Change Of Tone – SRA Issues Warnings To Solicitors At Its Annual COLP COFA Conference
Solicitors beware. There was a sinister and unexpected change in the SRA’s tone towards law firm compliance at the annual COLP COFA conference, held on 18 October 2023.
In this post, we look at what the SRA had to say about the likelihood of bigger and automatic fines, partner-level accountability, AML warnings, and the Compensation Fund levy.
You can also watch the recording of this week’s webinar (see link below), which also covered these topics.
ICYMI: Hot topics: How to avoid unnecessary SRA fines and reputation damage
You may have noticed that the regulator has been busy flexing its new fining powers recently. The SRA can slap fines of up to £25,000 without reference to the Solicitors Disciplinary Tribunal. (ABSs are on the hook for fines up to £250m.)
Regular readers of this newsletter will know that these fines tend to fall into a few predictable categories, which include:
- Professional misconduct
- Money Laundering Regulations failures
- Transparency Rules breaches
- Using the client account as a banking facility
- Not dealing with residual client balances
In addition to the fine itself, there is the issue of reputation damage. No firm will welcome being named and shamed by the SRA. It will be a stain on their record for a number of years. It might even make clients think twice about using the firm.
Although we may never know the true extent of damage caused by a regulatory fine, it is certainly worth taking steps to tighten up these common breach areas.
So here are some things your compliance team could concentrate on:
- Reduce the likelihood of bad apples
- Check your AML systems and controls
- Tighten up your marketing and publicity
- Understand what goes through the client account
- Take control of residual balances
Infographic: Source of funds and source of wealth
Use this handy infographic to cut through the noise surrounding source of funds requirements.
After conducting your risk assessment on the client and transaction, ask these three questions:
- “Show me the money”
- “How did you get the money?”
- “Does it make sense?”
Download the infographic and send to your team.
Thank you to Rachael and Sam for putting this together.
News and Guidance
SRA Updates
- Warning notice: Client and matter risk assessments – This is an important reminder that the SRA will be targeting your AML ‘onboarding’ risk assessments in upcoming visits and desk-based reviews. These risk assessments are a core part of the Money Laundering Regulations, should be informed by the firm-wide risk assessment and must be updated when necessary throughout the transaction. They must be present on every file caught by the Regulations. The SRA dislikes client and matter risk assessments that:
- Are based on templates without any apparent link to the firm-wide risk assessment
- Encourage a ‘tick box’ approach, without requiring file handlers to record their rationale
- Do not clearly flag when enhanced due diligence is required
- Anti-money laundering report 2022-2023 – Note that the SRA signals it will be undertaking proactive sanctions inspections over the coming year, in addition to its usual round of AML visits. The report is worth reading in full, but if you only have a few minutes to spare the accompanying infographic is a good overview of the findings.
- Year three evaluation of the SRA Transparency Rules – Research conducted for the SRA suggests that “the transparency rules are beginning to deliver tangible results. Not only are firms making more information publicly available, but consumers are increasingly looking for and using this information when they have a legal need.“
However, the research also found that over half of firms are not in full compliance with the rules. “More clearly needs to be done to make sure all firms comply with all aspects of the rules. There are no optional elements.” In particular:
- Only 42% of firms said they were publishing all the required price and service information
- “Most” firms are not in full compliance with the Transparency Rules, when measured by the SRA’s own website checkers (although we know how nit-picky they are).
- Deadline: Practising certificate renewals (2023/24) – The annual renewal exercise closes on 31 October. It can take a little time to gather all the required information about the practice, so don’t leave it to the last minute. Bear in mind the SRA now operates Two Factor Authentication for all mySRA accounts, meaning it’s much more difficult for an assistant to log in using your account.
Law Society Updates (may require login)
- News: ‘Off-the-shelf’ AML policies put firms and clients at risk
- Guide: Risk assessments: anti-money laundering
- Q&A: Can my client use bitcoin to purchase property?
- Q&A: Can the deadline for a subject access request be extended?
- Q&A: Do the Consumer Contracts Regulations 2013 apply to conveyancing retainers?
- Q&A: When can our practice accept client funds?
Other Updates
- OFSI Guidance: Legal Services General Licence – The general licence regarding accepting legal fees from sanctioned people is extended from 29 October 2023. Separate reporting obligations apply.
- Legal Services Board: Chair’s Blog – On its ongoing concerns about the ethical issues related to NDAs: “The Board discussed several thematic areas emerging from the call for evidence where legal professionals’ conduct appears to fall short of ethical standards of conduct and agreed that further analysis ought to be carried out, including considering other circumstances where similar conduct might occur and how this can be addressed. For example, there were accounts of individuals feeling pressured into signing agreements; of an imbalance of power leading to a detrimental outcome for an individual; and of individuals in vulnerable circumstances feeling this was exploited to the benefit of another party.”
