Regulatory update — Autumn 2022
Our latest update on compliance and regulatory issues.
The Compli team is delighted that, with the recent merger of Weightmans and RadcliffesLeBrasseur, the Solicitor Regulatory and Professional Discipline team has expanded, providing further expertise in the areas of risk and compliance and disciplinary assistance.
Update on compliance and regulatory issues
Increase to SRA’s fining powers
The SRA’s decision to increase its fining powers from £2,000 to £25,000 for solicitors, traditional firms and employees, despite the Law Society and other contributors’ arguments against the increases came into play from 20 July 2022. The increase will apply to all cases where the SRA considers a fine is appropriate, other than matters where the SRA has already sent a notice proposing to refer the case to an SRA adjudicator or the SDT (although if there is then an agreed regulatory settlement the fine could be up to the new level). Those being investigated now where a decision has not yet been made (and these matters could have been ongoing for 18 months -2 years), will come under the new fining regime. The SRA can refer the matter to the Solicitors Disciplinary Tribunal (SDT) if it believes the fine should be higher, or it believes it is in the public interest to do so.
Get in touch with us to discuss having a Risk and Compliance health check carried out. The cost of getting it wrong has never been greater!
SRA’s Risk Outlook Report: information security and cybercrime in a new normal
The SRA has published a Risk Outlook Report to remind firms of information security and cybercrime threats for law firms, particularly following the increase in the use and reliance on IT during the pandemic and continuing in the ‘post-pandemic new normal’. The report provides some practical advice to firms to avoid problems and mitigate such risks. The key IT incidents reported to the SRA by law firms are phishing and email modification frauds; ransomware and attacks on third parties, and provides examples including a compromised system at an IT service provider and an attack on a barristers’ chambers. The SRA believes that conveyancing practices are the most obvious future target, but states that any entity that holds money or confidential information can be a possible target.
SRA’s annual reports
The annual reports relating to the SRA’s operational work in 2020/2021 have been published by the SRA. The number of reports of potential anti-money laundering breaches has increased from the previous year; £26.9 million was paid out from the Solicitors Compensation Fund (nearly 50% more than in the previous year); and 10% of firms are now ABSs. The Chair of the SRA Board admitted that the areas that still need improvement include concluding cases in a timely manner. Some findings relate to ethnic minorities within the profession, in particular an over representation of BAME solicitors being reported to the SRA. The SRA is carrying out further research on this and plans to make some positive changes for the future. The annual reports are available on the SRA’s website to review.
After 18 months, HM Treasury finally approved the Legal Sector Affinity (LSAG) guidance, which had been issued in draft form in January 2021. There were some amendments to the 2021 version, so make sure you are relying on the correct version, destroy any hard copies you may have, and check links in your PCPs are to the approved version (215 pages, rather than 212).
While many firms in scope of the money laundering regulations have already been considering the draft guidance, it now has full standing and the court will take into account whether it has been followed when deciding whether offences have been committed by not following the regulations, as will the SRA.
The SRA is continuing its AML inspections, visiting low and medium risk firms, as well as high risk. The documents they ask for in advance of the visit are extensive, so being up to date and prepared is key to making an SRA visit as smooth and painless as possible. We know of a number of firms who have recently received letters notifying them of a planned AML visit and requiring documents and information within 21days, and we are carrying out independent AML audits for a number of clients.
If your firm is within scope and has not yet had an independent AML audit carried out, it is only a matter of time before the SRA will be in touch so don’t put off having an AML independent audit (the Regs require you to do so) and get in touch with the Compli team for a quote. If you have a visit coming up, have had one and have some work to do, or just need assistance with AML issues, including the independent AML audit, please get in touch.
From 1 September 2022, the Money Laundering and Terrorist Financing (Amendment) (No 2) Regulations 2022 require firms in scope to assess proliferation financing risks, in addition to combatting money laundering and terrorist financing, and put in place policies, controls and procedures (PCPs) to mitigate and manage the risks. Proliferation financing is the provision of funds or financial services used, in whole or in part, for the manufacture, acquisition, development, transport, transfer etc. or possession or use of weapons (chemical, biological, radiological or nuclear), in contravention of a relevant financial sanctions obligation.
The regulatory requirements mirror those for AML, so regulated entities can create a separate risk assessment and PCPs or incorporate it into the existing AML firm wide risk assessment (FWRA) and PCPs. The first National risk assessment of proliferation financing was published September 2021 and must be taken into account in the FWRA, and further sector-specific guidance e.g. from LSAG, FCA etc is awaited
Guidance and Practice Notes
The Law Society has recently issued a number of practice notes and guidance, including:
- Conflict of interests
- Alternative business structures
- SRA powers of investigation
- Professional undertakings
- Bribery Act 2010
- Price and service transparency
- Closing down your practice: regulatory requirements
- Setting up a practice: regulatory requirements
- File closure management
- Who owns the file?
