Recent discussions have highlighted potential concerns regarding the Solicitors Regulation Authority (SRA) enhancing its role in the mergers and acquisitions (M&A) of law firms.
The SRA recently revealed that additional requirements in the M&A processes could lead to unintended consequences like discouraging investors or delaying acquisitions. These insights were shared as part of a consultation aiming to safeguard client money, following a consumer protection review.
The focus is on identifying elements that could signify regulatory risk, particularly regarding a firm’s capacity and capability to expand into new areas or integrate systems effectively. Governance and financing aspects are scrutinised, though the SRA maintains no interest in commercial choices beyond these.
SRA Chief Executive Paul Philip previously indicated reservations about extensive control over M&A activities, a sentiment echoed in the consultation findings. It was noted that out of approximately 100 M&A incidents annually, few result in regulatory breaches necessitating SRA intervention.
A recent review commissioned by the Legal Services Board suggested the SRA establish a system to prioritise and review acquisitions posing significant risks. However, some industry voices fear that these measures may stifle M&A activity.
The consultation also addressed the issue of dormant law firms being sold primarily for their SRA authorisation, which might allow new buyers to bypass certain regulatory authorisations. It proposed revoking authorisation if a law firm fails to provide legal services for over a year without valid reasons.
Additionally, the SRA is considering reinstating annual accountant’s reports for all firms, highlighting a 58% decrease in qualified reports from 2018 to 2023. This move seeks to ensure compliance and monitor financial activities more effectively.
Concerns were raised about firms where a single manager holds all compliance roles, indicating potential conflicts of interest. The SRA is contemplating prohibiting individuals who hold key management and compliance positions from simultaneously handling client funds.
The consultation aims to avoid imposing excessive burdens on law firms while ensuring consumer protection. A balanced approach is deemed necessary to facilitate healthy M&A activity without compromising regulatory standards.
The ongoing consultation by the SRA reflects a cautious approach towards increasing regulatory scrutiny in law firm mergers and acquisitions, acknowledging the need for balanced oversight to protect consumer interests without hindering market dynamics.
