A fine time

The Solicitors Regulation Authority (SRA) has increased fining powers for traditional law firms and those that work within them from £2,000 to £25,000 while fines for alternative business structures (ABSs) remain unaltered at £50m for an individual and £250m for a firm. In March 2023 the SRA applied to the Legal Services Board (LSB) for approval of amended rules intending that the changes should take effect on 30 May 2023.

The amendments will address:

• the investigation;
• procedures and adjudication;
• the calculation of fines;
• the SRA’s approach to types of misconduct; and
• a new fixed penalty scheme for firms.

Investigation

Allegations of misconduct passing the SRA’s assessment threshold test will be investigated by an SRA investigation officer in the usual way. If formal allegations materialise, an SRA investigation officer will send out a notice in the usual way, with a recommended decision and where applicable sanction.

The changes come in at the decision-making stage. If the SRA determines that there should be no further action, a letter of advice, a warning or a rebuke will be sent. If a fine is to be imposed on a firm or individual under a regulatory settlement agreement, these will continue to be processed by members of SRA staff. 

However, a fine can only be imposed by an adjudicator or adjudicator panel (‘adjudication’). Therefore, when an SRA investigation officer considers that an allegation should result in a fine, and no agreement has already been reached, allegations will be referred to adjudication for decision, that is, both to decide whether they are proven and if so, what sanction if any will apply.

Whether a fine is agreed or imposed, the SRA’s jurisdiction is subject to the fining powers described above.

Where allegations are found proven, adjudication must rank the misconduct into ‘brackets’ of seriousness, bracket A being the least serious and bracket D, the most serious. Bracket D ‘offences’ must be considered by an adjudication panel, rather than a single adjudicator. Therefore, even before adjudication, SRA investigation officers will need to consider and ‘recommend’ which bracket the alleged misconduct falls into. 

Upon adjudication, in respect of any allegations found proven, and where they seek to impose a fine, they will be obligated to apply a multi-stage process to determine the level of that fine (explained in more detail below). 

One of the stages involves converting the ‘bracket’ rating of the misconduct into a percentage of the firm’s turnover or individual’s gross income. This process may, for traditional firms and individuals, cause a fine to be calculated above the SRA’s fining power limit of £25,000. 

Therefore, the SRA investigation officer will need to make such a calculation before issuing a recommendation to adjudication to impose a fine. This will necessitate firms and individuals providing evidence of their (last year’s) turnover/gross income even before a decision has been reached. 

If the SRA investigation officer’s calculated fine exceeds the SRA’s powers the matter will be referred to an SRA authorised officer (not functionally a separate member of SRA staff) to decide whether to make a referral to the tribunal. With a significant increase in fines proposed, the flow of traffic through the Solicitors Disciplinary Tribunal (SDT) seems set to increase after all. 

Adjudication

A single ‘adjudicator’ will be a legally qualified person, whereas an ‘adjudication panel’ will comprise lay and legally qualified persons. All adjudication personnel will be engaged by the SRA but remain functionally separate to the investigation officer.

When a matter is referred to adjudication, they will need to consider whether further evidence is required before carrying out the decision-making function. 

Adjudication may decide to conduct an interview or a hearing. Hearings will be limited to cases where the SRA is unable to refer a matter to the SDT and a hearing is necessary to decide the case, and:

• there are material disputes of fact which cannot be determined without a hearing in which the parties are cross-examined, or
• there is an exceptional public interest in matters being ventilated in public. 

In practice, the SRA is always able to refer traditional law firms and individuals to the SDT, consequently, hearings will only be heard in certain cases involving ABSs and individuals working within them.

Hearings will broadly follow the usual civil procedures, but, in contrast with the SDT, will usually be held in private.  Interviews on the other hand, if sparsely used, have already been within the SRA’s armoury. Such interviews may take place either on a first-instance or review decision by adjudication. Adjudication will only interview the firm/individual subject of the decision, not witnesses.

The following rules will apply to interviews 

1. They will be held in private.
2. While in theory representation is permitted, the interviewee will be expected to answer the questions put to them.
3. The interview will be inquisitorial in nature. 
4. Adjudication may adopt any procedure which is just and fair, but they are not bound by the same rules of evidence as the civil or criminal courts.
5. Adjudication may provide an opportunity for the interviewee and/or their representative to make opening and/or closing comments. 
6. No new evidence can be provided, including witness statements. The evidence should be provided during the investigation stage.

