Legal Compliance Update
The Access Group provides the latest legal compliance news for law firms and solicitors in the UK.
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Monthly Compliance Update – May 2024
We started this month’s update looking at a number of issues related to anti-money laundering (AML), including a review of the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 being carried out by HM Treasury. The review is looking at whether changes should be made to improve proportionality and additional clarity, and comes as the Treasury is considering radical changes to the anti-money laundering supervisory regime, which could a see a single AML supervisor for legal services, with the Solicitors Regulation Authority (SRA) putting itself forward for this role.
New AML inspections
The SRA is starting a new round of AML inspections in May and has updated its guidance on what to expect on an inspection; There are two key changes, (i) it will be looking more closely at AML controls, and (ii) it may not always interview fee earners.
Previous inspections have resulted in a number of firms being sanctioned over £120,000 for various procedural breaches, including having no, or non-compliant, firm-wide risk assessments, no client and file risk assessments, no client due diligence, no policies, controls and procedures in place since they were required (2017), and no AML training provided to staff. It will be interesting to see if any firms get caught out this time!
Estate agents sanctioned for AML breaches
More than 250 estate agencies have been fined a total of over £1.6m for breaching anti-money laundering requirements, with fines ranging from £1,500 to over £50,000. Law firms could rely on estate agents to carry out client due diligence on clients referred to them, but based on these latest sanctions many firms may choose not to go down this road, especially as the law firm would remain liable for any errors of omissions made by the estate agent relied upon.
New sanctions guidance
The Office of Financial Sanctions Implementation has introduced some new Frequently Asked Questions, which are designed to offer easily accessible responses to commonplace compliance questions, and should be read to ensure firms are and remain compliant.
By way of reminder, firms should not rely on third party assurances for sanctions due diligence as to do so could lead to sanctions being levied on them should the third party have carried out the checks incorrectly.
CQS clarification
Back in October 2023, the Law Society published new requirements around who could be a Senior Responsible Officer (SRO) for the purposes of the Conveyancing Quality Scheme (CQS), which led to a number of queries being raised by SROs who were not solicitors (FCILEx and CLC) but held these roles. The Law Society published some holding advice at the time but has now confirmed that SROs can in fact be FCILEx and members of the Council for Licensed Conveyancers as long as they meet the other requirements of the role.
Padding out time records
A recent poll found that more than a third of lawyers have admitted to padding time sheets, with 13 per cent saying that they do so “regularly”. The poll for RollonFriday, a law industry website, received nearly 900 responses, with 35.5 per cent of people admitting that they were guilty of “time dumping”, or adding time to clients’ bills that in reality had not been incurred. Thirteen per cent were regular offenders, 12.6 per cent were “occasionally” guilty and nearly 10 per cent considered themselves “rarely” culpable.
These results follow on from a solicitor who was struck off last month for adding time for work he had not carried out, but who said he was going to do it in the future; clearly manipulating time records to obtain some form of gain is unacceptable. It has been said by some that clients do not suffer as such padding is caught by the firm before bills are sent out, but this should still be addressed by firms as it shows fee earners to be lacking integrity and honesty.
Fair rates of interest
We reported last month that there had been a 1000% increase in the amount of interest earned by firms on client monies held in their client accounts, and since then the SRA has said, “we have heard of cases of firms doing quite well out of the monies they hold if this involves large amounts and are held for a more significant period. Similarly, we have also been told that some firms are not accounting to their clients for anything like the same rate of interest, and certainly not what could reasonably be classed as 'fair’”.
Not only should firms review whether the rates of interest being paid are fair, but also whether their financial positions could become untenable should this interest reduce or disappear altogether.
Post Office scandal update
This month has seen a number of current and ex-Post Office lawyers appearing before the Public Inquiry looking into the scandal, and a number of areas of serious misconduct were exposed, including:
- Drafting critical documents in such a way that they attracted legal profession privilege and reduced the risk of having to be disclosed.
- Gave advice not to keep a paper trail in relation to reporting issues to insurers.
