A warning from the Regulator on Law Firm Mergers and Acquisitions: Compliance and Best Practices for Conveyancing Firms

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A warning from the Regulator on Law Firm Mergers and Acquisitions
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Boardroom Conversation

Kate Burt, HiveRisk

Mergers and acquisitions (M&A) remain a prominent strategy in the legal sector, especially as firms seek growth and stability. However, recent activity by ‘accelerator firms’ has drawn regulatory attention, prompting the Solicitors Regulation Authority (SRA) to issue a Warning Notice on mergers, acquisitions and sales of law firms in June 2024. The SRA’s notice highlights significant regulatory and ethical risks for firms that mishandle these transactions, especially in conveyancing, where client protections are critical.

The SRA’s Concerns

The SRA points out, growth through acquisitions can compromise governance structures, service standards and client protections if not managed carefully. The most significant concerns highlighted by the SRA include:

  • Clients’ interests being overlooked: Treating client files as commodities without considering their preferences.
  • Failing to obtain informed consent: Not properly notifying or consulting clients about where their files, documents, or funds will go in the event of a transfer.
  • Neglecting urgent client matters: Overlooking key deadlines post-acquisition, thereby jeopardizing client interests.
  • Unregulated sales of wills and documents: Selling client wills or documents without the testator’s knowledge or proper consent.

These risks are particularly concerning in the conveyancing sector, where client deadlines are critical, and breaches could result in property transactions falling through or clients incurring substantial financial losses.

In our work supporting law firms through the due diligence process during acquisitions, we frequently witness the fallout from overlooked compliance risks. Too often, we are brought in after a deal has been finalised to help mitigate an unforeseen compliance issues that could have been avoided with proper pre-acquisition scrutiny.

For instance, we’ve seen cases where firms have inherited significant unreconciled client funds in the target firm’s accounts resulting in substantial disruption. By investing in comprehensive due diligence in the early stages of negotiating a deal, firms can avoid costly rectification efforts, including regulatory issues, legal fees and consultancy costs. Beyond the financial impact, the emotional toll on business leaders left to manage the fallout, along with the potential damage to the firm’s reputation, can be substantial.

Here follows some practical pointers for conveyancing law firms looking to protect themselves from regulatory breaches, ensure compliance with the SRA’s guidance and maintain client trust.

Best Practices for Safeguarding Compliance in M&A

1. Prioritise Client Communication and Consent

  • The SRA stresses the importance of obtaining properly informed consent from clients. Before any transaction, firms should:
    • Inform clients of any impending merger or acquisition.
    • Explain how their case files, documents and funds will be handled post-transaction.
    • Provide clients with enough time to decide whether they are comfortable transferring their case to the acquiring firm.

In our experience, clear and early communication can ease client concerns and prevent regulatory headaches later. For example, during a recent acquisition we assisted a conveyancing firm ensuring that each client received tailored communication outlining how their transactions would continue without disruption. This proactive approach resulted in minimal client attrition and a smooth transition. In the conveyancing space this is especially critical, as client files often contain time-sensitive documents and information.

2. Due Diligence is Non-Negotiable

Performing thorough due diligence on the firm being acquired is essential. We’ve seen conveyancing firms rush into acquisitions without fully understanding the business they are acquiring, leading to integration issues and compliance breaches. Proper due diligence should include:

  • Assessing the target firm’s competence, systems and staff capacity: Can the acquiring firm handle the additional workload?
  • Reviewing the handling of client money: Ensure client funds are properly reconciled before transfer.
  • Investigating legacy risks: Check for unresolved claims, regulatory issues or client complaints that could emerge post-acquisition.

3. Secure Document and File Storage

Conveyancing firms handle a significant amount of sensitive client data, including property deeds and wills. The SRA warns that selling will banks or transferring documents without proper client consent or a clear storage policy can lead to breaches. To mitigate this risk:

  • Establish clear protocols for document transfer: Ensure that clients are aware of where their documents will be stored post-transaction and obtain their consent.
  • Develop a file retention and destruction policy: Acquired client files should be stored securely for the appropriate period before confidential destruction.

We’ve seen instances for example where client archives are neglected. By implementing a systematic review of these issues and a mitigation plan can avoid inherited regulatory issues related to mishandled client data.

4. Manage Client Money Responsibly

The SRA’s Accounts Rules mandate careful handling of client money. Unreconciled client funds or mishandled accounts can lead to serious breaches. Firms should:

  • Make enquiries to ensure client accounts are reconciled before any transfer.
  • Ensure that the acquiring firm has systems in place to manage client money correctly.

We’ve seen instances where the acquiring firm has been left ‘holding the baby’ opening themselves up to regulatory scrutiny for an inherited issue. By undertaking robust due diligence and ensuring financial hygiene prior to completion of the deal, firms can avoid such issues and ensure smooth transitions.

The Importance of Governance and Cultural Integration

Acquiring or merging with another firm often brings challenges related to integration, both operationally and culturally. Poor governance can lead to a decline in service quality, which ultimately impacts clients. Conveyancing firms should:

  • Establish strong governance frameworks: Post-acquisition, it is vital to have clear management structures in place to maintain standards across all offices and departments.
  • Invest in cultural integration: Misalignment between firm cultures can lead to internal friction and poor client service. Firms should actively work on aligning values and service standards during the integration process.

In conclusion,while mergers and acquisitions can be a sound strategy for growth and resilience, they come with significant regulatory, operational and reputational risks. By prioritising client interests, conducting thorough due diligence and ensuring strong governance and communication, conveyancing firms can navigate these transactions successfully.

By adopting these best practices, your firm can stay competitive whilst safeguarding client interests and maintaining trust in your services.