The Top 10 SRA Compliance Topics of 2021 [COLP resource]

Linda D. Garrow

This free COLP resource is an overview of December’s monthly compliance webinar from the Jonathon Bray team. Sign up to our newsletter for invitations to future events.

We called it “The Final Count Down” of 2021’s hot compliance issues.

In at number 10…Cyber risks

If we were writing this post in any given year since about 2000, cyber risk would be a significant part of the legal risk landscape.

Law firms are proven lucrative targets for criminals. Not just in the amount of money held by solicitors, but also the data and sensitive information.

And it’s much nicer to commit fraud from the comfort of your living room (and certainly safer if you happen to be in a different jurisdiction) than physically stealing assets.

Law firms are often seen as a softer target than banks, since not every firm is willing or able to invest in state of the art cyber defences.

We were lucky to have expert counsel, Adam Richardson, join us for a webinar on the topic in November. Well worth going back to for practical tips and his insight into the scale of the problem.

Let’s not forget the very recent cautionary tale of Premier Property Lawyers, whose ‘security incident’ affected thousands of transactions.

Hanging on in at number 9…NDAs and sexual misconduct

Although the Beckwith case and appeal were heard in 2020, the fall-out of the decision came more into focus in 2021.

To recap, the case centred around allegations of sexual misconduct and abuse of power by a partner of a City firm. It was something of a test case for the SRA, who had a string of similar cases lined up for prosecution. Although the SDT sided with the regulator and handed out a hefty fine to the solicitor, the High Court found differently on appeal. Serious questions were raised by the Court about the extent to which the regulator can interfere into a solicitor’s private life.

The pipeline of 100+ sexual misconduct prosecutions that the SRA was talking about in 2020 has failed to materialise. So far.

It looks likely that the SRA will concentrate on cases where abuse of power can be established, although they do say that all allegations of sexual misconduct will be investigated.

Note also that the Solicitors Disciplinary Tribunal has not been deterred by Beckwith. In its annual report, the SDT sent a warning that it would not disregard solicitors’ private lives in determining professional integrity. Sexual misconduct and offensive social media media posts were specifically mentioned.

In a linked matter, do not forget the SRA’s 2020 Warning Notice on Non Disclosure Agreements. Ignore this at your peril!

In short, the regulator deems it unethical and a breach of its Code of Conduct for a solicitor to draft or advise on NDAs which prevent a person from taking legal advice or reporting issues to law enforcement or regulators. We wrote more about this here, which includes a free template NDA policy.

A solicitor was recently rebuked for drafting an NDA which purported to prevent another party reporting irregularities to HMRC.

Lingering like an unwelcome guest at number 8…Baby, it’s Covid outside

Starting on a positive note, the legal profession has generally responded very well with the Covid-19 challenge. Some firms have never been busier. And we’ve had several years worth of technological advances forced upon us over the course of a few months.

But in addition to the human costs of the pandemic, there are compliance risks for law firms. Much of this stems from the movement towards working from home, which poses several challenges including:

  • Supervision of files and general oversight
  • Increased data security risks
  • Lost firm culture and team cohesion
  • Managing workloads and balancing childcare/home-schooling responsibilities
  • Identifying bullying behaviour, stress and mental health issues
  • Development of trainees and junior lawyers
  • Managing the tension between those who want to return to the office, and those who would prefer to remain at home.

And of course, it’s not exactly easy executing documents, conducting hearings, and completing due diligence in a pandemic.

We can only hope that Covid doesn’t make a strong comeback in 2022.

Ever-present at number 7 – Equality, diversity and inclusion

In 2021 all SRA regulated law firms had to complete the bi-annual diversity survey. When it is collated, this data is used by the regulator to monitor the make-up of the profession. And law firms have to publicise their own (anonymised) diversity information.

The most recent survey data suggested that the profession was not doing too badly at representing women and people lumped together as “BAME”.

