The Impact of Covid-19 on the Legal Sector

Impact of Covid-19 - updated 12 February 2021

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:

A recent survey by The Law Society’s Law Management Section suggests that firms are forecasting a 10-20% drop in revenue for the 2020/2021 financial year.  In our client base, we are seeing a fall in revenue closer to 10%, but actually an increase in profits.

In addition, the long lockup cycles of legal services add to the potential cashflow issues within law firms. The same survey by The Law Society suggests that the average number of lockup days for firms of all sizes is 155 days and that most firms expect those 155 days now to increase by 15-25 days.  Armstrong Watson’s own benchmarking database currently suggests slightly lower lock-up days of 127. 

Below are the latest topical COVID-19 related issues for the legal sector:

National lockdown – 4 January

With the third national lockdown starting on 4 January , the law society has met with government officials and it has been agreed that the rules allow for law firm offices to remain open during this period. Staff should still work from home if it is possible, but if not they can work in the office. Similarly, solicitors must try to see clients remotely and deliver services virtually, but if this isn’t possible, then face to face meetings (in client homes or offices) are permitted.

The government has also confirmed that the definition of ‘key workers’ will be the same in this lockdown as previously. This, therefore, covers solicitors who fall into the following categories (“those essential to the running of the justice system”):

  • 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.

The courts will also remain open unless otherwise stated.

Impact by work-type:

Conveyancing and Property

Many law firms with conveyancing departments have reported huge growth in workloads since the housing market re-opened. Encouragingly, despite the latest national lockdown, the government has confirmed that the housing market will remain open.

Sales in October were reported to be up 52% on last year. The stamp duty holiday is making a significant contribution to this upturn as well as the pent up demand and Covid driven lifestyle changes. This bounce-back was certainly needed as Quarter 2 of 2020 was the lowest for residential conveyancing transactions since the banking crisis of 2009.

The upturn in demand also means that the recruitment market for conveyancers is buoyant with jobs advertised increasing.

Although the feeling right now is one of positivity, it is not without issues - many people are still reporting problems obtaining mortgages and delays with lenders which are lengthening transactions (by up to 8 weeks), creating a risk of missing completion before the end of the stamp duty holiday. Congestion in terms of capacity for estate agents as well as services such as removers are also taking their toll. The delays are so widespread that there are calls for Rishi Sunak to extend the stamp duty holiday. It was reported in October 2020 that there were 400,000 transactions looking to complete with a sales value of £112billion, but that up to half of those could miss out on the stamp duty holiday due to the delays.

The longer-term impact of COVID-19 re general economic and employment factors on conveyancing demand once this potentially short-lived upturn has run its course is still to be seen.  Pricing in conveyancing should be altered to meet the peaks and troughs in demand, and so the opportunity from the current peak should not be missed.

Family

Family law is one area where work has continued from the instructions in hand at the outbreak of the pandemic and with increasing family tensions since then, albeit at a slower rate of completing such work with it taking longer to obtain court hearings and the financial options being more difficult - given the impact on housing/house prices/pensions/the stock market. 

We have not seen the usual January bounce in family instructions, most probably because the effect of families being together is now much more widespread through the year rather than in holiday pockets. There is the potential for family work to surge in the future, as the strain of spending weeks together, along with financial pressures, become too much. Some reports are suggesting that this is the case in China and that they have seen record divorce cases following the ending of their lockdowns, although a recent YouGov poll found that 28% of respondents would refrain from going ahead with a divorce during the pandemic.

The changes in the use of technology forced by the social distancing requirements allowed continued access to family justice, but reports of issues are starting to increase. Remote hearings are tiring and can be more drawn out than face to face hearings with some parties feeling that they are not able to adequately state their case through the phone or webcam, and any opportunities to negotiate have to be much more structured leading to judges having to make tough decisions.

Employment

Employment lawyers saw a surge in enquiries from both employers and employees since the start of the coronavirus pandemic. Not all of that work was chargeable or recoverable in fee income terms. 

