Things can only get better, but not just yet

With growing anxiety over financial distress in the legal services sector it is tempting to look at the extended indemnity period (EIP) as the new barometer of the profession's health. Halfway through the EIP, 145 firms have now entered the cessation period and can no longer take on new instructions. They are the new walking dead. Should we be so shocked?

The EIP will, in due course, act as a more effective trigger to clean up the profession of poorly managed firms where the assigned risks pool (ARP) simply delayed the painful process. It will also allocate risk more fairly. Like its predecessor the Solicitors Indemnity Fund, the ARP was still funded by the profession - albeit indirectly via higher premiums across the sector. But there has always been a low-level cull of firms around the professional indemnity renewal date. The difference is that, this time, it will come sooner, and it may go on for longer.

What is more surprising is that the number of firms in the EIP is not greater. There may be an issue of accuracy with the figures. As the SRA suggested in a statement earlier this week, it appears some firms have failed to report their position, which is technically a breach of the indemnity insurance rules. By way of comparison, 393 firms closed in the last quarter of 2012, and 199 in the last quarter of 2011. So altogether, the latest figures for 2013 do not paint a disproportionate picture of the market.

What's more, the number of solicitors with a practising certificate has, for the first time, broken the 130,000 mark, and the impression is of a profession positively brimming with confidence about the future. Not to mention the fact that, somehow, there have still been many more firms opening than closing in the past '¨two years.

The mismatch between these numbers and the regulator's latest findings in relation to financial stability is yet more disconcerting. The SRA has just published the first update of its Risk Outlook. These latest findings do not differ hugely from the previous ones, but the SRA has uncovered several areas of concern that suggest financial instability comes in many guises
Between July and September 2013, for instance, reports of client funds misuse have risen to more than 140 in each of these months. There is also growing concern over the use of cloud computing and the risk of data leaks. And group contagion was flagged as a new risk. The SRA only makes a generic reference to "conglomerate business structures" and "any firm in a group structure or marketing collective" but a few organisations come to mind, such as the new ABSs in the personal injury sector.

In the meantime, we've also had Penningtons' acquisition of Manches, demonstrating that 'FinStab' was not an affliction that discriminated between firms on the basis of size.

And as most insolvency specialists know, '¨more businesses collapse once the economy starts recovering because they are under-capitalised and unable to ride the wave of the upturn. So for all the reassuring messages about better-than-expected economic indicators and an interest-rate rise on the horizon, don't relax just yet.