In Industry Insights

The Solicitors Regulation Authority (SRA) recently issued a consultation (now closed) proposing significant changes to its financial penalties framework. The response from key stakeholders in the profession has been vociferous, with widespread criticism from the Law Society, the City of London Law Society, the Birmingham Law Society, and the Solicitors Disciplinary Tribunal (SDT). Each of these organisations has raised serious concerns about the proposed changes, which could have far-reaching consequences for law firms.

The proposed minimum and maximum fines in Bands E and F, for example, suggest a level of severity of misconduct that traditionally would warrant referral to the independent SDT. The consultation raises pressing questions: Is the SRA overstepping its remit? Are these changes a threat to the established role of the SDT? Does it undermine principles of “fairness”, and exacerbate the inequality of arms between regulator and regulated?

Overview of the SRA’s Financial Penalties Consultation

The consultation outlines the SRA’s plans to reform its approach to financial penalties, including significantly increasing the minimum and maximum fine levels. Bands E and F, which propose the highest fines, have drawn particular scrutiny. The rationale for these changes is to provide the SRA with more flexibility in penalising firms, making the most of its Parliament-granted powers in cases of financial crime, without having to refer cases to the SDT.

Part of the rationale for limiting referrals to the SDT put forward by the SRA is to reduce cost, delay and wellbeing consequences for those accused of wrongdoing. They say that the safeguard of the right to appeal removes the risk of the regulator becoming “judge, jury and executioner”.

However, this move has triggered backlash, with accusations that these changes not only risk overreach by the SRA but also could undermine the established regulatory and disciplinary system.

The Law Society’s Response: Serious Concerns Over Proportionality and Process

The Law Society has strongly opposed the SRA’s proposals. One of the main criticisms is the framework’s failure to distinguish between economic crime-related misconduct and other forms of misconduct, which the Law Society argues causes unnecessary confusion. The Society questions the lawfulness of the proposed changes, suggesting they may be inconsistent with the principles set out in the Legal Services Act 2007.

The representative body for solicitors objects to any further extension of the SRA’s fining powers, beyond the existing £25,000 limit for traditional firms and individuals. It views this consultation as an attempt to increase regulatory powers through a “backdoor” approach without proper justification. The SRA’s attempt to establish a single penalties framework for all forms of misconduct – not just economic crime – conflates separate issues and could unjustifiably erode the jurisdiction of the SDT, which currently possesses unlimited fining powers for the most serious cases.

Proposed Bands E and F, with their higher minimum fines, risks disproportionately affecting smaller firms and individuals with lower incomes. The Law Society argues that the SRA does not fully understand the varied structures and operations of regulated bodies, and recommends that a proper impact assessment be conducted and published before any further steps are taken.

It is argued that the introduction of minimum fines within each penalty band would be unfair and punitive, particularly for junior solicitors, individuals from minority backgrounds, and smaller firms. It could provide a perverse dis-incentive to self-report breaches, or indeed from pursuing a career in law altogether.

Another major point of concern is the lack of adequate safeguards and transparency in the SRA’s proposed decision-making process. The Law Society criticises the SRA’s plan to have senior staff review decisions made by junior colleagues, which introduces “a clear conflict of interest as well as the risk to independent decision-making”. 

The SRA’s proposed framework’s approach to using turnover or gross income as metrics to assess fines is viewed by the Law Society as unfair and potentially outside the SRA’s regulatory remit. It argues that larger fines do not necessarily provide a credible deterrent or maintain public trust, and the SRA has not provided empirical evidence to support this claim. It also emphasises that the SDT has not been shown to levy inappropriate or ineffective fines, which calls into question the SRA’s rationale for needing increased fining powers.

The Law Society strongly recommends the creation of a separate financial penalties framework specifically for economic crime cases, which would include detailed guidance and examples. It argues that the complex and distinct nature of economic crime, particularly money laundering, requires a nuanced approach beyond the current proposals.

The Law Society’s detailed response underscores several fundamental flaws in the SRA’s proposals. It highlights the risk of disproportionately high fines negatively impacting smaller firms, the dangers of conflating different types of misconduct under a single penalties framework, and the absence of proper safeguards for ensuring fair and independent decision-making. These concerns align with the broader argument that cases involving significant penalties, such as those proposed in Bands E and F, should be referred to the SDT to maintain proportionality, transparency, and fairness.

