With a number of recent reforms to rules regarding personal injury cases and legal aid claims likely to see many law firms facing up to a fall in fees, Darren Shaw of independent finance house County Finance Group outlines some of the options available to ease any short-term funding shortfalls.
“The last few weeks have seen government ministers introduce a raft of changes to legal aid and how personal injury cases are dealt with in a bid to crackdown on the multi-billion pound ‘compensation culture’ industry. It remains to be seen whether they will have the desired effect or not, but in the short to medium-term there will certainly be financial implications for solicitors’ practices that rely on these sorts of cases as core fee-earning elements of their business plan.
April’s Legal Aid, Sentencing and Punishment of Offenders Act slashed the personal injury fees law firms could claim from basic road traffic cases from £1,200 to £500, while limits on so-called ‘no win, no fee’ personal injury claims were also brought in. Even though Conditional Fee Arrangements still exist, the ‘success fee’ lawyers receive won’t be paid for by the defendant as it was previously, but will instead be deducted from any compensation the claimant receives. Just as significantly, ‘success fees’ will also be capped to just 25% of the compensation awarded, a huge change to the old rules where legal firms would often charge a 100% success fee to the defendant.
Combine this with the banning of referral fees to claims management and insurance companies and the payment of upfront inducements to the victims of accidents, and it’s clear that some firms will face the double-whammy of reduced fees generated from personal injury claims with the need to increase marketing spend to attract potential cases in the first place.
The legislative update also saw a major shake-up to legal aid aimed at cutting £350 million from the annual budget of £2.2 billion, primarily by restricting public funding in family law cases to incidences involving serious domestic violence or risk of child abuse – a whole host of important circumstances such as divorce, financial and property issues arising from divorce, and private child matters including contact and residence disputes aren’t now eligible for support. While legal aid cases are unlikely to be a major ‘cash cow’ for most solicitors, the tightening up of available funding will be another unwanted blow, coming as it does at the same time as the personal injury case crackdown.
In the immediate aftermath of these changes, some legal firms are finding themselves having to face up to a gap in their income, which could not only affect their short-term cash flow when forced to meet VAT and Corporation Tax liabilities, but also hinder plans for future expansion and growth. A meeting with a ‘sympathetic’ bank manager would traditionally have been the answer to such an issue, but with lending terms becoming more and more restrictive – many institutions now only offer secured loans requiring collateral such as property or pension policies – independent financial houses are becoming an increasingly popular fallback option for legal firms requiring fast, flexible funding solutions.
Unsecured loans from funders can be used as a vital injection of working capital to ease any short-term cash flow worries, but there are a number of longer term objectives it can help support too, from disbursement funding and covering tax liabilities, indemnity insurance premiums and practising certificates, right the way through to practice acquisition and partner buy-ins or buy-outs.
Such flexible funding can also be used in conjunction with government incentives such as the recently increased Capital Allowances scheme, enabling practices to purchase new equipment or carry out refurbishments to premises up to the value of £250,000 a year and write the sum off against its taxable income, giving them a fantastic opportunity to put plans in place for long-term growth.”
County Finance Group is an independent organisation that has been lending money to businesses across the UK for over 20 years. The firm works in close partnership with its clients to ensure a personal service each and every time, and prides itself on providing ongoing support to its clients to help them achieve their short and long term business objectives. The team brings a wealth of experience within the financial arena helping its clients grow, develop and diversify through the provision of fast, intelligent and flexible lending that is specifically designed to suit the individual needs of each of its clients.