has reported this as a success, but claims volumes remain significantly down and those that do use the portal still seek the services of a lawyer. Many law firms have now stopped handling low value RTA work altogether stating that it is no longer profitable.
The long term decline in RTA claims has only been exacerbated by the coronavirus pandemic.
The Legal Services Board reports that the number of claims made through the Portal have been lower every month compared to the previous year since April 2020.
It also remains to be seen what impact the pandemic will have on clinical negligence. The public may be unwilling to take legal action against the NHS given current feeling around their efforts during this time. Equally so, there could be a fall out from rushed, delayed or untrained medical care that has occurred during this time with some forecasting a whole new claims sector with virus-related claims against workplace, the NHS and potentially travel companies. There has also been recent press attention around bereaved families taking legal action against the government over their handling of the pandemic.
The pandemic is also likely to have an impact on consumer litigation claims, with an expected rise in employment claims and insurance claims.
The pandemic has forced certain changes within litigation including remote mediations and hearings and the virtual sharing of court documents and it will be interesting to see if these changes become permanent.
Webinar: Legal Sector Review Q2 2022
Legal Sector Partner, Andy Poole, along with Geoff Dunnett of Shieldpay and Alex Holt of Cashroom, talk through Q2 and provide their expert insights into the current state of the legal profession with Law Firm Ambition.
Click to watch the webinar recording here.
Finance
Solicitors and law firms continue to be obliged to act in compliance with the SRA Standards and Regulations regarding financial difficulties, therefore you must tell the SRA personally if you think the firm may be in serious financial difficulty.
In order to assess the financial stability of your firm, you should prepare a 13 week short-term cash flow forecast to identify the position of your firm’s cash on an ongoing basis. This should be a rolling document that is used as a management tool, not only to assess what payments can/should be made, but also to identify the timing of any funding being received. The use of this document will also assist with a regular review of staffing needs to assist with furlough decisions, and conversely, the need to bring people back into the business from furlough.
We have developed a template for you that you can use for this, which can be found here.
If you would like any support with preparing an initial version for your practice, for you then to use on an ongoing basis, please do let us know. Please note: we are aware of various grant funding packages that may even pay towards the costs.
In our opinion, this will be the most important management tool you will have. It can help you to manage your fee earners remotely; with team leaders asking each fee earner on a weekly basis for the work they are doing, when it will be done by and what cash will be received and when. This information can then be inputted into the 13 week cash flow template and, notably, once fee earners have put their names to an expected cash receipt, they are then more likely to do the things that are needed to generate that cash commitment.
Steps you should take to assist with cash flow continuity
- You should ensure that your debt management is strong and that you are in regular contact with your clients about any monies owed to the practice.
- You should ensure that fee earners are regularly reviewing WIP and billing on a regular basis to ensure cash collections continue.
- Your finance function should review the outstanding invoices due for payment and pay essential and business critical suppliers first and, where possible, negotiate alternative credit terms for non-essential spend.
- You should consider negotiating a time to pay arrangement for your PAYE, NIC and Corporation Tax liabilities – HMRC have set up a dedicated helpline for queries such as these 0800 024 1222.
- You may be able to change your year end, which could result in lower/deferred tax payments. This is not a straightforward area and you should contact us for advice for your circumstances, particularly around the impact of overlap profits.
Law Society financial stability toolkit can be found on the Law Society website.
Staff issues
As part of your finances and workflow review, you may consider that you have too many people in certain areas of your firm. You may want to consider what resource you will need in the future and it is still likely that discussions with some staff will be required, whether that is reduction in hours, part-time working or a re-structure of the firm as a whole.
It does still feel inevitable that unfortunately there will be job losses in some areas of the legal sector. To help with your resourcing decisions your management team should still be reviewing staff timesheets on a daily basis, as accurate time recording is more vital now than ever. Monitoring productivity will be essential to make the correct decisions if there is not enough work for everyone.
