Ian Gilroy, Sales Manager at Shieldpay, discusses the challenges solicitors face in starting their own practice and suggests why more firms are using a Third-Party Managed Account to ease the workload.
Starting a new law firm? Take running a client account off the to-do list
With the pandemic and changes to the regulatory environment, running a law firm has become more difficult and more costly. The number of law firms has dropped to a low, the fewest since records began eleven years ago. The Law Gazette cited the rising price of insurance and the increasingly stringent regulatory environment as the reasons why there is on-going consolidation in the market.
However, that being said, on the whole the consolidation is happening with larger firms. The vast majority of smaller law firms aren’t considering mergers but rather are positive about their future and have organic growth plans.
There are very persuasive reasons why lawyers make the move to work independently. In a recent study, 9 out of 10 solicitors considered the benefits of working in a small firm to be generally ‘advantageous’, citing the ability to remain in control (82%), a better client experience (79%), and swift decision making (76%) as the major benefits. Working alone or with few colleagues gives more flexibility in all aspects of who, what, when, where and how.
Before you can reap the rewards of stepping back from a multi-partner firm, there is a lot of groundwork to lay; it is no easy feat to create a new law practice. The SRA, or your chosen regulatory body, will have guidelines and checklists available to ensure that your firm complies with their rules. The focus of all aspects, such as insurance, financial reporting and data, is around safeguarding the consumer, so do keep this front and centre in all of your decision making.
However, on top of these requirements there will also be the basics of building a business. Everything from the firm’s business structure, hiring the team and putting in place HR policies through to marketing initiatives and business development activity. The resources from Law Firm Ambition on setting up a law firm are a great read if you’re looking for support in some of these areas.
Whether you are starting from scratch as a sole practitioner or freelancer, or joining forces with other solicitors to form a new firm, there are a few compulsory, but rather burdensome, areas to address before you take on clients. According to the LexisNexis 2021 Bellwether report, there are three key challenges to overcome:1. Insurance
According to the report, the greatest threat is rising indemnity costs. Over the past year, the average policy increased a staggering 30%, in the most part due to the new risks that have emerged during the global pandemic. Price jumps of this level can be difficult to account for, especially for smaller firms that may not have the resources available to cover unforeseen costs.2. Compliance demands
When it comes to providing legal services, solicitors must comply with their chosen regulatory body. The legal industry is highly regulated, and for good reason. The law can be complicated to understand for a lay person, putting them in a vulnerable position. Regulators aim to protect the consumer and give them reassurance that they can trust the advice of a solicitor.
However, the rules are increasingly stringent. Between the processes, tools and resource required to produce the required reporting, the time and cost of compliance can be very high relative to the size of the firm.3. Talent attraction and retention
While there are clear advantages to working for a smaller firm, it can be difficult at times to uphold these promises. Flexibility isn’t always possible when simultaneously aiming to provide excellent client service. When starting a firm, the culture, mission and values of the firm will be very important for hiring the right people, as well as the benefits and remuneration on offer.
An interesting comment made by Andrew Roberts, director of law consultancy Ampersand and chairman of the Association of Law Firm Merger Advisers, in an article from the Law Gazette was that “the proliferation of consultancy model firms paying out up to 75% of billings, mean that those younger entrepreneurial solicitors who would normally have set up on their own are now joining those firms instead”.
Easing the workload
While there are a few momentous tasks at hand to get a law firm started up, it doesn’t all have to be hard work. This has been especially the case in recent years with the surge in legaltech providers offering new tools to streamline and simplify legal processes.
One area to highlight is running a client account. This can pose a great strain on the resources of the firm, requiring a lot of time and money to manage funds and complete regulatory reporting. However, in 2019, the SRA approved an alternative means of managing client monies: Third-Party Managed Accounts (TPMA). The Account Rules allow firms to use a TPMA and provide a similar service without the same burdensome regulatory requirements.
What you need to know about the SRA Account Rules (SARs) for using TPMA
The TPMA must comply with rules 11.1 and 11.2 and associated guidance. The rules clearly lay out the following principles that law firms must follow:
- Ensure the TPMA provider is authorised and regulated by the FCA.
- Ensure the use of the account does not result in the firm receiving or holding the client’s money.
On review of terms and conditions and other contractual arrangements the firm must be careful to not become trustee of the funds.
- Take reasonable steps to ensure, before accepting instructions, that the client is informed of and understands the arrangement.
Both the firm’s and the TPMA provider’s engagement terms must be clear and set out appropriately to the client. In particular: (i) who will be responsible for paying the TPMA fees (firm or client); and (ii) how the client can dispute a payment.
- Obtain regular statements that accurately reflect all transactions on account.
Funds held with a TPMA are not considered client money meaning there is no requirement to have audited accounts in relation to those funds. There does, however, remain a requirement to keep accurate and appropriate records of TPMA transactions. The payment provider should provide statements to satisfy this requirement.
The benefits of using a TPMA
The main cost differentials between running a client account and using a TPMA are:
1. Compensation fund payments: With a TPMA, firms are not required to make these contributions.
2. Annual client monies audit: The SRA does not ask law firms using a TPMA to submit this reporting, saving the firm a substantial accounting fee.
3. PI insurance premiums : While firms must continue to have the insurance, we have been told of instances where the annual premiums have been reduced because the firm is less at risk when using a TPMA.
4. Service costs: Using a TPMA service does come with a fee. At Shieldpay we offer a subscription model with monthly tariffs. To learn more about our pricing, please get in touch to discuss.
Reduced regulatory risk
With a TPMA solution, law firms remove the risk of breaching regulation related to innocent mistakes and no longer need to deal with residual balances.
Teams can gain efficiencies in their practice and reduce the number of unbillable tasks. In conversations with our clients, a major benefit is that they are able to do the work they are trained to do and want to do, rather than be left with administrative or accounting tasks that they aren’t qualified to carry out.
Enhanced client service
Managing transactions through the Shieldpay platform ensures all parties involved have full visibility of the scheduled payments, enabling there to be added transparency, security and trust in the relationship between law firm and client.
Strengthened cyber security
Law firms want peace of mind against the threat of cyber criminals and phishing scams. Working with a payments provider reduces the risk of attacks. The Shieldpay platform is built on AWS and we are PCI compliant, ensuring our systems are keeping up with stringent security standards.
Shieldpay is the leading provider of Third-Party Managed Accounts (TPMA) for law firms in the UK. Whether you're a freelance solicitor, starting a small practice or working in a multi-partner firm, our technology-led solution can streamline your client account function, saving you time and money in administrative and regulatory burden. Get in touch to find out more.