Hello and welcome to another edition of COLP Insider. Publication was slightly delayed this week due to half term, but we intend to revert our usual Friday afternoon slot from 1 March.
In this week’s newsletter, you will find two new blogs: what to expect from an SRA investigation and a self-assessment exercise for Compliance Officers.
There are some interesting pieces of news this week – we particularly enjoyed the outgoing LSB chief labelling legal regulation as ‘mildly ridiculous’. That sentiment rings true in many respect, but wasn’t it his job to sort it out whilst being head of the super-regulator??
Also worth looking at is the Corruption Perceptions Index – if you don’t already use this free resource as part of your due diligence on unfamiliar jurisdictions, it is well worth a bookmark.
In this week’s Compliance Corner we have answered a question we are often asked by ABS firms about SRA authorisation related to future group restructures. If you have any compliance questions you would like us to cover in future newsletters, please just let us know.
Don’t miss our sanctions webinar this Wednesday – the invitation is below. We look forward to seeing you!
Jon and the Team
SRA Investigations: What to expect when the regulator comes knocking
When solicitors are facing an SRA investigation, it’s natural for them to feel apprehensive about the potential impact on their career. Readers of our newsletter will be familiar with the serious penalties handed out by the regulator for professional misconduct. Understanding the investigation process can significantly alleviate concerns and prepare solicitors for the steps ahead.
Self-Assessment Exercise: A COLP And COFA Training Needs Checklist
We all know that the SRA views the roles of Compliance Officer for Legal Practice (COLP) and Compliance Officer for Finance and Administration (COFA) as being central to law firm compliance and ethical practice. However, many compliance officers may have taken on their roles without ever receiving any formal training specific to their critical functions.
This potential oversight presents not only an obvious compliance risk, but also commercial risks in an environment in which the SRA is increasingly aggressive with enforcement.
The regulator’s recent actions and communications signal a clear message: the era of leniency is over. With a marked increase in fines and an expressed intent to target partners collectively, the incentive is there for law firms to reassess and beef up their compliance frameworks.
The absence of formal training for COLP and COFA roles is a glaring vulnerability in the legal sector’s compliance armour. It is insufficient for these officers to rely solely on their legal expertise or administrative experience. The specialised nature of compliance demands a comprehensive understanding of the regulatory environment, risk management strategies, and the ability to foresee and mitigate potential breaches before they occur.
Furthermore, the SRA’s focus on collective responsibility emphasises the need for a culture of compliance that permeates every level of a legal practice. COLPs and COFAs, with their unique oversight positions, are pivotal in cultivating this culture. However, without formal training, their ability to lead, educate, and influence their colleagues is significantly hampered. It is not enough to be reactive; compliance officers must be proactive, anticipating changes in regulation and adapting their strategies accordingly.
The case for investing in formal COLP and COFA training is compelling. Such training equips compliance officers with the knowledge and tools necessary to navigate the complexities of legal regulation effectively. It fosters a proactive approach to compliance, encouraging officers to stay ahead of regulatory changes and to implement best practices within their firms. Moreover, formal training demonstrates a firm’s commitment to compliance, potentially mitigating the severity of any SRA actions by showing a willingness to invest in compliance infrastructure.
ICYMI: Suspicious Activity Reports: 6 practical tips for law firm MLROs
Vigilance against money laundering and terrorist financing is not just a matter of ethical responsibility but a strict regulatory requirement. Suspicious Activity Reports (SARs) form the cornerstone of the legal sector’s contribution to the global fight against financial crime. This post will demystify SARs, setting out the legal framework and offering practical advice for law firm leaders and Money Laundering Reporting Officers (MLROs).
ICYMI: Drink driving offences have just become a lot more expensive for solicitors. Here’s why
In recent actions by the Solicitors Regulation Authority (SRA), drink-driving has become significantly more costly for solicitors, serving as a stark reminder of the regulator’s expected standards.
