The Law Society of Scotland (the ‘Society’) is the professional governing body and regulator for Scottish solicitors. It promotes excellence among solicitors through the support and regulation of its members. It also promotes the interests of the public in relation to the legal profession. The Society was established by statute in 1949 and its core legislative framework is set out in the Solicitors (Scotland) Act 1980. All practising solicitors are members.
The Society operates through five directorates covering its main areas of work:
- regulation and standards;
- member services and engagement;
- education, training and qualifications;
- external relations;
- finance and operations.
The work of the Society is supported by solicitors and non-solicitor volunteers who contribute their time and expertise through many committees and working groups.
The Society also controls and administers the Client Protection Fund, the operating name of the Scottish Solicitors' Guarantee Fund (SSGF). The fund exists solely to protect clients who have lost money as a result of dishonesty of a solicitor or a member of their staff in connection with the practice of the solicitor. It is paid for entirely by solicitor firms without the use of taxpayer money from government. The fund is only available to clients who use solicitors who are employed by legal firms regulated by the Society.
During the early part of 2020, the Covid-19 pandemic struck the world. The severe threat to health in the UK has resulted in widespread disruption to ordinary life and has presented major challenges to individuals and organisations. The significance of this event is reflected within the full set of financial statements (see PDF below), and is given particular prominence within the going concern section where detailed commentary is provided.
In compliance with Financial Reporting Standard 102, the Society’s financial statements have been consolidated with those of the Scottish Solicitors’ Guarantee Fund and with the Law Society of Scotland (Services) Limited) and presented as group financial statements. The statutory basis, day to day management and governance oversight of the SSGF is unaltered by consolidation which is essentially about presentation of the Society group year-end financial statements in accordance with FRS102. The SSGF is included within the consolidated financial statements in recognition of the Society exercising control over the management, governance and operation of the fund.
It should be noted that, as required by statute, all income received by the SSGF is legally ringfenced to meet only future claims and therefore not available under any circumstances for the Society’s use. Similarly, the reserves of the SSGF are legally designated for that purpose and do not under any circumstances form part of the Society’s free reserves. However, control of the SSGF is bestowed on the Society by law, and, more widely, the SSGF is considered to be of benefit to the Society in helping underpin the positive reputation of the profession.
The Group (as defined above) reports a profit (prior to the actuarial adjustments to the closed final salary pension scheme liability) of £899,000 for the financial year ended 31 October 2019 (2018 - £87,000 loss). This comprises the following components:
The significant improvement in the performance of long term investments held by the group in addition to continued low volumes of claims against the SSGF contributed to the increase in surplus reported by the Group.
Profit reported by the Group after actuarial adjustment was £698,000 (2018: £988,000 loss).
The Society reports a profit (prior to the actuarial adjustments to the closed final salary pension scheme liability) of £39,000 for the financial year ended 31 October 2019 (2018 - £312,000 loss). Further detail of the Society’s financial performance is given in the Income Statement on page 18 of the full financial statements (appended below).
There was a significant improvement in the performance of the investment portfolio. The gain reported on long term investments held by the Society was £215,000 (7.5%). In 2018 the equivalent figure was a loss of £96,000. These investments are held for the long term, and produce an income of around £90,000 per annum, so will be subject to market volatility.
Looking ahead, in the context of the Covid-19 outbreak, Council is aware of the need to support the profession but also to ensure the ongoing viability of the Society. Council is confident that an appropriate range of measures and steps are being taken within the Society to both protect reserves and to address the pressures being experienced within the profession. Detailed commentary is provided within the going concern section of the full financial statements appended below.
Loss reported by the Society after actuarial adjustment was £162,000 (2018: £1,213,000).
Income for the year (excluding investment gains) was £11.5 million, an increase of 6% from the previous year. Income is analysed as follows:
Membership income comprises Practising Certificates, Retentions and Non-Practising Member fees. Other Core Income comprises fees from regulatory activity. This includes an element of the Scottish Solicitors’ Guarantee Fund Accounts fee paid by firm principals towards financial compliance and interventions, recovery of costs awarded to the Society by the Scottish Solicitors Disciplinary Tribunal, and commission and recoveries from Judicial Factories.
Income was higher than 2017/18, driven principally by three factors; Commission and recoveries from Judicial Factories up on the previous year by £153,000 (57%) due to healthy recoveries relating to current and prior year cases. Membership income grew by £373,000 (4%), driven by a combination of increased Practicing Certificate fees and higher roll numbers, while commercial revenues were up £38,000 (3.7%) to £1,145,000.
