Regulatory update - June 2020
New risks will no doubt be on firms’ agendas as lockdown eases and people start to talk about returning to their offices and to what will be the “new…
We hope this update finds you all fit and well. We know from discussions with our clients that there has been quite a lot of pressure on COLPs and risk managers over the last few weeks, implementing business continuity plans and managing the risks of remote working during the pandemic. New risks will no doubt be on firms’ agendas as lockdown eases and people start to talk about returning to their offices and to what will be the “new norm”. Do get in touch if we can assist in any way. Below is a summary of what has been happening in the world of compliance.
SRA and Law Society advice and practice notes
The SRA and the Law Society continue to provide advice, practice notes and updates on issues of concern and FAQs, so do check their websites and get in touch with us if you have any queries that we can assist with.
The general approach from the SRA is that while acknowledging that law firms and solicitors face uncertainty and difficult business conditions, and it is looking at what it can do to help, coronavirus is not a reason to reduce standards in relation to compliance. In situations where there are compliance difficulties, the approach taken should be clearly documented, and, if possible, when ‘normality’ is resumed, the position be rectified e.g. in the case of a will, arrange to see the client to confirm instructions, arrange a capacity assessment if needed, and re-sign the will. The SRA has confirmed that it will take a proportionate approach, which includes enforcement and if it receives complaints, it will take into account mitigating circumstances.
The SRA has closed its telephone professional ethics helpline during the pandemic so the only way of contacting them is via the Standards and Regulations webchat function or by email. If you want access to immediate advice that you can rely on during these challenging times, our Compli helpline is always available so do get in touch if you need support.
The Legal Sector Affinity Group (LSAG) has issued an Advisory Note ‘COVID-19 –and preventing Money Laundering/Terrorist Financing in Legal Practices’, which warned firms that criminals may try to take advantage of the situation and to be alert to the risks in new or prospective customers, including being asked to work with unusual types of client or types of matter; clients resisting compliance with due diligence checks; becoming involved in work outside the practice’s normal area of experience/expertise and transactions where the business rationale is not clear. The note also provides advice on identification and verification.
EU countries are required to transpose the 6th Anti-Money Laundering Directive (6MLD) into national law by 3 December 2020, with relevant regulations being implemented by 3 June 2021. While 5MLD was mainly aimed at increasing transparency, 6MLD provides minimum requirements for the definition of money laundering offences, focused on eliminating loopholes, and the offences include cybercrime and environmental crime. One change under the 6MLD is the expansion of criminal liability to legal persons (i.e. companies or partnerships) where they neglected to stop the illegal activity provided by a ‘directing mind’ within the company. Even though the criminal activity that generated illicit funds may not be fully or even partially identified, an individual or legal person could be convicted. Conviction is another area that has been changed as imprisonment will be for a minimum of four years for money laundering offences, an increase from one year, and any sentence may be enhanced with ‘effective, proportionate and dissuasive sanctions’ which could be combined with fines, which can include the full shut-down of a business.
The SRA is continuing with its thematic reviews of firms’ AML policies and procedures so do make sure they have been updated and also reflect what is being done in practice. Independent audits of your policies and procedures can help to provide you with comfort and peace of mind so if this is of interest, please get in touch.
SRA data on firm diversity
You may recall completing a diversity questionnaire last summer. The SRA has analysed the information received from 96% of law firms, representing information from over 186,000 people working in over 9,500 firms. The SRA confirms that levels of diversity continue to slowly improve, although it varies depending on firm size and level of seniority and, on the basis that just 3% of solicitors who responded described themselves as disabled (the Government’s figure for the wider UK workforce is 13%) says that this indicates that an ‘apparent unwillingness of employees to declare they have a disability continues.’ It goes on to say ‘this potentially suggests a culture where disabled solicitors are not coming forward and therefore accessing adjustments which could be made within the workplace to benefit both themselves and the service they provide to clients.’ In addition to the firm diversity study, the SRA carried out a survey of 3000 law firms about their policies and practices on disability inclusion and engaged with disability experts, disabled solicitors and law firms. It found some firms are beginning to do more to promote disability, but most had not adopted a holistic or rounded approach. There was also uneasiness about requesting adjustments and having discussions about them. The SRA found an ‘emphasis on mental health and wellbeing and whilst we highly praise the work being done in this area, we encourage firms to put similar commitment into other areas of disability.’
The diversity data also showed that nearly half of all solicitors are now women (49%), up 1% since 2017, although just one in three (34%) partners are female; the proportion of Asian solicitors has increased from 9% to 15% over the past five years, although this falls to 5% among the larger firms and the overall proportion of black solicitors (3%) is broadly in line with the general population. The proportion of solicitors attending fee paying schools goes down marginally each year, (21% of all solicitors, rising to 32% in the larger law firms), compared to 7% in the general population.
Whiplash reforms delayed to April 2021
In what will not come as a surprise to anyone, the reforms to the whiplash claims process have been put back again, this time to April 2021. The Government said it remains fully committed to the measures but that the coronavirus crisis made it impossible to meet the 1 August deadline. Law Society president Simon Davis said the decision 'provides welcome pause for thought and much-needed clarity for the personal injury sector'. He noted that important policy decisions remain to be made about how the portal will work in practice, and solicitors as well as the general public will need time to adapt.
Business continuity plans and risk registers
There has been much discussion about BCPs and their effectiveness in the face of the challenges of COVID-19, including the Law Society producing its BC toolkit. If you’ve not already done so, now may be a good time to review your plan, consider how it ‘performed’ and what, if any, changes need to be made. While it was not possible to have foreseen the pandemic, and therefore plan for it, there will be lessons to be taken from what did happen, what should/could have been in place and improvements that can be made.
