SRA in the news: Post Office Horizon Scandal
There’s been a lot of talk in recent weeks about the SRA investigation into certain solicitors connected to the Post Office mass miscarriage of justice scandal. In our latest blog post we take a look at the reports that the SRA will likely await the outcome of the public inquiry before proceeding further with its investigation.
📏 New rules and guidance for firms subject to AML Regulations
There’s been a raft of new guidance and changes in the anti-money laundering (AML) space in the past couple of months, thankfully without enormous immediate impact for the most part. We try to summarise the key reminders and takeaways below.
Proposed updates to Legal Sector Affinity Group (LSAG) have been published by the Law Society as an addendum while Treasury approval of the wording is awaited. Most of the addendum refers to reminders of recent changes and clarification on certain points rather than more substantive changes:
- As a reminder, firms with annual turnover exceeding £10.2 million should be registered with HMRC to pay an additional levy on combating economic crime
- Detailed guidance has been published on revised discrepancy reporting regimes for telling Companies House about ‘material’ errors in ownership information as recorded on the registers as compared with what the law firm knows. Guidance has also been published on reporting discrepancies between client instructions and the HMRC’s register of trusts. Most trusts must be registered with HMRC and lawyers need to ask for proof of registration. If the instructions and proof of registration contain ‘material discrepancies’ or the trust is not registered then a report will ordinarily need to be made.
- Register of overseas entities – as a reminder overseas companies and other entities wishing to buy, sell or transfer property or land in the UK must register with Companies House. The ever industrious Tax Policy Associates have created a – dare we say it – ‘fun’ interactive map which where you can dig into any overseas ownership details for properties you’re feeling especially nosy about. As well as keeping an eye out to ensure that appropriate interests have been registered the register will also serve as useful verification of overseas property ownership in appropriate cases.
- Amendments to the Proceeds of Crime Act mean that under certain circumstances it is now possible to return up to £1,000.00 of potentially dubious money or property value to the client in order to end the relationship with that client (whose ID you must have verified) without securing NCA consent. Note that any applicable reports would still need to be made. Such a scenario will perhaps arise rarely in most firms but it is a potentially helpful move. The first time you come to rely upon this exception it may be prudent to take legal advice to ensure that you properly fit within the eligibility criteria.
- If approved, the tone of the revised LSAG source of funds guidance appears to be shifting again, leaning towards the SRA’s more broad interpretation of the Money Laundering Regulations requirement to risk assess new matters: “Without understanding the SoF of both client and associated third parties to the transaction, you are unlikely to be able to carry out an effective risk assessment or ongoing monitoring under regulations 28(11) to (13).” Given the express references to checking source of funds in other contexts one might perhaps reasonably have expected the Regulations to state more clearly that source of funds checks are nearly always going to be mandatory if that had been the intention. Nonetheless thorough source of funds checks remains one of the most robust methods by which firms can protect themselves and so this stance is certainly in keeping with best practice. It is important that at the very least you ask and understand where funds are coming from. In practice, obtaining documentary evidence to verify what you are being told will also be expected by the SRA for individual clients and for less well established corporate / entity clients.
- There is also proposed guidance pending approval on the obligation under Regulation 28(3A) to take reasonable measures to understand a company or entity client’s ownership and control structure. The Regulations make no reference to verifying this documentation as they do with verifying ID of beneficial owners and yet the proposed changes seem to suggest that checking what you’re being told against independent documentation is required: “”Reasonable measures” means gathering information and verification that is risk-based, proportionate and effective in mitigation of the identified money laundering and terrorism financing risks inherent in the client or matter being undertaken.” Perhaps this means checking what the client tells you in appropriate cases dependant upon the risk factors, which would seem logical. But it’s not entirely clear and neither is it clear how one would obtain reliable documentation independent of the client to prove all potentially governance arrangements in unlisted companies. In some instances Companies House or an E-ID provider’s report will clearly set out the relevant ownership and structural information. In other cases however it may be prudent to obtain a structure chart for entity clients, particularly if there are risk factors presents or if there is any uncertainty. It is to be hoped that a bit more clarity can be provided before this guidance is finalised into the core LSAG document.