The City of London Law Society’s Response: Questioning Legality and Proportionality

The City of London Law Society (CLLS), representing over 21,000 City solicitors, also expresses significant concerns about the SRA’s consultation. Its response centres around the potential unlawfulness of the proposed changes, the lack of proper consideration for the impact on firms and individuals, and the flawed design of the proposed fining regime.

The CLLS questions the legality of the SRA’s proposed framework, particularly as it appears to extend beyond the SRA’s statutory powers. It is argued that the consultation should distinguish between cases that fall under the Economic Crime and Corporate Transparency Act 2023 (ECCTA) and other types of misconduct. It notes that this lack of clarity and specificity may result in an unlawful application of the proposed penalties. The CLLS also criticises the SRA for attempting to consult on powers it does not yet possess, suggesting a piecemeal approach to financial penalties (“salami-slicing”) that undermines the fairness of the consultation process.

Moreover, the CLLS highlights the SRA’s failure to transparently set out its interpretation of the scope of its ECCTA powers. Without a clear understanding of these boundaries, the legal community is left in the dark regarding the potential impact and scope of the proposed penalties framework. This ambiguity, coupled with concerns over the quality of SRA decision-making, contributes to an overall lack of confidence in the proposed scheme.

A critical point raised by the CLLS is the SRA’s apparent disregard for the unique economic model of law firms. The response emphasises that the SRA has not adequately assessed how fines might impact the economic viability of law firms or considered that excessive fines could result in firm closures. The CLLS stresses that law firms operate differently from corporate entities; their profit margins are often shared among partners, and any large fines directly reduce the income of these partners, potentially causing disproportionate financial distress. The response also raises concerns that high fines might force firms to cut costs, including reducing staff or limiting investment in compliance and risk management systems, thus impairing their overall competitiveness and financial stability.

The CLLS underscores that global law firms, with complex structures and interlocking partnerships, are particularly vulnerable to the proposed fining regime. The SRA’s suggestion to consider global turnover when assessing fines demonstrates a lack of understanding of how these firms operate. Such an approach could multiply the financial impact on the SRA-regulated entity in England and Wales, disproportionately affecting its partners and potentially extending to partners in other jurisdictions who had no involvement in the conduct in question.

It is argued that these flaws are further compounded by the lack of safeguards in the SRA’s decision-making process, which the CLLS views as outdated and not fit for purpose in cases involving substantial fines.

Additionally, the CLLS criticises the SRA’s focus on “deterrence” as the primary objective of its proposed fining scheme, arguing that this is both unclear and too narrow. Instead, the purpose of any fining regime should be to maintain public confidence in the delivery of regulated legal services, not merely to impose punitive financial penalties.

The Birmingham Law Society’s Response: Grassroots Criticism

The Birmingham Law Society (BLS), the largest local law society outside London, has also voiced strong opposition to the SRA’s proposals. The response largely aligns with the Law Society’s criticisms, particularly emphasising the lack of empirical evidence, the flawed approach to fining calculations, and concerns about independence in the SRA’s decision-making process.

A key concern for the BLS is the absence of data and impact assessment in the SRA’s consultation. The BLS notes that the SRA frequently uses phrases like “credible deterrent” and “public interest” in its consultation, yet fails to provide any empirical evidence to support these claims. They highlight that over 90% of individuals and firms sanctioned by the SRA or the SDT are “first-time offenders,” questioning the SRA’s assumption that higher fines will act as an effective deterrent.

Moreover, the BLS criticises the SRA for not assessing the potential impact of increased fines on smaller firms, legal aid practices, sole practitioners, and solicitors from Black, Asian, or minority ethnic groups. The Society fears that these higher fines could signal the end of many small practices, especially those operating in the lower-paid but vital sectors of the legal market. The BLS argues that the SRA is overlooking three critical regulatory objectives under Section 1 of the Legal Services Act 2007: improving access to justice, protecting consumers’ interests, and encouraging a strong, diverse legal profession.

BLS vehemently opposes the SRA’s method of using gross turnover for firms and gross income for individuals when calculating fines. They argue that this approach is wholly unfair, as it fails to account for tax and other financial obligations. For example, an individual with a gross income of £150,000 would pay nearly £50,000 in income tax, reducing their net income to £100,000. However, under the SRA’s proposed bands, a fine could range from 3% to over 145% of the gross income, leading to a financial penalty that far exceeds the individual’s actual take-home pay.

It suggests that using net income would at least align penalties more closely with the actual financial circumstances of firms and individuals, making the regime fairer and less punitive.

