Risk outlook

Horizon scanning is always a worthwhile risk management task to help firms plan, prepare and budget for the year ahead. There will inevitably be unexpected, unplanned for events (who knew that Russia would invade Ukraine with the resulting impact on the sanctions regime and the new Economic Crime (Transparency and Enforcement) Act 2022?).

So, while none of us can accurately forecast the future, there is a significant amount of information available from various sources which will help firms to identify and manage risk effectively in the year ahead. If it’s important to the Solicitors Regulation Authority (SRA), it will be important to all firms and individuals it regulates as well. 

Anti-money laundering

In October 2022 the SRA published its annual anti-money laundering (AML) report for 2021/22 where it reported on the increased capacity and resource at the SRA to focus on desktop and in-person visits to supervise firms’ compliance with the Money Laundering Regulations 2017. It’s clear from the SRA’s business plan for 2022/23 that its anti-money laundering work will remain high priority in 2023 with an ever-expanding number of firm inspections and desk-based review activity. The annual report reiterated its previous guidance that most firms need to have an independent audit yet highlighted that this was an area of compliance which was still lacking. If your firm falls within the regulated sector for AML and hasn’t yet had an independent audit (and in practice, it will be rare for any firm that isn’t a sole practitioner to not need one), you should make this a priority for 2023. 

Sanctions

Compliance with the sanctions regime has presented recent challenges, particularly following the invasion of Ukraine, and the consequences of non-compliance are high because of the strict liability enforcement by the Office of Financial Sanctions Implementation. The SRA said in its annual AML report that, “In the coming year, we will continue to work proactively to make sure we help firms we supervise to comply with sanctions legislation, stepping in to take action where they don’t”. The SRA has now published further guidance (28 November 2022) setting out what it expects from firms and providing advice on how best to meet these obligations.  

Proliferation financing

We can also expect guidance from the SRA/Legal Sector Affinity Group (LSAG) on proliferation financing, the changes in relation to which came into effect through the Money Laundering and Terrorist Financing (Amendment) (No 2) Regulations 2022 on 1 September 2022. Proliferation financing is the provision of funds or financial services used, in whole or in part, for the manufacture, acquisition, development, transport, transfer or possession or use of weapons (chemical, biological, radiological or nuclear), in contravention of a relevant financial sanctions obligation. The act requires firms in scope to assess proliferation financing risks, in addition to combatting money laundering and terrorist financing and put in place policies, controls and procedures (PCPs) to mitigate and manage the risks. The regulatory requirements mirror those for AML, so regulated entities can either create a separate risk assessment and PCPs or incorporate it into the existing AML firm-wide risk assessment (FWRA) and PCPs. The first national risk assessment of proliferation financing was published in September 2021 and must be taken into account in the FWRA.

Economic crime levy

This year will see the first economic crime levy being collected on all anti-money laundering regulated businesses including law firms. The amount of the levy will be a fixed fee based on size as determined by UK revenue. Small firms (with less than 10.2m revenue) will be exempt, with medium-sized firms (£10.2m-£36m) paying £10,000, large firms (£36m-£1bn) paying £36,000, and the very large businesses (£1bn or more) paying £250,000 annually. HM Revenue & Customs will start collecting the levy from April 2023. 

While the SRA agrees that the vast majority of firms are doing their best to comply, keeping up to date with all these regulatory changes in relation to AML, sanctions and economic crime generally is time consuming and difficult. Notwithstanding that, Anna Bradley, chair of the SRA, sent out a clear message in the foreword of the AML annual report when she said: “To those firms not doing enough to prevent money laundering, you need to take your obligations seriously and play your part. As we increase our inspection and desk-based review supervision, now is the time to put your house in order.”

With the Economic Crime and Corporate Transparency Bill currently going through parliament, which is likely to give the SRA unlimited fining powers for economic crime (and this will apply to all firms, not just those in the regulated sector), Bradley’s warning is timely indeed. 

 

Fraud

As the country enters what is expected to be a long recession, the concern over fraud is high on the agenda. With issues such as vendor fraud and dubious investment schemes in conveyancing, or internal opportunistic fraud by employees struggling to pay their bills and finding ways to access the firm’s accounts, firms will need to be alert and ensure their systems and processes are robust enough to avoid breaches and falling victim to such criminal activity.  

The economic climate may also see a downturn in certain practice areas and/or credit control issues with clients unable/refusing to pay their bills. Monitoring of financial stability will need to be high on COFAs agendas. 

Cyber-attacks

Cyber-attacks are also on the increase and again, firms need to be comfortable that they have robust layers of security in place which have been independently tested and improved. Staff should also be trained to recognise and avoid the common (and ever evolving) infiltration techniques being used by criminal gangs.  

