Growth vs. client care: SRA’s warning on mergers and the risk to public trust

The SRA issued a warning notice on 17 June 2024 (Mergers, acquisitions and sales of law firms) to its regulated firms and individuals) setting out concerns about detriment to client interests as a result of some mergers or acquisitions. The warning notice sets out the SRA's view that client interests are paramount and sets out in detail the SRA's expectations from firms and solicitor managers appointed by administrators of law firms.

What is the background to this issue?

In recent years, mergers have become a popular growth strategy within the legal market. In 2022 alone, the number of mergers surged by nearly 23% compared to 2021. This trend includes several high-profile mergers, some of which have raised concerns following financial difficulties, such as those experienced by Axiom Ince and Metamorph Group, which led to SRA interventions. The Solicitors Regulation Authority (SRA) has expressed increasing concern that, in some cases, client interests are being sidelined in favour of firms' commercial ambitions. As a result, the regulator has issued the warning notice to firms involved in mergers, urging them to keep client care central to their decision-making processes.

SRA Chief Executive Paul Phillip commented:

"We have seen some firms making multiple acquisitions in a relatively short period of time, which can create challenges in terms of business integration, organisational culture, and maintaining standards of service to an increased client base."

While the SRA acknowledges that mergers are a legitimate means of growth, offering significant commercial benefits—such as expanding practice areas, acquiring top talent, and achieving economies of scale—the regulator is reminding firms of their duty to prioritise client interests. The warning notice stems from concerns that recent merger-related collapses could undermine public trust in the legal profession and the delivery of legal services. In particular, the SRA are concerned that client interests are not always paramount during transactions, with commercial interests or expediency sometimes appearing to take precedence, which is unacceptable.

Mergers, financial failures, and client protection

The SRA’s June 2024 warning notice coincided with the SRA's  Consumer Protection Review which subsequently concluded in July 2024. The review examined the regulator's approach to protecting consumers of regulated legal services and alluded to concerns about the strain on the Compensation Fund following an increase in interventions, especially of so-called "accumulator" firms. The SRA noted that the number of interventions in 2024 has already more than doubled compared to the previous year, putting additional pressure on the Compensation Fund where many of these interventions arise out of circumstances also generating significant claims.

What behaviour is the SRA concerned about?

The warning notice gives examples of conduct which might breach regulatory arrangements, including:

• Treating client files as commodities that can be bought or sold without reference to the client's own wishes – and/or failing to give clients enough time to decide whether to give informed consent to the transfer of their matter, money and documents.
• Overlooking important matter deadlines during the file transfer.
• Sale of will banks without testator's consent, including to unregulated entities.
• Failing to ensure that the client account is not in deficit before acquiring it.

It is fairly obvious how each of these examples might be detrimental to client interests; however, the SRA is also concerned about more "high level" or indirect impacts, such as:

• Failing to carry out due diligence on the firm being acquired.
• Both the buyer and seller firms failing to consider whether the acquiring firm has the competence, systems, staffing or capacity to carry out the work being acquired.
• Failing to notify the SRA promptly of any indicators of serious financial difficulty.

The first two examples here demonstrate the continuing widening of the regulator's reach, with the SRA's tendrils now firmly embedded into key commercial decisions made the firm. The SRA make clear that a number of provisions of both the Code of Conduct for Solicitors, RELs and RFLs and the Code of Conduct for Firms are engaged in a merger or acquisition situation.

The issue of this warning notice also fits with the SRA's recent trend of committing to written guidance legal analysis that solicitors were previously trusted to work out for themselves, such as the trust implications of a shortage on client account, which was the subject of another SRA warning notice also released in June 2024 (Money missing from client account). This also fits with the increase in litigants in person in recent years – sharing information in this way arguably primarily aids clients in understanding precisely what to expect from their solicitor.

What does the SRA expect?

The SRA expect that protection of client interests is at the forefront of decision-making when selling, merging or acquiring another law firm.

The warning notice sets out the following requirements, all of which are unarguably best practice, but some of which may be difficult to comply with in the commercial realities of a complex transaction such as a law firm merger:

1. Keeping clients informed and avoiding imposing unreasonably short timescales on clients (as this indicates that you have not managed the situation effectively and, as such, have not complied with regulatory requirements), who should be able to make an unfettered and informed decision about who to instruct.
2. Acting in clients' best interests even when selling your firm.
3. Making all reasonable efforts to contact testators before transferring storage of their will – and evidence such steps.
4. Ensuring that a file storage and destruction policy is in place to ensure that files are kept for an appropriate period and destroyed in a confidential way.
5. Carrying out a systematic review of any acquired client balances.

The warning notice highlights the complexities involved in balancing commercial interests against regulatory requirements. Law firm mergers are by no means the only area in which difficult ethical calls need to be made – some other obvious examples are the tension between chargeable hours targets and employee wellbeing / workplace culture, and hourly rate billing vs fixed fee pricing. Metaphors about the "regulatory obstacle course" have never been more apt.

What about solicitor managers?

When a law firm enters administration or liquidation, solicitor managers are commonly appointed to ensure that client interests, privilege and confidentiality are protected and regulatory obligations met. The SRA speculates that this is not always done due to cost considerations or because the insolvency practitioner may not be aware of the need for one.

It is clear from the warning notice that the SRA expects a solicitor manager to be appointed "in most circumstances" where the firm enters administration or liquidation. This is an "explain or comply" obligation, with the warning notice making clear that firms who do not appoint a solicitor manager will need "clear justification" for deciding not to do so.

Looking ahead: ongoing regulatory review

The SRA's warning notice will be updated once the findings of the Consumer Protection Review are consolidated and incorporated into an ongoing review of growth strategies within the legal sector. This indicates the regulator's intent to continue scrutinising the balance between law firms' commercial ambitions and their obligations to clients in the context of growth strategies seemingly overtaking consideration of client's interests.