Cash call

Axiom Ince’s demise will send ‘shock waves’ through the profession, regulation specialist Andrew Pavlovic of CM Murray said in a podcast last Friday. How prescient. I’d just got in touch asking him to expand when the SRA dropped its bombshell.

Some 160,000 practitioners are on the hook for £400 each to ensure the Compensation Fund can plug a £64m black hole in the client account. Otherwise, the fund will be as insolvent as Axiom Ince. And that’s not accounting for the £15m costs of the SRA’s intervention, which adds another £100 each on top.

This is too simplistic, of course. Insurers may cough up some money – and the SRA may invoke its statutory right to cap total payments on connected applications. Yet that is problematic too. A cap could leave clients seriously undercompensated and would raise uncomfortable questions about the client protections offered by solicitors.

There are no easy options, even before one considers the bigger issues.

These include what to do about the Compensation Fund. Over the last decade the fund has paid out an average of £13m each year, so it’s not unreasonable that the current ‘pot’ stands at £18m. But the trend has been inexorably upwards.

There is some irony in the fact that it is 20 years ago next week since David Clementi first set out his stall for liberalising the profession and opening it up to buccaneering entrepreneurialism. The SRA does not sign off law firm acquisitions, which have become more unorthodox. Should it? This was a highly unusual buyout – a smaller firm acquiring a well-known but financially stricken larger practice that had once been stockmarket-listed. Had the SRA scrutinised deal-happy Axiom DWFM earlier, could we have seen a better outcome?

Unfortunately, due diligence costs a lot of money too. Beancounters don’t come cheap. Solicitors would presumably have to pick up the tab for this as well. Accusations that the SRA was ‘asleep on the job’ seem confused. Auditing M&As is not what it does.

A closer look at corporate governance is surely justified in the round, nevertheless. For example, it seems Pragnesh Modhwadia was both COLP and COFA. In firms beyond a certain size,  is it sustainable to vest multiple compliance roles in one individual?