The power to sanction – is the SRA overreaching in its desire to have greater fining authority, and where does that leave legal regulation?

October 2023

Joe Bryant and Eleanor Gold

Introduction

Solicitors are no strangers to regulation. The vast majority of legal professionals would agree that a weakly regulated legal sector invites serious risk for advocates and clients alike. A clear and considered regulatory framework enables legal professionals to carry out their duties compliantly and with certainty. Effective regulation also protects legal professionals – offering a coherent framework against which allegations of poor practice or negligence can be measured.

Whilst a weak regulatory environment is obviously to be avoided, pernicious risks often lurk behind any onerous alternative. Proportionality – another familiar concept to the profession – must be applied for regulation to be not only strong, but effective.

The recent request from the Solicitor’s Regulation Authority (“SRA”) for an unlimited expansion of its statutory fining powers is, for many, a disproportionate disruption to the regulatory balance struck between deterrence and fairness. Many commentators are wondering – is this an example of ineffective regulation masquerading as ‘strong’ regulation?

Recent Developments

On 4 August 2023, the Chair of the Legal Services Board (“LSB”) announced a review into the SRA’s regulatory authority, specifically its “lack of effective fining powers”. Shortly thereafter, the Government’s Economic Crime and Corporate Transparency Bill 2022 incorporated proposals to lift the cap on the SRA’s fining powers entirely, when a fine relates to an economic crime. In practice, this means that any law firm, sole practitioner, or regulated individual convicted of an economic crime could be subject to an unlimited financial sanction from the SRA. At the date of this article, the Bill is yet to achieve Royal Assent.

At present, the maximum fine capable of being issued by the SRA is £25,000 – or, if the individual or firm has “greater means”,[1] between 0.5% – 2.5% of annual domestic turnover.[2] As outlined in our prior article, this is itself a recent change, only coming into force on 20 July 2022. Prior to this date, the SRA’s fining powers were limited to a maximum of £2,000. If the SRA currently considers a higher financial penalty is warranted, the SRA must refer the case to the Solicitor’s Disciplinary Tribunal (“SDT”). The SDT, in turn, has the power to issue fines exceeding £25,000.

The Rationale

According to the SRA’s CEO, Mr Paul Philip, the key argument for this further proposed change is as a result of “the deterrent effect of people realising there are consequences should they engage seriously in laundering money”.[3] Mr Philip warned of sectoral “sluggishness” allowing criminals to “pull the wool over solicitors’ eyes”. He further stated that the industry needed to “wake up” and address anti-money laundering risks.[4]

This is a step away from Mr Philip’s justification for reform which took place in July 2022, as being motivated by “efficacy, less stress, less delay and less cost”.[5] The rationale then was to ease the burden on the SDT by having the SRA handle more serious but “straightforward” cases. The recent changes therefore attempt to address several challenges: an overwhelmed SDT, a less-than compliant legal sector, gaps in the SRA’s regulation and/or oversight of money laundering.

Why No?

Just over a month after the introduction of increased fining powers in July 2022, Spotlight on Corruption released a report criticising the SRA and the legal profession alike, for falling short in their approach to anti-money laundering compliance.[6] Amongst other findings, the report revealed that 60% of firms visited by the SRA in 2020-21 failed to have adequate anti-money laundering controls in place.

Less than a year later, the SRA intervened and shut down three firms operating in immigration services.[7] All three firms had been named in a Daily Mail investigation published just days earlier.[8] A letter to the Chancellor, published by the SRA from its Chair, Anne Bradley, expressed shock and regret under the circumstances. Ms. Bradley added “we have, for some years now advocated that the SRA be given unlimited fining powers”, hoping such measures would “provide a swifter deterrent and change behaviour.”[9] Whilst these changes may certainly have been catalysed by the recent reporting into SRA scrutiny, it is clear that they form part of a sustained campaign by the regulator. The War in Ukraine has also clearly played a part in highlighting the UK legal sector’s exposure to money laundering risk.

Industry reaction

The new fining powers follow a significant increase in the number of fines handed out by the SRA in recent years. For example, fines against law firms more than tripled between 2017 and 2022.[10] This may, in part, underpin recent widespread industry apprehension.

Specifically, those concerns are:

Proportionality

The leap from a maximum fining power of £25,000 to a complete removal of the cap in just over a year has raised eyebrows and prompted accusations of disproportionality. The Law Society, for example, has “strongly urge[d] the government to carefully consider the proportionality of any further increases to the SRA’s fining powers”.[11] This follows the body’s earlier criticism of the July 2022 reform who, at the time, recommended a rise to between £5,000 and £7,500 to be more appropriate based on previously imposed fines by the SDT.[12]

One of the justifications for the proposed reform is to achieve alignment with other UK regulators. In backing the change, the Government pointed out that “other regulators do not have limits set in statute and have the flexibility to set appropriate financial penalties in relation to economic crime matters”. The Government further noted that such sanctions represent “credible fines” for crimes as serious as money laundering activity.[13] The Financial Conduct Authority (“FCA”) does in fact wield the power to impose unlimited fines on firms and authorised persons. However, that is not to say that there is no power to impose heftier fines on solicitors; the SRA does not operate in a vacuum. As the law stands, if a fine greater than £25,000 is deemed appropriate, the SRA can refer the case to the SDT who have the capacity to impose fines “without financial limit”.[14] In other words, the mechanism to impose unlimited fines already exists within the regulatory framework. Calls for reform on the grounds of alignment apparently fail to take this into account.