- Using inappropriate wording in communications (‘whim’, “they can leave if they don’t like Horizon”, “this is purile”, inappropriate email jokes, “I smell a rat”, “axe to grind”)
- Commercial lawyer dabbled in criminal work.
- Lack of supervision of the only criminal lawyer in POL, who only had previous property experience.
- Lack of competence of external lawyers in dealing with prosecutions.
- The size of the Post Office account led to a lack of independence in advice.
- Advised in writing that key evidence should not be disclosed to the defence.
Monthly Compliance Update – April 2024
Consultations and reviews seem to be the flavour of the day at the moment, with HM Treasury carrying out a consultation on improving the effectiveness of current money laundering legislation, Members of Parliament (MPs) on the Justice Committee backing a review or legal regulation, and other MPs carrying out a review of the property sector.
It will be interesting to see what comes out of the consultations and reviews, but it is hoped we will see:
- AML Reliance – liability being placed on the entity being relied upon, rather than the entity asking to rely on the client due diligence carried out.
- Single regulator – a new single legal regulator introduced to make regulation more transparent for consumers and a consistent approach to regulation for practitioners.
- Referral fees – a ban on referral fees and the removal of improper pressure by referrers on law firms.
Ethics
Professor Richard Moorhead told a recent Legal Services Board conference that ‘apathy’ and ‘ignorance’ were a ‘root cause’ of unethical behaviours that have manifested in issues such as the Post Office scandal, and that lawyers’ lack of interest in ethics may be fuelling an increase in rogue behaviour in the profession. The Post Office scandal had revealed weaknesses in professional rules and highlighted occasions where lawyers were either ignorant about their responsibilities or were ‘too clever by half’.
The next stage of the Public Inquiry looking into the Post Office scandal starts on 9 April, when senior Post Office executives, government ministers, and 15 lawyers will give evidence; the lawyer hearings will provide a real insight into how they operated and whether in fact their conduct was unethical. It is worth watching the previous hearing that involved Jarnail Singh, in-house solicitor, as if his evidence in that hearing is anything to go by, his next hearing will be very interesting!
New property form (TA6)
The Law Society has updated its property form (TA6) to support National Trading Standards (NTS) guidance on 'material information' required for property listings, but this has drawn significant criticism from conveyancing solicitors, who believe there should have been consultation with them; the Property Lawyers Action Group has been particularly vocal about how the form has increased in size to 32 pages, the liabilities it appears to open conveyancers up to, and whether in fact many of the questions are relevant to them bearing in mind the new information is to assist clients when dealing with estate agents.
The Law Society has said it will review the position and will change the form if it is felt appropriate.
In-house solicitor guidance
As a consequence of the role played by in-house solicitors in the Post Office scandal, and the findings from the thematic review carried out by the Solicitors Regulation Authority (SRA), the regulator has developed a raft of new resources, and views are now being sought on them before they are formally adopted.
AML due diligence on other parties
We carried out a poll during the webinar asking “Are you conducting AML due diligence on the other party(s) involved in high risk (property, etc.) transactions?”; the results were, 22.3% - Yes, 47.1% - No, and 33.6% - unsure.
We asked the question as we had been approached with a query around sanctions, where carrying out due diligence on the other party is a requirement, but it became apparent that firms may not be applying the same to high risk matters when carrying out AML due diligence; the poll drew a number of questions, which clearly showed a lack of clarity around the rules and how they should be applied.
Property work is regarded as high risk, so enhanced due diligence (EDD) is required as it falls into the definition of “any other case which by its nature can present a higher risk of money laundering or terrorist financing”; the Money Laundering Regulations say in relation to EDD that “depending on the requirements of the case, the enhanced customer due diligence measures required may also include, among other things taking additional measures to understand better the background, ownership and financial situation of the customer, and other parties to the transaction.”
This means that a firm acting for a seller therefore needs to consider carrying out checks on the buyer, but not necessarily to the same extent as they would do on their own client; the SRA has confirmed that the fee for doing this can be passed on to the client as part of their transaction costs (but not a disbursement).
In order to assist we have sent an email to the SRA asking for clarity around the questions received on a ‘no names’ basis and will provide an update in due course; watch this space!
