Recession and regulation: why some solicitors are leaving the profession

Family Law|August 28th 2012

Reading the comments left on the website of the Law Gazette last week I was struck by the vast number of seriously upset and angry solicitors who are making the same general point – week in, week out. They complain that we are the most over regulated profession in business today. That try as we may, there is always someone to pounce; ready to complain and attempt to knock us down.

I don’t think many solicitors in the current market would seriously disagree. The Law Society, who once carried great authority and fought hard and convincingly for our profession, now seems to be almost toothless. They may well be trying to stand our ground and fight our corner, but it doesn’t seem to be doing much good.

And with the dire impact of the recession, things have got far, far worse. I wasn’t in the least surprised to read two comments on an article about increased working hours saying:

“I found having a mental breakdown at work both negative and limiting.”

And another that:

“Now, however, for anyone daft enough to embark on a legal career, the advent of desktop technology, a tsunami of bonkers regulation from all directions…has turned the job into a relentless nightmare: the law as aversion therapy…”

It also sadly isn’t unusual to hear of firms of solicitors going bust, something that just a few short years ago would have been unthinkable. As a result of it all, another solicitor commenting elsewhere on the site said that he had thrown in the towel and left the profession.

Is it really so bad you may wonder? I’m afraid for many, it is. There have been some high profile law firms collapsing, while others cling on for dear life. Other less high profile, but equally disastrous, collapses of firms have been masked by a wave of mergers and acquisitions.

The impact of the recession has, along with many other professions, been personally very serious for many individual solicitors too. This is particularly the case for those solicitors whose firms were thriving in the conveyancing and commercial sectors. They are now seriously struggling as banks, who almost threw money at them less than five years ago, are now calling it back in.

But exactly how does it get repaid? Banks are looking to individual partners who have given personal guarantees to come up with the money, and if they don’t, an Individual Voluntary Arrangement (IVA) or bankruptcy is a strong possibility.

If you combine all those financial worries, as one woman solicitor did in the recently published case of R-v-R, [2012] EWHC 2390 (Fam), with the stress of trying to continue in practice and the breakdown of a marriage, you are presented with a very sad story. She was faced with having to repay fees after a fee regime was imposed long after the fees were paid, keep all her staff in a job and keep paying overheads including conveyancing insurance premiums even though work had dried up during the recession. She sadly failed as it all collapsed around her. It was a recipe for physical and mental illness, even more so as she had to manage the  collapse of her marriage when her husband began an affair with another woman and declined to assist her financially.

The chilling facts as set out by Mrs Justice Macur are lengthy, but worth quoting in full:

“The wife’s substantial indebtedness arises from her practice as a solicitor. She was a qualified Solicitor when the parties met in 1982. In 1983 she became a salaried partner and then an equity partner in 1984. In 1988, she acquired 40% of the equity in AB solicitor’s practice and 20% of the equity in AB Property Centres. The property centre business was sold in 1989, the wife’s share being £40,000. In 1990 she increased her equity in AB to 50%. In 1995, the Wife began trading as sole practitioner as ABC – C being her professional/maiden name. She subsequently opened a temporary office in the Midlands and by 2005 was employing over 60 people with a turnover in excess of £3m and profits in excess of £1m.

“Things began to unravel in 2004 when the wife’s practice was subject to a two day forensic Solicitor’s Regulation Authority investigation. This related to the deduction of fees in industrial disease cases for payment to third parties. In November 2005, the Wife was diagnosed with breast cancer. She underwent surgery three times in 2006, and thereafter radiotherapy and chemotherapy. In 2006 the wife’s firm was referred to the Solicitors Disciplinary Tribunal. In May 2007, it was required to repay £730,000 to the DTI, who had successfully appealed the tariff set for the payment to lawyers in one type of industrial disease cases. The payment had to be made over a 12 month period. The wife borrowed £100,000 from Z Ltd via the husband, and repaid the same in 2008.

“From the end of 2007 the recession and the collapse of Northern Rock impacted adversely on conveyancing work. The firm’s turnover fell drastically and a large number of staff were made redundant. The firm’s PII insurance premium was significantly increased and ultimately resulted in the firm being unable to obtain cover. Payment of PAYE, National Insurance and VAT went by the board. In March 2010, the wife’s practice was fined £5,000 and ordered to pay costs of £70,000. In addition there was the cost of legal representation and repayment of fees. The total cost amounted to approximately £263,000. The firm’s insurers have only recently settled this claim, the wife receiving £8,410, net of legal fees and retention. A bankruptcy Petition was issued by HMRC for the non-payment of tax in January 2011. To avoid bankruptcy, in May 2011 the wife entered into an IVA with her creditors. The wife’s firm ceased to practice in 2011. By reason of her inability to pay the ‘run off’ insurance cover required, the Wife is guilty of a disciplinary offence and is currently suspended from practice as a Solicitor. The cost of this insurance funded by the ARP is now included within her IVA.

