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Risk and Compliance Service

Planning an exit strategy

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Deciding to cease practising or change careers can be difficult decisions to make, particularly if you own a law firm. Helen Carr, co-author of the Law Society’s Exit Strategies Toolkit, looks at the personal and practical considerations and the regulatory requirements that should form a part of an exit plan.

Failure to properly plan for your exit from practice can have significant negative consequences: clients can be put at risk; it can generate negative publicity resulting in damage to your reputation and that of the profession; and, it can put you at risk of an intervention by the Solicitors Regulation Authority (SRA) and disciplinary sanctions which can be very costly.

Moving on

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The regulations

An exit from practice as a law firm regulated by the SRA can take various forms including retirement, the sale of the firm, a merger event, an insolvency event, switching regulator or becoming an unregulated service provider. Whilst many of the regulatory requirements will overlap each scenario, there are some obligations which require special attention in particular circumstances. For example, if your firm switches regulator or becomes an unregulated services provider, you should explain to clients what this means in terms of the consumer protections such as professional indemnity insurance and access to the Compensation Fund.

Professional indemnity insurance

It is often the case that whether a firm can continue in practice is a decision made by the professional indemnity insurance market – if a firm is unable to obtain insurance, it is unable to continue to practise. In such circumstances, it would enter a period known as the extended indemnity period (EIP) during which it must notify the SRA (within the first five days) but can continue to provide legal services. If it is not able to obtain insurance after this, it must notify the SRA of this and cease to accept new instructions – this phase is known as the cessation period. If the firm is unable to obtain insurance 90 days after entering the EIP it must either cease to practise or be merged with or acquired by another firm.

Notifying clients and other third parties

It is important that clients are made aware of the closure of a firm and are given as much notice as possible to enable them to transfer their files. As mentioned above, if a firm is changing regulators or is becoming an unregulated legal services provider (as it can be, as long as it does not carry out any of the reserved legal activities – broadly speaking, certain steps in conveyancing, litigation, probate and administration of oaths (ie those activities reserved to certain categories of lawyers under the Legal Services Act 2007)) clients must be informed of the implications of this and how it will impact on the protections they receive.

Firms should also take care to appropriately notify relevant third parties such as the courts, Her Majesty’s Revenue and Customs (HMRC) and other parties to a matter.

Storage of files and documents

On 25 May 2018 the General Data Protection Regulation (GDPR) came into force. This requires all data controllers and data processors (most firms, if not all, will be data controllers and some will be data processors for third parties) to have documented systems and processes in place to ensure the protection and accuracy of individuals’ data. These requirements overlap with firms’ professional conduct obligations to maintain the duty of confidentiality to clients (set out in chapter four of the SRA Handbook) and to ensure the safekeeping of client money, clients’ documents and assets (Principle 10 in the SRA Handbook).

The long-term storage of files can be expensive and onerous, so part of any exit plan should include provision as to how to manage this issue. Many firms already provide for what will happen to a client’s file once the retainer has ended in their terms of business and other client care documentation. For firms who have not discussed this issue with clients, consideration will need to be given as to what the next steps should be. Long-term wholesale storage of vast numbers of paper documents is unlikely to be a sustainable option and so firms may wish to explore other options such as returning documents to clients, storing the files securely in an electronic format, or arranging for the files to be properly stored by another firm (in preference to them being abandoned or destroyed without consent), bearing in mind that original documents such as deeds and wills should never be destroyed without the express written consent of the owner.

The proposed new SRA Handbook, due to come into force in 2019, contains new options for individual solicitors providing legal services. The proposed changes will allow many practitioners to explore new and innovative ways to practise law and this may have an impact on the number of entities regulated by the SRA. Some traditional law firms may wish to take advantage of the proposed changes and, if so, should be mindful of the various regulatory requirements in moving out of the regulated sphere.

For anyone ceasing to practise, proper planning and an orderly exit is of fundamental importance.

The Exit Strategies Toolkit is published by the Law Society and can be ordered for £59.95.

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