Monthly Compliance Update – March 2024
We covered a mixed bag of issues this month including the introduction of the Information Commissioner’s new Legal Services Operational Privacy Certification Scheme (LOCS:23); the aim of the scheme is to help law firms demonstrate compliance with data protection requirements and inspire trust and confidence in clients.
A poll we carried out during the webinar showed that 84.5% of attendees had not previously heard of LOCS:23, and of the 15.43% that had heard of it only 9.42% would look to obtain it, with 77.54% saying they were unsure at this point.
We have approached the Law Society and asked whether it intends to make LOCS part of the Lexcel/CQS accreditations, and if it is, whether it will be a mandatory or optional requirement; Cyber Essentials has been adopted as an optional requirement, so it may take the same approach with LOCS.
AML Update
A number of issues related to anti-money laundering (AML) were covered in the webinar where firm-wide risk assessments will need to be reviewed and updated accordingly, for example:
- The Financial Action Task Force (FATF) has published its annual report for 2022/23
- The Solicitors Regulation Authority (SRA) has updated its sectoral assessment, with major changes covering:
- Vendor fraud
- Pooled client funds
- Third-party managed accounts
- Irregular methods of transferring funds
The last month saw a number of firms being sanctioned for various AML breaches, with fines ranging from £3,203 - £23,000; the majority of issues found were around a lack of compliant firm-wide and client and matter risk assessments.
The SRA has made it very clear that it will take action against firms where they have failed to comply with their obligations and that this is because the SRA itself is under pressure to enforce the relevant regulations on those it regulates.
Ethical conduct
The Legal Services Board (LSB) has said that frontline regulators need to look at not just whether firms are complying with rules but also whether they are acting in the public good, with the LSB Chief Executive saying “lawyers may be technically competent but if they then use that in a bullying or harassing way that will not be acting in the public good. Solicitors need to look at how conduct would be perceived by the public, not just to show they are complying with the rules.”
The SRA has started a conversation about the future of client protection arrangements, the extreme end of which could see the end of firms holding client money and of the SRA Compensation Fund.
The consumer protection review essentially aims to answer whether there is more the regulator can do to identify firms that might fail and how to protect consumers when they do.
Regulator performance
The SRA is one of only two of the eight frontline legal regulators to achieve top ratings in the LSB’s latest assessment of its domains. It is notable that the report points out that the assessment period, the eight months to May 2023, misses what may be three key events: the Daily Mail’s ‘sting’ against immigration practitioners, the intervention into Axiom Ince and 'the coming to light of the potential scale of involvement of legal professionals in the miscarriages of justice at the heart of the Post Office scandal'.
A recent article written by Greg Treverton-Jones KC, gave his thoughts around why he believes the SRA is misusing its fining powers it is well worth a read; here is a flavour of what he said, “Over the last fortnight or so, two astonishing decisions have shown how the SRA now uses (or more accurately misuses) the wide-ranging powers to which I drew attention. A Farrer & Co solicitor was ordered to pay £10,105.44 (note the spurious precision in the figure) and £300 costs after he was disqualified for 22 months for driving when his alcohol level was above the legal limit. He had been ordered by magistrates to pay around £2,000 by way of fine, costs and victim surcharge: the fine itself was £1,348.”
Residual balances
A recent case has raised a number of issues around the annual accountants report and whether auditors are carrying out their roles effectively; the case involved a law firm that had held nearly £600,000 in hundreds of residual client balances dating back almost 29 years, with the firm being fined £5,899. Although the issues were eventually identified and reported by an accountant in 2022, why weren’t they identified in the decades before this, especially when the Accounts Rules were more stringent around the lodging of qualified reports.
It will be interesting to see how the firm deals with the balances bearing in mind many of the files will have been destroyed after the normal archive retention period (6/12 years), but then again, if the residual balances were in such a mess perhaps the archive system and data protection procedures are too!
It will also be interesting to see how many complaints the firm will get when it returns the balances and clients complain about why it has taken so long to return them, especially when some of them could have been earning significant amounts of interest or been used for paying bills, mortgages, etc.!