and the SRA has issued/updated guidance including:
- Confidentiality of client information
- Accepting instruction from vulnerable clients or third parties acting on their behalf
- Issuing Solicitors Disciplinary Tribunal proceedings
- The SRA’s approach to financial penalties
- Legal Service Affinity Group guidance
- Guidance on firm inspections
- Convictions arising from matters of principle or social conscience
- Sexual Misconduct
- Acting with integrity
- Undertakings given by, or on behalf of, incorporated practices
Recently we have been advising firms/solicitors on a range of issues, including:
- Compliance health check and independent AML audit for a new client prior to retainer
- Disciplinary advice relating to an investigation by the CLC
- AML independent audits
- Alternative business structure application
- Responding to an SRA investigation
Struck off for verifying forged signature
A 31-year PQE solicitor has been struck off for signing two parental consent affidavits for the children to travel to South Africa to confirm the documents had been signed and sworn before her, when neither parent was present, and, as was discovered by the mother after the parents divorced, the father had forged the mother’s signature. The solicitor admitted it was an error of judgement, but done with the best of intentions.
Rebuked for preventing complaint to regulatory bodies
A solicitor who made an offer to settle a complaint conditional on the client not making a complaint to the Legal Ombudsman or the SRA has been rebuked by the SRA. The solicitor admitted his actions were in breach of the standards that solicitors are required to uphold, which was taken into account by the SRA when it imposed the sanction.
Struck off for not revealing convictions
An experienced solicitor was struck off for not revealing his convictions for drink-driving, having previously served a custodial sentence for driving to work when he was disqualified as a result of a drink-driving conviction. He did not notify the SRA about his offences and lied to his firm that he could drive and insure his car. The SDT said his conduct was lacking ‘probity and integrity expected of a solicitor’.
Rebuked for not disclosing conflict of interest
A solicitor who acted in relation to a residential property transaction on behalf of both his stepsister (the purchaser), and one of his father’s companies (clients of the firm), which was providing the completion monies, and provided advice on the loan agreement between the two parties, was rebuked.
He did not follow internal procedures, did not make appropriate checks for source of funds and acted in a conflict of interests. The solicitor admitted the breaches, and the SRA noted this was an isolated incident, he did not personally benefit from his actions and there was no adverse impact.
Banned for dishonesty
The SDT has struck off a solicitor and ordered him to pay £25,300 costs following a finding that client monies were used for purposes other than the completion of property purchases in at least seven matters, and there were probably more cases as the SRA had received 25 claims on the compensation fund from former clients totalling £752,000.
Deputy District Judge struck off for misappropriating monies from law firms and clients
A solicitor who was head of commercial property and a Deputy District Judge has been struck off for dishonestly misappropriating almost £300,000 from two law firms and their clients by making payments into his own bank accounts or those controlled by him. He altered invoices so money would be paid to him personally, overstated how much a client was required to pay to settle litigation and took the surplus, and transferred money from client account to a company that was doing work on his house.
Solicitor struck off for false statement
A solicitor has been struck off for making false and misleading statements on applications for PII, failing to mention three SRA investigations; issuing group litigation proceedings without consent; seeking to charge improper additional fees in other litigation; breaching the accounts rules, and failing to co-operate with the Legal Ombudsman. The solicitor’s view that she did not need to disclose the ongoing SDT proceedings on the basis that nothing had been proven at that point was “incredulous”. The SDT said the misconduct was ‘dishonest, deliberate, calculated and repeated”.
Struck off for transferring client’s money and property
A partner was struck off having transferred his deceased client’s £1million property into his own name before probate had been granted and £820,000 from the estate into his own bank account and for diverting money from 25 other matters into his private bank account which he opened with the firm’s name, claiming this was to pay expenses and disbursements he had covered from his own money. He denied being dishonest and acting without integrity. He and ordered to pay £25,000 in costs.
Fined for using the firm’s account as a banking facility
A solicitor who acted as a sole trustee for beneficiaries of her family trust has been fined £15,000 for using her firm’s client account as a banking facility. The solicitor, who has been practicing for 50 years, used the firm’s account for 18 years as a family trustee. An SRA investigation revealed that the client account was used as an overdraft when the family account did not have enough funds.
While the SDT did not find her actions to be dishonest or deliberate, the rule against using the client account as a banking facility was breached and the conduct was found to be: “inconsistent with the division in the statutory regulatory regimes governing financial services on the one hand and legal services on the other”.
Trainee fined for inappropriate behaviour at the firm’s Christmas party
A trainee solicitor who under influence of alcohol touched his colleagues inappropriately at the firm’s Christmas party and told one of them that he spiked her drink with a date-rape drug (Rohypnol), was ordered to pay a fine of £2,000 and £600 SRA’s costs. He accepted that his actions were not appropriate and asked the SRA to accept his remorse. The SRA decided that inebriation was not a mitigating factor.
Struck off for a criminal conviction for sexual assault
A 20 year PQE solicitor with no previous regulatory history was struck off following his criminal conviction for sexual assault. The SDT had regard to its overriding objective which is “to maintain public confidence in the integrity of the profession”.
Ban for accepting £2,500 gift
In an agreed outcome with the SRA, a solicitor has been suspended for 12 months for accepting a £2,500 gift from a client into his personal account without declaring it to his firm and later contacting the property developer who had made the payment by email from his personal email address requesting a further benefit for introducing them to a business partner.
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