David is Director of Financial Eye. A partner of Legal Eye, Financial Eye has a product designed to help COFAs deal with the increasing burden of regulatory requirements. David has over 30 years’ experience in the industry having started off in 1983 as a conveyancer handling plot sales for Heron Homes. Before starting up Financial Eye he was previously the CEO of First Title plc for 17 years.
Why did you choose to set up Financial Eye?
“Well I spent 17 years working as the CEO of an insurance company. During that time the FSA started to get firm with insurance companies and banks, the same way that they are with lawyers now. I was on the other side of this for a long time, as the CEO of an insurance company you are a ‘Control Function 1, a CF1’. So when the new regulatory regime came in we had to pretty much transform the entire business to the new set of rules.
“What we’re seeing now from the SRA is exactly what I saw in the insurance industry so I feel really well-positioned to do what Financial Eye is doing and offering solicitors now. Also I’ve spent 30 years in this industry, I know what it’s like for conveyancers to try and get on with running their business whilst also dealing with this new wave of regulation. It seems like using a sledgehammer to crack a nut. You are now forced to dedicate a load of time and resources and money in complying. And what we’re doing with Financial Eye is taking away a lot of the burden of compliance from the firms so they can get on with what they do best, practicing law.“
Can you give us an overview of what firms need to do to comply?
“Well firstly they need to look at the roles of COLPs and COFA. A COLP must take all reasonable steps to ensure compliance with all the regulatory arrangements. A COFA must take all reasonable steps to ensure that the body and its employees and managers comply with any obligations imposed on them under the SRA Accounts Rules. In order to do this, they need the appropriate systems and controls in place, including financial management information. Most importantly, they need a good understanding of accounting policies and an ability to interpret financial management information.
However, what should have been a clear delineation of responsibilities has been confused by references to rule 1.2 of the Solicitors Accounts Rules.
“The suggestion being that this makes the COFA responsible for the systems around sound financial management in the firm and reporting compliance failures about them. The good news for COFA’s is that this is not actually the case. The responsibility for ensuring compliance with Chapter 7 of the Code lies with the firm and its managers. However, when I asked the SRA whether they would expect the COFA to notify them in the event the COFA felt that the firm was in serious financial difficulty even if the managers and COLP disagreed, the answer was they absolutely would expect them to. Be in no doubt, the COFA has a duty to report serious financial difficulty to the SRA.
“It also goes without saying that given the necessary close interaction between the operation within a firm of the client account and other financial systems, for the COFA to undertake their role effectively, they should have involvement over the totality of the financial management of the firm.
What steps would you recommend firms take?
“Firstly I’d say that now is the time to keep a really close eye on your business. Business planning is essential and cash flow forecasting is now even more important than ever. But what happens as things start to improve as they surely will? For example, an increase in house sales activity will logically require an increase in conveyancing resources and other additional expenses.
“But when was the last time you asked yourself this question, “How much longer can our partners afford to keep on drawing the same amounts as the business staffs up to deal with increased volumes?”
“I think the real danger is yet to come. Taking on more costs now can potentially be lethal if your income never catches up with your expenses. You can end up becoming a victim of your own success. Many firms that made it through the downturn can go under as the market improves if they don’t have realistic cash flow projections to sustain their business. Ask yourself “Do we really need those extra premises and if so is it really necessary to sign a new lease for that long”? “What about those new car leases”? Can we really afford them”?
“Mergers and acquisitions may look attractive and can be an effective way to grow a business. But they are costly and time consuming. Believe it or not, one of the biggest single barriers to getting a deal over the line is the sheer number of archived files that each firm has. Nobody knows for sure what potential liabilities they will actually be taking on.”
What do you think the main opportunities are within the market?
“I think lawyers are well-positioned to keep delivering excellent service to their clients. The problem is that a handful will always let the side down. That’s why the regulators are reacted the way they have. In order to defend against the handful they are causing great heartache for the rest of the profession. And so I think they are just raising the bar a little bit. I think the opportunities for lawyers are going to be better when organised law firms can carry on delivering the service they want to deliver. It’s just going to be a bit of pain to go through get to that point. But I think when they get there they will be better organised businesses. People are always going to want legal services. There are going to be new players entering the market. But if firms get organised now they’ll be one step ahead of them.”
What’s next for Financial Eye?
“We’re lining up more and more clients now. When we take on board a client it’s not a one-off tick box exercise. That’s part of our initial review but it’s not just that, we really work with them, we see ourselves as their “Financial Eye”. We come in have a look at what they are doing, have a good look around at some of their processes and systems and more importantly we will make sure they are on track to meet their financial forecasts. It’s not just a one-hit; it’s an on-going relationship.”
What are the aspirations for the future?
“Well our partners Legal Eye work with some 250 clients and that’s what we are aiming for. We very much see the business we provide as complimenting their service and actually sitting side by side. They are signing up more and more law firms every week. So the race is on for us to play a bit of catch up!”