Changes to the PEP (politically exposed persons) regime are now in force. For those familiar with the FCA guidance on applying enhanced checks on politically exposed individuals the changes may represent little change in practice. The changes essentially state that, in the absence of other risk factors, while UK politicians and other PEPs still require enhanced due diligence the starting point is that the level of caution required would be less than for non-domestic PEPs. That has been the position in practice for some time. In terms of the approach under the Regulations, I would stress the words “starting point”. It perhaps makes little sense for politically exposed individuals from say Denmark to be treated as higher risk than UK politicians when Denmark are considered by Transparency International to pose a lesser risk of corruption following the UK’s latest drop in the Corruption Perceptions Index. The SRA guides that firms should consider amending their policies and certainly we will be adding some minor changes to our templates in our next update to flag the issue for staff.
The Money Laundering Regulations have been amended to refer to the Financial Action Task Force’s (FATF) list of high-risk AND increased monitoring jurisdictions rather than maintaining a separate list of high-risk third jurisdictions. The requirement to apply enhanced checks on matters with certain links to such jurisdictions and indeed the list itself for the moment remain the same. However they will now be found in a different place – though the Law Society maintain one combined user friendly list also. Guidance accompanying the changes encourage firms to consider the reasoning behind the FATF decisions in appropriate cases.
🔥 Hot topics
SRA issues first fixed penalties. 🛑 Delighted to have been quoted in Legal Futures recently on the news that the SRA has issued its first quick fire fining process for website non-compliance. ****I think we’re all pleased to see resources being saved for blatant breaches. However, I do feel for firms who have clearly put a lot of effort in and are being threatened over some perhaps less clear cut points of detail. We’ve got a checklist if anyone needs a refresher. Look out for the comprehensiveness of the pricing in particular. SRA appears to have zero tolerance for firms saying ‘contact us’ for unusually large or tricky matters however hypothetical and academic those scenarios may be. We have just carried out website audits on all our retainer client’s websites as part of their retainer package, if you need a website audit, please reply to this email for a quote.
🔎 “Transparency Rules bringing benefits to firms & consumers” according to the independent review prepared by researchers Economic Insight. ****
Key findings from the review included:
- More than half (55% of individuals and 60% of SMEs) who had recently engaged with a legal services provider reported comparing price and service information before selecting an individual provider.
- 55% of individuals and 61% of SMEs who compared costs and services of different legal services providers found it easy to do so using information available online, while 21% of individuals found it difficult to compare this information.
- More than half (55%) of individuals who visited a firm’s website prior to instruction recalled seeing the SRA clickable logo (up from 15% in the one-year review) – with most stating it helped them understand the protection they would receive.
The SRA began issuing fixed fines late last year for solicitors failing to comply with these rules, with 8 fines issued by early January.
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📢 In a recent announcement, the Solicitors Regulation Authority (SRA) has opted against implementing a cap on claims targeting the compensation fund in relation to the fallout from Axiom Ince’s insolvency. The Compensation Fund normally has a discretionary cap of £5 million on claims arising from an intervention. Claims will be prioritised to make sure that the most pressing – such as for domestic conveyancing – will be dealt with first in order to maintain the financial solvency of the fund. They have also provided a statement on the potential impacts this case will have on the public and the legal profession as a whole. Recent news suggests that the SRA will be conducting a root and branch review of how client money is protected, with banning the client account one possibility being explored.
🔮 The use of AI in the legal sector has been heavily discussed of late. The SRA have also jumped into the debate with their report on the pros & cons of its use in law firms. With over three quarters of the largest solicitor’s firms using AI & evidence suggesting it is on the rise with small and medium firms, it is certainly something that needs close monitoring. If you would like to have your say on the subject, the SRA invite you to complete a short questionnaire.
