December’s webinar (recording link sent to our COLP Insider newsletter subscribers) was a roundup of the top 10 SRA compliance topics of 2022, with some 2023 predictions thrown in for good measure.
Our previous predictions were pretty accurate. We said that AML, law firm cultures, transparency, diversity and the economy would be on the regulatory agenda in 2022. That turned out to be correct, although perhaps we don’t get any Mystic Meg prizes for the AML prediction. It looks set to remain on our end of year lists for the foreseeable future.
Our Top 10 List
These are not intended to be in order of importance necessarily, but an arbitrary reflection of how much regulatory attention the topics have received. Tell us if you disagree!
10. Cyber risks
The general picture is one of continued risk, albeit changing in nature. It seems as though most firms are now alive to the less sophisticated attacks, bank mandate fraud and impersonation emails. Conveyancers are particularly cautious and protective of their client account transactions.
However, the crooks don’t go away that easily. Phishing emails can be surprisingly effective at getting people to part with their login credentials or download malicious software. And this is the would-be hacker’s best hope of gaining access to a firm’s system.
Law firms Tuckers and Ward Hadaway were in the legal press in 2022, after falling victim to separate scams. Tuckers were fined £98,000 by the ICO for failing to protect client information (a core requirement of GDPR). Ward Hadaway obtained an injunction against hackers who threatened to leak client data to the dark web unless a $6m ‘ransom’ was paid.
9. Sexual misconduct
Pre-Beckwith, the SRA promised a raft of sexual misconduct cases that were under investigation, with the implication that they would end up in the SDT. Since the High Court very publicly overturned the SDT’s finding against Mr Beckwith, the SRA seems to have taken a different path. That raft of disciplinary cases is yet to materialise.
Yes, we have the occasional sexual misconduct prosecution. See, for example, the case of Oliver Conway, a trainee solicitor fined £2,000 for making drunken advances towards colleagues at a Christmas get-together.
The guidance is an attempt to clarify where the ‘line’ is drawn between a regulated person’s private and professional life, to give examples of inappropriate behaviour and set out the aggravating factors that affect severity of the misconduct. It is a surprisingly specific summary of the SRA’s expectations. It also gives them further ammunition for future prosecutions
Now that the SRA has increased fining powers (sorry, spoiler alert for number 7 on this list) and can enter into regulatory settlement agreements to avoid the cost and stress of a full hearing, being at the wrong end of a sexual misconduct prosecution could prove to be very expensive.
It’s likely, however, that the most serious cases – particularly those involving an abuse of power – will continue to end up in the SDT. (And don’t forget that the tribunal now operates on the civil burden of proof).
8. Guidance, Guidance, Guidance
Continuing the theme, we think that the ever-growing library of SRA Guidance and Warning Notices is itself a compliance issue worthy of note.
2022 saw new and updated guidance on:
- Administering oaths
- Workplace culture and wellbeing
- Conduct in disputes
- Separate businesses
- Vulnerable clients
- Advising on leasehold property and ground rents
- Regulated financial services and prepaid funeral plans
- Professional duties during the Bar strike
- Undertakings given by incorporated law firms
- Sexual misconduct (see above)
- Convictions arising out of matters of principle and social conscience
- Immigration work
- Claims management and immigration services
These documents add to an already hefty library of guidance.
Now, bearing in mind that SRA guidance notes carry an ominous regulatory health warning (‘This guidance is to help you understand your obligations and how to comply with them. We will have regard to it when exercising our regulatory functions.’), they are not to be taken lightly.
It’s been said before, but this approach to regulation-through-guidance seriously undermines the purpose of the ‘slimmed down’ SRA principles-based rulebook. In simple terms, a solicitor cannot read the Codes of Conduct in isolation. They must be familiar with all of the guidance in order to know what the rules really mean, and what the SRA expects.
Leaving aside the fact that guidance is not subject to consultation or Legal Services Board approval, the practical impact is that the profession now has more de facto rules than ever. To make matters worse, guidance is not organised or searchable in a particularly useful way. The rules are not cross referenced or linked to relevant guidance notes. Solicitors have to subscribe to updates in order to be alerted to new guidance.
