The legal risk landscape outlook for 2020

With the festive break well behind us and a general election decided, most have returned to work in 2020 with a little more certainty and intent to enact their business plans.

For legal businesses, the outlook is an interesting one. The SRA’s new Standards and Regulations came into force in November 2019, replacing the previous handbook. Accounts Rules are now principle-based and the sometimes controversial SRA Digital Badge is mandatory for all regulated firms with a website.

The items which arguably have the most impact on risk are the treatment of non-reserved legal work and freelance solicitors within the new standards. Non-reserved activities can now be undertaken by businesses which are not overseen by a legal services regulator, further widening those that can tap into this market after the creation of the ABS model in 2012.

The creation of SRA-regulated independent, or freelance, solicitors is intended to allow legal consumers to access services more cost effectively. However, there is no outright regulatory requirement for these practitioners to carry Professional Indemnity Insurance and the insurance market is taking time to understand where risk lies for these solicitors, arguably leaving consumers exposed to uninsured professional negligence risk. My colleague Jake Fox will shortly be releasing an in-depth article exploring this issue further.

Additionally, SRA data showed that 603 firms closed in the 12 months up to August 2019, with over half of these ceasing operations entirely (1) – a worrying statistic that highlights succession planning as a key issue for many.

Law firms with a Professional Indemnity renewal in 2019 experienced changing market conditions, with fewer insurers providing primary layer cover and many initially seeking rate increases, especially for firms undertaking conveyancing or with an adverse risk profile. Previously, the market had also enjoyed relatively benign excess layer premiums – this was not the case in 2019, with most insurers increasing premiums in the order of 50 – 75% for cover above the standard £2M or £3M limits.

This overall state of flux, alongside increased uptake of technological capability, changing business models and new competition mean that risks in the legal sector are evolving. Whilst PII cover is mandatory for SRA-regulated firms and subject to a Minimum Terms and Conditions policy wording, practices should not take this to mean all PII policies are equal and cover all relevant risks.

Research recently commissioned by Leigh Day found that under half of firms surveyed had adequate insurance protection for regulatory investigation and defence costs, for example (2). Leigh Day themselves admitted they were fortunate to have adequate Directors’ & Officers’ cover in place to meet a £9M defence costs bill following the 2018 SDT investigation into the firm. There is the potential for similar risks and coverage issues to be found across a practice’s entire insurance programme if not properly considered.

The current legal landscape seems to present both risk and opportunity in equal measure. This position, overlaid with changes in the insurance market, means that firms and their senior managers must be able to demonstrate they have carefully considered their risk management plans – and how these tie in with the overall business strategy – to ensure their practices are on a sound commercial footing for the future.

1. SRA Regulated Population Statistics: https://www.sra.org.uk/sra/how-we-work/reports/statistics/regulated-community-statistics/data/firms_opened_closed/

2. Leigh Day Regulatory & Disciplinary Article: https://www.leighday.co.uk/Regulatory-disciplinary/Further-insights/Articles-updates/Walking-a-knife-edge-the-exposure-of-law-firms-to