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Regulatory update – March 2020

As we approach the end of the first quarter of 2020 the world of risk and compliance shows no sign of slowing down.

As we approach the end of the first quarter of 2020 (where has the time gone?), as anticipated at the start of the year, the world of risk and compliance shows no sign of slowing down, as more guidance is produced on an almost daily basis by the Law Society, the SRA launches a consultation on Compensation Fund changes and will be writing to all firms about AML changes, and all regulators produce information relating to the Brexit transition period.

Compliance with regulations and legislation

The raft of regulations and legislation that firms must comply with is onerous and can be daunting. We have recently carried out risk and compliance health checks, including our ethics barometer, and discovered that, for example, firm AML risk assessments often fall short of SRA requirements, EU regulations are overlooked and, while firms have added the digital badge to their website, those firms that do not cover work within the pricing requirements are overlooking that they need to include the complaints procedure on the website. As the SRA is conducting a sweep of websites to check firms are complying with the rules, is your firm compliant? The responses to our fee earner questionnaires, and the ethics barometer developed from those replies, indicate that not all fee earners take the same approach to matters, including ethical issues, which may lead to difficulties. If we can assist, then please get in touch.

SRA Standards and Regulations

3 months on from the introduction of STaRS on 25 November 2019, we do now have shorter codes but also a considerable number of new and re-issued guidance, rather unhelpfully all redated 25 November, together with warning notices, with no indication of what, if any, amendments had been made over and above the references to the previous Handbook, outcomes etc. being amended to the paragraph numbers of the new codes and new rules. The Law Society has also taken the opportunity over the last few months to release new advice and practice notes. It’s becoming a full time job just keeping up with the ‘new’ information!

We will continue to point out new guidance as it is produced, but would suggest that reliance is not placed on previous guidance that you may have copied/saved, even if that was relatively recent, and before taking what would be your ‘usual steps’, you check the Law Society and SRA websites for any updated advice or guidance.

SRA Transparency Rules

The Transparency Rules have caused difficulties for some firms, particularly with the need to keep updating websites as hourly rates, scope of work etc. change. As well as dealing with those firms whose websites were not compliant in the first review, the SRA ‘web sweep report’ dated 25 November, confirms that it will “conduct regular six monthly web sweeps, reviewing 600 law firm websites on each sweep.” The SRA also plans to conduct a thematic review during 2020. You have been warned!

AML Regulation

In December 2019 the SRA wrote to all firms it supervises under the money laundering regulations (almost 7000) asking them to confirm by the end of January that they had an AML risk assessment in place that complies with the requirements in the money laundering regulations. The SRA has recently said it will follow-up with firms that declared that they don’t have a compliant risk assessment in place, and those that did not respond, and from February, it was beginning a rolling exercise to call in a sample of firms’ AML risk assessments. All firms should ensure that their AML policies are updated to ensure compliance with 5MLD and recent guidance. Please get in touch with the Compli team if we can help you with this. 

10 January 2020 saw changes introduced by the EU’s fifth money laundering directive (5MLD). The SRA has changed its processes when approving some individuals under the regulations. Under the new AML regime, a listing on the roll will no longer suffice to show that a solicitor is not a criminal. The SRA has to inspect ‘evidence of suitability’ when approving appointments to key roles, which includes a basic DBS check. The roles affected are ‘BOOMs’ – beneficial owners, officers and managers.

At the date of writing, no guidance from the Legal Sector Affinity Group has been issued, but it issued interim guidance regarding key changes, which include the requirement for firms to inform Companies House of any discrepancies they find in records of beneficial ownership (other than those subject to legal professional privilege); collecting proof of registration for trusts, companies etc., and more situations where enhanced due diligence must be carried out.

5MLD also extended SRA AML supervision to include firms offering tax advice. At its recent meeting, the SRA board said it will be writing to the firms it already supervises for AML to ask if they offer tax services, and will write to the remaining firms it regulates but does not supervise for AML purposes at present (approximately 3,200 firms), to inform them of the position. The SRA will also issue guidance on which areas of tax advice are high risk and what best practice looks like.