The cases of Richard Lunn, Piers King, and William Rawstron illustrate this shift, with hefty fines based on a percentage of their income, following convictions for driving under the influence. These disciplinary measures reflect the SRA’s commitment to upholding public trust and confidence in the legal profession, emphasising that personal conduct, even outside professional duties, can have severe professional and financial consequences.
ICYMI: Half-million pound lesson: Clyde & Co’s AML failure and the SRA’s wake-up call to law firms
In a landmark decision that has reverberated through the legal sector, Clyde & Co, a prominent international law firm, was handed a staggering £500,000 fine by the Solicitors Disciplinary Tribunal (SDT) for significant anti-money laundering (AML) compliance failures.
This penalty underscores the growing rigour with which the Solicitors Regulation Authority (SRA) is enforcing AML regulations and highlights crucial lessons for law firms across the United Kingdom.
News and Guidance
SRA Updates
- Discussion paper – Protecting the public: our consumer protection review – The SRA is reviewing consumer protection measures, focusing on the Compensation Fund’s future after the widely reported shortfall caused by several high profile claims on the fund.
This review aims to balance protecting the public and ensuring legal services’ affordability. It will examine firm oversight, the handling of client money, and the impact of rapid firm growth on risk. The review seeks wide input to reassess current protections and consider sustainability and the legal market’s competitiveness. Deadline for submission: 1 July 2024
- Guidance- Sanctions regime firm-wide risk assessments – The SRA has published important guidance for law firms on assessing risks related to the UK’s sanctions regime, which has expanded significantly since the invasion of Ukraine in February 2022. The guidance emphasises the importance of firm-wide risk assessments, particularly for firms at higher risk, and outlines best practices for creating such assessments. Though not mandatory (yet!), they are strongly recommended.
The guidance document says that all firms need to be vigilant about transactions with sanctioned individuals or entities, highlighting the potential regulatory and criminal consequences of non-compliance. The SRA advice covers risk factors and best practices for identifying and mitigating sanctions risks, including the need for checks beyond client identity verifications mandated by the Money Laundering Regulations 2017 (MLR 2017)
More than 1,000 firms have received communications from the SRA highlighting the for sanctions risk assessments and the risks of poor compliance. The SRA’s outreach is framed as providing support to help firms identify clients in high-risk categories and ensure they are not inadvertently dealing with sanctioned entities. This move indicates a proactive approach by the SRA to bolster compliance amidst the complex and expanding sanctions landscape. The regulator also plans to conduct desk-based reviews and on-site inspections to test firms’ controls, underscoring the importance of having robust systems in place to manage sanctions risks.
If things follow a familiar path, these sanctions compliance audits could form the evidential basis for further warnings to the profession. Firms caught without sufficient sanctions controls in place could then be subject to automatic fines and unwelcome publicity.
Firms face significant challenges in complying with the SRA’s strict liability approach to sanctions compliance. This includes the apparent need for thorough client and counter-party checks against the UK consolidated sanctions list, regardless of whether these parties have their own legal representation. We covered that issue in this post.
Join us for a live webinar on this topic on 21 February (see below for details).
Law Society Updates
- Gazette: In Focus: ‘Mildly ridiculous’ – LSB chief’s candid verdict on the state of legal regulation – This article discusses Matthew Hill’s, the chief of the Legal Services Board (LSB), critique of the current state of legal regulation as “mildly ridiculous,” emphasising the need for honesty in acknowledging systemic issues rather than attributing problems to a few “bad apples.”
Hill, who is departing LSB for another civil service post, highlights the inadequacy of current regulatory responses to public concerns, such as the Post Office scandal, and calls for a shift towards more effective regulation that prioritises societal risks and ethical standards over individual lawyer transgressions. His comments make uncomfortable reading for the SRA, although they do not paint his own tenure at the LSB in a favourable light.
