The Impact of Covid-19 on the Legal Sector

Impact of Covid-19 by work type

Whilst many of the issues the legal sector faces during the Covid-19 pandemic are common to businesses of all types, some are unique. Here we focus on a few specific to legal professionals:

Conveyancing and Property

On 13 May the government announced its plans to reopen the housing market as safely as possible with new specific guidance for conveyancers issued on 29 May – this can be found here.

Studies in early June have shown that new enquiries and website visits to estate agents have soared to above pre-COVID-19 average levels as people look to re-start their stalled transactions and home moving plans. Overall indications for conveyancers suggest that the market is no longer reducing and has stabilised, and is increasing for some.

Interest rates remain at a record low which will stimulate demand, but there will still be uncertainty for many around job security and financial future.

It will be interesting to see the trends over the coming months, predictions include people looking to move out of cities to rural areas, the rise of the home office and the need for that space within homes, and demand for homes in areas with high speed broadband.

Family

Family law is one area where work has continued from the instructions in progress as the pandemic started, albeit potentially slower and with fewer options/solutions - given the impact on housing/house prices/pensions/the stock market.  Other than that work, it was expected to remain relatively quiet until the lockdown ended. Work is starting to flow again and some reports suggest that the predicted surge is starting to happen (with divorce enquiries up 42% since the restrictions started), as the strain of spending weeks together, along with financial pressures, become too much.

Employment

Employment lawyers have seen a surge in enquiries from both employers and employees over the last few weeks. It will remain to be seen how much of that work is chargeable or recoverable in fee income terms.  We would suggest that where it is chargeable, full invoices should be raised in advance and payment secured before commencing.

The demand for employment law services is likely to continue as the JRS winds down with further difficult decisions regarding employees to come.

Commercial and Corporate

Initially, in early March, there was increased activity as clients pushed to complete transactions before matters worsened and this continued as clients sought to use the ‘force majeure’ clause in contracts. However, when the lockdown measures were introduced, many firms reported a significant drop in new enquiries and pausing of instructions on the majority of matters. The issue was both current transactions not completing, and a lack of new instructions jeopardising the pipeline of work with so much future uncertainty.

The reduced pipeline is likely to continue to impact fee income, as business confidence remains low due to uncertainty impacting transactional work, although unfortunately there is likely to be an increase in insolvency work in the coming months.

Private Client

Understandably this is one area that has thrived, with some firms reporting a four-fold increase in enquiries and instructions, especially around wills, power of attorney, trusts and tax planning.  This may be a short-lived up turn and again, payments in advance, not just payments on account, should be obtained.  The likelihood is that sadly, in the coming weeks and months, probate instructions are also likely to follow.

Litigation, Personal Injury, Clinical Negligence and Court of Protection

These cases tend to be long running and are therefore largely unaffected for now, although matters have slowed as response times from the other side, insurance companies etc slow down as everyone adapts to home working and Court redress is potentially removed/delayed.

Encouragingly, APIL (Association of Personal Injury Lawyers) and FOIL (Forum of Insurance Lawyers) have joined forces and agreed new guidance to create a new set of standard practices during the disruption to ensure that cases run as smoothly as possible.

Although these matters are expected to continue in the near future, there is a worry as to where the pipeline of future cases might come from as there will be fewer new cases, accidents etc due to the restrictions on people’s movements.

It also remains to be seen what impact the pandemic will have on clinical negligence. The public may be unwilling to take legal action against the NHS given current feeling around their efforts during this time. Equally so, there could be a fall out from rushed, delayed or untrained medical care that has occurred during this time.

Webinar: How have Professional Service Firms Dealt with Covid-19?

Legal Sector Partner, Andy Poole joined Bernard Savage from Size 10½ Boots and other professional service leaders, including Nadia Biles Davies, Chief Operating Officer from Sharpe Pritchard, Anne Harnetty, Managing Director and Founder of Jonson Beaumont and Harry Iliffe, Account Director at Capita Workplace Technology, to discuss how professional service firms, like Armstrong Watson have dealt with the impact of Covid-19.

Click below to watch the webinar recording.

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Finances

Solicitors and law firms continue to be obliged to act in compliance with the SRA Standards and Regulations regarding financial difficulties, therefore you must tell the SRA personally if you think the firm may be in serious financial difficulty.

In order to assess the financial stability of your firm, you should prepare a 13 week short-term cash flow forecast to identify the position of your firm’s cash on an ongoing basis.  This should be a rolling document that is used as a management tool, not only to assess what payments can/should be made, but also to identify the timing of any funding being received. The use of this document will also assist with a regular review of staffing needs to assist with furlough decisions, and conversely, the need to bring people back into the business from furlough.

