December 2024
The festive season is upon us, but that doesn’t mean the focus on regulation and compliance should be switched away, especially with the plans the Solicitors Regulation Authority (SRA) has for 2025!
Client Accounts
One of the key issues for many firms is the SRA’s proposal to remove client accounts and introduce third party managed accounts; a recent poll of law firms found complete opposition to this move but it will be interesting to see what the SRA finally decides once its client protection consultation has come to an end.
Other SRA proposals could see the cessation of interest on client account funds being retained by law firms and a restriction around the collection of advance fees; firms need to be planning just in case these proposals are implemented, as they could have a significant impact on them depending on how they currently operate.
SRA Initiatives
The new year will see the start of a number of SRA initiatives, starting with spot checks around the obtaining of Annual Accountants Reports; a number of past SRA investigations found that some firms had not complied with their obligations to obtain such reports and send in reports that had been qualified. A number of firms will receive an email in December advising them that they will be involved in this project.
Another initiative will be a thematic review looking at how firms handle client source of funds checks; I suspect this will include a review of policies, controls and procedures, file reviews, and discussions with both senior management and fee earners, the latter because the SRA will want to see that those who carry out checks are aware of their obligations, and if they are, whether they are complying with them as required.
AML Breaches
A further tranche of firms has recently been fined for various breaches of the Money Laundering Regulations (MLRs, with failings around firm, client and matter risk assessments being the main areas of deficiency; a number of firms were found not to have retained previous versions of policies going back decades to when they were first required.
Training Records
At the SRA’s recent Compliance Conference it said that it was not mandatory for solicitors to maintain training records, but that by doing so, it would show they were taking competence seriously, what it failed to say was that the MLRs require firms and Sole Practitioners to maintain training records, but I wonder how many Sole Practitioners would have realised they were NOT included in the SRA's conference statement!
In addition, the SRA's statement conflicts with its normal mantra of, "If it isn't written down it didn't happen"; wouldn't it therefore make it less confusing if the SRA made it mandatory for firms AND solicitors to keep their own training records?
I've always worked on the basis that if something is not mandatory, but you have to explain why you haven't done it, then you should see it as such, otherwise you will always be on the back-foot in having to make sure your justification for not doing something is acceptable to the regulator!
It is also worth noting the requirement to keep 'documentation' around training that has been undertaken; I wonder how many firms/solicitors do in fact retain notes, handouts, slides, etc., once they have recorded the relevant training details in their records!
Thank you for your support during 2024, we look forward to helping you in 2025!
Have a great festive period and New Year!
Monthly Compliance Update – November 2024
I attended the SRA Compliance Conference on 5 November, and as expected there were some real fireworks over the conduct of the Solicitors Regulation Authority in the Axiom Ince scandal, especially when the Chair and Chief Executive seemed in full denial, with the Chair saying the scandal was “history for us”!
The report produced by Carson McDowell on behalf of the Legal Services Board found that:
- The SRA did not act adequately, effectively and efficiently
- The SRA did not take all the steps it could or should have taken
- The SRA’s actions and omissions in this matter necessitates change in its procedures to mitigate the possibility of a similar situation arising again.
The report went on to say, “If the SRA had carried out an effective assessment of Axiom’s proposed purchase of Ince Gordon Dadds, including a review of Axiom’s accounts, this could have assisted in revealing the alleged misappropriation of funds from the client account.”
In its response to the report the SRA said, “The suspected fraud was not spotted until we picked it up, even though a number of other bodies, including accountants and auditors were involved with the firm. There is a lot in the report that we do not agree with, including the headline conclusions.”
Isn’t it for the regulator to implement and police appropriate systems and procedures for protecting clients so that £64m of their money doesn’t go missing?
A question many solicitors will be asking is “why should we pay for massive increases in Compensation Fund fees when it is apparent from the report that our regulator was ‘asleep at the wheel?”; a question that seems very valid, but I suspect will go unanswered!
Aside from the SRA trying to defend its position in the Axiom Ince scandal, it said that it was focused on the following topics:
- The Post Office scandal – the fallout from this is likely to be massive for the legal sector so it has been gearing up for this. The Solicitors Disciplinary Tribunal has increased its budget for next year to take account of referrals from this and the Axiom Ince scandal.
- Consumer Protection review – this has come out of the Axiom Ince scandal, with many solicitors believing the SRA will push through changes in how they operate using the scandal as an excuse for these; the main area of concern is the potential introduction of third-party managed accounts, which many conveyancers believe would increase costs, bureaucracy and delays. The SRA has said this would not be the case and that it has ‘heard’ what conveyancers have had to say.
- Client account interest – based on comments made by the SRA CEO, it looks likely that firms retaining interest earned of client monies will be stopped; this could lead to some firms closing or having significant financial problems as they rely too heavily on this interest to sustain their businesses.
- Residual balances – the SRA will be looking at this more closely as it is concerned that many of these are being retained by firms, leaving clients out of pocket. Recent disciplinary cases have included firms holding on to balances for decades!