The BLS also raises concerns about the SRA’s decision-making process, describing it as a fusion of the roles of investigator, prosecutor, and judge within a single organisation, which undermines natural justice principles. They highlight that the SRA’s Investigation Officers gather evidence, decide on the allegations, and make sanction recommendations to the Adjudication Panel. This process leads to a perception that the Adjudicators are merely rubber-stamping the SRA’s recommendations, compromising the fairness of proceedings.

Additionally, the BLS points out the lack of true independent oversight, as even for the most severe penalties (Bands E and F), the proposed safeguards involve approval by other SRA employees, reinforcing the notion that “the SRA is marking its own homework.” They argue that to achieve fair and transparent decision-making, the SRA’s Investigation Officers should be forbidden from making any recommendations as to sanctions. The Adjudicators should instead independently assess the facts and decide on the appropriate sanction.

Although the SRA asserts that there is a right of appeal to the SDT for all its fining decisions, the BLS notes that this process is limited, as the SDT only carries out a review rather than a full rehearing of the case. The cost and risk of an adverse costs order further deter many solicitors from appealing, even when they believe they have been unfairly treated. 

The SDT’s Response: Battle Lines Drawn

The Solicitors Disciplinary Tribunal (SDT) has responded to the SRA’s consultation with a clear message: matters of the seriousness envisaged in Bands E and F should fall within the Tribunal’s remit, not be handled internally by the SRA. The SDT’s response raises questions about the necessity of the proposed updates, the fairness of the new fining regime, and the potential erosion of justice in the legal profession.

The SDT questions the rationale behind the SRA’s attempt to retain in-house control over cases serious enough to attract the new Bands E and F fines. It emphasises that the SDT already has the power to impose unlimited fines in addition to a full range of other sanctions. The SDT is independent of the investigatory process, ensuring transparency and adding to the body of jurisprudence in regulatory law. The response argues that this independence, coupled with its track record for thoughtful judgments, has earned the confidence of both the profession and the public.

The SDT also points out that while the SRA justifies extending its fining powers to reduce the number of cases referred to the Tribunal, the opposite effect might occur. The methodology used by the SDT for calculating fines typically results in lower penalties than those under the SRA’s proposed scheme. Consequently, firms and individual solicitors might prefer to risk the trouble, expense, and potential negative publicity of an SDT hearing rather than settle with the SRA.

In addressing the SRA’s claim that its proposed approach provides a credible deterrent against serious breaches, the SDT disagrees. It argues that for those with the deepest pockets, the prospect of fines at levels proposed in Bands E and F might simply be viewed as an “arithmetical problem” to be weighed in a cost-benefit analysis. This reduces justice to a transactional and commercial event rather than an ethical and professional issue.

The SDT asserts that serious breaches of rules should not be summarily disposed of by the SRA, which acts as both investigator and adjudicator. A single form of sanction cannot alone serve as a credible deterrent. Instead, a range of sanctions, including those within the SDT’s purview, is necessary to address the most serious misconduct and uphold public confidence in the profession.

The SDT also finds the SRA’s proposed introduction of new nature and impact scores overly complex, suggesting that this added layer of calculation does not provide meaningful clarity. 

This consultation response from the SDT is particularly telling because it highlights the tension between the regulator and the disciplinary body. The SDT views the proposed changes as an overreach by the SRA, potentially encroaching on its jurisdiction and diminishing the importance of an independent adjudicatory process. 

By attempting to handle severe cases internally, the SRA risks reducing professional misconduct to a commercial calculation rather than addressing the deeper ethical and professional issues at play. The SDT’s perspective reinforces the argument that matters of significant gravity, particularly those involving proposed high fines, should be referred to an independent tribunal to ensure a fair, transparent, and proportional response.

Should Serious Fines Ever Be Dealt With By a Regulator?

The common thread in all these objections is a deep-seated concern over proportionality, due process, and the independence of disciplinary mechanisms. The high fines proposed in Bands E and F suggest a level of misconduct that should be referred to the SDT. By attempting to expand its fining powers, the SRA risks not only overstepping its regulatory remit but also undermining the tribunal’s essential role.

This situation raises a crucial point for the profession to consider: should serious cases that attract bankruptcy-risking fines ever be within the remit of a politically-driven regulator, or left to an independent tribunal? The answer seems clear. Allowing these cases to be handled by the regulator itself risks undermining the fairness and balance that provides the foundations of the disciplinary system.

Solicitors should also bear in mind that the SRA makes no secret of the fact that it has lobbied the government to extend its unlimited fining powers beyond financial crime matters. If successful, these proposed financial penalties could apply to a much broader set of misconduct allegations. 

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