❗LeO address change❗ The Legal Ombudsman are changing their postal correspondence address from Monday 22nd January 2024 – do make sure you update the relevant documents (such as client care terms, complaints procedure, office manual) to reflect this new address:
Legal Ombudsman
PO Box 6167
Slough
SL1 0EH
With how picky the SRA are being with their transparency checks on 💻 websites, we do urge you to ensure your complaints procedure is updated on your website also!
⭐ The SRA have recently published a news release reporting their key findings on their biennial collection of over 9,000 law firms in England & Wales. You can find the full report here.
Some key findings:
🔍 53% are women lawyers
🔍19 % are black, asian & minority ethnic lawyers
🔍 6% are disabled lawyers (compared to 16% of workforce)
If you want to see how your law firm compares, you can use the SRA’s tool which allows you to benchmark how you compare to similar firms in the profession
😲 Tribunal trends and cases of interest
❌💰 Anti – Money Laundering
- A couple of AML whopper 🍔 fines for you here. Ashfords LLP, a prominent regional law firm, was recently fined 😯 £101,357 by the SRA due to failures in complying with anti-money laundering (AML) regulations. This is one of the biggest fines ever handed out by the SRA and followed an investigation into alleged lapses in dealing with potential money laundering risks in a small number of property transactions. Two of these transactions may have involved a sanctioned entity, although there were no suggestions that the firm had helped to facilitate any financial crime. That sanction was imposed by the SRA as regulator itself because Ashfords are an alternative business structure (ABS). Topping that fine, Clyde & Co were fined half a million pounds by the Solicitors Disciplinary Tribunal for anti-money laundering failings in what is thought to be the joint highest financial penalty ever imposed by the Tribunal. Interestingly, if another firm of equivalent current reported turnover to Clyde & Co (£788.6 million) was found to warrant a financial penalty and happened to be an ABS then the SRA’s fining criteria would indicate a potential fine before discounting for mitigation of between about £1.5 million and £39 million. I do wonder if any very large firms considering a switch to the ABS model would look at the SRA’s latest fining numbers and now think twice. We suspect that we mill see our first seven figure law firm fine before the end of the year and it will most likely relate to AML. The disciplinary landscape is changing dramatically.
- A lack of client due diligence led to this solicitor receiving a £15,000 fine with £1,350 costs. Owing to a lack of client due diligence (CDD) it was unclear who the solicitor’s client was in each of the completed transactions. It was said that he took instructions from an individual who directed the transactions but was not a formal party to them. All the transactions were said to have had unusual features and signs of money laundering
- Following a desk based review carried out by the SRA’s Proactive Supervision team, a firm has been fined £7,900. The firm was found to have not had in place a compliant firm-wide risk assessment (FWRA) between 26 June 2017 and March 2023, in breach of Regulation 18 of the MLRs 2017. The FWRA provided to the SRA’s AML Officer dated November 2022 was found to not be compliant with the MLRs 2017, as it did not cover each of the five key risk areas in sufficient detail. The firm was said to have failed to have in place compliant policies, controls and procedures. The firm had an AML policy in place since its inception, however, the desk-based review concluded that this policy did not cover all of the mandatory requirements of Regulation 19 of the MLRs 2017.
- Another firm being fined for failing to have in place a fully compliant firm wide risk assessment & for providing the SRA with inaccurate information by making a declaration that its firm wide risk assessment was compliant with the requirements of Regulation 18 MLR, when it was not. The firm also:
❌failed to document client/matter risk assessments as required by Regulation 28(12) MLR
❌failed to carry out adequate customer due diligence (CDD), to include source of funds (SoF) checks as required by Regulation 28 MLR
❌failed to carry out enhanced due diligence (EDD) as required by Regulation 33 MLR.
- And another one….these guys also got themselves into trouble for declaring to have a compliant firm wide risk assessment when according to the SRA it did not.
