Regulatory update — Autumn 2021
Our latest update on compliance and regulatory issues.
Autumn has well and truly arrived, with dark mornings, nights drawing in, heavy rain etc. but the world is opening up (and will hopefully stay that way!) and Christmas is round the corner. In pre-pandemic times, we would have completed practising certificate renewal ‘season’, but if you/your firm have not yet renewed your practising certificates, this year you have (at the time of writing) until 13:00 on Thursday 11 November to do so.
PII renewal and risk
This has been, for a number of firms, a very difficult and stressful renewal period which hit some firms hard, and unfortunately will mean the closure of some businesses. Marsh, the sponsors of the ‘Legal Business Risk Management and Professional Indemnity Survey 2021’, confirm, as many firms have discovered, that premiums have increased steeply, new insurers are not forthcoming to replace those who have left the market and more detailed information was being sought. The survey results indicate that data security, both IT and data privacy breach, remains a number one concern, while other concerns include procedural oversights, failure to diarise, supervision issues and potential reputational damage due to unethical or unsavoury clients. If your renewal is coming up early/mid 2022, we would advise that preparations are started as early as possible as it does not appear that, going forward, the market is going to improve any time soon.
We have recently completed risk audits and provided assistance for renewal purposes and if you need any help, please get in touch.
SRA AML report
In its first professional supervisor report, the SRA has reported that, in the last 12 months, there were 85 visits to firms, with a further 168 desk-based reviews. The most common reason for non-compliance with anti-money laundering (AML) regulations was not having a proper risk assessment, followed by poor client due diligence, checks on source of funds, inadequate training or supervision and poor policies. The report says the SRA continues ‘to see firms struggling with independent audit and screening requirements’ with firms not carrying out an independent audit (a requirement of the AML regulations), and steps were needed to be taken by the SRA AML team to bring firms into compliance. In addition, 60% of policies, controls and procedures reviewed were either not compliant or only partially compliant. 273 reports of potential AML breaches were made to the SRA, with 29 enforcement actions, resulting in total fines of £160,000, and the SRA made 39 suspicious activity reports to the NCA ‘reporting on £180m of potentially criminal funds.’
In its 2021-22 business plan published on 26 October, the SRA identified its key areas of work which included ‘further increasing proactive monitoring and regulating of anti-money laundering arrangements within the profession’ and expanding its programme of AML visits to firms, so if you are in scope of money laundering regulations and have not yet had an independent AML audit, you should arrange one as soon as possible.
If you need any assistance, please contact us.
The Supreme Court’s decision in Harcus Sinclair v Your Lawyers, confirming the Court of Appeal’s decision that the court’s ability to enforce undertakings is limited to individual solicitors as officers of the court, rather than the entities they work in (other than partnerships), has led to some law firms asking for separate undertakings from individual solicitors. This raises issues for the individual as they would be personally liable, need to be certain about the wording of the undertaking and be in a position to control performance, and is not likely to be something most solicitors would agree to. The decision does not affect the ability to report the firm to the SRA. The Law Society is discussing the position with the SRA and said it will be providing guidance to the profession ‘in due course.’
Three years after the regulation of claims management companies was transferred to the Financial Conduct Authority, a survey commissioned by APIL reveals that members of the public continue to be plagued by cold calls/texts from claims management companies about making a personal injury claim and the vast majority of those surveyed supported a total ban on calls and texts. Remember that, as solicitors, you have an obligation to ensure that any client referred to you by an introducer has not been acquired in a way which would breach the SRA’s regulatory requirements if the person acquiring the client were regulated by the SRA, so make sure that your due diligence on introducers is robust enough, not only at the start of any relationship but also on an ongoing basis.
Law Society and SRA practice notes, guidance and reports
The Law Society has issued a number of updated practice notes, including:
- Legal professional privilege
- Conflict of interests
- Compliance Officers
- Who owns the file
- Residual client balances
- Closing down your practice: regulatory requirements
- Client information requirements
- Providing services and taking on roles outside your practice as a solicitor
- File closure management
The SRA have updated its guidance on:
- Transparency in price and service
- Meeting our standards for good qualifying work experience
- Solicitors and COLPs confirming qualifying work experience
The SRA has also published its latest suite of annual reports which cover five key areas: anti-money laundering, authorisation, client protection, education and training, and upholding professional standards.
Lying never pays
A solicitor who told her indemnity insurer she had never been investigated by the SRA eight days after being notified by the SRA that she was being investigated, and told the SRA her firm had merged with another firm and was covered by that firm’s professional indemnity insurance (neither of which was true), took on new clients during the cessation period and practiced without insurance, has been struck off and ordered to pay costs of over £55,000. In addition, she failed to reply to four statutory notices for information issued by the SRA; complete a compulsory anti-money laundering questionnaire; respond to two Legal Ombudsman investigations and comply with the ombudsman’s decision.