But that isn’t the full picture. There is the age-old issue of “glass ceilings” in law firms, where senior positions tend to be occupied by white middle-to-upper class men. And the gender pay gap also needs to be addressed.

2021 saw the launch of the Solicitors Qualifying Exam (SQE), which will gradually replace the LPC with two centralised exams, and the training contract with a less formal period of work experience.

SQE is largely designed to make the profession more accessible and inclusive. Whether it will or not, only time will tell. In the meantime, there are significant concerns about the new system resulting in a “two-tier” profession and creating a flood of newly-qualified solicitors (with a resulting downward pressure on wages).

However, SQE clearly presents opportunities for both trainees and law firms who choose to engage with it positively.

Sticking at number 6 – You’ve heard this one before…Access to legal services

It has been five years since the Competition and Market Authority (CMA) first raised concerns about the legal market. They concluded that consumers and small businesses perceive legal services as expensive, difficult to access and – well – a bit stuffy.

As a result, many potential law firm clients end up going to unregulated providers or having a bash themselves.

Whether or not this perception is justified, the regulators have been trying to tackle it ever since. And the CMA is keeping a close eye on progress.

For its part, the SRA started off with its Transparency Rules which applies to all SRA-regulated firms. There is no such thing as being out of scope of the rules. And the SRA has a team of people crawling solicitors’ websites checking compliance. Repeat offenders are routinely named and shamed (and fined) for transparency failures.

We can expect to see the SRA expanding the scope of the Transparency Rules in years to come.

And the regulator has other initiatives on the go, including:

  • working closely with price comparison websites
  • promoting the use of technology to improve access
  • providing a regulatory “sandbox” to safely test out innovative ideas
  • pushing the potential benefits of selling “unbundled” services (e.g. standalone templates)

Rapidly climbing the charts at number 5…Junior lawyer strike-offs

Regular newsletter readers will know that 2021 saw a lot of disciplinary and strike-off decisions against junior solicitors, trainees and paralegals. Often these cases feature a background of pressure and “challenging” working conditions, resulting in poor ethical decisions being made.

In the case of an inexperienced solicitor under immense pressure from clients, courts and opponents, with little support from their employer, backdating a document, covering a mistake or misleading a client about progress is often too tempting.

But is always professionally fatal when found out. Where the SRA succeeds in a prosecution of dishonest behaviour, a strike-off is almost inevitable.

It’s not as if the COLP has any discretion to protect the individual, either. As soon as they become aware of serious misconduct, they have their own responsibility to report to the SRA.

What is worrying is that these young lawyers are being solely targeted by regulators, whilst the employer generally gets away Scott free. This is despite, in many cases, being responsible for maintaining a toxic work environment or culture of fear.

If we are really serious about mental health and protecting the public, the regulators have to look at this situation. Firms have a responsibility to their junior lawyers. Putting anyone in a position where they see dishonesty as the only way to relieve intolerable pressure must have consequences.

Climbing steadily at number 4 – Professional indemnity insurance

The PII market continues its challenging cycle. Many firms faced hiked premiums this year, with some as high as 200%. An unlucky few have failed to receive any renewal terms and have been forced to close.

New law firms, particularly those that want to do property work, are finding it increasingly difficult to get insurance.

Brokers tell us that the insurance market has seen a perfect storm of huge conveyancing claims, reduced market capacity (with some big insurers exiting) and our good old friend Covid.

Unchecked, these conditions may well persist for some years.

Late in 2021, the Legal Services Board announced a consultation in their 2022/23 draft business plan about PII and its impact on access to legal services, which we know they take very seriously. A glimmer of light at the end of the tunnel, perhaps.

In the meantime, firms have to prioritise making themselves as attractive as possible to insurers. The renewal process is key. Work with your brokers to highlight your risk management and compliance systems. What can you point to that makes you a good insurance risk?

Making a surprise entry at number 3…Undertakings

It was an interesting year for undertakings. That is a phrase rarely uttered.

Failure to comply with a valid undertaking is both a regulatory and civil issue.