Even worse, useful nuggets of information are often buried within seemingly unrelated guidance. Take, for example, the recent Warning Notice on SLAPPs (Strategic Lawsuits against Public Participation). Reading the title, it might be reasonable to assume this is only relevant to those firms that provide ‘reputation management’ services and represent ultra high net worth clients. That would be a mistake, for the document provides additional guidance about the SRA’s expectations around the conduct of litigation generally.
7. SRA fining powers
Over the summer, the regulator’s power to fine firms and individuals (without referring them to the SDT) increased from £2,000 to £25,000.**
The SRA says this will reduce costs in disciplinary proceedings (costs orders in the SDT are usually borne by the accused, even if the allegations are not upheld), enable them to deal with cases more quickly (it can take years for a case to make its way through to final hearing), and will reduce the negative stress and anxiety placed on the accused professional. As a result, the SDT should be reserved for the most serious cases of professional misconduct.
To be fair, there is merit to all of those points. The flipside, of course, is whether it is right for a regulator to be judge, jury and executioner. And whether the SRA can be trusted to deliver consistent, fair and appropriate punishments. We are unlikely to have much transparency about decision making, unlike at the SDT where full judgments are published.
There is also the possibility that the SRA will become more bullish with enforcement, in the knowledge that most people would prefer to be dealt with swiftly – even at a premium.
Misconduct ripe for an uplift in punishment would include AML failures and failure to comply with the Transparency Rules. It is clear that the regulator is losing patience with firms who do not – or cannot – comply with rules that have been clearly communicated and can be audited.
**This does not affect the almost unlimited fines available to the SRA against ABSs.
6. Culture and wellbeing
The war in Ukraine overshadowed an important thematic review published by the SRA in February, a piece of work that signalled a new regulatory priority and resulted in separate guidance. (There’s that word again…)
Toxic workplaces are often blamed for contributing to solicitors’ poor ethical decisions. Long hours, intense billing pressure, tyrant supervisors – these once-accepted features of private practice are now firmly in the SRA’s sights. The thematic review revealed that around a quarter of respondents felt their firm’s culture was ‘not positive’.
That chimes with a 2021 report which found that lawyers were ‘stressed, tired and anxious’.
Now the SRA has drawn a line in the sand, making workplace culture a regulatory issue:
“We expect firms to create and maintain the right culture and environment for the delivery of competent and ethical legal services to clients with effective systems, supervision arrangements, processes and controls in place.
This includes taking steps to run businesses in a way that supports wellbeing by minimising the risk of working practices and workplace behaviours leading to poor mental health. A failure to put in place systems that protect employees may lead to an increased risk of breaching our regulatory requirements.”
This will be followed by a change to the Code of Conduct, making it a requirement for law firm leaders to treat colleagues ‘fairly and with respect’ and challenge bullying behaviour.
5. Prosecution of junior lawyers
This category is perhaps more notable for its reversed trend. Over the past few years, which we began noticing some time ago, there has been a worrying trend towards seemingly heavy-handed prosecutions against relatively junior lawyers, where the facts of the cases suggested that the SRA’s ire was misplaced. The Matthews and James cases spring to mind.
It is perhaps a reflection of the SRA’s work on mental health, wellbeing and toxic workplaces (see above) that we seem to see fewer junior lawyers in the SDT.
4. Register of overseas entities
The Economic Crime (Transparency and Enforcement) Act 2022 was implemented at breakneck speed following the war in Ukraine. It has long been a legislative intention to make offshore owners of UK property declare their beneficial ownership, but until Spring it did not look like anyone’s priority.
Fast forward less than a year and we have an impending deadline of 31 January 2023 for overseas entities to register their beneficial owners, some of whom will have previously been hidden from sight by complex structures, or face committing an offence.
There are a couple of compliance implications for law firms.
Firstly, whether or not to act as ‘verification agents’ – effectively rubber stamping the identity of an overseas entity’s beneficial owners. Not many firms are rushing to do this, no doubt taking heed of the Law Society’s unequivocal warnings (“we consider that any law firm acting as a verifier will face significant challenges and expose itself to significant risk, including possible criminal prosecution, regulatory sanction, and reputational damage”).
