Regulatory update — Spring 2022
Our latest update on compliance and regulatory issues.
UK Government sanctions
Firms will need to be aware of, and keep on top of, the recent and developing changes to Government sanctions following Russia’s invasion of Ukraine in February. If you have not already done so you should review policies and consider the effect of the changes on clients and matters you are dealing with, and, where applicable, review clients against the updated sanctions lists, and consider whether amendments need to be made to ongoing monitoring, particularly prior to completion of a transaction. There are frequent additions to the sanctions list so regular checks should be made. Even if the decision is taken that no further steps are required and the existing policies, controls and procedures are sufficient, this should be recorded. The SRA expects firms to take their responsibilities under the sanctions regime to safeguard the UK and protect the reputation of the legal services industry seriously. It said it will conduct spot checks on law firms to ensure they are complying with the financial sanctions regime and will take disciplinary action if there is evidence of serious non-compliance.
Guidance has been published by both the SRA and Law Society and is being updated as matters progress. The guidance helpfully includes reference and links to the Financial Conduct Authority (FCA) guidance on the sanctions regime, and the lists and information about the UK sanctions regimes in force which are constantly updated. The SRA guidance confirms that if you use an electronic verification system for customer due diligence and sanctions checks, you should check that sanctions lists are being refreshed with sufficient frequency. It also suggests signing up to receive alerts on the changes on the Office of Financial Sanctions Implementation (OFSI) website.
If you need any assistance, please get in touch.
A reminder to take MLRs seriously
Whilst we are sure a reminder is not needed of the importance of adhering to the Money Laundering Regulations (MLR), we have seen a firm receiving a record breaking fine of £232,500 from the SRA, plus £50,000 towards costs, for failure to carry out the required level of due diligence and making payments from client account which did not relate to the delivery of services by the firm.
Anti-money laundering was at the forefront of the SRA’s activity in 2021 and it will continue to monitor all firms who are subject to the regulations with unwavering resolution in 2022 and beyond. If you haven’t yet carried out your AML independent audit as required by Regulation 21 of the MLRs, we can help so do get in touch.
Data security issues
Firms are reminded of the importance of maintaining sufficient information security measures. A law firm was recently fined £98,000 by the Information Commissioner following a ransomware attack. The firm was aware it had issues with cybersecurity but did not rectify the problems and this allowed the hackers to penetrate and exploit the systems. The firm had previously failed to achieve the Cyber Essentials standard and had not dealt with the issues, despite holding Lexcel which says firms should be accredited against Cyber Essentials. Another factor taken into account by the ICO was the failure of the firm to meet the SRA standards and take account of the SRA advice provided on cyber-security to regulated firms.
A warning for law firms over "wholly unreasonable workloads"
The SRA has warned law firms that imposing "wholly unreasonable workloads or targets" on their staff may result in disciplinary action. The SRA has said it had received concerns and complaints that ranged from "systemic bullying, discrimination or harassment" to ignoring complaints and "exerting pressure to take short cuts or act unethically".
In February 2022 the SRA released the results of its Workplace Culture Thematic Review, which included a survey of 200 solicitors and other law firm workers and interviews with 12 law firms. 25% of the solicitors asked said they would be uncomfortable reporting "unacceptable behaviour concerns". The SRA said law firms should "do everything they reasonably can to look after their staff’s wellbeing in the workplace". At the same time, it published Workplace environment: risks of failing to protect and support colleagues - Guidance, together with case studies.
The last few months have seen a number of consultations, and it will be interesting to see the results when published.
The Law Society has opposed the SRA’s proposals to increase its fining power from £2,000 to £25,000, suggesting a threshold of between £5,000 and £7,500 was appropriate and the Solicitors Disciplinary Tribunal (SDT) also responded negatively, commenting that it could create an increased risk of miscarriages of justice, although it also accepted a small increase, to no more than £7,000.
The Law Society’s response to the SRA’s PSYROC (post six-year run-off cover) consultation showed clear support, backed by the Legal Services Consumer Panel, for a "negligible" additional £240 levy on firms and strongly opposing the SRA’s proposal to close the Solicitors Indemnity Fund (SIF). If SIF closes as planned in September 2022 without alternative arrangements being made for PSYROC, firms which have closed without a successor practice will be left uninsured for claims made after their mandatory six-year run off cover has expired. This will not only have important implications for solicitors but also for clients.
The SRA is also consulting on proposed changes to its rules and Codes of Conduct on health and wellbeing at work, to clarify its approach to 'appropriate treatment of work colleagues by the individuals and firms we regulate' and 'a solicitor’s health and fitness to practise'. This follows on from the Workplace Culture Review. The proposed changes include introducing explicit obligations in both Codes of Conduct to treat colleagues fairly and with respect, and not to engage in bullying, harassment, and unfair discrimination, and clarify that the SRA can take action to manage risks arising from an individual solicitor’s health issues at any point, including at admission stage, and through conditions on a practising certificate or registration. The consultation opened on 4 March and runs until 27 May 2022. Any proposed additional rules would need the approval of the Legal Services Board.