As part of your future strategy you may be looking at your remote/hybrid working arrangements and supervising junior staff and trainees will need to be considered as part of this. The Law Society has provided some guidance on good practice in relation to this which is available here
Key roles
You should already have absence planning in place for the key roles in your firm such as the COLP and COFA, MLRO and MLCO. However, you should also consider informal deputies for these roles, and if any absence does become prolonged then you should apply to the SRA to replace these roles.
For the COLP and COFA roles you can apply to the SRA for temporary, emergency authorisation, and for the MLRO and MLCO then you need to inform the SRA of their replacement through the completion of a FA10b, for which a DBS check would also be required.
Sole practitioners may want to consider an agreement with another solicitor to be available for any absences.
Compliance
The SRA expect firms to continue to do everything they reasonably can to comply with the Accounts Rules and to keep client monies safe and this includes obtaining the independent accountant’s report. However, the SRA have said they would be pragmatic regarding the six month deadline given the exceptional circumstance, but there must still be a good reason and those reasons should be clearly documented.
The safety of client money remains a key focus for the profession, and the SRA has stated that it is vital the five week reconciliation statements should not be delayed if at all possible and that you should already have contingency plans in place to prevent his from happening. If those contingency plans fail for any reason, you should take whatever steps you can to assure yourself that client money is being dealt with correctly.
‘Future Fund’ loan scheme
The SRA has released some guidance around this loan scheme and a potential breach of rule 3.3 regarding banking facilities.
A condition of the scheme is that funds received from third-party investors and the Future Fund must be held by the investee company solicitor (who must be permitted to receive and hold client money).
The SRA’s view is that even if you are not engaged to advise on the loan, as the scheme is structured with a requirement for solicitor involvement in handling completion monies, there is a risk that the loan would not complete without monies being received into a client account, and therefore there would not be a breach of rule 3.3.
Client confidentiality
Assuming that some form of remote working will continue in most firms, you should still have measures in place to protect a client’s confidentiality. This is required both by the SRA and law.
You should ensure that your policy and procedures are up to date and details the arrangements that you have put in place during this time.
Inability to comply with your professional obligations
You must notify your client as soon as possible that you cannot provide any services they require. You should also provide the name (or ideally three names) of another solicitor to try to take over from you.
There are various firms that can provide services to your clients if you cannot meet your obligations. These tend to be on an agency fee share basis and may be suitable for you.. Please do not hesitate to get in touch if you would like us to put you in touch with one of these.
You also must ensure that any out of office email has all relevant information on – it is vital that any client does not suffer because they are expecting you to respond.
Virtual meetings and document approval
Although previous advice from the Law Society was to follow the government guidance (when in place) on meeting face to face including social distancing and hygiene, this has been more recently updated since the relaxing of the rules to be more risk based, and if you judge that a physical visit is imperative, choose personnel who are not a risk to the client and who are not at high risk themselves.
The Law Society’s latest position on the ‘use of virtual execution and e-signature’ is available on their website.
Law Firm M&A during COVID
The Future
We all hope that we really are in the recovery phase of coronavirus pandemic, but its effects will remain for the long term. It is clear that the way we work and operate will have changed forever. Looking to the future, as people have begun to settle into their ‘new normal' lives, so have businesses and legal service providers.
There have been positives in that some of the practices and decisions that have been forced upon law firms through this crisis are decisions that should have potentially been made in any case. Many firms have demonstrated their agility in adapting to a new unprecedented normal and the law firms that still remain when this is over will be leaner, more efficient and well equipped to deal with clients from any location in a profitable way.
In the wider legal services market place, we are likely to see the loss of some firms that don’t make it through this period, we are also likely to see consolidation in the market place as well as diversification from firms looking to reduce their reliance on work-types and reduce their future risk.
As a sector, we must hope for the best and that we can continue to return in full health to some semblance of normality, but unfortunately we all must monitor, measure and plan for the worst case scenario.
The future of finance in law firms
Useful links:
The Law Society - https://www.lawsociety.org.uk/support-services/coronavirus/
The SRA - https://www.sra.org.uk/home/hot-topics/coronavirus/
The CLC - https://www.clc-uk.org/lawyers/coronavirus/
The Law Society of Scotland - https://www.lawscot.org.uk/news-and-events/law-society-news/coronavirus-...
