How agents work when the SRA intervenes into a failing firm

When the Solicitors Regulation Authority intervenes in a failing practice, it is a fast-moving process – and one that is often misunderstood by clients, creditors and practitioners alike.

Within hours of the decision being made, the firm’s practice accounts will be frozen and within days its files, computers and accounting records will be removed and catalogued. The challenge for the law firm acting as the SRA’s intervention agent is to make sure no client suffers as a result – whether they are about to move house, complete on a deal or appear in court.

Many of those caught up in the maelstrom turn to the intervening firm on the assumption that it is effectively taking over the failed practice. But it is not there to act as administrator, or wind up the firm.

‘We remove the heart of the firm,’ explains James Dunn, who leads City law firm Devonshires’ intervention team, ‘but we leave the business there and that remains the responsibility of the principal or partners.’

The issue of interventions is very much back in the spotlight. Numbers had been falling, but the SRA warned recently that its forecast of 30 this year was likely to be a significant underestimate. In the first quarter alone, it was forced to close 15 practices, including two high-profile firms on consecutive days in March – Midlands firm Blakemores (see case study) and Yorkshire firm Atteys, at an estimated cost of £800,000 and £1m respectively.

Faced with intervention costs forecast to be (at best) £7m over the £1.28m set aside in the SRA’s budget – or as high as £15m in its ‘worst-case scenario’ of 60 interventions – the SRA’s board agreed last month that excess costs should be met from the compensation fund.

The power to close down a solicitor practice is draconian and it is not one the SRA uses lightly. Helen Herniman, director of post-enforcement, says colleagues in supervision work with firms which are struggling, but there comes a point when there are no options left.

The final decision to intervene is taken by an external panel of adjudicators based on a two-stage test. The first is that one of the grounds for intervention – such as dishonesty, bankruptcy, the need to protect clients or abandonment – has arisen.

‘The second is a balancing exercise,’ she says. ‘The panel has to decide if it is in the best interests of the public to close [the firm] down compared with the consequences for the firm and for its employees who will be out of work.’

Until last summer, the SRA had 24 firms on its panel of intervention agents. But Herniman says the regulator decided to reduce this to eight so the firms would be instructed on a larger number of interventions, allowing them to retain a dedicated infrastructure and build expertise.

There have been other changes, including appointing Capita to remove and catalogue the files, and send out the initial standard letter to clients, and involving the SRA’s own archive unit from the outset. These have saved costs and speeded up the process. These changes also free the panel firms to focus on urgent client matters and queries.

The panel, appointed by a tender process every three years, comprises Devonshires, Stephensons, Lester Aldridge, Morgan Cole, Blake Lapthorn, Gordons, Pannone and Russell-Cooke.

Devonshires has been doing intervention work for a decade and for most of that time averaged six a year. Dunn says the work had started to dry up significantly, which made it impossible to maintain dedicated staff. But since the new panel was appointed, the firm has handled seven interventions and now has a permanent team of five paralegals which can be supplemented when a call comes in.

‘Another huge benefit for the SRA,’ says Dunn, who combines his role with a busy litigation practice, ‘is that the panel firms now take a much more collaborative approach. We bounce ideas off each other and discuss tricky issues, so we have much more consistency.’

Lester Aldridge, headquartered in Bournemouth, first joined the SRA panel in 2009, doing two or three interventions a year.

Partner Karen Thompson, who heads the intervention team, says the firm has done six since being retained on the new panel, which has made the logistics much easier to manage.

The SRA is her only client. ‘We did this deliberately,’ she says, ‘because I am very used to dealing with regulatory issues. I am responsible for things like our PII renewal and Lexcel accreditation.’

As soon as the call comes from the post-enforcement directorate, the intervention team has to gear up quickly. The first task is to check whether there are any conflicts, particularly if it is a local firm.