Strategic lawsuits against public participation

Strategic lawsuits against public participation (SLAPPS) have featured a lot in the news following the Russian invasion of Ukraine. The concern is that certain (wealthy) clients will seek to abuse the legal system by using such tactics to harass or intimidate another person seeking to hold them to account. The SRA has made it very clear to firms, through its warning notice (issued 28 November 2022) of the importance of ensuring that the duty to act in a client’s best interests does not override the wider public-interest obligations and duties to the court and that litigation is conducted properly. 

This year is likely to see more investigations, potential disciplinary action and sanctions being imposed on firms and solicitors in breach. As Paul Philip, chief executive of the SRA stated: “We are committed to cracking down on SLAPPs so that genuine and appropriate scrutiny can continue, while balancing that with the need for solicitors to be able to bring legitimate claims on behalf of their clients.”

Transparency Rules

In August 2022, the SRA announced that over the next few months they would be starting a rolling programme of checks on firms’ websites to ensure compliance with all aspects of the SRA’s Transparency Rules. The SRA will be checking all law firm sites, including those of firms who have previously filled in a self-declaration stating that they are fully compliant. Remember that any firm with a website which offers services in the areas of conveyancing, probate, immigration, employment tribunals or motoring offences, must publish certain information including details on the services offered, who delivers them and pricing (see Andrew Donovan’s article on p 15).

In addition, all firms irrespective of the services offered, must publish details of their complaints procedure and the website must also include the SRA clickable logo. 

Professional indemnity/post-six-year run-off cover

After extensive consultations on what should happen with regard to the Solicitors Indemnity Fund and post-six-year run-off cover, the SRA has now decided that a scheme run by the SRA offers the most cost-effective and proportionate solution to providing appropriate consumer protection. The details of the scheme rules are yet to be finalised (the consultation on this was open until 3 January 2023) but the scheme will come into effect from September 2023. 

SRA fining powers

With effect from 20 July 2022, the Ministry of Justice increased SRA fining powers from £2,000 to £25,000 for ‘traditional’ law firms and the solicitors who work in them. This does not impact on alternative business structures and the individuals working for them, for which the SRA can impose fines of up to £250m and £50m.  

The SRA’s aim is for cases to be resolved quicker as fewer of them will have to be referred to the Solicitors Disciplinary Tribunal. We have already seen increased fines being imposed in recent SRA decisions but the latest consultation is around issues such as:

• how the SRA will improve its transparency of decision-making
• the proposals for fixed penalty fines for lower level “technical” breaches (such as failures to ensure all necessary approvals have been obtained), and
• the proposed increased fining tables based on the seriousness of the breach and a firm’s turnover or individual’s gross income.

The consultation only recently closed so at the time of writing the detail is yet to be finalised. What is certain, though, is that we will see an increase in the fines being imposed in both traditional and ABS law firms.  

Also in consultation is the proposal to pilot the use of victim impact statements for cases involving sexual misconduct, discrimination or any form of harassment. 

Health and wellbeing in the workplace

Following a consultation in 2022, the SRA Board has approved changes to the Standards and Regulations to introduce new rules relating to the unfair treatment of colleagues and to a solicitor’s health and fitness to practise. The changes relating to the treatment of colleagues is designed to clamp down on unsupportive, bullying or toxic working environments and culture, and will require individuals and firms to treat colleagues fairly and with respect and for managers in firms to challenge unfair treatment. Guidance was already published in February 2022 requiring firms:

• to have effective systems and controls to supervise staff
• monitor concerns which may affect their wellbeing and competence, and 
• provide a safe environment for employees to raise concerns and address them promptly and in a constructive manner.

Hopefully this means that firms will already have these processes in place to ensure compliance not just with the code but also employment legislation. It will be interesting, however, to see how the SRA will deal with complaints where a manager has failed to challenge unfair treatment in the future. 

Legal Ombudsman Scheme changes

Following a consultation by the LeO in February 2022, we will see some significant changes from April 2023 in its scheme rules and how it manages and deals with complaints. Some of the key changes include:

• reducing time limits for complaints to LeO from six years to one year from the date of the act/omission/becoming aware of it 
• enabling LeO to exercise discretion to dismiss a complaint if specific criteria are met, without the need to first accept the case for investigation 
• enabling LeO to consider whether a case should be dismissed if a reasonable revised / increased offer is made by the service provider during the course of an ongoing investigation, and 
• discretion to dismiss a complaint where the nature or scope of the complaint, the volume of evidence, or the conduct of the complainant is such that it would be disproportionate for an investigation to be carried out.

The changes will mean that firms will need to revise their terms of business/client engagement letters/final complaint response signposting clients to the timescales for complaining and further guidance will be issued ahead of the changes coming into effect. 

The Legal Services Board is also likely to consult in 2023 on the complaints process, including ways to make complaints signposting clearer and how a complaint is defined/interpreted. It is also considering adopting the financial services approach to “identify whether the root cause of complaints could have affected consumers who have not complained, and potentially offer redress to these consumers”. 

It’s impossible to anticipate and cover everything that risk and compliance managers in firms will have to face over the next year, but what I can safely predict is that we will all be kept very busy indeed.