💻🔎🕵️♀️ Transparency Rules
I think you’re going to need to get used to seeing this heading in the tribunal cases section of our update! The SRA are clearly on a mission to check law firm websites & they are being increasingly picky about what they expect you to provide. Here’s the first of the fixed fines issued by the SRA….
- A fixed fine of £750 plus £150 was handed to this firm for allegedly failing to comply with the SRA Transparency Rules to the SRA’s satisfaction. The firm failed to publish details about: ❌its costs for probate work; ❌ its complaints procedure and ❌how a complaint might be made to the SRA or the Legal Ombudsman
The firm was found to be in breach of rules 1.5 and 2.1 of the Transparency Rules.
- Another fine here of £750 plus £150 costs handed to this firm after failing to publish to the SRA’s satisfaction mandatory details about its: ❌Costs for debt collection, conveyancing, probate, motoring law, immigration and employment
- Do you see a theme yet?! Same for these guys – £750 fine with £150 costs for: ❌failing to publish mandatory details about its costs and/or services to the SRA’s satisfaction in breach of rule 1.5 of the Transparency Rules.
- How about now?? £750 fine with £150 costs for: ❌• the firm allegedly failed to publish mandatory details about its costs and/or services in breach of rule 1.5 of the Transparency Rules.
More of these fines have already been issued in January, they just keep on coming. We urge you to ensure your website is compliant. We are happy to help with a website audit, just get in touch.
💥 Conflict of Interest
- A number of breaches of the SRA Principles 2011 & SRA code of Conduct 2011 led to this solicitor receiving a £9,074.80 fine with £600 costs after acting in a conflict situation when advising both developer and private investor in a property development transaction.
💰Accounts Rules
- This firm breached SRA accounts rules and was handed a fine of £1,900 with costs of £675
🤐🙊Tipping Off
A solicitor who tipped off his client about a criminal investigation was sentenced to 9 months in prison (suspended for 18 months). The firm Director & Money Laundering Reporting Officer was convicted on of informing his client about the Serious Fraud Office’s investigation into the client’s loan of £4 million towards the purchase of a house in Mayfair and forging a “Letter of Engagement” about his role as solicitor around the purchase. The SFO regularly issues notices requesting information for its criminal investigations, and it is an offence not to comply without a reasonable excuse. This is the first time the SFO has ever prosecuted a solicitor for “tipping off” another person about an investigation after receiving one of these notices.
☹Inappropriate Behaviour
- A male former senior client development manager at who repeatedly grabbed a female colleague at an away day has been barred from the profession.
- A solicitor has been fined over £1,500 for crashing her car into a stationary police car whilst driving under the influence of alcohol. In addition to her SRA fine, she received a 24 month driving ban, a fine of £199 & 100 hours community service.
- Another solicitor receiving a fine for driving under the influence of alcohol. He received a £1,500 fine from the SRA as well as receiving a fine from the court of £2,700 & a 16 month driving ban.
- Oh dear and here’s another one!
- The above fines pale into insignificance given that this solicitor has received a record ❗£13,836❗ fine 😲😲😲 for drink driving. This is thought to be the biggest fine the SRA has ever issued for a drink driving offence. The fine from the SRA was around 31 times higher than the financial penalty issued by the criminal Court, which has raised some eyebrows in the regulatory space. Drink-driving convictions previously resulted in fines of around £1,500, but the revised approach – combined with the SRA increasing its maximum fining powers to £25,000 – mean than much larger penalties are likely to become common.
⭐ Diversity
A firm has recently received a fixed fine from the SRA for failing to publish its diversity data within the deadline. Our retainer clients can make use of our very handy diversity data collection tool, as well as the reminders from us that it needs doing! This looks like something the SRA are keeping a close eye on, so we urge you to do the same.
📋 ❌ Code of Conduct
These fixed fines keep on coming! This firm was fined £750 with £150 costs for allegedly failing to promptly notify the SRA of a material change to the information it had previously provided to the SRA about its COFA. The fine came about after the firm failed to remedy the breach after being given notice & reasonable time to do so.
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