Expenditure (excluding actuarial movements in closed pension scheme) was £11.7 million, an increase of 4% from 2018. Expenditure is analysed as follows:
Although control over expenditure remains tight, an increase in Regulation expenditure covered the establishment of the Anti-Money Laundering team, while Commercial expenditure grew to support a restructuring of our CPD offering.
The Group’s investment portfolio performed well during the year, returning a gain against the market value at 31 October 2019 of £539,000 (2018: loss of £230,000), equating to approximately 6.4% of investments held. The Finance sub-committee monitors investments at least quarterly and reserves are diversified to enable investments to be held over the long term (defined as 5-10 years). The balance of cash and investments held is monitored. Fluctuations in investment values are accepted and the portfolio produces a much higher dividend yield than achieved by interest rates on deposits.
The Society is responsible for a defined benefit pension scheme which was closed to future accrual from 1 May 2010. The most recent full actuarial valuation was carried out at 31 March 2019 by a qualified actuary, independent of the scheme's sponsoring employer.
The overall deficit shown by most recent valuation at 31 March 2019 was £1,423,000 (March 2016: £1,722,000) with the value of assets covering 86% (March 2016: 78%) of the value of the liabilities. The main reasons for the improvement in the funding level are the contributions paid by the Society over the intervaluation period, combined with better than expected investment returns and the adoption of new mortality tables.
However, these factors were offset by changing market conditions, falling gilt yields and rising inflation which resulted in an increase in the value of the liabilities.
The current deficit recovery repayment plan agreed in 2017 has resulted in aggregate contributions of £1,559,000 in the three years to March 2019, with further annual payments of £170,000 scheduled for the years to March 2020 and 2021. The Society meets the scheme running costs as they fall due. The Society is currently finalising negotiations with the scheme trustees to determine the next recovery plan following the recent triennial valuation; which will be agreed prior to 30 June 2020.
Financial Reporting Standard 102 applies less prudent assumptions than those in the triennial actuarial valuation (as explained in note 13). Consequently, the majority of sums paid to the scheme this year have resulted in a reduction in reserves as the FRS102 valuation resulted in a surplus. The valuation surplus is not carried as an asset in the financial statements as the Society does not have an unconditional right to any surplus funds remaining at the cessation of the scheme. The actuarial valuation reported a loss for the year of £201,000 (2018: £901,000).
At 31 October 2019 there was no scheme deficit for financial reporting purposes (2018: deficit £nil).
The Society’s reserves fell from £5.4m to £5.2m in the year under review. The principal reasons for this reduction was due to the actuarial valuation of the defined benefit pension scheme which reported a loss of £201,000 in the year, combined with a deferred tax charge of £57,000 on unrealised investment gains.
Reserves held by the SSGF are legally designated solely for the purposes of the fund and are not available to the Society. At 31 October 2019 the SSGF reserves were £6.8m (2018: £5.9m).
The Society’s policy for free reserves (excluding designated SSGF reserves) is to hold between three and six months’ average expenditure for the Society. Reserves for this purpose are calculated as follows:
The reserve levels are monitored by the Society’s Finance sub-committee at least quarterly. The sub-committee regards this level as reasonable and is content that a break-even financial performance in 2019/20 remains the expected outcome, despite the actual and anticipated impacts of the Covid-19 outbreak. The sub-committee reviews the appropriateness of the policy on an annual basis. It is possible that changes may be necessary in future periods to reflect the impact of a prolonged period of economic recovery. In setting reserve targets the sub-committee also recognises the remaining operating lease commitment for the rent of the Society’s premises (note 16), as reflected in future cash flow projections.
We are the professional body and regulator of Scottish solicitors. We have responsibility for promoting the interests of the solicitors’ profession in Scotland and the interests of the public in relation to the profession. Our responsibilities as a professional body and regulator are overseen by both our Council and our Regulatory Committee. The Council consists of up to 48 seats, of which 31 are elected solicitor members, up to nine lay members, eight co-opted solicitor members, and such ex officiis members as may be required.
We are a statutory body governed by the Solicitors (Scotland) Act 1980 with a Constitution made under that Act and accompanying standing orders. We are committed to the principles of good corporate governance and seek to comply with the relevant parts of the 2018 UK Corporate Governance Code where it is practicable given our scale and operations.
