Top 5 risks affecting law firms in 2023

1.  

Claims arising as a result of the economic downturn

In Howden’s view, the current economic climate creates the potential for an increase in claims against law firms. Conveyancing will certainly be an area to keep under review given the experience of the economic crises in both the early 1990s and 2008 that delivered a spike in property related claims. This time around mortgages are likely to play a key part given the increase in interest rates and the difficulties some purchasers may face in obtaining a mortgage or re-mortgage. In addition, a drop in property values is expected which may also prompt claims from lenders if they suffer a loss following any repossession activity.

Aside from conveyancing, as the cost of living rises and more businesses and individuals are in financial distress, this could prompt more attempts to try and recover losses from the solicitor who advised them in relation to deals they can no longer afford and cannot unpick.  We are also expecting to see an increase in debt recovery claims and fee claims being pursued resulting in clients making counterclaims in negligence to avoid paying outstanding fees.

2.

Cyber security issues

We have previously reported that the Howden claims team has seen an increase in notifications from law firms relating to cyber incidents. This continues to be the case and is consistent with reports of an increase in cyber security issues in the wider community generally.

Firms are continuing to experience ransomware and phishing attacks along with data breach issues with law firms often being targeted as they hold client money and sensitive information.

There has been an increased sophistication of attacks such as push payment fraud and invoice interception together with third party attacks where it is the client’s email being hacked or the firm’s IT provider being compromised as criminals find indirect ways of attacking.

We expect this to continue, especially with the increase in hybrid working so firms must continue to remain vigilant and review their cyber insurance position.

3. 

Mental health and wellbeing of fee earners

There is no doubt that there is a link between poor mental health and wellbeing of fee earners and PII claims. Claims can initially present as a missed time limit or failure to properly advise a client, but if you look a little deeper, the real cause is that the fee earner is struggling to cope.

When fee earners are tired, stressed or anxious, it can be a challenge to simply get through the day. Short-cuts happen, diaries don’t get checked, and it can be difficult to tell clients what they don’t want to hear. People also worry that asking for help will reflect badly on them

We are expecting mental health and wellbeing will remain an issue whilst firms continue to address work-life balance, supervision and having an open door policy to encourage fee earners and staff to raise concerns. As many firms are adopting a hybrid way of working, having adequate systems, oversight, communication and supervision is imperative to ensure that any warning signs are spotted and issues are addressed at an early stage.

4. 

Fraud/employee dishonesty

In 2022 we saw a number of notifications relating to employee or partner dishonesty, most commonly involving theft and unauthorised payments.

There is a connection between poor mental health and wellbeing and some of these claims, coupled with the economic outlook appearing bleak for some, causes concern for a potential increase in the risk of fraud and dishonesty. We suggest that firms should consider reviewing controls and protocols in response to this.

5. 

Regulatory issues/SRA breaches

The SRA has been cracking down on how firms are carrying out their anti-money laundering (AML) obligations and a recent SRA report found that a lack of customer due diligence was the main cause of AML breach in 2022[1]. The common themes identified by the SRA included the poor verification of clients, inadequate firm wide risk assessments and the failure to respond to the SRA and provide declarations about AML compliance. 

It imperative that firms are never tempted to take short cuts and that regular training is deployed to ensure that fee earners are aware of their regulatory obligations. However, given that the risk of money laundering and fraud remains high, we are expecting to see a rise in the SRA investigating the firms they regulate.