The purpose of the interview is to clarify the interviewee’s evidence or test its credibility, prior to reaching a decision. They will not be held if witness evidence is also material; under those circumstances, the SRA will refer such matters to the SDT.

Adjudication is unlikely to have the same judicial experience as those sitting at the tribunal, and their decision could prejudice a position to be taken on appeal to the SDT. 

Some adjudication panels have experience in conducting limited hearings, for example, in applications to direct an Insurer to indemnify a firm under the Indemnity Insurance Rules. 

Calculation of fines

If adjudication decides that a fine is appropriate they are obligated to calculate the fine as follows.

Step 1

Adjudication will attribute two ‘scores’ to the misconduct, one for its ‘nature’ and another for its ‘impact’.

The ‘nature’ score will be ‘1’ where the conduct:

• was not intentional or continued after it was known to be improper; and
• did not arise out of recklessness or gross negligence, or form part of a pattern of misconduct. 

The nature score will be ‘3’ where at least one of the elements leading to a score of ‘1’ is not made out.

The ‘impact’ score will be 2, 4 or 6 according to the loss and impact caused, or that which could potentially have been caused. A ‘no/minimum’ rating will score ‘2’, moderate will score ‘4’, and significant will score ‘6’. 

The nature and impact scoring will then be added together and result in a score of 3, 5, 7 or 9, which are then re-labelled as letters in what the SRA refers to as brackets A, B, C or D, where 3 = A and 9 = D.

This means that:

• an unintentional error, not involving recklessness, gross negligence or a pattern of misconduct that caused, or had the potential to cause significant harm will attract a category C rating; and
• intentional misconduct, continued after it was known to be improper, involved recklessness, gross misconduct and a pattern of misconduct but caused no/minimum loss, and had little potential for loss, will attract a B rating.

It seems that the SRA considers that impact or potential impact is more important than culpability for an offence. 

Step 2

Having reached a ‘bracket rating’ of A–D, adjudication must then decide upon on an appropriate sub-bracket which it refers to as a ‘band’:

• For firms, this will be a sub-banding of A 1–2, B 1–3, C 1–5 or D 1–5, the higher the numeral, the more serious the sub-band. 
• For individuals the sub-bands run from A 1–2, B 1–3, C 1–6, or D 1–4. 

SRA guidance indicates that adjudication should consider, ‘the individual facts and circumstances’ to determine the correct sub-band.  

Step 3

Having arrived at a bracket and sub-band adjudication will then run their fingers down a table to determine a ‘multiplier’, being a percentage, which will be applied to the firm’s turnover or individual’s gross income 

• For firms the multiplier will be, in bracket A rising from 0.2% to 0.3%, bracket B, 0.4% to 1.2%, bracket C, 1.6% to 3.2% and for bracket D 3.6% to 5%, according to the sub-band established. 
• For individuals, the multiplier will be in bracket A rising from 2% to 3%, bracket B 5% to 11%, in bracket C 16% to 49% and bracket D 65% to unlimited (which could be greater than 100%).

In exceptional cases adjudication will be permitted to depart from the tabulated outcome, higher or lower.

For traditional firms and individuals, the SRA’s sanctioning power remains subject to the £25,000 limit, therefore the higher the domestic turnover of the firm or gross income of the individual the more likely that a referral to the SDT will be made. The SDT will not necessarily apply the same criteria.

Annual turnover will mean a firm’s turnover in England and Wales from SRA authorised activities, taken from the most recent year’s firm submission prior to referral to the decision maker. 

Therefore, for a traditional firm with an annual turnover of £500,000, the fine could range from £1,000 to £25,000, all within the SRA’s jurisdiction. For traditional firms with turnover exceeding £500,000, the SRA’s jurisdiction to impose a fine at the top ends recedes. Traditional firms with a turnover exceeding £12.5m, will, in the absence of agreement, always need to be referred to the SDT as the lowest rating (0.2%) will exceed the SRA’s fining powers.

