Warning that 3,000 law firms are at serious risk of failure

SOME of Britain’s biggest law firms could be forced to close or merge over the next few months, it was claimed yesterday.

Richard Marshall, the Leeds-based managing director of Lupton Fawcett Lee & Priestley, has warned that a significant number of law firms could find it hard to renew their professional indemnity insurance cover, which is due next month.

Mr Marshall said: “Out of 11,000 law firms, roughly 3,000 are probably at serious risk of failure. Thirty of the top 200 firms are being actively monitored by the SRA (Solicitors Regulation Authority) as at risk of collapse. A number of firms are being starved of cash, partly through poor working capital management and partly because the banks are tending to have a polarised view of the legal services market.

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“The banks are more supportive of strong firms and less so of weak firms, however, the banks are generally unsupportive of the sector as a consequence of losses over recent years through law firm failures such as those of Halliwells, Cobbetts, Atteys, and others, the weakness in the professional services sector, and the weakening balance sheets of many firms.”

According to Mr Marshall, law firms are facing a number of challenges, including the liberalisation of the legal services market. At the same time, publicly funded lawyers are being hit by reductions in public funding.

Mr Marshall added: “This is the last year in which all firms will be required to renew their professional indemnity insurance (PII)at the same time – in October. PII insurers are liable to provide six years’ run off cover when a firm fails, whether paid or not. Over the last couple of years they have been badly burnt by this issue, and are now looking very carefully at the resilience of law firm finances; in September and October, a significant number of firms might not be able to find cover, and will have three months to shut their doors or find a new home.”

Mr Marshall added: “The firms that are doing really well have tightly managed their cost base and cash flow, developed clear strategies, invested wisely, put resilience before immediate profit, and taken a realistic view of what profit really means, while other firms are running out of money. There remains a failure to realise ‘cash is the only absolute truth’.”

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Ajaz Ahmed, the co-founder of Freeserve, who set up a fixed-price online service called Legal365 with the law firm Last Cawthra Feather in 2011, believes the legal market is ready for a revolution.

He added: “It will attract the attention of entrepreneurs from other industries. Ultimately, the only companies that will succeed are those that offer the lowest possible level of complexity for the maximum value for money. It looks like lawyers are going to carry on adjusting the window dressing when it’s the foundations that really need some attention.”

A Law Society spokesman said: “While Mr Marshall’s views are his own, there’s no doubt at all that it is a tough time for many law firms, thanks to market changes, new regulatory structures and reductions in public spending, for instance on legal aid. The Law Society is offering a range of advice and support... in particular, there is a wealth of advice for firms in renewing their professional indemnity cover.”