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The ‘Cost of Living Crisis’ has had widespread press coverage since late 2021, and will undoubtedly continue to do so. This means that you could well expect to be asked about it at interview. For example: ‘What do you think will be the implications of the current cost of living crisis for our firm and its clients?’
In order to answer these questions, you need:
- Up-to-date knowledge about what has caused the crisis and its impact generally;
- An understanding of basic economics; and
- Specific knowledge, focussing on the legal profession, the firm itself and its clients.
Variations of this question include: ‘What are the implications of the cost of living crisis for the legal profession?’
Or more broadly: ‘Explain the importance of [a specific news story] to our clients.’
‘Talk us through the implications of a current issue affecting law firms.’
Such questions will depend on what is going on at the time of your
interview, and different types of firms will ask different
questions. Be careful with your answer. This is not an opportunity
for you to give a forthright answer based on your own political
views. You need to be aware of the firm’s client base and
operations, and demonstrate your ability to present a balanced view.
If we go back to the first question, you should start by acknowledging the question and showing that you understand that you are being asked about the cost of living crisis, and its implications for the firm and its client—a brief introduction.
To help you, here is a summary of the situation at the time of writing, March 2023.
Cost of Living Crisis—background
The cost of living crisis refers to the fall in real disposable income since late 2021. This has resulted in sharp falls in household living standards. This is the result of high inflation, driven mainly (but not exclusively) by high energy costs and exacerbated by the Ukraine war.
The UK economy has narrowly avoided going into recession, but growth remains flat and the risk of recession remains.
Here you need to start by demonstrating that you understand what you mean by real disposable income and inflation, the causes of inflation and what is a recession.
Research
Chapter 18
Chapter 20, particularly sections 21.4.5—21.4.8 and 21.2.1
For facts and figures, see, for example, the IFS’s report on the cost of living crisis. Note that these figures are current in March 2023. You would be advised to conduct further research near to the time of an interview. The House of Commons Library publishes insights that are also useful, such as ‘Economic update: Short recession looming and concern over US climate policies’.
The cost of living crisis has hit households on lower incomes worst. This is because they spend more of their income on essentials, especially food and energy. Richer households can save more on non-essentials. The worry is that the crisis is also beginning to hit middle income families hard. Inevitably, this will mean more people falling into debt. See the Institute of Government’s article on the cost of living crisis for more.
Impact on the firm and its clients
Although this question is partly about commercial awareness, it is also designed to see whether you have researched the firm and its clients. Your answer will depend on the type of firm that you are targeting and its clients. This answer cannot cover every type of firm or every type of client, but it is designed to highlight some areas of concern and give you some pointers on where you can start your research into various sectors.
Consumer sector
You have seen that there is already a crisis in legal aid provision. The cost of living crisis has made this worse. Struggling consumers will not be able to afford legal representation. Certainly this will impact on litigation departments within consumer related sectors, e.g. family departments and on criminal legal aid law firms. Note that this is a topic in itself that could come up at interview. The Law Society issued judicial review proceedings against the Ministry of Justice in March 2023. If you are interested in this type of work, you should follow this closely.
Research
Section 21.1.5.2
The Law Society takes government to court on criminal legal aid
Unbundling
If you are interested in private client work, you may have seen that probate work, historically the ‘bread and butter’ of high street law firms has been hit by ‘unbundling’. More potential clients will avoid seeking legal advice when taking out probate, which can be done by an application online. Making a will will also not be at the top of people’s priorities.
Research
Section 21.1.5.2
Legal Services Consumer Panel: The provision of unbundling in the legal services market
Property (domestic)
Most law firms have some involvement with property transactions, either domestic or commercial. There is evidence that the housing market is beginning to stall, but prices are still high with an average house costing over 9.1 times the average salary. You have seen from Chapter 18, that with increases in bank base rates, mortgage payments have gone up by 61% for an average household. In uncertain times, the indications are that clients are putting any plans for buying or selling houses on hold.
Research
Chapter 18.2.2
Up to date news articles, for example, ‘Will house prices fall in 2023 and will it be a bad year to sell or move?’
Property (commercial)
The commercial property market is also uncertain, particularly the retail sector. Consumers are shopping less, and when they do are increasingly shopping online. Demand for office space has been hit by the mover to hybrid working. Commercial property values fell by over 2.5% in September 2022 alone. Rising interest rates will have an impact here too.
Research
Jenny Petch’s article on the commercial property crisis
Company and Commercial
As consumer spending falls, and energy prices increase, businesses are beginning to suffer. Particularly hard hit are energy intensive businesses, for example within the hospitality sector or the manufacturing industry. A downturn in the property market will inevitably affect the construction industry. Employees are looking for higher wage rises to help them meet their increased expenditure, and many businesses are dependent on debt finance (see Chapter 18) and will feel the impact of rising interest rates.
Already, insolvency rates have increased. The monthly insolvency statistics for January 2023 show a 7% increase on a year-on-year basis, and an 11% increase from pre-pandemic levels. These are all ‘lost’ clients. The question is whether they are being replaced? If you consider the Case Study in Chapter 18, do you think now is the time for Tom to set up his business which is heavily dependent on ‘non-essential’ consumer spending? Surprisingly, ONS figures show that in 2022, over 580,000 companies were dissolved, but over 750,000 new companies were incorporated.
Research
Official Statistics from The Insolvency Service: Monthly commentary (January 2023)
Official Statistics from Companies House: Companies register activities: 2021 to 2022
Outlook
However, despite all the uncertainty in the economy, and the consequent challenges facing the legal profession, recent surveys show that law firms have remained resilient. The PwC ‘Annual Law Firms Survey’ for 2022 shows that the top 100 firms increased their fee income by 9% and the Lloyds Bank annual Financial Benchmarking Survey for small and medium sized firms shows that 75% of firms recording year-on-year growth.
Research
PwC’s Annual Law Firms Survey 2022
The Law Society’s Financial Benchmarking Survey 2023 [Note that this survey, although produced in 2023, is based on figures for from April 2021—April 22 before the full impact of the worst of the cost of living crisis, the war in Ukraine and the collapse of the Liz Truss government were felt. It may be that small and medium sized firms may have struggled in a more challenging environment.]
Opportunities and Challenges
You should make it clear that you are able to see the bigger picture. You have outlined some of the challenges facing clients and firms, but you should also show that you recognise that the current climate may bring challenges but it also brings opportunities. Let’s think about a few examples.
It goes without saying that insolvency and restructuring practices inevitably thrive in times of economic uncertainty. A survey by City AM of in-house lawyers said that they anticipated an increase in debt recovery work. Interestingly, they also foresee a ‘surge’ in fraud cases and disputes.
Other areas where there are opportunities include employment law. Employers everywhere are finding it hard to fill vacancies and it is tempting to try to get existing employees to work harder and longer hours, or to boost profits by taking on staff at lower salaries. All of these have implications and the potential to infringe employment legislation.
The statistics on start-up companies show that many of these new companies are small technology companies. Again, this presents opportunities. New companies particularly need funding and other financial support and advice on where and how to get it, e.g. how to access government grants or tax breaks and incentives.
At the end of the day, a good answer is not just about giving facts and figures. You need to answer the question. Where the outcome is as uncertain as the state of the economy, it is more difficult to give your own critical opinion. However, look for comments from practitioners in the legal press and be prepared to explain what they are saying and how far you agree with them.