Solicitors in partnership: when partnership disputes collide with regulatory issues

In this series of three articles Susanna Heley and  Andrew Cromby have been considering some of the most common repeat problems that they see in their dealings with solicitors – Susanna, from a regulatory perspective, whilst Andrew has looked at some of the most basic issues giving rise to disputes. These are problems which crop up time and time again and which, with just a little forethought and care, could be eliminated or their impact significantly reduced.

In this article we consider the connection between regulatory issues and disputes between solicitors who, more often than not, operate out of partnerships and limited liability partnerships (“LLPs”).

The regulatory framework

Anyone in private practice as a solicitor is painfully aware of the regulatory framework in which we operate. At no stage in the history of the profession have we ever been more regulated than we are now. The way we deal with clients, client money, other solicitors, staff, diversity, and the culture that we create in our businesses are all subject to complex rules and can be subject to independent scrutiny. Permitting a partner to breach those rules, or failing to react appropriately, can create a millstone around the neck of a legal business, resulting in fines and, in the most extreme cases, closure. So, it’s no surprise that, when solicitors discover that a regulatory breach of some kind has occurred, they take it pretty seriously.

To get a sense of the scope of the regulatory scrutiny to which solicitor are being subjected, the SRA received some 10,121 ‘concerns’ in the 21/22 practising year, of which they referred 1,741 for formal investigation. An additional 1,100 ‘concerns’ were redirected internally or to the Legal Ombudsman. Approximately 25% of reports are made by the profession, with significant but not published proportions also being made by clients and counterparties.

It's the nature of most solicitors to be conservative. Accordingly, when a complaint comes in from a client or a counterparty, solicitors have to consider the issues raised and may find themselves reported by their own firm even where the conduct alleged is not considered particularly serious. A firm’s self-report carries a connotation that the firm believes that there is at least a risk that there has been misconduct and, as such, is likely to be taken seriously by the SRA.

The question as to whether to report your own staff or partners is difficult. Making a report can impact the relationship, will definitely cause stress and place wellbeing at risk, and could have far-reaching personal, professional and reputational consequences for both the individual and the firm, particularly if not handled appropriately.

If in doubt, report…?

Do law firms overreact to alleged conduct failures because of the regulatory culture? That’s an interesting question. It is perhaps noteworthy that, on the face of it, the SRA received over 2,500 reports from the profession alone in 21/22 but only opened 1,741 investigations across all reports from professionals and other sources. That may suggest a level of over-reporting, but it is very difficult to draw conclusions based on the very sparse data available.

Of course, solicitors find themselves in a difficult position under their regulatory regime. The perception, correctly, is that failing to react appropriately to non-compliant conduct is a dangerous path for a firm to take, and the SRA encourages us to err on the side of caution and make a report if in doubt. For a firm then, not reporting can represent increased regulatory risk. But that is not the full story.

Consequences may flow from a decision to report. Whilst an investigation is taking place a partner’s career and earnings may be damaged or frozen. Even if the partner who is subject to an SRA investigation is ultimately vindicated, the damage caused can be immense. The firm may also suspend or expel a partner in the light of the decision to report, and the damage to career, client relationships and reputations may be irrevocable.

Firms can offer support to those they have reported, ensuring that indemnity cover is available for regulatory investigations, offering counselling, training and/or wellbeing support. But they will have to decide whether such facilities ought to be available and to what extent. There are cultural and pragmatic questions which arise, including the costs of provision and whether it is appropriate to assist someone who may have acted very badly and alienated colleagues. Can such costs be justified if the firm intends to expel a transgressing partner?

Weaponising and dealing with conduct issues

It can be tempting for firms to investigate and escalate allegations of misconduct in order to manage-out partners, or to secure a perceived advantage. In other arenas, we are seeing a marked rise in tactical regulatory complaints.

It’s not every partnership dispute where allegations of misconduct are raised as a means of pressuring the other party to come to the negotiation table – but it does happen.  Fully deploying an allegation of misconduct to the SRA with a view to forcing a better deal is both improper and very much the thermonuclear option; there’s no withdrawing such complaint once made. Nor can any settlement, if reached, seek to fetter the ability of a partner or firm to make a further complaint relating to issues of misconduct.

Care needs to be taken when raising the issue of misconduct. If circumstances have arisen which give rise to a requirement to report then a report should be made. Failing to do so, or linking the threat to do so to obtain an advantageous position in negotiations in a dispute, can backfire badly. Its unsurprising, therefore, that where parties refer to potential conduct issues in disputes, they need to ensure that the way they deploy those issues does not itself result in misconduct or even illegality. 

Where a conduct issue is reported by a firm it is not uncommon for temporary restrictions to be placed on the partner concerned whilst the investigation at the SRA runs its course. This may be the prelude to the exit of the partner and may also coincide with an internal investigation.

How should a partner who finds themselves in that position deal with this extremely difficult situation?

• Conduct issues can be the herald to both regulatory investigations and partnership disputes.
• It’s important to deal with all aspects of a situation like this coherently, rather than dealing with the individual elements of what is taking place in isolation
• A realistic view needs to be formed at an early stage of the likely outcome of any SRA review, based on experience of how the regulator works
• A plan to navigate the situation, holistically, should put in place where possible, as opposed to waiting and reacting to decisions made by others. This needs to allow for the extended timeframe within which an SRA investigation can be anticipated to run
• If you are a partner who is being subjected to internal pressure and/or an SRA investigation for reasons without merit, this needs to be explained to the firm and the SRA at an early stage so that the position is known, together with the consequences and costs that will result. You will also need to know what has been said about you to ensure that this is accurate
• Conduct issues can ultimately prove a protracted headache for all concerned, both firm and partner alike, so in reaching a resolution as between the partner and the firm, it may be worth exploring what can be agreed in terms of severing the relationship, to the benefit of both.