We have developed a template for you that you can use for this, which can be found here

If you would like any support with preparing an initial version for your practice, for you then to use on an ongoing basis, please do let us know. Please note: we are aware of various grant funding packages that may even pay towards the costs.

In our opinion, this will be the most important management tool you will have. It can help you to manage your fee earners remotely; with team leaders asking each fee earner on a weekly basis for the work they are doing, when it will be done by and what cash will be received and when.  This information can then be inputted into the 13 week cash flow template and, notably, once fee earners have put their names to an expected cash receipt, they are then more likely to do the things that are needed to generate that cash commitment.

Steps you should take to assist with cash flow continuity

  • You should ensure that your debt management is strong and that you are in regular contact with your clients about any monies owed to the practice.
  • You should ensure that fee earners are regularly reviewing WIP and billing on a regular basis to ensure cash collections continue.
  • Your finance function should review the outstanding invoices due for payment and pay essential and business critical suppliers first and, where possible, negotiate alternative credit terms for non-essential spend.
  • You should consider negotiating a time to pay arrangement for your PAYE, NIC and Corporation Tax liabilities – HMRC have set up a dedicated helpline for queries such as these 0800 024 1222.
  • You may be able to change your year end, which could result in lower/deferred tax payments.  This is not a straightforward area and you should contact us for advice for your circumstances, particularly around the impact of overlap profits.

Although the 13-week short term cash flow is a vital management tool, you should also be looking further ahead to the medium and longer term, particularly as the government support and any payment holidays start to end. How will your firm meet those future obligations, particularly if work, income and cash collections are reduced. Law firms will almost find themselves in a position of re-setting and re-starting the working capital cycle.

Other financial considerations which are relevant to all businesses can be found below:

Staff issues

Although the government still asks that everyone that can work from home does so, we are seeing a gradual return to offices and as part of that you have a responsibility to ensure that staff are not at risk.

The Law Society has provided a framework for law firms on how to safely return to the office which can be found here: https://www.lawsociety.org.uk/support-services/coronavirus/covid-19-fram...

The Law Society has previously advised that it is highly likely that there will be periods over the next two years where the government requires parts of the workforce to stay at home, so you should still have a home working default policy which can be implemented at short notice.

The government had previously confirmed that “those essential to the running of the justice system” are classed as key workers. These include advocates required to appear before a Court, including prosecutors; other legal practitioners required to support the administration of justice, including duty solicitors and those working on imminent or ongoing Court or tribunal hearings; solicitors acting on the execution of wills; solicitors advising people living in institutions or deprived of their liberty. You should be aware that some staff may fall in and out of the above categories intermittently and it is for the individual to decide if they fall within the above categories. The above groupings would qualify for their children to still attend school if there are no other options.

As part of your finances and workflow review, you may consider that you have too many people in certain areas of your firm. We now know the details regarding the winding down of the JRS and therefore you will need to start to consider what resource you will need in the future. There will be discussions to be had with your staff, whether that is coming back from furlough (and when), reduction in hours, part-time working or a fuller re-structure. It is inevitable that unfortunately there will be job losses in some areas of the legal sector.To help with your resourcing decisions your management team should still be reviewing staff timesheets on a daily basis, as accurate time recording is more vital now than ever. Monitoring productivity will be essential to make the correct decisions if there is not enough work for everyone.

Salaried Members of Limited Liability Partnerships (LLPs)

It was previously confirmed that Members of LLPs who are designated as employees for tax purposes (‘salaried members’) were eligible to be furloughed and receive support through the JRS.

Our FAQs on the scheme can be found on our website here.

Attendance at Court

The current status of courts and tribunals building as of 10 June 2020 is as follows:

  • 188 open courts – open to the public for essential face to face hearings;
  • 92 staffed courts – staff and judges working from these buildings, but are not open to the public. All other parties involved will be via video or telephone hearings;
  • 61 suspended courts – these are temporarily closed.

HMCTS has published a risk assessment which allows regular reviews of safety of buildings which can be found here https://www.gov.uk/guidance/coronavirus-covid-19-courts-and-tribunals-pl...

Governance and Compliance

With the likelihood of social distancing restrictions being in place for a period of time, law firms will need to change the way they work and how they are governed. Decisions about how you can continue to operate during this time will need to be taken collectively.

Key roles:

You should already have absence planning in place for the key roles in your firm such as the COLP and COFA, MLRO and MLCO, and we must hope that any cases of coronavirus are relatively mild and subsequently any absences are no longer than usual holiday periods. However, you should also consider informal deputies for these roles, and if any absence does become prolonged then you should apply to the SRA to replace these roles.

For the COLP and COFA roles you can apply to the SRA for temporary, emergency authorisation, and for the MLRO and MLCO then you need to inform the SRA of their replacement through the completion of a FA10b, for which a DBS check would also be required.

Sole practitioners may want to consider an agreement with another solicitor to be available for any absences.

