Sector Scorecard

News that got us thinking (click to read).

Hot take 🔥

Personal financial challenges: the firm-level risk hiding in plain sight

The Legal Service Board painted a stark picture in its consultation document on the future of legal ethics:
"Recent events have highlighted that we cannot take professional ethics for granted. The challenges facing legal professionals are complex and evolving, from serving commercial interests and powerful clients to technological disruption. These pressures can test even the most principled practitioners, making it crucial that we create a working environment that supports and empowers ethical decision-making". 

 
I've lost count of the times I've been told by a legal leader: "We pay our people extremely well, what they do with that money is up to them." True to a certain point but it got me thinking:

What happens when the inherently personal dynamics of finances becomes a professional matter and is the next legal financial scandal already brewing?

Since our last newsletter, we held three Chatham House roundtables with legal risk and compliance leaders in Manchester and London. A cross-section of law firms - from regional firms, to Big Law - as well as academics, legal charities and compliance advisors. We invited people to share stories that might corroborate or contradict our data on personal financial management in law. Below is a snapshot of what was discussed in the room ⬇️

All data cited below is from the Wealthbrite 2024 Financial Wellbeing in Law Report.

What the data says: 61% of lawyers across all grades and income levels (72% of juniors) rate their personal financial skills as average or below. 36% report having less than £1,000 in cash savings while 48% report regularly relying on credit for essentials because they have run out of money. 

Stories from the Sector: 

Law firms nationally are already dealing with incidents arising from poor financial management by their people. No firm is left untouched by the reality of financial stress and many had stories of how that had manifested at work. From the individual who doesn't have insurance or emergency savings to cover the replacement cost of contents lost in a flood, to the person caught time dumping out of financial desperation for their bonus.

Conclusion: While theft of client funds or firm funds appears to be limited fraud, error & poor performance are real firm-level risks arising from personal financial challenges. Fraud prevention is a particular growing concern for firms with the failure to prevent fraud legislation going live on 1 September 2025.

In our view, at present little connection is actively made between personal financial management and the risk of fraud. However to properly mitigate and defend against this risk, requires non-judgemental education about the interaction between personal wellbeing and legal ethics, as well as proactive competency training to build strong financial skills. This is particular important for those in higher risk positions or business functions.

What the data says: There is a trusted resource gap. 70% of lawyers cite family, friends and social media as their go-to resource for financial advice and guidance. 76% of lawyers are unaware of any support their firm offers for financial wellbeing.

Stories from the Sector: 

Lawyers tell us "it's just assumed everyone knows about this stuff" and "everyone is in competition" as reasons they don't speak up about personal finances in the workplace. Sadly, from our roundtable events we know that for some dealing with severe financial problems like the person driven by addiction or a costly divorce, has led to theft and in some tragic instances, death by suicide.

Conclusion: A culture of expertise in law can hold people back from seeking support at the right time to avoid the slippery slope to bad action.

To change this cycle requires cultural change - a more open and honest approach to talking about personal finances across the sector. Clear and regular signposting of financial support services that firms is needed to ensure problematic financial behaviours are supported before they escalate.

In our view, training managers as the "first line of defence" to spot and support problematic financial behaviours would also help avoid the worst problems. 

While legal charities exist to provide specialist help many lawyers we speak to are unaware of the services they provide. Many are also not aware of any sector specific financial resources that they can use to proactively build their financial confidence and resilience. 

What the data says: There is no formal record of the costs associated with a misconduct or legal ethics matter that goes before the SRA, save where a theft or penalty is reported. However, based on our discussions, we estimate firm costs as:

• A single incident dealt with in silo (typically by HR) costs ~ £30,000 - £50,000.
• Single incident requiring compliance support costs ~ £60,000 - £100,000.
• Where the matter goes to the SRA costs ~ £150,000 + 

Stories from the Sector: Firms are already expended significant time, resources and money dealing with the consequences of personal financial challenges.

Stories of the partner that had spent their drawings and was caught short on their tax bill (a potentially embarrassing reputational risk had the firm not stepped in); to the individual who misused the company expenses policy as their own line of credit.

Everyone at the table had stories to share. What was clear was that the truly bad apples - or bad actors to use the parlance of legal ethics - are few and far between. The vast majority of cases that go before the regulator for review are the actions of a person driven by a series of unfortunate events. 

This however is only the tip of the iceberg - there are many other stories of cost, damage and risk within firms that never gets close to the SRA. 

We have seen no evidence that firms are conducting poste facto assessments  to spot trends in incidents or calculate total costs incurred. Nor is analysis of the potential for future firm-level risk from personal financial challenges being done and few examples of remedial action taken to prevent the same issues reoccurring elsewhere in the organisation.

Conclusion: Without a clear understanding of the risk levels and potential costs around personal financial challenges, law firms are exposed to unprovided financial support and uninsured people risk. 

How to assess your firm-level risk around personal finances:

• Conduct a risk assessment - what do you know the current financial health of your employee population and what level of risk does that represent?

   

• Competency framework - what are you already doing internally to educate people on personal finances and to what extent are you making the connection between personal behaviours and legal professional ethics?

   

• Checks and Controls - what systems and processes exist to limit the ability for people to take unethical action and what help is available for those in need?