The Law Society has published a series of separate advice and practice notes covering various money laundering issues including: written AML risk assessments; the warning signs of money laundering; how to report suspicious activity to the National Crime Agency, and sanctions lists - the requirement for firms when conducting AML risk assessments to consider how likely it is that clients may be on the lists.  Importantly, this guidance states that firms cannot limit their risk assessments to the work regulated under the AML regulations and provides examples of unregulated work the sanctions regime may affect, including payment of personal injuries settlements and property settlements following a divorce. 

Disciplinary issues

On 25 November 2019 the Solicitors (Disciplinary Proceedings) Rules 2019 came into force with the burden of proof in SDT proceedings being changed to the civil standard. The rules will only apply to those cases certified as having a case to answer from that date, and the 2007 rules will still apply to those certified before 24 November, but heard after then. Unlike the changes to the SRA Handbook, the new rules are longer, with the emphasis on the overriding objective to progress matters quickly and proportionately. It is more than likely that with the change in the standard of proof there will be an increase in referrals to the SDT, with cases listed more quickly than previously due to the additional sitting days available, and we have already seen this with a number of our cases. Last year we advised, in light of the Leigh Day costs, that if you didn’t already have insurance cover for regulatory defence costs, or your existing cover would be inadequate, it would be the time to speak to your broker/insurer. If you didn’t do it then, you should certainly do so now.

Disciplinary decisions

Solicitor who employed fraudster struck off

A solicitor who was duped into employing a fraudster who had stolen the identity of a genuine solicitor has been struck off after the bogus solicitor committed a £1.2 million conveyancing fraud. The SDT considered that the solicitor had been a victim to some extent but that his failures had allowed the frauds to be committed. The solicitor provided a copy practising certificate, driver’s licence and utility bill as proof of identity and address. The solicitor checked the Law Society website which indicated that the name of the solicitor being used by the fraudster specialised in crime. The solicitor allowed the fraudster to handle conveyancing matters despite her apparent specialism in crime.  In two conveyancing transactions, £1.15 million purchase monies received was not transferred to the sellers or charge holders, and was instead sent to third parties, partly in reliance on forged copies of the land register. In two other property transactions in respect of which there were no files, the solicitor authorised the transfer of sums received into client account which were only stopped because the firm’s accounts were blocked by its bank. The SDT found that the solicitor should have recognised various irregularities, such as one payment not relating to a listed charge and another not being included on the redemption statement. The SDT determined that this was manifestly incompetent. The SDT concluded that even though he had not been dishonest, the level of recklessness and lack of integrity meant that the only appropriate and proportionate sanction was to strike him off. He was also ordered to pay costs.

Fine for acting in direct conflict of interest

A solicitor who represented both the developer and buyers in a regeneration scheme for 790 flats has been fined £10,000 plus costs for misconduct after he paid out almost £6 million before a first legal charge was registered on behalf of the buyers, as had been agreed. The solicitor had continued to act for both clients even after he knew that the charge had not been registered. It was in the buyers’ interests to have it registered and in the developer’s interests to retain the existing charge. The SDT determined that at that point the solicitor was acting for both sides in an “actual conflict of interest and that to continue acting in these circumstances was both unreasonable and reckless.”

Solicitor struck off for misleading clients

A solicitor who misled clients on three matters to hide her own inaction, telling them their matters were progressing, was struck off by the SDT following a regulatory agreement with the SRA. She admitted dishonesty, having informed two clients that their disputes were progressing through the court when no proceedings had been issued, and fabricated and backdated an email purportedly sent to the Insolvency Service, having failed to act on a client’s instructions in relation to annulment of a bankruptcy order.

Solicitor struck off for backdating an application

A solicitor realised that legal aid applications were not signed by the clients before an inquest, asked the clients to sign them at the inquest and then backdated the signatures to make it appear that they were signed months earlier. He then realised he had backdated one signature to the day after the application was submitted and attempted to change the date, but made such a mess of the form that it was unusable. He put it in the shredding bag and was going to inform the LAA it had been lost. He admitted his conduct to the firm a week later. In addition to being struck off, he was ordered to pay £2,322 in costs.

Case studies

Recently we have advised our clients in relation to:

  • Preparing a suite of policies, procedures and client engagement documents for a newly acquired ABS
  • Defending proceedings before the SDT
  • Reporting on the results of the clients’ risk and compliance health check and ethics barometer
  • Proposed referral arrangements
  • Checking and updating client care documents

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