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Serious concerns raised over methodology, analysis and underlying data in Law Society’s financial health report


Wednesday, Feb 22, 2017

The Law Society of Scotland has today published a report relating to the financial position of firms providing services supported by legal aid.   

We share the Law Society’s strong interest in the financial health of legal aid firms in Scotland, which on the basis of this report appears to be fairly robust.

The Society’s report shows that the majority of firms participating in its survey are profitable and those doing more legal aid work are substantially more so.

However, we have a number of very serious concerns about the analysis in its report. We have already pointed out major errors, some of which the Society has corrected, but the report still presents an inaccurate and misleading picture.

We asked for urgent clarification as to how the Society arrived at an apparent hourly rate for eight sole practitioners doing a tiny proportion of all legal aid work.  While they have now revised the figure, the basis for estimating it remains seriously flawed.

It appears to have been calculated using assumptions based around the workloads and overheads of busy, profitable legal aid firms rather than the actual financial position of these eight solicitors.

We hope the Society will make the data and assumptions underpinning its profitability report available to the independent review of the legal aid system recently announced by the Scottish Government.

Additional information and clarification on the Law Society report

The research suggests that most firms undertaking legal aid work are profitable, with a median annual profit per equity partner of around £80,000. Firms which specialised in legal aid were found on average to be slightly more profitable than firms with a higher share of private fee income. 

The firms which undertook most legal aid work - accounting for over two thirds of the legal aid income generated by the legal aid specialists - were most profitable, with average fees per equity partner of over £260,000 and pay per equity partner of over £102,000. 

In its own reporting of the findings, the Society has chosen to focus on the small minority of firms that between them earned only 1% of the total fees, and 2% of the legal aid fees, generated by the firms who responded to the survey.

The level of fees generated by these firms, over 40% of which came from private fees rather than legal aid work, suggests that many of them simply have too little business to support a full time solicitor. 

Placed alongside the level of profit achieved by most of the legal aid firms in the research, it is unclear why the Society has concluded that the challenges faced by firms with too little income to be economically viable are caused by the level of legal aid fees and the operation of the legal aid system.

SLAB has a strong interest in this topic and offered to work with the Society to develop a robust and credible evidence base.

Unfortunately, our warnings about the methodology chosen by the Society were not taken on board and as a result the report contains mistakes, anomalies and inconsistencies.

It is unclear how the data provided by the participating firms has been used and the analysis presented in the report makes it difficult to draw any firm conclusions.

Hourly earnings rate calculation

There are crucial underlying questions about the way the ‘profit’ has been calculated to arrive at an apparent hourly earnings rate for some small firm owners.

The Society says the method used to arrive at an hourly rate of £6.65 – revised from an original £6.29 after we queried the underlying data - adds back in a notional salary of £60,000 that is deducted from fee income in calculating profit per equity partner.

This moves a notional ‘loss’ of £43,074 to what is described in the footnote as an “actual profit of £17,000” (or £16,926 to be precise).

Dividing this by an assumption that all solicitors work 2,544 hours annually produces the hourly earnings figure of £6.65.

This is despite those responding to the survey providing a figure of 1,845 annual working hours.

However, to arrive at the original loss of £43,074, not only is a notional salary of £60,000 deducted, but so according to the report are notional employer NIC and pension contributions of £9,000.

This is a purely notional cost, itself calculated by reference to the £60,000. If the methodology involves reinstatement of the £60,000, it MUST also logically include reinstatement of the £9,000 as this is a related cost that is not incurred, just like the notional salary.

If the £9,000 is added back in, the “actual profit” goes from £16,926 to £25,926. Dividing this by 2,544 hours gives an hourly rate of £10.19. The living wage is £8.45. Using the worked hours figure provided by those in the survey of 1,845 instead of the assumed 2,544, as is done later in the report, produces a figure of £14.05, more than double that quoted by the Society in its report.

The figure used in the February edition of the Society's Journal is now recognised to be factually wrong and has been removed completely from the online version. The revised figure in the report is also methodologically wrong.

It is also factually incorrect to describe, as the Journal article does, solicitors being paid "less than the national living wage" for their legal aid work.

The table containing the erroneous £6.65 is not for legal aid work, or even for work carried out by legal aid specialists: it is the derived figure for all work done by all the firms with the lowest fee income from all sources.

The firms in this group derived on average only 59% of their fee income from legal aid. The words in report are therefore a misreading of its own data.

 


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