The expected increase in demand for employment law services due to the winding down of the JRS scheme may now have been delayed as the scheme has recently been extended to March 2021. What is certain though, is that there will still be further difficult decisions regarding employees to come which will result in increased work in this area.

We would suggest that where such work is chargeable, full invoices should be raised in advance and payment secured before commencing.

Commercial and Corporate

This practice area was the second-worst hit during the pandemic after property with many firms reporting 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. In fact, the start of 2020 saw the slowest rate of deal making for seven years.

The reduced pipeline is continuing to impact fee income, as business confidence remains low due to uncertainty impacting transactional work. We did start to see some pick up in the M&A market at the end of Summer 2020, but due to the continuing future uncertainty with the global recession, new emerging variants of the virus and lockdowns, as well as potential tax changes, mean that significant continued activity is likely to be sporadic. The expected increases in insolvency cases have yet to materialise due to the continuing support from the government, although unfortunately for those businesses, this is still likely to come once that support ceases.

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 increased probate instructions are also sadly likely to continue.

Litigation, Personal Injury, Clinical Negligence and Court of Protection

These cases tend to be long running and were largely unaffected at the outset of the pandemic, although matters slowed as response times from the other side, insurance companies etc slowed down as everyone adapted to home working and Court redress was potentially removed/delayed.

Although ongoing matters will continue, there is a continuing worry as to where the pipeline of future cases might come from as there are fewer new cases, accidents etc due to the restrictions on people’s movements so far in 2020. Some reports suggest that the number of personal injury claims being filed in Q2 of 2020 were 35% down on the previous year.

The long term decline in RTA claims has only been exacerbated by the coronavirus pandemic.

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 with some forecasting a whole new claims sector with virus-related claims against workplace, the NHS and potentially travel companies.

The pandemic is also likely to have an impact on consumer litigation claims, with an expected rise in employment claims and insurance claims.

The pandemic has forced certain changes within litigation including remote mediations and hearings and the virtual sharing of court documents and it will be interesting to see if these changes become permanent.

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.

.

Finance

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.

Further tax deferrals – VAT 

The Winter Economy plan also announced a further deferral of the payment of VAT from the quarter ended April/May/June 2020. A New Payment Scheme will provide an option to pay the deferred liability in 11 smaller interest-free instalments during the 2021-2022 tax year, rather than the whole deferred amount being due by 31 March 2021.

CBILS and Bounce Back Loans

The deadline date for CBILS applications is 31 March 2021. This deadline has been extended a number of times, but further extensions are not currently expected.

A further deadline extension was also announced regarding Bounce Back Loans with the final application date for these also now the 31 March 2021. In addition, further flexibility for these loans were announced, including extending the length of the loan from six years to ten years, interest-only periods and payment holidays. Although these measures are welcome to ease cash flow, there is a danger if effective cash flow forecasts are not prepared, that debt within firms will build in more difficult trading conditions to come,  pushing issues further into the future. 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

Prior to the latest lockdown, the Law Society has provided a framework for law firms on how to safely return to the office, when that is required, which can be found here.

The Law Society has advised since the start of the pandemic, 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.

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 that the JRS has been extended until March 2021, but you may still want to consider what resource you will need in the future. Despite the extension of the JRS, it is still likely that discussions with some staff will be required, whether that is coming back from furlough (and when), reduction in hours, part-time working or a re-structure of the firm as a whole.

It does still feel 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.

Governance and Compliance

With the continuing social distancing restrictions, 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.

The hardening of the PII market has been widely reported in the legal press. Given the current pressure on law firm finances, there will have been some firms that simply could not obtain cover at a cost they could afford.

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 a 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 a 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. Face masks are now required by law for face to face meetings.

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. This has been further re-iterated for the current national lockdown.

The Law Society’s latest position on the ‘use of virtual execution and e-signature’ is available on their website.

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.

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.

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.


The deadline for February’s claims is 15 March 2021, so please submit claims to jrs@armstrongwatson.co.uk.