It may be the case that your COLP or COFA has been furloughed and under the rules of the scheme cannot therefore undertake any work for the practice. An informal deputy can be used in these circumstances. If the period of furlough is likely to be in excess of four weeks then you will need to appoint a replacement COLP/COFA through the temporary emergency approval process.

Compliance

The SRA expect firms to continue to do everything they reasonably can to comply with the Accounts Rules and to keep client monies safe and this includes obtaining the independent accountant’s report. However, the SRA have said they would be pragmatic regarding the six month deadline given the exceptional circumstance, but there must still be a good reason and those reasons should be clearly documented.

The safety of client money remains a key focus for the profession, and the SRA has stated that it is vital the five week reconciliation statements should not be delayed if at all possible, and that you should already have contingency plans in place to prevent his from happening. If those contingency plans fail for any reason, you should take whatever steps you can to assure yourself that client money is being dealt with correctly.

‘Future Fund’ loan scheme

The SRA has released some guidance around this loan scheme and a potential breach of rule 3.3 regarding banking facilities.

A condition of the scheme is that funds received from third-party investors and the Future Fund must be held by the investee company solicitor (who must be permitted to receive and hold client money).

The SRA’s view is that even if you are not engaged to advise on the loan, as the scheme is structured with a requirement for solicitor involvement in handling completion monies, there is a risk that the loan would not complete without monies being received into client account, and therefore there would not be a breach of rule 3.3.

Client confidentiality

With remote working you should still have measures in place to protect client’s confidentiality. This is required both by the SRA and law.

You should ensure that your policy and procedures are up to date and details the arrangements that you have put in place during this time.

Inability to comply with your professional obligations

You must notify your client as soon as possible that you cannot provide any services they require. You should also provide the name (or ideally three names) of another solicitor to try to take over from you. 

There are various firms that can provide services to your clients if you cannot meet your obligations. These tend to be on an agency fee share basis and may be suitable for you where certain fee earners have been furloughed.  Please do not hesitate to get in touch if you would like us to put you in touch with one of these.

You also must ensure that any out of office email has all relevant information on – it is vital that any client does not suffer because they are expecting you to respond.

Virtual meetings and document approval

You should follow the government guidance on meeting face to face including social distancing and hygiene. If you judge that a physical visit is imperative, choose personnel who are not a risk to the client and who are not at high risk themselves. Both the client and the employee will need to agree to the meeting despite any risk.

Ideally, holding virtual meetings is considered to be a good option, particularly as many clients requiring legal services now may be classed as particularly high risk to coronavirus. 

The physical witnessing of wills has been topical in recent months and the latest guidance from the Law Society on virtual execution and e-signature can be found here https://www.lawsociety.org.uk/support-services/advice/articles/position-...

Pricing

Andy Poole, Legal Sector Partner joins Nigel Haddon, a consultant at Burcher Jennings to discuss pricing options and actions that law firms should be looking at right now in the Covid outbreak. 

Law Firm M&A during COVID

The Future

None of us know for how long the coronavirus pandemic will last or what the long terms effects will be but it is clear that the way we work and operate will have changed forever. Looking to the future, the hope is that as people settle into their ‘new normal’ that life begins to re-start and as such, so does business and legal services.

We’d expect certain work types to see a return to normal levels more quickly than others – family (divorces), litigation (potentially if there have been breaches of contract throughout this crisis) and employment (as redundancies following the end of furlough start to occur).  Although conveyancing may be slower to pick up, there are signs that activity is starting to increase once again.

There are positives in that  some of the practices and decisions that have been forced upon law firms through this crisis are decisions that should have potentially been made in any case. Many firms have demonstrated their agility in adapting to a new unprecedented normal and the law firms that still remain when this is over will be leaner, more efficient and well equipped to deal with clients from any location in a profitable way.

In the wider legal services market place, we are likely to see the loss of some firms that don’t make it through this period, we are also likely to see consolidation in the market place as well as diversification from firms looking to reduce their reliance on work-types and reduce their future risk.

As a sector, we must hope for the best and that we can return in full health to some semblance of normality as soon as possible, but unfortunately we all must monitor, measure and plan for the worst case scenario.

You can read a recent article on Planning for the Future by Rosy Rourke, Legal Sector Director here.

Useful links:

The Law Society - https://www.lawsociety.org.uk/support-services/coronavirus/

The SRA - https://www.sra.org.uk/home/hot-topics/coronavirus/

The CLC - https://www.clc-uk.org/lawyers/coronavirus/

The Law Society of Scotland - https://www.lawscot.org.uk/news-and-events/law-society-news/coronavirus-...

Contact Us

For help and advice on how Armstrong Watson can help support your Legal Sector business contact Andy Poole, Rosy Rourke or Tom Blandford.