Regulatory update – April 2020

I hope this update finds you all fit and well in this period of great uncertainty and change. Your business continuity plans have no doubt been implemented and hopefully they have been effective in minimising the impact of the Coronavirus on your businesses as far as is possible, but do get in touch if we can assist in any way. Below is a summary of what is happening in the world of compliance.

Coronavirus and compliance

The SRA has now issued its update on coronavirus and compliance (following criticism that it had been silent on the issues facing law firms). The SRA has said that it understands that firms and solicitors will be facing uncertainty and difficult business conditions and it will look to do what it can to help, whilst continuing to make sure that the public remains protected. It has stressed however that it expects solicitors and firms to continue to meet the high standards the public expects so we must do everything we reasonably can to comply with the SRA’s rules, regulations and Principles.

It expects firms to have contingency plans in place for disruption but also recognises that these are exceptional circumstances and we must all remain pragmatic. The SRA has confirmed that it will take a proportionate approach and focus on what it considers to be serious misconduct, distinguishing between those who are trying their best to do the right thing and those who are not.

That is clearly a most welcome message but in order to protect your firms as best you can from any regulatory scrutiny, documenting your business continuity procedures, decisions made, ongoing monitoring and taking specialist advice if necessary will be essential.  

The SRA’s update provides some answers to common queries which its professional ethics helpline has received and these can be found in the Guidance and Support section of the update. It also refers to the Law Society’s Coronavirus advice and updates which, in our opinion, provides more practical advice.

Common queries raised with the SRA include issues around Accounts Rules compliance (particularly around difficulties with complying with accountant report deadlines and client cheques), maintaining client confidentiality whilst remote working, wills and witnessing of signatures, the loss of key role holders to illness, client due diligence and ID checks, conveyancing, appearances at court and PII renewal. It will continue to be updated as additional queries are raised. Similarly, the Law Society’s advice offers additional guidance for employers including the various schemes available to support law firms financially during this difficult period as well as more detailed practical advice for those working in specific sectors such as litigation, private client, crime, legal aid firms and conveyancing.

AML – the SRA’s quest to ensure compliance goes on

In March the SRA reiterated that AML work will remain a priority. Following the recent requirement for all firms to confirm that they have a risk assessment in place that meets the requirements of AML regulations, the SRA will now embark on a rolling monthly programme of AML spot checks requiring firms to provide copies of their risk assessments so that the SRA can check compliance. When the SRA does make enquiries with a firm, it will interview the firm’s relevant compliance officers, the MLRO and MLCO (if different). 

A recent regulatory settlement agreement between the SRA and Withers LLP further underlines the importance for all firms to ensure that they are fully compliant when it comes to AML, not only in terms of having the correct policies and procedures prepared, but also by ensuring that they are properly implemented, including training. Following the introduction of The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, Withers had provided AML training to approximately two-thirds of the individuals it considered to be relevant employees by the end of 2018. The training of the remaining one-third was not completed until October 2019. As a result, Withers has been rebuked and ordered to pay the SRA’s investigation costs in the sum of £1,350, after it admitted that, between June 2017 and October 2019, it failed to take appropriate measures to ensure that all of its relevant employees were given AML training as required by the regulations.  

If you are concerned about whether your risk assessment and AML policy are compliant then you should take action urgently. Please get in touch if you need assistance. 

AML levy

It was announced by the Treasury in its March 2020 budget that organisations that are subject to the UK’s AML regulations will face paying a charge to fund action against economic crime. An AML levy would no doubt put firms under further financial pressure and would present an additional burden to the already very onerous AML regime. A consultation on the levy is expected this spring, so be sure to have your say!

Closure of the Solicitors Indemnity Fund (SIF)

The SIF has been providing ongoing professional indemnity insurance (PII) to closed firms from the end of their mandatory six-year run-off cover. Owners of closed firms should be aware that the SIF will cease providing cover for new claims from 30 September 2020. Former firm owners should therefore consider whether they need to make arrangements to cover claims made after that date. The closure of the SIF will also affect anyone looking to close in the near future.

Nicholas Gurney-Champion, Chair of the Law Society’s Professional Indemnity Insurance Committee, has indicated that, unless alternative arrangements are made, principals of firms that closed after 31 August 2000, their estates, and perhaps even individual employees, could be held liable for losses arising from previous work. He has recommended that if your firm closed after 31 August 2000, or is currently in run-off, you should contact your broker as soon as possible to see if they can extend your policy beyond the end of September 2020. Conveyancing, wills and child personal injury settlements carry the most risk because of the possibility of claims being made for “decades” after work has been completed. 

The Law Society is looking into potential alternative arrangements to the SIF and will provide further information if a suitable solution can be found.

SRA updates

In its latest update the SRA provided details of a competence support package for those working with younger clients in the courts as well as further guidance on cyber crime and tackling scams.

