Legal Compliance Update

Regulatory resignations was the stand out issue of the month, with the Chair of the Legal Services Board (LSB) resigning with immediate effect, and the Chief Executive Officer of the Solicitors Regulation Authority (SRA), who will be leaving the organization towards the end of 2025; these resignations follow on from the recent resignations of the Deputy Chief Executive Officer/GC and Head of Legal at the SRA.

It is unknown why all these resignations have occurred, but some have suggested that it is as a consequence of the criticisms that came out of the Axiom Ince report, the potential criticism that may be coming in the SSB report, and the reputational damage that has been sustained by the SRA over the last few years; others have suggested they have just been coincidental and are merely for career reasons, retirement, or for family reasons! 

Fall-out from Axiom Ince

The SRA has increased its efforts to crackdown on suspected dishonesty and financial irregularities having found these reasons for intervening into firms, with accounts rules breaches being cited in 11 cases in the year October 2023-24; in the previous year there were only four, and only one in 2021/22. Suspected dishonesty interventions increased from 14 to 16 during the last year.

The future of client accounts is still uncertain, but the Legal Services Consumer Panel (LSCP) has come out strongly supporting their demise and replacing them with third party managed accounts (TPMAs); the chair of the LSCP has criticised the SRA for its ‘conservatism’ and ‘resistance to change’, which suggests it may be pressured into taking action many in the profession object to!

Economic crime and sanctions

The government has announced the largest sanctions package against Russia since its invasion of Ukraine in 2022; for the first time, it is also using new powers to target foreign financial institutions supporting Russia’s war machine, including sanctioning of a major Russian bank, disrupting Russia’s use of the international financial system to support its war efforts.

The Office of Trade Sanctions Implementation (OTSI) has issued new guidance detailing its enforcement powers; firms dealing with the following work should pay particular attention to this:

• Legal advisory services – providing advice on corporate structures, contracts, or transactions that could involve sanctioned entities or jurisdictions.
• Trust and company services – setting up companies, trusts, or other legal structures that may be used to evade trade sanctions.
• Client due diligence and risk assessment – ensuring proper checks when dealing with high-risk clients or transactions.
• Litigation and dispute resolution – managing cases involving sanctioned individuals, entities, or assets, where compliance with trade sanctions is required.
• Commercial transactions – handling mergers, acquisitions, or financial arrangements involving restricted goods, technology, or services.

The Financial Action Task Force (FATF) has published its latest annual report (2023/24). One of the most significant achievements has been the substantial shift in the focus on asset recovery globally; this focus aims to ensure that governments prioritise asset recovery, and that illicit proceeds are rapidly frozen, confiscated and recovered. Improvements in this area are essential to remove the profit-incentive from crime and to return money to victims, including the State in cases of tax evasion or corruption.

Firms should ensure they update their firm-wide risk assessments to take account of the above, even if this is just to say they have decided they do not apply to them.

The Law Society has warned that the new statutory duty on lawyers to promote the “prevention and detection of economic crime” should not trigger an “over-zealous” response by the SRA, however, based on its recent fines for procedural breaches of the Money Laundering Regulations, some would argue that it is already being over-zealous in its approach!

First-tier complaints

The SRA has been writing to a randomly selected cross section of 750 firms, requiring Compliance Officers for Legal Practice (COLP) to provide information on how their firms identify and handles first tier complaints.
The SRA is undertaking a programme of work in response to the LSB's policy statement on first tier complaints which requires it and other legal regulators, to pursue specified outcomes. This continues the SRA’s aim to ensure that all firms have procedures in place for the effective, efficient and fair investigation and resolution of complaints.

To be, or not to be …… a solicitor!

The SRA has reopened its investigation into business secretary Jonathan Reynolds who described himself as a solicitor when he was in fact only a trainee solicitor; this was not only on social media but also in conversations and during a statement in the House of Commons. There are calls for the business secretary to be prosecuted for committing a criminal offence under the Solicitors Act 1974 and the Legal Services Act 2007; it will be interesting to see what happens, but if he is able to avoid action it will bring both Acts into serious disrepute. 

This month we covered a number of topics involving the Solicitors Regulation Authority (SRA), including criticism by the Solicitors Disciplinary Tribunal (SDT) of its conduct in bringing an ‘improper’ prosecution leading to it having to pay costs totalling £184,000.

Other activity involving the SRA:

• Since enhanced fining powers were introduced two years ago, 96 firms have been fined over £1.5m; unlimited fines for economic crime breaches are due to be implemented this year, so it will be interesting to see how the SRA uses these in relation to procedural breaches of the Money Laundering Regulations (MLR).
• The SRA has lodged an appeal in the High Court against an SDT decision where a breach of the MLRs was not regarded as a breach of the SRA Codes of Conduct; this is very much a case to watch!
• The Legal Services Board (LSB) has approved plans by the SRA to change its publication policy and keep details of misconduct on its website for longer. If your firm holds any Law Society accreditations, like CQS or Lexcel, don’t forget that you have an obligation to report an SRA investigation to the Law Society within the relevant timeframe.
• A number of senior executives have left the SRA recently, including its Deputy CEO and GC, and its Head of Legal; some may see this as a consequence of the criticisms around the Axiom Ince scandal and what may be coming in the SSB scandal report, but it may just be individual decisions around their careers, but I will leave you to make up your own minds!
• Another batch of fines relating to firms not able to show they were complying with anti-money laundering regulations has been announced, with fines ranging from £3,370 - £25,000.

Losing your COLP!

A recent case involved a COLP who left his firm immediately after 25 years, and it got me thinking about how the firm would need to react to such a sudden departure.

Every SRA regulated firm must have an authorised Compliance Officer for Legal Practice (COLP) in place at all times, and where an immediate departure occurs the firm involved must apply to the SRA for emergency cover within seven days of the departure, with a permanent replacement being put in place within 28 days of this date.

But what happens if a new COLP can’t be found?

The short answer is, the firm can no longer operate!

But why wouldn’t someone want to step into such a critical role?

There are a number of reasons, including:

• They don’t have the relevant experience and authority
  
  
• They don’t want the pressure on top of their fee earning duties
  
  
• They don’t want to be the ‘sacrificial lamb’ for their firm – both the SRA and Law Society have said this would not be the case, as compliance is a joint liability issue for all owners/managers
  
  
• They don’t think the previous incumbent did the job correctly, so don’t want to take over what they may see as something that they will be held accountable for – if I was taking over I would want to be happy that everything was in order before I sought approval from the SRA, with any serious breaches having been reported as appropriate, whether to the SRA, Law Society or PII insurers!
  
  At some point, current COLPs will want to move on or retire, but what could they be leaving in their wake; just take a look at recent SRA/SDT cases to see that we are likely to be only seeing the tip of the iceberg?

Although he was not a COLP, a firm’s manager, who was compliance officer for finance and administration (COFA) has been found to have failed to remedy any of the firm’s accounts rules breaches or report them to the SRA; he was fined £25,000!

Some good news came out of a recent SDT case, where a COLP was cleared of failing to adequately investigate concerns about a property development their firm was advising on; the SDT said that the COLP was justified in relying on assurances provided by a senior property partner.

Addressing the ‘client interests -v- ethical conduct’ conundrum

The Legal Services Board (LSB) has decided that lawyers’ lack of proper regard for ethics, and their “disproportionate focus” on client interests above all else, means regulators need to take action to improve compliance; much of this comes out of the conduct of lawyers in the Post Office scandal.

You may be interested in a Linkedin blog I produced around this topic.

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!