Managing Risk

Description

Category

Risk 

Appetite

Mitigation

Credit exposure

The Group has a number of ongoing arrangements with law firm customers and joint-venture partners, some of which include extended credit terms, which create a credit risk in the event of their insolvency or a dispute.

Financial

Cautious (6/12)

The Group has processes to approve credit limits and monitor exposures to law firm customers and partners that are consistent with its cautious appetite for risk. In Consumer Legal Services, extended credit terms have not been offered to new customers since 2020 and contractual provisions, such as set- off clauses and parental guarantees, are in place to mitigate the risk for material debts with joint-venture partners. An historic £1.4m debt owed on a settlement relating to the termination of National Law Partners, agreed in 2019, was cleared in June 2022.

In Critical Care, the business offers extended credit terms on certain services and the risk is diluted by having a diverse range of customers. Material debts are monitored more closely by the credit control team and reported on the risk register.

Accuracy of business model assumptions 

The Group’s business model relies on several key assumptions which, if not delivered, could have a material impact on financial performance.

These key assumptions include:

• Enquiry generation costs and volumes
• Placement of personal injury enquiries to panel firms
• Claim processing performance
• Volume of instructions in Critical Care
• Average revenues for services in Critical Care

Model assumptions are determined by management with oversight from the Executive Directors and the Board, and sensitivities are then performed on the key assumptions. The model assumptions are scrutinised and regularly compared to actual results and updated where necessary. The 2023 budget factored in prudent assumptions relating to personal injury enquiry generation with no market growth assumed.

Additional measures have been taken to de-risk certain assumptions by securing contractual guarantees from key partners.

Regulatory Breaches

The Consumer Legal Services division operates in a highly regulated environment and handles high volumes of sensitive customer data, including credit card information and medical data, as well as client money. The Group’s law firms are regulated by the Solicitors Regulation Authority. Breaches of regulations could result in regulatory action against those businesses, directors, and compliance officers.

Critical care is audited by the Care Quality Commission (CQC), and any failings could create reputational damage and loss of customers.

Both divisions employ dedicated compliance resources responsible for managing regulatory issues and reporting directly to the Board.

External legal advice is taken, including from leading counsel, where appropriate, in particular when faced with changes to the law and regulation, internal processes, or structure. In Critical Care, the divisional management have created a Clinical Governance Board to report to Executive Directors on risks arising from clinical decisions and regulation. This group comprises senior management and a Chief Medical Officer who is a consultant surgeon, at the Royal National Orthopaedic Hospital, Stanmore.

Critical Care self-employed associate model

IR35 legislation requires careful interpretation to ensure arrangements do not breach tax laws, resulting in unexpected tax charges and fines.

To comply with IR35 rules, the Board has taken external advice from a leading accountancy and tax firm and made the necessary status determinations for each associate. These determinations are supported by contractual terms, operational processes and working practices currently in place. Bush & Co regularly monitors compliance with these processes and has controls in place to ensure the risk of a breach of the legislation is low.

Key Person Dependency and Recruitment 

Unavailability or loss of key individuals could have a detrimental impact on business performance.

Significant intellectual property, relationships and experience is held by certain members of management. If they became unavailable there could be a short-term impact on operational performance and the progress of key projects. To support its growth agenda, the Group has successfully developed its hybrid and remote working models.

Working capital management and funding 

The Group is managing its levels of working capital as it builds its book of personal injury claims in National Accident Law.

These claims can take up to three years to process and it is at the point of settlement of each successful claim that cash is received.

The Group’s working capital is funded through its £20m revolving credit facility (RCF), which runs to December 2024. This facility includes several financial covenants, which have been aligned with the Group’s strategy and medium-term forecasts. If performance falls outside of expectations, the Group could be required to depart from its growth  strategy in order to meet covenant requirements (e.g. by reducing investment in NAL).

The Board closely monitors the use of capital and uses short and medium-term forecasts to plan future requirements.

Compliance with the debt covenants is reviewed on a monthly basis by the Executive Directors and reported to the Board.

IT infrastructure and security

Many of the Group’s interactions with its customers are online and systems are increasingly automated, creating an increased exposure to systems error. Both divisions are reliant on their IT systems to capture and protect valuable customer data obtained in the normal course of business. Theft, loss, and misappropriation of

digital assets and data could result in reputational damage and/or regulatory fines. The Group relies on a number of key IT suppliers and its systems are increasingly automated, creating an increased exposure to systems error.

The Group takes data security very seriously and has robust policies and procedures to ensure it is compliant with the Data Protection Act 2018 and the General Data Protection Regulations (GDPR).

Business Continuity plans are in place and have been tested, the Group’s employees are provided with regular training, and the cyber security controls are regularly stress tested. External suppliers are used to conduct regular penetration and phishing testing and the Consumer Legal Services division has secured the Cyber Essentials accreditation. A Cyber security steering group meets quarterly to assess risk.

Interest rate risk

The Group is exposed to interest rate risk through its £20m RCF, of which £16m was drawn at year- end. Interest accrues at 2.25% above the Sterling Overnight Index Average (SONIA), which closely tracks the Bank of England (BoE) base rate.

The Group will continue to leverage its flexible placement model to drive short-term cash flow in addition to developing its maturing book of claims in NAL. Strong cash generation from the Group’s joint venture law firms and Critical Care division will underpin free cash flow in 2023, leading to a further reduction in drawn debt.

The Board have explored interest rate hedging strategies, such as interest rate swaps, but concluded that the cost of such tools currently outweighs the potential risk. This decision will be reviewed should the forecast for interest rates worsen further.