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 the COLP Insider 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

Professional misconduct is an inherently personal issue. A proportion of solicitors (and non-lawyers – they get sanctioned too) will misbehave, no matter what. 

The good thing for law firm leaders is that the SRA will always hold individuals accountable for their own actions and misdeeds. After all, that is why we are regulated in our personal capacity. It is actually quite rare for a sanctioned solicitor’s firm to be dragged into the disciplinary proceedings. There would need to be some kind of systemic failure or collusion that contributed to the individual’s misconduct.

However, the fallout of a high profile SRA enforcement action obviously has the potential to damage the firm. Let’s take the recent focus on sexual misconduct by way of example. If a solicitor is sanctioned for inappropriate or predatory behaviour, it may leave people wondering (possibly unfairly) whether there is a wider cultural problem at that firm. Do clients and potential recruits want to be associated with such an organisation?

But what can law firms do to protect themselves? Here are some practical suggestions:

1. Consider an independent review of the firm’s culture, taking into account staff opinion, exit interviews, grievances and so on. Do people feel that they are treated fairly and with respect?
2. Thoroughly vet new hires. Are there any red flags or warning signs that this person does not share the firm’s ethical values?
3. Do not brush allegations of misconduct under the carpet, no matter how uncomfortable they may be. Investigate and take action where needed. 
4. Provide clear guidance on professional ethics, the latest SRA guidance and what your firm considers to be unacceptable behaviour. 

Check your AML systems and controls

Anti-money laundering compliance is a huge topic. And growing in importance for law firms. The regulators, under pressure from legislators, are proactive in checking that firms are taking the required steps to forestall financial crime. 

Every law firm should anticipate having an SRA money laundering audit. 

Without going into the full range of compliance requirements, here are some steps you can take to avoid SRA fines:

1. Update your firm-wide risk assessment. This is the first document that the SRA will want to see. Don’t forget that most firms will have made regulatory declarations in 2021 that ‘compliant’ risk assessments are in place. Has anything changed since the document was last reviewed? Has it been updated to reflect changes to the Money laundering Regulations and sanctions regime? 
2. Review your AML policy and procedures. Does your team follow the firm’s internal rules? Does the documentation need to be updated in light of changes to the firm-wide risk assessment? 
3. Train your team. Make sure that all relevant staff have up to date knowledge of AML and financial crime. Bonus points for tailoring the training to the firm, rather than trotting out the same old Powerpoint. 
4. Do a Regulation 21 audit. There is a requirement under the Regulations to independently audit the effectiveness of the firm’s AML systems and controls. The SRA auditors pick up on firms who have not yet done this.

Tighten up your publicity and marketing

Our regulators love a bit of transparency (except when it comes to their own Board meetings, but that is a different story). 

Loathe them or hate them, the Transparency Rules are relevant to all regulated firms. The majority now have the SRA digital badge on their websites, and those caught by price transparency will have some form of wording in place about costs. 

The SRA has a dedicated team of website checkers trawling the internet for non-compliance. Offending websites may outrageously omit to tell the world that VAT is 20%. Or fail to provide a ‘prominent’ link to the complaints policy. Really important stuff.

The risk of a fine is relatively low, so long as the identified breach is minor and the firm is willing to rectify without a fuss. 

But since nobody wants unnecessary SRA engagement, firms should undertake an independent transparency audit.

Understand what goes through the client account

The ‘banking facility rule’ is contained at 3.3 of the SRA Accounts Rules. This quirky part of the rulebook has received increased regulatory attention over the past few years. Firms and individual solicitors are now regularly fined for using the client account inappropriately. 

It is also one of the least understood rules in the Standards and Regulations and it can be very difficult to put systems in place to catch breaches. 

The basic position is that money can only go through the client account if it is closely connected to regulated work conducted by the firm. In principle, that sounds quite simple. But you only have to go through the SRA Warning Notice and Case Studies to appreciate that there is lots of potential for various shades of grey and differing interpretations.

Clients often expect their solicitors to be able to hold money on their behalf for almost any purpose. Solicitors are often guilty of allowing their desire to help long-standing clients cloud their judgement on the risks involved. This can be compounded by insufficient safeguards in place to stop breaches occurring. 

We recommend that COFAs should:

1. Ensure the file handling and accounts teams understand the rule and its application. Provide training relevant to the firm’s practice areas to check everyone’s knowledge. Ironically, those who are more experienced may be more likely to fail to appreciate that doing clients a favour could land the firm in hot water.
2. Have a clear policy on receiving client money. Give practical examples of situations where the SRA could say the firm is acting like a bank.
3. Require all client money receipts to be explained by the file handler. This gives both the file handler the opportunity to think through the transaction, and the accounts team visibility of what comes into the client account.

Take control of residual balances

If you have read Brian Tracy’s productivity and time management book Eat that frog!, you will recognise the logic of tackling your hardest tasks first. These are the things that your brain knows are important, but will procrastinate about unless you just get it over and done with.

This concept applies to law firm residual balances. Those with old client balances usually know that they have a problem. But tackling the issue is hard, time consuming, and has seemingly little value. Nobody is screaming at you for their money to be returned. And there is always something more important to do. 

Before you know it, the amount of client money that should have been returned long ago grows to the point that the reporting accountant cannot ignore. The SRA receives a relatively low number of qualified accountant’s reports, so it is easy for them to identify where they need to start asking questions. 

Taking no action is clearly not a viable option. The COFA needs to:

1. Understand the scale of the problem. Most accounting systems have a residual balance reporting function. If it is a serious problem, you might have to consider a self-report to the SRA, telling them what you are doing about it.
2. Investigate each old balance. That is going to require an element of file review and input from the file handler (if they are still around). 
3. Categorise the balances and take action accordingly. Return money to clients where you can. Raise invoices for unbilled fees and disbursements. Pay ‘unclaimed’ client money to charity in line with SRA guidance. Where you are validly holding balances for clients, remind them that you still have it and why. 
4. Put in place a system to stop client balances building up in the first place. For example, ensure that all files must be closed shortly after the matter concludes, with the file closing process including tidying up the client ledger. 

If there is anything in this post that resonates and you would like some impartial advice, please contact us.