Gross annual income will mean the individual’s gross income in the most recent tax year prior to submission to the decision maker. The guidance doesn’t make clear whether this is income from all activities, or only through the individual’s activities as a solicitor.

Traditionally, a suspension, even for six months, has been considered a more serious sanction than a fine. For individuals, a C5 banding will cost six months’ salary.

Adjudication can also:

• take into account other financial circumstances of a firm or individual and seek further evidence if there is evidence that an individual is of significantly different ‘means’ to that suggested by the income figure provided (because of changes since last year’s figures);
• increase the seriousness ‘band’ and estimate income according to market standards where an individual refuses to provide evidence of turnover / gross income;
• discount the penalty by up to 40% to take into account specific mitigating factors relating to the respondent’s conduct after the breach including early admissions, remedying harm caused and cooperation with the investigation; and
• set the fine so as to remove any financial benefit arising from the conduct giving rise to the breach.

The rigid nature of the proposed rules will greatly limit adjudications’ jurisdiction, and thus the scrutiny of the SRA’s operational functions.

Types of misconduct

On 30 January 2023 the SRA and SDT issued a joint statement regarding the type of cases that might be referred to the SDT, that is, even where the SRA considers it has sufficient powers of sanctions. The list includes cases involving allegations of:

sexual misconduct, racism, bullying, harassment or other counter-inclusive misconduct and/or conduct that targets an individual because of a protected characteristic;

• a pervasive toxic workplace culture;
• misappropriation/serious misuse of client money; and
• repeated failures to correct poor practices, despite warnings from the SRA.

It also includes cases where one of the following is evident:

• high public interest or a novel point of law;
• a serious failure by a law firm resulting in harm to clients or employees;
• there is more than one respondent, and some/all contest the allegations; or
• a material dispute can only be resolved through an oral hearing.

SRA guidance will state that in any case involving sexual misconduct, discrimination or any form of harassment, a financial penalty will only be considered in exceptional circumstances. Such exceptional circumstances will not include cases where there is an imbalance of seniority or power between the individual and the complainant or abuse of position but might include cases of inappropriate or insensitive behaviour where there is no ongoing risk. In such cases, the SRA may impose a rebuke or in rare circumstances impose a fine.

The SRA indicates that it will also commence a pilot scheme to obtain and consider personal impact statements for cases involving sexual misconduct, discrimination or any form of harassment.

New fixed penalty scheme

The application to the LSB also incorporates rule changes that will introduce a fixed financial penalty scheme for firms only, in respect of what the SRA refers to as ‘non-compliance with our more administrative requirements or failure to respond to our requests.’ A full list of the breaches will be set out at rule 11.2 of the SRA Regulatory and Disciplinary Procedure Rules.

The SRA will impose a fine of £750 for a first breach and £1,500 for a subsequent breach of the same category within three years of the date of the first penalty, or for a continuation of the same breach.  The SRA may also impose a ‘charge’ of £150 for its investigation costs.

Reviews

Where a right of review exists, it must be considered by someone other than the first instance decision maker. First instance decisions made by an adjudicator or adjudication panel may only be reviewed by a different adjudicator or adjudication panel.

Appeals to the SDT will, where permitted, be by way of review rather than re-hearing. In consequence, new evidence, documentary or oral, may not be permitted. 

What next?

The SRA says its proposed harsher stance on fines will create a credible deterrence and improve proportionality and fairness but, if applied rigorously, the SRA’s inflexible method of calculating fines could lead to unfairness.

An unintentional error, not involving recklessness, gross negligence or a pattern of misconduct, which had the potential to cause significant harm but in fact caused none, will result in a solicitor being fined 49% of their gross annual income, even if they have no savings. Therefore, where a solicitor earns £80,000 per annum gross, after tax and national insurance they will, in 2023/2024, net £55,449.40. A 49% fine in such circumstances is equivalent to £39,200 leaving the solicitor with a net gross income of £16,249.40.

The SRA warns against taking a more holistic approach to a person’s means as being, ‘more likely that individual judgments would need to be used’ which would, ‘impact on certainty and transparency’ 

There is no or little history of the SDT issuing the level of fines now proposed by the SRA. It remains to be seen whether the SDT will be convinced that the SRA are correct in their quantification of fines. I suspect it won’t.