Secondly, property lawyers will need to factor offshore ownership into their advice. Say a Jersey holding company is seeking to buy a London investment property. If the purchaser is not already registered and verified it is likely to add time to the transaction, and expense to the buyer’s side.
Likewise, the sale of a property by an unregistered overseas trust is likely to face all manner of complications – ultimately the Land Registry will not register the transaction, and the seller is likely to have committed an offence. Appropriate advice will have to be given to the parties.
It will not have escaped your notice that we are in the midst of a cost of living crisis, probable recession, uncertain housing market, high inflation and rising interest rates.
The immediate implications for law firms are commercial. Regulators are suggesting that conveyancers should stress test their business models for 40% reductions in conveyancing instructions.
Aside from the housing market, the public’s general ability and willingness to pay for lawyers could place a downward pressure on fees, at the same time that office costs are rising and wage expectations are increasing.
Financial stability is a key issue for the regulated sector. It is not inconceivable that we will see some high profile law firm failures as a result. See Metamorph Group’s spectacular implosion as a recent example.
The SRA always says that there is a direct correlation between tough economic conditions and the temptation to dip into client funds, or make other poor decisions. COFAs in particular should make sure they properly understand the financial information presented to them, and are able to conduct account reconciliations.
But it’s not all doom and gloom, litigators and insolvency lawyers will be kept busy.
Unsurprisingly, anti-money laundering continues to dominate much of the SRA’s attention. They have built a supervision unit capable of directly monitoring firms’ compliance with the Money Laundering Regulations, through visits and remote reviews.
Those who fail the assessments are increasingly facing fines and, even more damagingly, being named and shamed. 2022 saw a record £232,000 fine for a firm’s AML breaches.
Firms within scope of the Money Laundering Regulations should work on the assumption that they will be visited in the near future.
Although firm-wide risk assessments are still an important part of AML compliance, the SRA is moving on to look at other aspects of the Regulations. That will include:
- Client and matter risk assessments
- Client due diligence and source of funds/wealth checks
- Policies and procedures
- Independent (‘Regulation 21’ audits)
Don’t forget that the LSAG Guidance received approval from HM Treasury this Summer, so it now carries statutory force.
Hands up, who saw this one coming? Although sanctions compliance has always been relevant to lawyers, in practice it was often something of an afterthought for many firms (if thought about at all). Since Spring 2022 it has come to prominence, topping our year-end list.
And for good reason. Keeping up to date with UK sanctions has been an incredibly complex task for compliance teams this year. New legislation and technical guidance came thick and fast throughout the year, mainly focused on the Russia and Belarus regimes. And we are not just talking about sanctioned individuals, but entire industries and types of legal services.
Unlike AML compliance, sanctions compliance applies to all law firms. It is not optional and there is little scope for taking a ‘risk based approach’.
Firms operating internationally may also need to comply with US and EU sanctions, adding a significant layer of complication.
Of all the SRA guidance to be published in 2022, the regulator perhaps left the most useful until late in the year. ‘Complying with the UK sanctions regime’ is a comprehensive summary of the issues pertinent to most law firms. It is essential reading.
Well, what do you think of the Top 10 list? It wasn’t until putting it together that we realised what a hectic compliance year it has been. We didn’t touch on the issues contained in the SRA Risk Outlook, the ongoing SIF saga, the reintroduction of the £20 keeping of the roll levy, or the PII market.
What else did we miss?
Predictions for 2023
We think we can expect these topics to become increasingly prominent this year:
- More AML – yes, we think there is more to come. Solicitors are having to become economic crime practitioners.
- Supervision – the SRA’s recent guidance note on effective supervision links in with the thematic review on workplace culture and an increasing trend towards hybrid working. Firms that fail to get to grips with the implications can expect unwanted SRA attention.
- UK GDPR – there is political appetite to put the UK on a path towards its own data protection regime.
- Continuing competence – the LSB has been making noises that the current ‘CPD’ system is not working. 2023 could be the year we see reform proposals.
- Legal Ombudsman scheme changes – all firms will need to change their complaints policy wording to take account of the reduced limitation for LeO complaints.