Legal Compliance Update

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.

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!

If you haven’t yet completed the Solicitors Regulation Authority’s (SRA) anti-money laundering  questionnaire, time is running out for you to do so as the deadline is 23 September; based on the queries we have received it is clear that some questions are causing difficulties for those completing them, so don’t leave it until the last moment!

If previous approaches to surveys/questionnaires is anything to go by, the SRA may extend the deadline and then pass firms that have still not responded for enforcement action, but don’t rely on any extension being given; in any event firms may be ‘black-marked’ for not meeting the original deadline!

Compensation Fund

The Legal Services Board (LSB) has delayed for the first time ever approval of the SRA’s application for the level of Compensation Fund contributions, which are set to increase dramatically in October; it is uncertain what will happen if approval is not given by this time, or at all!

It would not be surprising if the delay is connected with the delayed publication of the LSB’s report looking into the conduct of the SRA in the Axiom Ince scandal; we are now 100 days since the LSB said the report would be published, so the continued delay seems to indicate that the findings may not be favourable to the SRA!

Chinese underground banking

The SRA has issued a warning to law firms after the sentencing of seven people involved in a money laundering network involving Chinese underground banking; as money entering the UK by this route has left China illegally, these were not funds that should be accepted for transactions or payment of fees. https://www.nationalcrimeagency.gov.uk/who-we-are/publications/445-chinese-underground-banking/file

Don’t get confused over the handling of these criminal funds, and funds coming out of China as a breach of currency restrictions; the former will need a defence (DAML) from the National Crime Agency, whereas the latter won’t as long as there are no other red flags apparent.

Cyber-crime

The number of successful cyber-attacks against UK law firms rose by 77% in the past year to 954, up from 538 the year before, according to a new study produced by chartered accountants Lubbock Fine, who said that “the wave is driven by criminals seeing law firms as prime targets for ransomware attacks or blackmail. This is due to the sensitive personal and financial information they hold, which hackers can sell on the dark web or threaten to publish on the internet.”

The legal sector has also faced “astronomical ransom demands” from cyber-attackers in recent years, ranging from $30,000 to $21m, according to new research by Comparitech, which identified 138 individual ransomware attacks on the legal sector, with nearly 3 million individual records compromised.

The threat of deepfake attacks has escalated rapidly in the last five years and therefore firms need to be more alert to these when carrying out online client due diligence. Deepfake attacks digitally replicate a person’s likeness, and manipulate a face, voice, or body, and have become increasingly convincing and difficult to spot without proper equipment and can even be broadcast in real time. In Hong Kong, a firm was recently tricked into paying $25 million to cybercriminals who used deepfake technology to impersonate the company's CFO in a video call.

The Chartered Institute of Legal Executives Regulator has issued a scam warning in the following form:

“It has recently come to our attention that a company named Newcastle Regulation has published misleading content on its website. They are presenting themselves as an `independent regulator’ using content that appears to have been taken from CRL’s website.

Please be aware that this organisation and associated website is in no way connected to CILEx Regulation Ltd and as such, individuals should not submit any information or payment to them.”

Sanctions

The SRA has published revised guidance on complying with the UK sanctions regime, and the Office of Financial Sanctions Implementation (OFSI) has updated its frequently asked questions on UK financial sanctions, both of these should be read and training provided where appropriate; in addition firm-wide risk assessments should be updated to reflect any changes or a note made to say the updates have been read but do not apply.