You should also consider updating your risk register to reflect the “new” risks that have arisen as a result of Covid-19. The risk register is a great tool to demonstrate compliance as it provides documentary evidence that you are identifying, managing and monitoring the firm’s risks.
The SRA has said that firms that are unable to secure PII because of Covid-19 can extend the extended indemnity period by agreement and with regulatory approval. Under the usual rules, firms unable to obtain a new policy go into the extended indemnity period under their existing policy, namely a 30-day extended policy period (EPP) and then a 60-day cessation period (CP), and by the end of the 90 days, the firm has to either obtain cover or close. In situations where firms have not been able to sort PII due to Covid-19 related difficulties, the SRA has said firms should try and reach agreement with their insurer to extend the EPP, CP, or both, and then apply to the SRA for a waiver from provisions in the SRA indemnity insurance rules. Insurers may ask for payment of the premium in advance, and, if so, the firm will need to confirm in the waiver application that it has or will make payment to the insurer for any additional premium for the extension. Firms that cannot agree an extension and reach the end of the 90 days must notify the SRA and close.
Legal Services Board to review random sample of disciplinary decisions
Last year, the LSB completed a review of the enforcement processes used by the SRA and BSB, and one of the issues it identified was the need for assurance of the quality of enforcement decisions. As a result it is planning to review a “random sample” of disciplinary decisions to ensure the right processes and procedures are in place. The LSB said that although it lacked the power to appeal against legal regulators’ decisions, there was “no impediment to the development of a considerably more rigorous approach” to oversight than it currently had. It will not be looking at whether a decision was correct, but will consider whether the processes and procedures used “support sound decision-making”.
Briefcase left on train
The former junior solicitor who was struck off for lying about leaving a briefcase which contained sensitive documents on a train is appealing the decision, supported by a firm, QC and counsel acting pro bono. The appeal is on the grounds that the SDT failed to investigate the impact of the incident on her mental health; failed to take into account factors including good character, the fact that no harm occurred, there was no gain to her financially or professionally and it was a one-off incident; erred in its findings of misconduct and dishonesty, and erred in law by deciding the case did not fall under 'exceptional circumstances'.
During the hearing it emerged that her former employers, the SRA’s appointed legal adviser, had not reported her conduct, although it had reported the loss of documents. The SRA’s investigation of the case concerning regulatory conduct was instigated following a complaint made by someone named in the documents. The SRA said it has written to the firm reminding it of its obligations to promptly report possible misconduct.
Failure to run business effectively
A sole practitioner who let his firm “dissolve into a complete mess” and which was shut down by the SRA in February 2018 has been fined £7,500 by the SDT, following a regulatory settlement agreement with the SRA. He also agreed that conditions should be placed on his practising certificate for an indefinite period preventing him from being a sole practitioner, partner in a law firm, COLP or COFA and from holding client money or being a signatory on any client account. He had used a “manual accounting system” which did not comply with the rules and there was a cashbook but no running balance and breaches identified in the qualified accountant’s reports had not been rectified. The solicitor admitted continuing to accept instructions from conveyancing clients after his office bank account had been frozen, and was awaiting funds on a probate matter, and admitted failing to protect client money.
Using firm as a banking facility
A solicitor has been struck off and ordered to pay £28,000 costs after allowing the firm to be used as a banking facility for two years, during which more than £8 million passed through the client account. The SDT heard that the solicitor effectively oversaw a cheque clearing scheme with a third party, paying out sums before cheques had been cleared by the firm’s bank, often on the day deposits were made. She also withheld up to £40,000 that should have been sent to clients, in order to help the firm and for over a year, had failed to promptly replace shortfalls in the client account. The solicitor self-reported the £150,000 shortage on the client account and delays in making payments to clients.
The tribunal found she had acted with a lack of integrity, allowed her independence to be compromised, failed to act in the best interests of clients and had acted dishonestly.
Lying about PII
A solicitor, one of two partners in a law firm and its COLP and COFA, was struck off and ordered to pay £8,000 costs for allowing his firm to operate without indemnity insurance and then lying about it to the SRA and a new insurer. The SDT said he denied all the allegations, describing himself as “mistaken perhaps, nothing more” over whether he had insurance.
The existing indemnity insurance policy expired at the end of March 2017 and an offer of insurance was accepted the same day, but the premium was not paid. The firm was advised at the end of May that it was without cover and the offer of cover was withdrawn. He failed to notify the SRA. By mid-August 2017, he secured a policy from another insurer, having said that the law firm had cover at the time.
The solicitor denied dishonesty. The SDT said there was no evidence of harm caused to any individual clients, but “there was significant potential for substantial harm”, while the damage to the reputation of the profession was “very substantial”.
Four partners in a law firm have been fined for sitting on almost 1000 residual balances, ranging from 2p to £95,000 and totalling over £468,000, with the oldest going back to 2002. The firm’s last five accountants’ reports had all been qualified. The firm’s COLP and COFA told the SRA he was aware of the residual balances but had delayed addressing the issue until the firm had installed a new account software package, but was still considering which one to install.
In an agreement with the SRA, approved by the SDT, the partners admitted: failing to keep properly written up accounting records, failing to carry out client reconciliations, breaching the rules on residual balances, causing or permitting a minimum client account shortage of at least £9,100 and operating client suspense accounts with overdrawn balances. The COLP and COFA was fined £10,000, reflecting his greater responsibility, and the other partners and the firm were each fined £7,500, with costs of £10,000 on a joint and several basis.
In recent weeks, we have been advising firms on a range of issues including:
- Data protection breaches
- Business structures and ABS applications
- Potential conflicts/own interest conflicts
- Terminating client instructions
- SRA/FCA regulation
- Disciplinary matters