There is also a consultation on changes to the Legal Ombudsman Scheme Rules. In the foreword, Elisabeth Davies, Chair of the Office for Legal Complaints, says "It is now vital that these foundations are supported by the right Scheme Rules – a set that support the customer experience and drive efficiency is essential to achieving and sustaining longer-term stability. That is what this consultation is about; identifying opportunities to remove barriers which allow us to improve the customer journey and drive forward operational improvements". The consultation closed on 13 April 2022. Michelle Garlick spoke at the recent Law Society Risk and Compliance Conference on a joint platform with the Legal Ombudsman on topics including avoiding and handling complaints and learning from mistakes. This is one of many topics we can deliver training on to your staff so do get in touch if this is of interest.
Guidance and practice notes
In addition to the above, the SRA has published:
- Sole practitioners and small firms regulatory starter pack
- Administering oaths or statutory declarations outside your normal practice
- Advising on leasehold provisions including ground rent clauses
- Conduct in disputes
- Closing down your practice
- Separate business
The Law Society has issued an updated practice note 'Responding to a financial crime investigation', a guide on 'Source of funds', and an article 'Economic Crime Act: what does it mean for law firms?' following the government’s introduction of the Economic Crime (Transparency and Enforcement) Act 2022 brought forward following Russia’s invasion.
Struck off for retaining money paid on account
A solicitor who took £10,000 from a client in relation to a retainer for immigration work was struck off by the Solicitors Disciplinary Tribunal and ordered to pay £21,500 costs following a finding that he acted dishonestly after agreeing to repay the money and then ignoring the client’s attempts to contact him.
Reminder to keep accounts up to date
An owner of a firm has been fined and had conditions imposed on his practicing certificate, including a prohibition to be a COLP, COFA or sole practitioner, and not to hold, receive or have access to client money and make electronic transfers from office or client account, following his failure to keep the firm’s accounts up to date, which enabled a dishonest employee to intercept clients’ monies. The employee had taken around £25,000 from client account, mainly by providing his own bank details rather than the firm’s bank details, for the payment of personal injury settlements.
Struck off for intercepting client’s complaint
An 8-year PQE solicitor has been struck off for intercepting a complaint that was sent by the client and responding to the client twice purporting to be the COLP (having initially acknowledged the complaint from a generic email address), the first time promising to review the file and the second apologising for the delay and confirming action was being taken. She was also ordered to pay £11,400 costs.
The Solicitors Disciplinary Tribunal said that while the initial acknowledgement of the complaint may have been a ‘spontaneous and a panicked reaction’, the subsequent misconduct in perpetuating the concealment was a dishonest act.
Suspension for out-of-pocket law firm owner
A director of a law firm has been suspended by the SRA after failing to report that one of his employees stole almost £670,000 from the firm’s client account. After learning of the misappropriation in May 2019, the director failed to report the issue and stated on his professional indemnity proposal form that there was nothing adverse to be disclosed about the firm. The director personally rectified the client account shortage by August 2019; however, he did not inform the SRA until January 2020. His explanation for the delay was that he was concerned the firm would be shut down, which would in turn disrupt clients, cause the staff to lose their jobs, and not allow time for the money to be replaced.
Solicitor struck off for misleading clients
A 20-year PQE sole practitioner who mislead two clients for months regarding £180,000 owed to them has been was struck off by the Solicitors Disciplinary Tribunal. She repeatedly assured the clients that she had the funds to repay them and that the payments would be confirmed in days. Despite these assurances there was only £5.16 in the client account and none of the missing money was returned to the clients.
No get out of jail card for dishonest solicitor
A solicitor whose client had been jailed has been struck off for dishonesty and improperly benefiting from holding client money in the firm’s office account. The solicitor in question was under instruction to assist the incarcerated client in moving money from their deceased mother’s estate into their own account. Instead of moving the funds as directed, the money from the mother’s estate was paid into the firm’s business account. The solicitor then went on to transfer £7,000 from the office account to his personal account, and then falsely told the client that both the firm account and his own bank account had been frozen.
Solicitor struck off for seven years of unpaid disbursements
A solicitor who used payments for settled personal injury cases to prop up his own business and failed to pay outstanding disbursements for seven years has been struck off. The tribunal was told that the solicitor’s failure to maintain accurate records meant the SRA could not be sure how much money was owed – it could be anywhere from £46,000 to £800,000. The solicitor was made bankrupt on 30 April 2018, the day after the firm’s administrators reported their concerns about unpaid disbursements to the SRA.
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