- In-house lawyers – as a consequence of the Post Office scandal, the thematic review of the sector, and the negative feedback given by GC’s in response to this, the SRA will be looking to introduce new rules and guidance to help in-house lawyers navigate difficult conflicts between their employer and complying with the SRA Principles.
- Unlimited fines – the SRA CEO made a big play about the new powers he now has to issue unlimited fines for financial crime breaches, so firms need to ensure they do everything they can to keep out of the regulator’s grasp.
- Anti-money laundering – the SRA’s annual AML report has just been published and it is clear that there are areas of concern that remain, for example, only 22% of law firms checked by the SRA were fully compliant with the rules. Key breaches were:
- Failure to carry out client and matter risk assessments
- Failure to have good policies, controls and procedures
- Failure to check source of funds
The SRA has also published its report looking into AML training, with some firms clearly taking a ‘tick box’ approach to it.
It is clear that the pressure on firms to comply is not going to reduce anytime soon, and if the recommendations made in the Axiom Ince report are implemented it will lead to closer supervision going forward.
October 2024
Those viewing this months’ update would be forgiven for thinking that the view of the Solicitors Regulation Authority (SRA) was that those they regulate are awash with cash, what with the increase in Compensation Fund fees, its proposals to increase its fining powers, and its view that it may need to increase the fees it gets from solicitors to pay for new work streams; if you are a big firm such increases are likely to be brushed off but for Sole Practitioners and small firms these additional costs could be crippling!
SRA fining powers
The SRA’s proposals include penalty bands for progressively more serious misconduct and a minimum fine levels for each, with firms facing £5,000 in the lowest band, rising to £500,000 in the highest, and for individuals, £2,500 and £100,000 respectively, and have met with significant resistance from a number of major organisations, including the Law Society, Birmingham Law Society, City of London Law Society, and the Solicitors Disciplinary Tribunal.
Some may say that those who breach the rules deserve all they get, and this may be true where for example, the misconduct is very serious, however, significant fines for purely procedural breaches where there is no consumer harm are likely to be viewed as totally unreasonable.
The SRA has said that the new fining powers are required to act as a deterrent to firms and solicitors, however, that view could be called into question when you look at a recent case where a solicitor who held all compliance roles within an alternative business structure (ABS) was just rebuked for multiple failures that took place under his watch; he was said to be “unsuitable for a managerial, supervisory or compliance role”!
The solicitor was clearly not deterred by the SRA’s fining powers available for ABSs, namely £250m for the ABS and £50m for individuals within the ABS, so what makes the SRA think its proposed new fining powers will deter those working within non-ABSs?
The question in my mind is why was someone found to be unsuitable for managerial, supervisory and compliance roles authorized to hold them in the first place; is this yet another example of the SRA’s authorization regime being unfit for purpose?
A further question is whether the sanction (rebuke) was appropriate?
In the last 12-18 months we have seen a number of firms being fined significant amounts for AML procedural breaches, where there was no actual money laundering or harm to clients, yet the solicitor’s misconduct in this case contributed to their firm being closed down; is it any wonder why there are concerns around the application of the proposed fining powers!
SRA costs
In addition to the increased costs mentioned above, the profession is likely to have to pick up the costs the SRA has been ordered to pay after a number of unsuccessful prosecutions, for example, it was recently ordered to pay £36,000 after it failed to overturn an SDT decision to dismiss allegations against a solicitor who was alleged to have failed to carry out adequate money laundering checks; this follows on from another costs order for £189,000 where the case against a large city firm for similar breaches was dismissed in full.
Compensation Fund fees
The Legal Services Board (LSB) has now approved the SRA’s request to increase fees levied against firms and their solicitors, with individual fees going from £30 to £90, and going from £660 to £2,220 for firms, with no banding to take account of how big a firm is; this means a small firm will pay the same as a Magic Circle firm, which to many will be seen as very unfair.
The decision to approve the increased fees has been met with much derision from practitioners, especially when the LSB has still not released the report looking into the SRA’s role in the Axiom Ince scandal, which is what led to the need for fee increases in the first place; many cannot understand why they are having to pay for the crimes of others!
OPBAS update
The Office for Professional Body Anti-Money Laundering Supervision (OPBAS) is tasked with overseeing legal regulators’ anti-money laundering (AML) work, and recently said it was not seeing “the consistent, effective improvement we need”; it went on to say there needed to be a “combined commitment… to effectively fulfil their ongoing AML supervisory role to protect the UK against the threat of money laundering”.
In effect, you need to expect increased scrutiny around anti-money laundering compliance and therefore need to ensure your firm-wide risk assessments, policies, controls and procedures, staff training, and client and matter risk assessments are all in place and compliant.
Transparency Rules
The SRA has sanctioned 470 law firms in the past 18 months over failures to comply with the transparency rules, with 439 official warnings and 31 fixed penalty fines being levied; it recently sought to impress its commitment to ensuring that the public have more access to information when choosing law firms.
Firms regulated by CILEx Regulation will now have to display price information for all areas of work after tighter transparency rules were given the go-ahead, and the SRA has said that it is looking to implement the same for those it regulates. Watch this space!