Feeling fine, Part 2 – The SRA consults on its new fining regime as unlimited financial penalties loom for economic crime

In the Summer last year we reported on the increase in the SRA’s fining powers for traditional law firms and solicitors from £2,000 to £25,000, which were intended to empower the SRA to deal with a wider range of offences than before, relieving pressure on the Solicitors’ Disciplinary Tribunal (“the SDT”).

Following the SRA’s new fining powers coming into force last July on the detail of its new regime, the SRA concluded its consultation on the detail of the new financial penalties framework in November last year.

Already this year the SRA has been issuing some very significant fines, including a record £20,000 fine against Oxfordshire firm, Ferguson Bricknell, for failing to have anti-money laundering training and systems in place, even though the SRA accepted that there was no evidence of harm to consumers or third parties.

The government is also now on a path to introduce legislation that will enable the SRA to take greater action against the ‘facilitators’ of money laundering by unlimited fines from the SRA for ‘economic crimes’.

Consultation on the SRA’s new fining regime

Various concerns had been raised over the lack of transparency behind the SRA’s decision-making when its fining powers had been substantially increased.  The SRA heard those concerns and published last summer an explanation of the detailed procedures and safeguards that it already has in place, as well as the “additional enhancements” that it proposes to make “to provide additional assurance”.

In August last year, the SRA opened its second consultation (building on the previous consultation from November 2021) on the new regime and sought responses to the detailed rules and guidance that the SRA proposes to bring in. This consultation included proposed updated fining bands for firms and individuals and detailed proposals regarding the implementation of the fixed financial penalty scheme for low-level breaches – which breaches the SRA proposes to include, the process it intends to follow, and the proposed level of fines.

SRA fines are imposed by legally-qualified adjudicators, who are “functionally separate” from the SRA’s operations team.  Cases that are particularly high profile, complex or sensitive are heard at a panel meeting.  Fines (and other sanctions) can also be imposed through a Regulatory Settlement Agreement (“RSA”), where the respondent agrees the case against them and the consequent sanction..

The SRA proposes a number of changes designed to improve the openness and robustness of its procedures including:

• All RSAs agreeing a fine over £2,000 will need to be approved by senior staff;
• The SRA will publish an updated version of its Schedule of Delegation, explaining who makes which decisions;
• The SRA will clarify its rules for when adjudicators may interview a witness or a respondent, or conduct a hearing that may be held in public, albeit the SRA anticipates that such hearings will be rare;
• The SRA will introduce rules to clarify that all fines are imposed by adjudicators, unless agreed, but that fines in the most serious band will be determined by an adjudicator panel;
• The SRA will amend its rules so that referrals to the SDT can be revoked more quickly and easily, and so that adjudicator decisions can only be reviewed by other adjudicators or adjudicator panels;
• The SRA will publish guidance on its decision-making processes and procedures, in order to show the existing functional separation and the independence of its adjudicators, as well as the safeguards in place to ensure a fair and transparent process;
• The SRA will work closely with the SDT to publish a joint statement on what constitutes a serious case, appropriate levels of fining and when a matter should be referred to the SDT;
• In early 2023 the SRA will implement changes following its consultation on the publication of its regulatory decisions; and
• The SRA will provide additional detail on the fines it issues in its annual Upholding Professional Standards report.

Alongside the SRA’s increased fining powers, it also intends to amend its guidance to clarify that a financial penalty will only be considered “in exceptional circumstances” for any cases involving sexual misconduct, discrimination or any form of harassment.  The SRA considers that such cases are serious and raise issues that present a risk to others, unless the incident was a one-off and was poorly judged rather than ill-motivated.  Accordingly, the SRA proposes that such cases are usually referred to the SDT for suspension or strike-off.  The SRA also proposes piloting the use of victim impact statements in these cases.

In response to the second consultation, the Law Society suggested that the “safeguards proposed by the RSA to increase the transparency and accountability of its enforcement processes do not go far enough” and “there needs to be a clearer functional separation of the roles of investigators and adjudicators to maintain the confidence of the profession and the public.” The Law Society viewed the regime as too complicated and suggested that the SRA should consider simplifying it. The Law Society also wanted to see affordability of a fine assessed by reference to an individual’s real economic circumstances rather being set merely as a percentage of an individual’s gross income. The Law Society disagreed with the SRA’s proposal to publish the percentage of an individual’s income which a given fine represents on the basis of it being disproportionately intrusive. However, it supported in principle the proposal that adjudication panels should consider matters which fall into the SRA’s most serious category of fines (Band D) and, in its view, panels should comprise (and be chaired by) a majority of legally qualified members alongside lay members.

The SRA’s second consultation closed on 14 November 2022 and the SRA will consider responses to the consultation before deciding on how to proceed.

Unlimited SRA fines on the horizon

In the wake of the move by the SRA to increase its fining powers, the government is on a path to introduce legislation that will enable the SRA to take greater action against the ‘facilitators’ of money laundering, by removing the maximum statutory cap on the financial penalty that the SRA can direct traditional law firms, solicitors and employees, to pay in disciplinary matters relating to economic crime.

The government wants to align the SRA more closely with other regulators to ensure the SRA has the necessary enforcement powers and can levy financial penalties that act as a credible deterrent in relation to economic crime matters.

The Economic Crime and Corporate Transparency Bill introduces a raft of new measures designed to combat economic crime, including the provisions concerning unlimited fines for economic crime, which will mean the SRA will be able to impose more fines internally without referral to the SDT. The definition of economic crime as proposed by the bill leaves little uncertainty whether failures relating to anti-money laundering, fraud, and bribery will fall within the remit of the SRA’s new unlimited fining powers, if enacted.

Once the bill has received royal assent, we can expect the SRA to consult the SDT on the levels of penalty it can set, and on draft rules, which will then require the Legal Services Board’s approval. When enacted, the impact on law firms, solicitors and employees facing investigation and enforcement action by the SRA will be profound.

Comment

It is helpful that the SRA has heard the concerns that have been raised around the transparency and robustness of its procedures for issuing fines under the new regime, and that the SRA is taking some steps to address those concerns.  It remains to be seen how effective those steps will be in practice, and whether solicitors will benefit from a similar level of independence in matters of significant professional importance as was afforded to them by the SDT.

The above said, it is perhaps worth bearing in mind the numbers involved.  In 2020/21 the SRA estimated that, out of 156,928 solicitors, it received 10,358 reports of concerns.  Of those reports, around two-thirds (6,959) did not require an investigation.  A further 2,451 were subject to ongoing investigations or were redirected elsewhere (e.g. to the Legal Ombudsman).  Of the remaining 1,816 reports, the SRA carried out investigations and found in the vast majority of cases (1,763) that the firm or solicitor had not breached, or not seriously breached, its rules.  The SRA imposed sanctions in 268 cases, and referred 101 cases to the SDT (where around half the solicitors concerned were struck off).

It is therefore clear that the SRA’s proposals are aimed at a relatively small section of the profession, and an even smaller section of those who are investigated.  The impact of the SRA’s proposed changes may therefore be somewhat limited in the profession as a whole, although the changes will be deeply concerning for those who are affected by them.

It may also be a concern for the wider profession if the SRA’s proposed changes result in a greater number of investigations being carried out and sanctions being imposed.  Insurers would still not cover any fines, but could potentially be exposed to the costs of dealing with SRA action, or find that claimants may try to use an adverse finding by the SRA to bolster a related civil claim for which insurers are on risk. Of course, this assumes that the SRA can effectively shoulder its increased workload in circumstances where delays can already be expected.