Might the prospect of tipping dozens of law firms into financial trouble deter the Solicitors Regulation Authority from imposing a ban on pocketing interest on client money? A provocative question but not a facetious one, judging by this year’s Law Society Financial Benchmarking Survey.
The report poses the question more or less explicitly: ‘The SRA’s recent consultation considered the impact of client account interest on firms’ future financial viability and asked questions around the impact of removing the availability of this income. We therefore consider it likely that the SRA will seek to understand, and monitor, firms’ underlying trading profitability and the extent to which this profitability can withstand financial volatility [my emphasis].’
I fear such an inference may be optimistic. In 2024, some 22% of median profit per equity partner was contributed by interest income, notes Andrew Allen, chair of the survey working group. Free money. In 2022, before interest rates took off, that percentage would have been 0%.
Extrapolate, and the windfall is worth hundreds of millions to the profession in pure profit.
Allen reckons the interest boon has benefited consumers too, by putting a lid on rising prices for legal services. Yet the SRA is on record as saying there is no ‘compelling’ argument for allowing law firms to pump up profits in this way. The regulator is just as likely to hail the figures as incontrovertible proof of the necessity of a ban.
Perhaps the profession will need to wait for a decision until the regulator appoints a successor to outgoing chief executive Paul Philip. We shall see.
Also overshadowing the bottom line is the inertia of law firms in preparing for a possible ban, or for interest rates to fall. Productivity as measured by chargeable hours remains poor, to such an extent that the survey suggests client interest may be breeding complacency. Around a fifth of participants still take drawings in excess of profits even as the cash rolls in, with one in 10 saying they did so in both 2024 and 2023. Sometimes this is no more than a timing difference – but still.
Is your law firm ‘complacent’?
A red light ought to be flashing on the law management dashboard.
1 Reader's comment