Dunn runs through the process: ‘The SRA provides the equivalent of two lever-arch files of information, so you get a feel for what will be needed and the extent of the urgent matters. You then talk to the SRA intervention officer and Capita about the practicalities and put together a gameplan.’

The principal or partners are usually given 24 hours’ notice. Typically, the SRA’s intervention officer and the team leader will go in the next morning and talk to them before bringing in the rest of the team.

In the past, interventions typically involved around 500 live files and 5,000 archived files. At Blakemores, live matters ran into thousands, while Atteys had 450,000 dead files in storage.

Speed is of the essence. ‘You flick through every file and you have to decide within a few seconds whether it is live or dead,’ Dunn explains. ‘Any longer and it is cheaper to put it in the live pile and review it later. You look for clues – recent letters and the file is live, six years old you put it in the dead pile.’

Immigration is a risky area. ‘A file may not have been touched for a year but, because the Home Office takes so long to respond, it may absolutely still be live,’ he says.

Correspondence is checked for urgent matters and swept into boxes. There may be rooms of archived files on- or off-site which need spot checks before they are removed by Capita. There is often a sub-category of dead files with outstanding accounts queries, which can involve substantial sums.

Urgent files go back with the intervention team to be worked on immediately. Everything else is removed by Capita to be indexed and returned to the team within 36 hours. Dunn says they will take an image of the accounts system and copy it on to their network, so the team can see it as a virtual machine.

‘The documents and monies belong to us and we aim to clear them on that first day,’ he says. ‘We then leave the office to the intervened solicitor who remains responsible for all the liabilities – salaries, redundancy payments, rent, bills. News quickly gets out and creditors and staff may turn up, but we cannot help them. The key is to be absolutely clear about that and generally they accept it.

‘The second day you are back in your office with the most urgent matters. This is generally the quiet before the storm when you work out who and how many you will need to work on the files when they are delivered the next morning.’

Dunn has done more than 50 interventions. In one he found tens of thousands of pounds in cash in the office. In another, he went into an office which was empty, apart from an envelope on the floor with an invoice for five tons of shredding the previous week.

Offices where everything is computerised can create their own problems. ‘We did one intervention,’ he recalls, ‘where nothing had been filed and each person had thousands of emails in their in-boxes. It was the equivalent of sorting out a bunch of paper files which had been thrown up in the air.’

Going in to a firm to close it down takes experience and diplomacy because, however much the intervened solicitor knows it is coming, it is still a shock. ‘The skill is to get them onside,’ he says. ‘I make it clear I am not there to judge them but to protect their clients. Even those who have ignored their professional obligations will still recognise that they have a moral obligation to their former clients.’

Insolvency partner Paul Caldicott leads the intervention team at Morgan Cole, which has offices in Wales and southern England. ‘We have to be alive to what is a very dynamic and developing situation,’ he agrees. ‘Clients can be outraged – how can you do this to someone who is such a pillar of the community? – while others just want their papers back.

‘What is important is that clients are given complete freedom of choice whether to take their file, have us transfer it to another solicitor or instruct us to do the work going forward. After the initial intervention, if there is work that is of interest to us, we can discuss that with the client or third-party referrer as an entirely separate business proposition. Being intervention agents doesn’t rule us out of acting for clients of the firm being intervened.’

One of the biggest challenges is to reconcile the accounts, which often have not been kept up-to-date for months. Once the practice accounts are frozen, the money goes into a statutory trust. One consequence is that it can only be paid out to clients or other solicitors when all the claims have been investigated and a distribution schedule approved, which can take months. However, in urgent cases, the intervening firm can call on emergency funding from the compensation fund.

In one intervention, Dunn was alerted to a house sale that was due to be completed that day. ‘We had the bank statement showing X thousand had been paid in by the client and no money had gone out,’ he says. ‘I had a laptop with me so I wrote a report, scanned in the documents and emailed it to the SRA who put it before an external adjudicator. The money was sent out the same day and the sale went ahead.’

