Is your firm Financially Stable?
Financial Stability - the first key area for COLPs
In March 2013, the SRA had to intervene in two practices facing severe financial difficulties. Given the downscaling that the SRA anticipated by the appointment of compliance officers, where they anticipated 30 interventions for 2013, they seem to be concerned that they have already intervened in 14 cases, and this is only 4 months into 2013.
In order to mitigate the risk to their budgets that exceeding 30 interventions would present, it seems they are likely to begin more active monitoring of firms financial viability, as well as considering how to increase their budget.
The implications for COLPs and COFAs is to ask themselves what approach the SRA would take if they have not already reported issues with financial stability to the regulator before they decide to 'see for themselves.'
To assist compliance officers understand when to report issues of Financial Stability, the SRA have published guidance on their website, in terms of a set of poor and good indicative behaviours that firms should and should not demonstrate, as follows;
Poor indicative behaviours
- Drawings exceeding net profits
- High borrowing to net asset ratios
- Increasing firm indebtedness by maintaining drawing levels
- Firms controlled by an "inner circle" of senior management
- Key financial information not shared with "rank and file" partners
- Payments made to partners irrespective of "cash at the bank"
- All net profits drawn, no "reserve capital pot" retained
- Short-term borrowings to fund partners' tax bills
- VAT receipts used as "cash received" resulting in further borrowings to fund VAT due to HMRC
- Partners out of touch with office account bank balances
- Heavy dependence on high overdraft borrowings
Good indicative behaviours
- All partners regularly receive full financial information including office account bank balances
- Drawings are linked to cash collection targets and do not exceed net profits
- Provision is made to fund partners' tax from income received
- A capital element is retained from profit, and a capital reserve account built up
- Premises costs are contained
- Profitability levels are tested and unprofitable work is (properly) dropped
So if you are the COLP or COFA for your firm, consider which behaviours your firm demonstrates, before the SRA does it for you.
Cpm21 provides a range of COLP support services, if you would like to know more, contact us using the contact details on the website.