Our governing body is the Council which sets the overall strategy as well as the annual corporate plan and associated budget. The Council has put in place an ambitious five-year strategy entitled “Leading Legal Excellence” which is due to be delivered by late 2020. The Council with input from a wide range of stakeholders is developing the next five-year strategy. The Council manages the overall strategic direction for the Society within the context of the annual operational plan and annual budget. The Council also measures our performance against the annual operational plan within the context of our longer-term goals set out in the current five-year strategy. The Council delegates the monthly oversight of our implementation of the operational plan to the Board. The Board is chaired by our President and is made up of the Vice President, Past President, Treasurer and five other elected Council members. Sitting beneath the Board is the Chief Executive, the senior leadership team and management team, who all work together to implement the annual operational plan, deliver the five-year strategy as well as managing the Society on an operational basis.
There are a number of checks and balances within our governance model which seek to ensure an appropriate and fair discharge of our statutory responsibilities as a professional body and regulator. These checks and balances include the monthly reporting of progress on the implementation of the annual operational plan to the Board and the Council. The oversight of the regulatory duties of the Council is discharged by the Regulatory Committee through a delegated authority scheme in conjunction with the various regulatory sub-committees and our employees.
Our Audit Committee has, as one of its main roles, responsibility for reviewing and making recommendations on our internal control and risk management systems, in order to monitor and assess the effectiveness of those procedures and management and reporting systems. The convener of the Audit Committee reports quarterly to the Council on these matters as well as to the members at the annual general meeting. The Audit Committee also benefits from the provision of internal audit services provided by Wylie & Bisset CA.
We also have a Finance Sub-committee chaired by a Council member who is the Society’s Treasurer. The Finance Sub-committee has responsibility for producing and then presenting the annual budget for approval by the Council. The Finance Sub-committee also proposes the annual practising certificate subscription, first to the Council and then to members for approval at the annual general meeting in May. There is also a Nominations Committee chaired by a Council member, which oversees the system for the appointment of members to our committees as well as making recommendations for the appointment of the conveners for such committees.
The Public Policy Committee is now in its third year of operation. Its modus operandi is now well established. This committee replaced the former Law Reform Committee. The principal role of the committee is to oversee all of our public policy work and to ensure that it is in line with our five-year strategy.
We have three Office Bearers: the President (who is the Chairman of the Society), the Vice President and the Past President. Each of these three Office Bearers take office for one year. The Vice President becomes President with the handover taking place at the Council meeting in May. The Office Bearers, together with the Chief Executive, are our main ambassadors and represent the Society at home and abroad.
Our Constitution provides for a Secretary of the Society, more commonly referred to as the Chief Executive. The Chief Executive’s key responsibilities include the provision of leadership and the vision necessary to create a professional body which effectively regulates and represents the interests of its members and delivers a range of services and products as required by the profession. The Chief Executive is responsible for advising the Council and the Board on the development and implementation of policy as well as managing our staff and resources. The Chief Executive works alongside the Office Bearers and Council in providing effective and meaningful communications and representing us as an organisation. Additionally, the Chief Executive is responsible for ensuring effective relationships with members, external bodies (including governments) at the highest level and internationally, and with all other appropriate third parties, the public and the media. The Chief Executive is also responsible for ensuring that the respective parts of our governance structure operate effectively and efficiently.
The Council’s responsibilities are set out in statute, the constitution and the standing orders. The principal role of the Council is to approve the strategy, annual corporate plan and the annual budget for the Society. The Council also sets the most significant fees for members as well as recommending the practising certificate subscription for members to consider at the autumn special general meeting. There is also a Code of Conduct which sets out the standards of behaviour expected of Council members. The Chair of the Council is the President. Greater details of our governance arrangements are available on our website.
The principal roles of the Board are –
- to provide guidance to our executive on initial drafts of strategy and the annual corporate plan, which will include resource plans, before their submission to the Council for approval
- to provide direction to both the executive and committees on any strategic level initiative or project before submission to Council for approval
- to monitor the Society’s quarterly performance against our targets contained in the annual corporate plan and report any major variance to Council
- to regularly monitor the our financial performance against budget and to ensure that all risks identified in our risk register are managed and escalated to Council for those which the Board consider to have the potential to have a high impact on the work of the Society, and with a medium to high likelihood of occurring.
The principal roles of the Regulatory Committee are –
- to ensure that the standards for the profession are set by way of making relevant and appropriate rules, to be applied in a uniform and consistent way and regularly reviewed
- to ensure that the internal processes, policies and procedures adopted by the Regulatory sub-committees are effective, appropriate and proportionate in order to ensure the making of consistent regulatory decisions and to build and develop relations with appropriate third parties to ensure confidence in the work of the profession and our regulatory regime.