- Legal Futures: SRA makes pitch to be sole AML supervisor for UK legal sector – If this comes to pass and the SRA becomes the regulator for CILEX lawyers, the SRA will significantly expand its sphere of influence on the legal professions.
Free webinars and recordings
Recording: Risk and compliance horizon scanning – top takeaways from the SRA Conference 2023
The annual SRA Compliance Officers Conference is a ‘must attend’ for compliance officers as the regulator sets out its current priorities.
If attending in person was not possible for you, the virtual event will be hosted by the SRA from 6th – 9th November.
Following the conference, Jon and Rachael took some time to reflect on the day. They discussed some of the key takeaways and the surprising tone of the SRA’s warnings to the profession.
Feel free to share this recording with colleagues who may be interested in this free training.
JBL clients get priority access to our live sessions.
Password: Jxv4NDu=
Recording: Strategy hour – law firm insurance, recruitment and mergers
On Wednesday 27 September 2023, our monthly webinar focused on issues around buying and selling law firms, the insurance market and recruitment.
Our expert panel includes:
- Gary Horswell, Managing Director of Ntegrity Insurance Solutions – a specialist in the solicitors PII market since the ‘open market’ began in 2000.
- Jonathan Fagan, Founder and Managing Director of Ten Percent Group – a specialist in locum & permanent solicitor recruitment, as well as law firm sales, mergers & acquisitions.
- Jeff Zindani, Founder and Managing Director of Acquira Professional Services – a leading M&A matchmaker and broker for law firms and legal tech companies.
Download Jeff Zindani’s article (‘Exit strategy’)
Recording: The dangers of using your client account as a banking facility and how to avoid it
Operating a client account can be an interesting business! Not only do you have increased money laundering and financial crime risks, you must also avoid acting like a financial institution.
Accounts Rule 3.3 states: “You must not use a client account to provide banking facilities to clients or third parties” …. and this can be quite tricky to navigate. Several solicitors have been fined and disciplined by the SRA under this rule.
But how do you avoid getting this wrong? What is a ‘banking facility’ and how does the SRA interpret the rule?
Fear not, we are here to help! In this webinar we looked at:
- The history of the ‘banking facility’ rule
- Why can we not act as a bank?
- SRA Guidance
- Disciplinary decisions relating to Accounts Rule 3.3
- Practical considerations for law firms
Recording: Optimising your AML knowledge to ensure you are LSAG compliant
We were delighted to co-host this session with our friends at Thirdfort.
Unsurprisingly, we get asked many questions about source of funds, source of wealth, identification of clients, and the like. In the current world of regulation, we find many law firms are very nervous about ‘getting it wrong’ and want to ensure compliance.
In this webinar, our JBL team discussed some of these most common compliance queries with valuable input from Harriet Holmes of Thirdfort, including:
- Source of funds – how far do we need to go? How do I know I’m done?
- Source of funds – is the ‘Bank of Mum and Dad’ low risk?
- Source of wealth – can I take my client’s word for it?
- Risk assessment – do I need to do one at the start of every file?
- Ongoing monitoring – what should this look like in practice?
- Employee screening – we don’t DBS-check all our staff. Should we?
- Independent audit – how often does it need to be done?
- CDD – do I need to verify the identity of all the Directors of a client company?
- CDD – who do I need to verify in a trust?
SRA and SDT disciplinary decisions
- Vinay Amar Nath Veneik – non-solicitor consultant (a formerly struck off solicitor) fined £6,750 for failing to conduct sufficient due diligence in high risk transactions, and requesting payments unconnected to an underlying legal transaction i.e. acting like a bank.
- Angela Craig– Legal Executive banned from any future role at an ABS for misleading clients as to the progress of their probate applications.
- DKLM LLP – firm fined £12,072 for AML breaches, namely: insufficient EDD; no client and matter risk assessments; basing source of funds enquiries on information from a Ukrainian law firm; relying on representations from the parties that transaction money passed between themselves (rather than through the client account). No evidence of actual money laundering was found.
- Hattens Solicitors Limited – firm fined £12,700 for AML breaches, namely: no firm-wide risk assessment in place several months after the firm confirmed it had one; submitting an inaccurate declaration to the SRA in relation to the same risk assessment; lack of client and matter risk assessments.
- Susan Lebreton-Towell – solicitor suspended for 3 months for conducting reserved work through an unregulated firm.
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