The SRA is also apparently working on 20 pieces of guidance to help solicitors better understand and take advantage of the Standards and Regulations on issues such as acting independently as an in-house lawyer, identity checks and undertakings, whilst its guidance on conflicts of interest has already been revised following a complaint from a local Law Society that the initial guidance was not clear enough.

Concern about conveyancers’ relationships with developers

Concerns have been raised by the Competition and Markets Authority (CMA) that conveyancers’ relationships with developers could compromise advice given to leasehold clients.

Although currently permitted, developers recommending panel solicitors can present issues if solicitors are concerned about losing recommendations. There are also concerns about the effect of inducements offered to purchasers to exchange contracts quickly. 

Whilst a developer recommendation can be appropriate, for example because the conveyancer has handled a number of transactions on a development and is familiar with the documentation, there should be no penalty for buyers wanting to instruct a different firm, nor should they feel pressured to use a particular solicitor via financial enticements. 

The CMA referred to “worrying evidence” on advice in various areas including escalating ground rents, the cost of converting leasehold to freehold, the features of leasehold property and excessive service charges. 

Solicitors should obviously provide impartial advice to their clients on all issues independently of developers and/or estate agents and we would recommend that all solicitors who act in conveyancing investment schemes should understand and follow the SRA warning notice on investment schemes including conveyancing.

We could see changes to the rules to address the CMA’s concerns in the near future so watch this space. 

Disciplinary decisions

“Surprisingly incompetent” solicitor fined

A solicitor with over 20 years’ experience who acted in a “surprisingly incompetent manner” has been hit with a substantial fine. 

In October 2013 the solicitor had been instructed to sell a UK property by a seller based in Pakistan. A power of attorney (POA) allowing a relative to act in relation to the sale had purportedly been signed in Pakistan. The same arrangement had been in place the previous year in relation to the sale of a different property.

In January 2014, the solicitor prepared a variation of the POA at the relative’s request, allowing the relative to distribute the sale proceeds at his discretion. The variation was never sent directly to the seller.

When the relative returned the POA, it appeared to be signed by the seller and attested by a lawyer in Pakistan, but the attestation stamp pre-dated the creation of the variation. The solicitor said that he assumed that this was a mistake, but he did not check with the seller or the Pakistani lawyer.

Some time that year, the relative changed his name. When the property sale completed, proceeds of more than £100,000 were paid into accounts belonging to the relative in his old and new names. The seller later complained he had not given these instructions.

The solicitor was charged with recklessly failing to make enquiries of the seller or the Pakistani lawyer, independently of the relative. He admitted that he had exercised poor judgment, but denied that he had acted recklessly. The SDT agreed; because the solicitor had known the relative for years and trusted him, it was accepted that it did not cross the solicitor’s mind that the seller had not given the instructions. 

The SDT considered that, since the revised POA was for the relative’s benefit, the solicitor should have contacted the seller directly to check that the changes reflected his instructions. The SRA deemed that the misconduct was “very serious” and that the solicitor had “acted in a surprisingly incompetent manner for a solicitor of his experience and ability”.  He was fined £30,000 and ordered to pay £18,412 in costs.

Suspension following misleading holiday sickness letters

A solicitor who admitted sending letters containing incorrect or misleading information to tour operators in holiday sickness claims has been suspended for 18 months and ordered to pay costs of £21,000.

The solicitor admitted sending letters on behalf of clients containing incorrect and misleading information that did not reflect the instructions, to developing a case management system which generated automated letters of claim purportedly reflecting information received from clients and to breaching accounts rules.

The SDT found that the solicitor, who was also COLP and COFA, had expanded his firm too quickly and had taken shortcuts in the handling of claims. In doing so he had lacked integrity and had acted recklessly. He was suspended for 18 months and ordered to pay £21,000 in costs.      

Solicitor fined for forwarding ‘grossly offensive’ email to colleague

A solicitor has been fined for forwarding an email that was “highly derogatory and grossly offensive towards women and persons of a particular religious group”. Although he did not create the email and did not expressly endorse the content, he forwarded it without condemnation. At the time, the solicitor was a partner at a law firm. He admitted that he had failed to carry out his role in the business in a way that encouraged equality of opportunity.

The solicitor expressed remorse and stated that he was deeply ashamed of what was said in the email. He was fined £1,600 and agreed to pay £600 costs.

Case studies

During the COVID-19 crisis, we have received queries from law firm clients on their business continuity and contingency plans covering a wide range of issues including:

• Data protection and supervision issues when working from home
• Client account monies received by cheque/inability to deal with incoming post
• Court hearings and duties to the court
• Wet signatures on documents
• Illness/incapacity of the COLP/other key stakeholders

Weightmans can also advise on funding/banking, employment, contractual and litigation issues where firms do not have the necessary expertise so please get in touch if we can assist.