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April 2014 - Principle 8 - Sound Risk Management in Practice

Principle 8 - Sound Risk Management in Practice


It was recently said by the SRA that from a ( fairly modest ) sample of law firms, a rather large percentage as yet were far from familiar with the professional obligations upon them and their firms. This is despite the long lead time of publicity and consultation that pre-dated the commencement date of 6 October 2011 regulating the conduct of Solicitors and their employees, recognised bodies and their managers and employees and licensed bodies and their managers and employees.

One of the 10 principles is that "you must (8) run your business or carry out your role in the business effectively and in accordance with proper governance and sound financial and risk management principles".

As can often be the case with many things in life, there is rather a lot in rather few words there. Some regulated businesses will already have a culture and structure that is closely aligned to this mandate, or at least will not have taken a sea change to be there already by 6 October 2011.

Others may have found and indeed are still finding that it is a sudden and large leap of faith to know what proper governance is and what principles for risk and financial management are appropriate.

The Principle clearly captures not only the law firms that still make up the vast majority of the profession - namely the rich and diverse mix of many thousands of small partnerships and sole practitioners, together with the multi partner multi office multi million pound turnover firms - but also the upcoming ABSs, starting per the SRA on 28 March 2012 with the CLS and 2 high street firms.


ABS according to the CE Antony Townsend fosters a more flexible and innovative market for legal services. By stimulating competition and encouraging innovation the SRA believes that there will be a "major boost "to the "experiences" enjoyed by consumers.


The fact that there are 10 mandatory principles must be kept firmly in mind when looking at just one of them as we do in this moment. They all interlink in our view and no one principle can live in isolation. However for the purposes of today we focus on principle number 8 summarised earlier.

Perhaps the most important point to bear in mind as you read this is that every person in your business should at the very least be aware of the 10 principles and indeed know them.

The SRA say that whether you are a manager or an employee you do have a part to play in helping ensure that your business is well run for the benefit of your clients.

We have come across firms where the team leaders and indeed the partners consider it perfectly proper that their regular team meetings, when they discuss current workloads for the lawyers in that team or location, hot topics and disseminate news from the management as well as be the conduit for incoming news, feel it would be wrong for their support colleagues to attend.

One hears of secretaries and other key staff with direct client facing roles to query what is going on in the team in terms of new instructions and key cases which will inevitably impact on the day to day spikes in workloads and pressures to be managed by everyone. A more inclusive structure would have avoided this and facilitated a true team approach for the better good of the client and for the firm.

That is just an example of where everyone has a real role to play and that varies depending on what that role is. Fundamentally the overarching responsibility for the business rests with its managers.


The managers have the responsibility to steer the business. The utopia would be that the business is going in a direction that not only meets the objectives of the investors (be they partners or otherwise post ABS) but also meets the 10 principles at the same time in an umbilically connected way.

That way the cost in time and effort will be minimised and yet the outcomes both to satisfy the SRA and to ensure business continuity and longevity will be maximised.

Outcomes and Indicative Behaviours

The SRA set out for you a number of outcomes that you must achieve to apply the principles. It then explains what it would see as Indicative behaviours which may tend to show that you have achieved the outcomes and thereby complied with the principles.

There is no substitute for reading and being familiar with the detail of the brief chapter in the Handbook on these available on the SRA website amongst other locations.

What they all serve to enforce in our minds is that there may in the past have been a gentle willingness to see Risk Management as a concept that one aspired to if it was explained in a tangible way, or at least in a way that really did fit with what your firm was actually trying to do on a day to day basis.

That in recent years has probably involved a strong element of survival in a competitive market in terms of client retention, pricing your legal services and having the financial backing from increasingly limited sources of funding to ride the storm and survive the growing peaks and troughs of cash flow.

How then have you had the time to engage with advisers on what looked like a cold unfriendly proposition that shouted only hard cost, rather than strengthening your bottom line?

Wesleyan Active Risk Management (WARM)

Chapter 7 of your code sets out 10 mandatory outcomes and 4 indicative behaviours to support compliance with the principle. They are not options or nice to haves.

An example is that it will be indicative behaviour if you act in a way that controls budgets, expenditure and cash flow. Those firms that may have existed in the manner of a benevolent dictator, where there may be a budget for income in terms of how many billable minutes each lawyer must deliver to the owner each day, week and year, but where the expenditure was an unwritten and unbudgeted process, will find it hard to satisfy the SRA that the management maintains systems and controls for monitoring the financial stability of the business.

In everyday terms this seeks to avoid the doomsday scenario that every partnership dislikes, of discovering at the yearend that the business has spent rather more than anyone thought, so whilst the income had grown by 10% the expenditure had grown by 20%.

Result: at best, unhappiness. It is not unprecedented that in some circumstances the partners have found they have received more than the accounts entitle them to and need to repay and/or draw no income for some months to stabilise the business. Oh for a transparent budget.

The principles, outcomes and indicative behaviours should put paid to that sort of management style, if the banks have not done so already in their desire to see solvency and to have more liquidity in a law firm.

It is no coincidence that Wesleyan Active Risk Management is a warm service for our clients. There is no downside to running a better managed and risk aware business. Those businesses that have already made the journey to LEXCEL or BS accreditation will be testament to that.

It has to be that one of the intentions of the regulator was to ensure that providers of legal services be in far better shape for their clients both existing and new, plus that the whole profession be stronger and less needing of a tick box regulation system.

Active risk management is a concept that you will already have in your minds, if not on your agenda for coming team meetings for all aspects of your business. In the language of the SRA, all of this will go to enhance the experience of the consumer, your client.


If you are reflecting on how well progressed you are or are seeking to be in terms of compliance with the SRA code of conduct and the 10 principles, there are many places you can turn to for guidance and advice.

Part of your review ahead of 6 October 2011 would no doubt have been to reconsider your appetite for risk and your management of risk appropriate to your business. If you are revisiting that after the first six months of the Code and ahead of further changes to the profession, do please contact us.

We will be holding a series of seminars with guest speakers for lawyers and workshops for our clients this summer, further details of which will be announced via our website.

For further information on the Wesleyan Active Risk Management service:

Phone: 0800 107 8171

This article is a general guide and is not a substitute for professional advice. No responsibility can be taken for any loss incurred by anyone acting or failing to act on the basis of this article.

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