The SRA rules is that solicitors “perform all undertakings…and do so within an agreed timescale or if no timescale has been agreed then within a reasonable amount of time”. Not doing so is a clear breach of the Code of Conduct, and the SRA can go after both firms and individual solicitors where appropriate. This position has not changed.

Harcus Sinclair v Your Lawyers affects the enforceability by the Courts. The case involved an undertaking given by a law firm structured as a limited company. The Supreme Court confirmed that the Courts have no jurisdiction to enforce an undertaking given by a legal entity, only by an individual as an officer of the court.

Additionally, a solicitor giving an undertaking who works in a legal entity, such as limited company, PLC or LLP, is not giving the undertaking in their own name and it cannot be enforced against them as an individual.

Back in August the SRA said there would be guidance on this, but at the time of writing we are waiting for that to materialise. We wrote here that “undertakings are too important to our profession – and jurisdiction – to allow to wither”.

Hopefully 2022 will bring further clarity on this point.

Just missing the top spot at number 2…Client money and using client account as a banking facility

The SRA continued to take action against firms who mishandle client money. The SDT is forever hearing cases where solicitors have been reckless or downright fraudulent with the money entrusted to them.

Dishonesty aside, some disciplinary cases can be put down to inexperience, poor accounting systems or a misunderstanding of the SRA Accounts Rules. But these are not excuses. If there is one thing that is likely to get you into regulatory hot water, it is mishandling client money.

A relatively new trend is the increasing number of prosecutions for using the client account as a banking facility. This has long been a regulatory no-no and there is a full SRA Warning Notice on the topic.

Still, a surprising number of well-intentioned and experienced practitioners find themselves getting caught in this trap. Mishcon de Reya being the most recent high profile recipient of a significant fine (£232,500). There have been plenty of others.

Before accepting client money, firms must be careful to ensure that they can justify holding it. Does the money relate to a genuine legal service, on which we are instructed?

At the recent SRA Compliance Conference delegates were warned that there are common conveyancing situations between parents and their children which can blur the lines of acting as a bank.

And as if there was any doubt, this year’s Number 1 compliance topic is…Anti-Money Laundering (AML)

During 2021 the SRA continued to target compliance with the Money Laundering Regulations.

Money laundering is unfortunately a fact of life and as gatekeepers to the legal and financial system, law firms are tasked with forestalling financial crime.

Most firms are caught by the Money Laundering Regulations and the SRA is the statutory supervisor for the profession. That means they are responsible for checking compliance with the Regulations.

And they take this role very seriously.

In 2019-20 the SRA carried out an exercise calling in Firm Wide Risk Assessments (FWRA). This included 168 desk based reviews and visits to 85 firms. Where improvements were necessary, the firms were given guidance and time to implement changes.

The SRA AML team is still actively carrying out these sweeps, but is increasingly less tolerant for basic non-compliance with the Regulations. Particularly FWRAs, which have received so much publicity.

We are also seeing them taking a tougher line on other aspects of the Regulations, including:

  • Independent audits under Regulation 21
  • Client due diligence
  • Policies and procedures
  • Training
  • Employee screening

In 2021 we also saw changes to the definition of “tax adviser”, bringing some firms into the scope of the Regulations even if they only give incidental tax advice. For further information, please see our post here.

The SRA has also been quite vocal for firms to check whether they are caught by the Regulations under the category of Trust and Company Service Providers. If you act as professional trustees, set up companies, or provide a registered address for clients this will likely apply.

Although lawyers often get tagged with the ‘professional enabler’ label, in our experience the vast majority of solicitors want to get AML compliance right and are very wary of their obligations. And in some cases, they are so scared of getting things wrong they tie themselves and their clients up in knots to the detriment of everyone.

But this one isn’t going away any time soon. If AML isn’t at the top of the 2022 list we would be very surprised…

We are law firm regulation experts, supporting firms with outsourced compliance and risk management services.  

Free 30 minute compliance and AML consultations available. We do not provide legal advice.

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