The Impact of Covid-19 on the Legal Sector

Impact of Covid-19 - updated 30 September 2020

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 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 (Armstrong Watson’s own benchmarking database currently suggests slightly lower days of 130) and that most firms expect those 155 days  now to increase by 15-25 days.

The Law Society is campaigning for further support for the sector through their submission to HMRC focussing on ‘Return, Restart and Recovery’ which aims to put the profession at the heart of the nation’s recovery. Whether that further support is achieved remains to be seen.

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

Impact by work-type:

Conveyancing and Property

Many law firms with conveyancing departments are reporting huge growth in workload in recent months since the housing market re-opened.

Usually, in the summer months, the housing market experiences a lull due to the holiday season, but recent figures from HMRC suggest that August was 15% busier than July and that sales agreed in July and August alone totalled more than £37billion. The stamp duty holiday is making a significant contribution to this as well as the pent up demand and Covid driven lifestyle changes. The figures for August are however still 16% lower than August 2019 but are certainly supporting the feeling of an upward trend. This bounceback 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 over 100% from July to August.

Although the feeling right now is one of positivity, it is not without issues - many people are reporting problems obtaining mortgages and delays with lenders which are lengthening transactions (by up to a month), 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 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 continued from the instructions in progress as the pandemic started, albeit more slowly and with fewer options/solutions, given the impact on housing/house prices/pensions/the stock market.   As suspected when the full lockdown was lifted work started to flow again and the predicted surge started to happen (with divorce enquiries increasing), as the strain of spending weeks together, along with financial pressures, become too much.

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 demand for employment law services is likely to continue as the JRS winds down and the newly announced ‘Job Support Scheme’ begins, with further difficult decisions regarding employees to come.

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.

The reduced pipeline is continuing 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 and M&A 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 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 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. 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.

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 and Income Tax

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.

Additionally, a further deferral of self-assessment income tax relating to the following tax payments was also announced:

  • Second POA 2019/20
  • Balancing payment 2019/20
  • Capital gains tax 2019/20 (if not paid under 30-day rule)
  • First POA 2020/21

Unlike the deferral in place on 31 July 2020, the taxpayer will have to apply for time to pay to spread the tax due over 12 monthly instalments to January 2022. Where the total tax due doesn’t exceed £30,000 the application for time to pay will be agreed automatically when the taxpayer applies using an online form. If the tax due exceeds £30,000 or the taxpayer needs longer to pay, the telephone service will still be available to agree a bespoke payment plan.

CBILS and Bounce Back Loans

On 24th September the Chancellor extended the deadline date for CBILS applications to the 30 November 2020 to allow businesses to apply for funding needed to support them through the ongoing pandemic. There is also the option to extend the length of the loans from six to ten years.

Details of the other changes are available here.

Further flexibility was also announced regarding the payback of Bounce Back Loans, including extending the length of the loan from six years to ten years, cutting monthly repayments by almost half, and interest-only periods and payment holidays will also be available. 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

Following updated guidance from the government, staff should again work from home if ‘they can effectively’. This guidance was after a gradual return to offices during August and the start of September.

The Law Society has provided a framework for law firms on how to safely return to the office which can be found here.

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 Law Society has also provided some recent guidance for law firms in areas with local lockdown restrictions as these become more widespread across the country.

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. The government has recognised that some of the re-introduced restrictions will impact on employment and have announced the introduction of the Job Support Scheme which is designed to support viable jobs. Despite the new scheme, 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, a fuller re-structure or utilising the Job Support Scheme.

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 be some firms that simply cannot obtain cover at a cost they can afford. If cover cannot be obtained it is important that you do not risk disciplinary action that may prevent you from being a solicitor in the future. If you cannot obtain PII cover then you have five days to notify the SRA which will trigger the extended indemnity period of 30 days under the existing policy. After that 30 days no new business can be taken on (unless cover has been obtained). The SRA has confirmed that due to the pandemic, it may be possible to extend the 30 day period, but agreement with your insurer will be required. The SRA will conduct checks once the October renewal date has passed to identify any firms who have not obtained cover or failed to notify them.

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. 

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.

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.