The extensive work involved means interventions can be very expensive and labour-intensive. The post-enforcement directorate has just under 60 staff split into technical, claims management and operational teams, while a big intervention can involve up to 50 people from the panel firm.

The intervened solicitor is liable for the costs, while former partners can also be pursued to avoid them ‘jumping ship’ in anticipation. However, Tony King, the SRA’s post-enforcement technical manager, says they generally do not recoup much from intervened solicitors, given they have just closed down the firm.

‘We try to negotiate instalment payments or take a reduced sum for early payment,’ he says. ‘We can also take a voluntary charge on their house. But if they have no assets, we aren’t going to chase them for the sake of it. However, if someone ignores us, we may be forced into a more formal insolvency route.’

Price is a factor in the SRA panel tender process. ‘We need to be confident the firms we select can meet our service requirements at a cost which allows them to make a profit but equally gives us good value for our money,’ says King.

Neal Boland is senior partner and head of the intervention team at north-west regional firm Stephensons. ‘When there is a large intervention, the SRA recognises it is a case of all hands to the pump,’ he says. ‘But ask me how the fees work out at the end of the three years. It was impossible to budget when we only had two or three a year, but the anticipated volume of cases makes it worthwhile.’

Thompson agrees: ‘We have set up our operation so we can make it profitable, which means having the right people at the right level and ensuring everything runs smoothly. I spend a lot of time on training because you need to be slick. The moment you go off at a tangent or use too much partner-time, it can affect your cost estimate. Certain rates could be higher but, to be fair to the SRA, once they had selected the panel, we all had input into achieving the smoothest system at the fairest rate.’There is also the kudos of being on the panel, which Thompson says is good for networking and business development. Boland feels ‘it is a real feather in our cap’ to be recognised by the profession’s regulators as a firm they can trust with this work.

He is concerned at comments posted below articles on interventions in the Gazette which accuse the SRA of intervening inappropriately or suggesting the intervention agents have not been put through a rigorous selection process.

‘In my experience that is wholly wrong on both counts,’ he says. ‘What we are doing is endeavouring to protect clients as best we can – and, in doing that, we are protecting the profession and its reputation.’

Grania Langdon-Down is a freelance journalist

The call to Neal Boland, head of Stephensons’ intervention team, came on Thursday 7 March : ‘Prepare your team for something big’.

On Friday, he realised just how big. On Monday, his team were to go into Blakemores, owners of the consumer brand Lawyers2you. With 250 staff and offices in Birmingham and Leamington, it was the largest firm to be closed down by the SRA (in terms of client account, live and archived files, and staff) since Wolstenholmes in 2010.

Boland briefed his 35-strong team, including the heads of the PI and conveyancing departments, IT and account experts, to prepare for 8,000 live files.

‘It was very stressful for their staff,’ he recalls, ‘and it is all credit to those partners and fee-earners who stayed to identify urgent files that we had such a smooth transition.’

Priority was given to the 1,400 personal injury files involving 1,000-plus clients because of the radical changes to conditional free agreements expected on 1 April. ‘We got through them all by the deadline,’ says Boland, ‘with files being delivered to local firms by the van load.’

Immigration was the next big challenge, because of language difficulties and imminent cases with clients at risk of deportation. Key information was translated into five different languages. The conveyancing department had both domestic and commercial transactions due for completion. ‘Clients’ removal vans were already booked,’ says Boland, ‘so we took on the most urgent cases, getting new mortgage instructions, letting the other side know, and completed them all on time.’

The family team in Leamington had imminent child care hearings. However, the partners immediately moved to a nearby firm. Their instructions were mainly from guardians, so in many cases authority came through quickly. Back at Stephensons’ Leigh office, staff were taking 400-plus calls a day. In all, more than 50 people worked on the intervention.

Three months on, almost all the files have been reallocated while the final task of distributing client money should start soon.