- Guide: Building Safety Act 2022: A guide for conveyancers – The Law Society’s guide on the Building Safety Act 2022, published on February 14th, is designed to assist conveyancers in navigating the complexities introduced by the Act, especially in the context of residential leasehold conveyancing. It aims to clarify the responsibilities and procedures for both sellers and buyers in light of the new legislation, which was enacted in response to the Grenfell Tower disaster to improve building safety standards.
The guide addresses key aspects such as the financial implications for leaseholders concerning remediation costs, the scope of buildings affected by the Act, and the criteria for determining whether a building falls within the Act’s parameters. Additionally, it provides practical advice on advising clients, both sellers and buyers, about their obligations and rights under the Act. The guide also touches on the specific considerations for leaseholder-owned blocks and offers insights into the legislative changes since its introduction, including amendments to the UK Finance Handbook and expected legislative developments.
- Insight: Housing legal aid: sustainability research – The Law Society commissioned research revealing that housing legal aid work is generally loss-making for solicitors. This study, part of a submission to the government’s review of civil legal aid, highlights the financial challenges faced by providers, including loss-making operations, the inability to recover full costs, reliance on cross-subsidisation, and the impact of low income and high costs.
The research identifies recruitment and retention challenges, solicitors leaving the market, and the creation of legal aid deserts, stressing the need for government investment to sustain this crucial service.
Other Updates
- ICO: Legal Services Operational Privacy Certification Scheme – LOCS:23, or the Legal Services Operational Privacy Certification Scheme, is a new initiative approved by the Information Commissioner’s Office (ICO) to help legal service providers, including solicitors, law firms, and barristers’ chambers, demonstrate compliance with UK data protection laws when processing personal data. This certification provides a structured framework for legal professionals to ensure the protection of personal data and data subject rights within their ‘client file’ operations. It aims to instil greater trust and confidence among clients regarding the handling of their personal information.The new scheme is a response to the increasing concerns over personal data breaches and theft, aiming to establish a clear standard of GDPR compliance within the legal sector.
Authors of the scheme say that by adhering to LOCS:23, lawyers will be able to mitigate against ICO enforcement actions, reduce potential fines, secure competitive advantages, reduce data breaches and their associated reputation and financial costs, achieve a universally recognised level of compliance, easily evidence GDPR compliance in due diligence processes, and simplify the procurement process, thereby winning more tenders.
Compliance with LOCS:23 may become a prerequisite for tendering for work, especially with public bodies and within the private sector’s supply chains, including financial institutions.
- Transparency International: Corruption Perceptions Index 2023 – The latest version of this report identifies rampant global corruption, with over two-thirds of countries scoring below 50, indicating serious corruption problems. The global average score remains stagnant at 43, with 23 countries hitting their lowest scores yet.
The report underscores a global trend of weakening justice systems, reducing accountability and allowing corruption to flourish, even in high-scoring countries that are implicated in cross-border corruption cases.
Compliance corner – real life Q&As
Do we need SRA authorisation to add a shareholder to our parent company?
This is a question that will mainly affect alternative business structure (ABS) law firms, which are often structured into a group with one or more corporate owner.
The shareholdings of those corporate owners are often not static. Owners may come and go due to retirement, promotion, investment, merger and acquisition.
Movements in equity in the “top companies” can trigger SRA authorisation requirements for the regulated firm. Sometimes this is overlooked, which can cause regulatory problems for the law firm.
Firms that are structured in this way need to be aware that any mandatory authorisation needs to happen before the change in ownership; it is an application rather than a notification.
The statutory test for whether authorisation is necessary can be found in the Legal Services Act 2007. The Act uses the term “material interest holder” to describe any person with an interest in a law firm that requires SRA approval.
As a rule of thumb, a non-lawyer owning 10% or more of a law firm, or who exercises significant control by other means, or is “associated” with another material interest holder (e.g. a spouse) will need to be authorised.
Some examples of how that could be triggered:
- The parent company of a law firm takes on new investors, resulting in an investment vehicle taking a 25% stake in the parent. The new investment vehicle (and possibly its owners) would need SRA authorisation.
