The Solicitors Regulation Authority (SRA) is considering increased oversight of law firm mergers and acquisitions (M&A).
- Concerns have been raised that new checks could deter investors or delay acquisitions, affecting their success.
- The SRA aims to identify potential regulatory risks in M&A activities, focusing on governance and operational capacity.
- A recent review suggested the SRA should develop a process to assess potential risks of acquisitions to protect consumer interests.
- The SRA consultation explores the misuse of dormant firms and proposes measures to prevent such practices.
The Solicitors Regulation Authority (SRA) has initiated discussions about enhancing its role in monitoring mergers and acquisitions of law firms. Stakeholders have expressed concerns that additional scrutiny could discourage investors or cause time-sensitive deals to fall through. The SRA’s consultation on these proposals is part of a broader review focused on consumer protection within the sector.
A proposed approach involves gathering more detailed information to detect any features of potential regulatory concern. This includes evaluating the capacity and ability of firms to incorporate new areas of practice, streamline operational processes, and maintain proper controls within a newly merged organisation. The review is not interested in the commercial aspects of such transactions unless they intersect with governance and financial stability issues.
Chief Executive of the SRA, Paul Philip, recently stated his opposition to extensive regulatory control over M&A activities. His viewpoint appears to align with the consultation’s findings, which reported that most annual mergers and acquisitions do not typically result in breaches or major issues requiring intervention. Inspections of past acquisitions seldom reveal systemic risks, thus the regulatory focus would be on specific risk factors to ensure they don’t threaten consumer funds.
A Legal Services Board review highlighted the necessity for a risk-based approach. It recommended that the SRA triage and examine acquisitions that might pose significant risks to consumers and public interest. However, there’s apprehension that changing the current process might dampen the pace of M&A activity in the legal sector.
The proposal also addresses the sale and misuse of dormant firms, where the value of transactions is sometimes solely attributed to SRA authorisation. This practice allows acquirers to bypass the application process for new authorisations, potentially concealing liabilities from previous activities. The SRA suggests that authorisation could be revoked if a firm does not offer legal services for 12 consecutive months without valid reason.
Another aspect of the consultation is the possible reintroduction of annual accountants’ reports for all firms, ending their decline. From 2018 to 2023, there has been a 58% drop in qualified reports, indicating some firms might skip this requirement entirely or fail to submit them post-preparation. Alternative solutions include mandating annual declarations about the reports’ qualification status or periodic change of accountants to preserve auditor independence.
Furthermore, the SRA expresses concerns about firms where a single individual holds multiple management and compliance roles. This concentration of power is seen as risky, especially in smaller firms without extensive oversight. The proposal involves seeking ways to reduce this power imbalance, such as outsourcing compliance functions or enhancing independent audits of significant financial decisions.
The SRA’s exploration into M&A oversight intends to strike a balance between necessary regulation and the continued growth of legal services.
