2021 Year in Review: Legal Sector

As you will have seen, last month we announced our merger with Leeds-based accountancy firm, Sagars.

The merger has allowed for our legal sector specialists to come together in one team, servicing and supporting clients across the UK.

With the end of 2021 approaching, John Beevers of Sagars reflects on the trends that have emerged throughout the year and looks forward to 2022.

Trends from 2021

It’s been a year of recovery from the economic shock caused by government-enforced lockdowns starting in March 2020. Firms with year ends in the first half of the calendar year commonly reported a drop in fee income but an increase in profitability and cash, on the back of government support and reduced costs facilitated by remote working practices.

Indications are that the recovery has continued throughout the year, with most firms reporting a return to at least pre-pandemic levels of fee income, fuelled in many cases by the conveyancing boom and a significant increase in demand for private client work. Despite the end of the stamp taxes holiday across the four devolved nations, the conveyancing market remains buoyant, although it’s becoming clear that this is an area where IT investment is an essential – no longer as a USP but just to keep pace with the market. The recent substantial cyber security incident suffered by the Simplify Group is a reminder of the continuing threat posed by cyber criminals across the entire legal sector.

Not all practice areas have prospered in the pandemic. Company commercial saw a significant activity drop in 2020 but, as businesses recover and begin to utilise the additional cash reserves they find themselves with, there are signs of recovery.

Contentious litigation has taken a hit during the pandemic and, with typically lengthy lead times on these cases, we’re yet to see an improvement. Any eventual recovery will doubtless be tempered by the expected continual reform of the sector.

The second half of the year has played host to a few high-profile claims firms’ failures, which will have a knock-on impact in the personal injury market.

Most firms have seen an improvement in their net cash position through the early part of 2021, largely due to the government’s financial support measures (CBILS loans, furlough monies and VAT deferrals) rather than reductions in working capital cycles. Dynamic and pro-active firms have taken advantage of the available financial support in early 2020 and are now reassured by improved cash positions.

Whilst the overall feeling within the sector is positive – there have been some challenges within the year…

In response to the growing demand for legal services, many firms have found it necessary to recruit additional fee earners and support staff. This has led to an aggressive and candidate-driven recruitment market and emphasised the importance of staff retention. With remote working adding another level of complexity to staff management, together with additional employer wellbeing responsibilities, many law firm owners have reported an increase in time spent on employee matters.

The pandemic has highlighted, or in some cases accelerated, the underlying succession issues faced by law firms. We’ve noted a significant increase in succession-driven M&A activity in the last six months. Another contributing factor is the continued hardening of the PII market, which has forced some firms into closure or sale after being unable to secure insurance at an affordable rate.

Looking forward to 2022

After two pandemic dominated years of running on the hamster wheel, many law firm owners will be hoping for a more “stable” year to allow them to catch a breath and plot their next steps – unfortunately, they are unlikely to get that opportunity.

Increasing costs will feature during 2022. National insurance uplifts will need to be covered by higher salaries to maintain the status quo, plus there’s the additional 1.25% payable as Employer’s NI. This is before the rising rate of inflation is factored in.

The challenging legal recruitment market has made staff retention a key objective for 2022, therefore upward pressure on wages is inevitable and fee income will need to grow to maintain profitability.

Solicitors face the hardest PII market for 20 years and, with the SRA in England recently stating it will not intervene in the market to help the industry, this is a serious concern.

Whilst law firms have already implemented remote/hybrid/centralised working practices, further evolution is anticipated – and with it, continued additional costs to enable all these options.

For all these real and immediate challenges, there are opportunities…

Dynamic and agile firms will be able to capitalise on the demand for legal services, which continues to be at pre-pandemic levels, and we could see significant growth among those who get it right.

One thing is for certain, the legal sector will continue to evolve throughout 2022 which means that law firms and their owners must too. Inactivity could have a negative impact, so firms must be proactive and strengthen their positions now to capitalise on the opportunities when they arise.

And let’s not forget, 2020 and 2021 were supposed to be all about how legal services developed in a post-Brexit world, but we’ve yet to see the full impact of Brexit on the sector.

If you would like more information or guidance on the legal sector, please contact AAB’s Jill Walker or Sagars’ Joel Topham and John Beevers.

Find out more about AAB’s business services team here.