A trainee solicitor was banned from working for a law firm without the SRA’s permission after forging signatures on four payment request forms, misappropriating £100,000 from third party insurances and £2,000 from the firm.
A criminal defence solicitor agreed to be struck off after claiming £3,248 in fake expense claims. He admitted his actions were reckless and a “severe and serious lapse in judgement”.
A trainee solicitor at a firm specialising in criminal law has been barred from working for a law firm without the SRA’s permission due to a criminal conviction for stalking, prior to his employment.
Funding and non-payment of premiums
A former managing director and partner of a collapsed professional indemnity firm has been struck off for ‘double funding’ around 20 matters and withholding payment of over £1m of ATE premiums. He stated that this was an attempt to prop up a failing firm as opposed to trying to “fleece lenders”. When the firm collapsed two lenders were jointly owed c.£2 million. He was found to have breached several SRA principles including failing to act with integrity.
A stark reminder of the importance of acting with honesty and integrity and the different sanctions that can be applied by the Solicitors Disciplinary Tribunal (SDT), depending on the facts.
The tribunal suspended a solicitor for six months and ordered her to pay costs of £2300 after she was caught using a disabled blue badge that she was not entitled to use just weeks after completing her training contract. To compound this deceit, upon questioning, the solicitor said the badge belonged to her father, but later admitted that it didn’t. The tribunal accepted that whilst the solicitor had been dishonest, this did not warrant striking from the roll. In mitigation, not agreed by the SRA, the solicitor said she needed to find a space to get into the office quickly, started to panic and without thinking of the consequences, used the badge left in the car by someone else.
However, in another case where a solicitor repeatedly used a relative’s blue badge to park closer to work, that solicitor was struck off. The solicitor, admitted in 2015, was the primary carer but used it at least eight times in a three-month period for his own purposes and was convicted of using a blue badge with intent to deceive and fined £1,500.
He submitted to the tribunal that he had made an ‘honest mistake’, but this was rejected. On one occasion, he had removed it from his dashboard when enforcement officers were in the area and then put it back when they left. He also submitted it was unrelated to his professional work, he had made a ‘stupid mistake’ and denied dishonesty.
Breach of SRA accounts rules
A firm was rebuked for allowing its client account to be used as a banking facility, and the lead fee-earner, a partner, was fined £2000 for enabling £44 million to pass through the client accounts of two firms, saying she didn’t appreciate that what she was doing was a breach of the accounts rules.
The SRA highlighted that a key failure of the firm was relying on the experience of the newly recruited partner and not ensuring that her work was compliant with the accounts rules.
Ignoring AML obligations
A solicitor who ignored AML responsibilities, overrode an electronic AML search by using a manual override facility to change a non-compliant check to compliant, and failed to carry out an internet check which would have shown that the client was a politically exposed person, has been banned from holding roles as COLP, COFA, MLRO or MLCO for three years, fined £25,000 (reduced by 50% due to his limited means) and the firm that he owns was fined £15,000. In the agreed outcome with the SRA, approved by the SDT, he admitted not having adequate risk assessments or procedures in place to manage the risks of money laundering, failing to undertake sufficient due diligence on clients’ identities and parties making payments into client account and source of funds and providing a banking facility.
Doctoring time recording
Two paralegals in a professional indemnity claims preparation team who falsely logged entries on the case management system have been barred from working in the legal profession. The firm reviewed their time recording and found that no calls had been made in relation to a large proportion of time entries. No clients were affected as the firm identified the position before clients were over-charged.
Social media abuse
A solicitor who sent offensive tweets over a seven-month period to MPs and Government advisors, via his Twitter account which identified him as a solicitor, has been fined £2000, having reached a regulatory settlement agreement with the SRA.
Dishonesty over struck out claims
The SDT ruled that a solicitor acted dishonestly after falsely letting clients believe their claims were ongoing when they had actually been struck out due to her mistakes. Her misconduct was discovered during an internal investigation and she was reported to the SRA. The tribunal heard that the solicitor had “panicked” and emailed the clients, saying there were administrative difficulties that were being dealt with. She was struck off and ordered to pay £36,000 in costs.
Failure to complete ID checks
A solicitor has been rebuked for helping a fraudster commit theft. The solicitor accepted a client who walked in without an appointment, explained he had borrowed some money and wanted to renovate and sell a property to repay it. The solicitor checked the client’s passport but did not see any evidence of where he lived or that he owned the property he intended to sell. The solicitor admitted to failing to conduct adequate client ID checks and failing to verify ownership of the property in question. The SRA noted this was an isolated incident with a low risk of being repeated. The solicitor was rebuked and ordered to pay £300 costs.
Recently we have been advising firms on a range of issues, including:
- Compliance health check for a new client prior to retainer
- Disciplinary advice on the implications of conduct outside of practice
- AML independent audits
- Advice on the need for a NCA Suspicious Activity Report
- Alternative business structure application
If we can help with any queries, concerns, future planning etc., please get in touch.