- A law firm sits in a group structure with two companies above it: a “topco” which wholly owns a another holding company with several subsidiary divisions, the regulated law firm being one. The UBO of the “topco” dies, and her shares pass to her two children. It is likely that they would both need authorisation from the SRA.
- Two corporate owners set up a 50/50 joint venture vehicle to own a regulated law firm. One of the corporate owners decides to convert to employee ownership, with 40% of the company’s beneficial ownership passing to an employee ownership trust. The SRA would need to authorise the trust, since it would represent an interest in the law firm above the 10% threshold.
As you can see, the law firm at the bottom of the structure would need to be aware of any impending structural group changes, so that the proper regulatory applications can be made. The COLP should make it their business to ensure that those at the top of the tree understand that there may be SRA application required, that they could take around a month, and that anybody being authorised will need to pass a suitability test.
Free webinars and recordings
The latest SRA sanctions guidance and what you have to do in response
This week’s live webinar will be focused on the latest important SRA guidance on sanctions risk assessments. The guidance applies to all regulated firms (albeit some more than others).
The session will cover:
- An update on the current sanctions regime
- A comprehensive overview of the latest SRA guidance
- Practical implications
- Your live questions and answers
When: Wednesday 21 February 2024, 12pm via Zoom
Recording: Looking back, looking forward – our annual roundup of the main compliance issues of 2023 and what to look out for in 2024
Last month Rachael and Jon discussed the hot compliance topics of the past year, and what’s on the horizon over the next 12 months.
They covered:
- Automatic fines
- AML fines
- GDPR
- Law firm failures
- AML updates
- Sexual misconduct cases
- Cyber-security
- Compensation fund
- Insurance market
- Future changes
- …..and ran out of time!
Watch the recording – use password l5?psfHz
Training resources: On-demand webinar archive
Contact us for access to our extensive back catalogue of recorded webinars. Topics include:
- Financial crime: LSAG, firm-wide risk assessments, client due diligence etc.
- Sanctions
- Use of client account as a banking facility
- Data protection
- Financial stability
- Conflicts and confidentiality
- SRA Transparency Rules
- Accounts Rules
- Employee Ownership Trusts (EOTs)
- Register of overseas entities
- Sexual misconduct and solicitors’ private lives
- Terrorist financing
- And more….
We also produce bespoke training webinars, live workshops for your team and COLP and COFA training.
SRA and SDT disciplinary decisions
- Sadaf Ijaz – sole practitioner rebuked for failing to pay court ordered costs in litigation brought in her own name.
- Ketevan (or Katie) Nakaidze – City firm employee barred for misleading her employers about her practising status.
- Ross & Co Solicitors LLP – firm fined £1,500 for failing to notify the SRA about changes to its COLP and COFA.
- David West– non lawyer barred for dishonestly failing to disclose a conviction to his law firm employer.
- Jacqueline Tunstall – Office Administration Manager ‘struck off’ after being found to have dishonestly written firm cheques to made out to herself.
- Valens Solicitors Limited – firm fined £750 for failing to display the SRA digital badge on its website.
- Amarjit Singh Bhachu – fined £10,000 after making an ‘error’ in instructing a client to pay legal fees into his personal bank account, whilst purporting to act through his law firm employer.
- W A G Davidson & Co – firm fined £750 for failing to submit workplace diversity data to the SRA.
- Affinity Seven Law Solicitors Ltd – firm fined £750 for failing to publish costs and complaints information required by the Transparency Rules.
- Miles Hutchinson & Lithgow – firm fined £3,203.20 for administrative AML breaches between 2017 and 2023, namely non-compliant firm-wide risk assessment and policies, controls and procedures.
- Westgate Solicitors Limited – firm fined £9,750 for similar AML documentation failures. These are issues that would get picked up by an independent Regulation 21 audit.