“I am satisfied on her evidence that throughout this downturn in the firm’s fortunes she attempted to maintain and re-align her practice, moving to smaller premises and utilising a property (‘the DCH’) which was adjacent to the former matrimonial home. I am satisfied that post ceasing to practice the wife had to retain a skeleton administrative staff and office premises to oversee the transfer and archiving of her files which she has funded by loans from family members. Equally I am satisfied that although the wife had, with hindsight over extended the firm’s business that the consequent financial losses did not result from any negligence, recklessness or misfeasance on the part of the wife.”

Then the judge went on to consider the current financial positions of the wife and the husband:

The wife’s current financial position is dire. She is subject to an Individual Voluntary Arrangement (“IVA”) with all the connotations that that entails as to credit. She has additional significant debts attributable to the closure of her solicitor’s practice. She has been indefinitely suspended by the Solicitors Disciplinary Tribunal since February 2012. She has suffered significant physical and mental ill health in recent years. I find she is unlikely to be employed in other than posts carrying very small honorariums in the future. She lives in the heavily mortgaged former matrimonial home and is dependent upon maintenance pending suit and family loans. She has minimal personal assets but may make recovery of a not insubstantial sum in contentious litigation still to be resolved. She has a modest pension pot.

“By contrast, the husband’s current financial position is secure. He is the majority shareholder (91.75%) in Z Ltd, a company primarily producing refreshments from which he is able to draw significant earnings whether by salary, dividend or utilisation of a director’s loan account. In financial year ending 2010, that is before payment of maintenance pending suit, his average monthly drawings were in the region of £24,000. He lives abroad but is likely to return to the United Kingdom to live permanently in the short to medium term. He lives in rented accommodation at this time. His only financial debts are to the company in terms of his outstanding director’s loan account and his present solicitors in relation to outstanding costs. He too has a modest pension pot.”

The judge was highly critical of the husband’s behaviour towards the wife in relation to her IVA: she rejected the husband’s arguments as to the illiquidity of his company and that the husband should have the benefit of post-separation accrual. She awarded the wife the marital home and surrounding land (both of which had little equity), an endowment policy and a £4m lump sum plus substantial maintenance until the lump sum had been paid. This would allow her to repay her debts and should give her, at last, a secure future.

This solicitor was very fortunate that her divorcing, but manifestly unwilling, spouse was around to help her move on financially. She certainly had to fight for it and still has to get paid. Perhaps he might have done better had he conducted himself more appropriately towards his wife and during the trial. It never pays to be aggressive or too clever.

There are however many others in the profession who are victims of a vicious recession and an over-regulated industry. They are being left with precious little after a lifetime of work and service to others. In fact, they are left dangling by a thread with little or no help at hand – something that would have been wholly unforeseeable when they first qualified. With that in mind it is not difficult to comprehend why some solicitors have seen the writing on the wall and decided to embark on a second career.

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  1. DT says:

    Very interesting Marilyn.
    It is absolutely incredible to think that the once such coveted profession is loosing people due to recession and over regulation. However, while people may be leaving, the current climate doesn’t appear to be stopping people from wanting to join the profession.
    I believe that there is too much regulation – I’m all for being vigilant but a lot of solicitors are too terrified to get on with their job for fear of getting something wrong and facing untold repercussions.
    I read recently how judges and magistrates are being ‘banned’ from blogging about their jobs, even if they do so anonymously, and it made me think about regulation and where it will all end.
    Yes, I think members of the judiciary need to be very careful not to go on a personal crusade but I think that these people have something interesting and valuable to say. I didn’t agree with the ‘Marriage Foundation’; however, the latest guidance is too absolute for my liking.
    All it will serve to do is keep the judiciary and indeed the legal profession shrouded in mystery and compound misconceptions.

  2. Phil says:

    The opening paragraphs could easily have been written about the plight of IFAs…is this not a case of differentiate or die?

  3. Tired says:

    I practised as a PI lawyer. I was very good at my job. I gained rightful recompense for people injured at work or elsewhere, people who more often than not were among the least empowered members if our society. I was proud of the job I did well. But the insurance industry powerfully lobbied government. So I transferred my skills to another area of law. I hit the ground running and learnt on the job and was able to become a profitable and useful solicitor once again. Then the government decided that it would be a good idea to let non lawyers practice law. This would not happen with medicine or architecture so why is it OK for law? This has devalued my professional (and hard won) qualification. I have had enough. I will leave the profession. It hurts.

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