Transparency

The role of the SDT is therefore undoubtedly undermined by the proposed reform and it remains unclear as to how this ‘dual fining power’ would comfortably sit alongside one another. At present, the role of the SDT is to deal with the most serious and/or harmful acts of misconduct by solicitors and is independent from both the Law Society and the SRA. Importantly, decisions of the SDT are subject to the principle of open justice – in other words – decisions are made public and are subject to appeal in the High Court. The SRA, on the other hand, adopts a much more oblique approach to decision-making. If the SRA is to deal with more serious and significant cases, concerns swirl around whether transparency is achievable in the SRA’s current form.

The SRA undertook a consultation in February this year into its process for the publication of regulatory decisions. The SRA specifically sought feedback on its approach to fairness and proportionality.[15] It is therefore clear that work is being conducted ‘behind the scenes’ at the regulator to examine and improve upon this specific area. However, opponents will maintain that such work, whilst important, is duplicative if applied to the proposed evaluation of more serious misconduct. After all, the SDT already has a framework, process, and infrastructure in place to support the transparent handling and publication of serious and significant cases. As noted by the Law Society President Lubna Shuja, the SDT “is independent from the regulator and has clearly defined processes. This transparency means that solicitors, clients, and the general public can have confidence in the SDT’s decision making processes.”[16] The proposed reform may risk not only duplicating an existing function, but to an inferior standard.

Effectiveness

The SRA accepts that instances of serious misconduct in the profession are limited to a small minority of actors. But, as the Law Society points out, “there is no evidence that the SRA’s current fining powers are insufficient.”[17]

Critics may also wonder how, in practice, an unlimited fine issued by the SRA is any different to an unlimited fine issued by the SDT. This is particularly so, given the SDT has the additional power to permanently strike solicitors from the roll, imposing not just a ‘one-off’ penalty, but a lifelong deprivation of livelihood. Where serious misconduct is identified and evidenced, there is no doubt that such sanctions are appropriate and correct. But the proposed reform is to act as a deterrent, which implies that the current sanctions are inadequate. This is not credible where such a penalty already exists in the regulatory ecosystem.

The SRA would argue that decisions of the SDT simply take “too long”, undermining its role as a deterrent. The SRA’s CEO has said that “if the SRA is threatening to fine the firm and the partners in the firm that is going to make a difference”.[18] In response to previous allegations of delay, the SDT has said that slow turnarounds “are almost without exception caused for reasons entirely outside the control of the tribunal and its administrative team”, citing the time taken to obtain papers as a key obstacle in an investigation.[19] It is unclear whether the SRA will be uniquely able to overcome these particular hurdles in expediting decision-making in such cases.

The SDT has indicated that it intends to oppose proposals to expand the SRA’s fining powers.

What is next for the legal regulation?

The suggested expansion of the SRA’s enforcement powers is just one instance of a more general trend towards stronger regulation of the legal sector in the UK. The Bar Standards Board (“BSB”), for example, recently published guidance into Barristers’ use of social media, including warnings against any “gratuitous attacks” on the justice system.[20] The SRA itself has also issued similar regulation in the form of its new Workplace Environment guidance[21].

The flurry of regulatory reform sits amidst a backdrop of rising regulatory fees. Legal professionals across the board are paying higher fees than ever, the impact of which will most keenly be felt by smaller law firms and sole practitioners. Those same smaller businesses will also have less capacity to implement expensive technologies or hire specific teams to assist with compliance. The current rates for the renewal of a practicing certificate alone for Solicitors, Barristers and Chartered Legal Executives is demonstrated below.

Regulator	SRA	BSB	CILEX
Fee per annum	£337	£365	£367

However, all this activity arguably serves to only complicate the regulatory landscape further. As highlighted at the beginning of this article, effective regulation should equip professionals with the parameters and guidance necessary to remain compliant with the law. To be effective, regulation therefore requires clarity.

The key challenge facing legal regulators today is the uncertainty and bureaucracy generated by their ever-increasing division. The legal sector in the UK is regulated by no less than eight bodies. In the United States, Canada, France, and Australia, lawyers are regulated by territory (i.e., by state, province, or otherwise).

In the UK, of course, the sector is instead regulated by the ‘type’ of lawyer; solicitor, barrister, chartered legal executive, and so on. The logic of regulatory oversight being differentiated by legal system (i.e., region) is sound. But that logic becomes less clear when applied to the ‘sub-professions’ within the legal system. It is interesting that the British model of legal regulation differs so fundamentally from those jurisdictions that are otherwise, in many ways, aligned with our own. More radical commentators may suggest that an ‘existential’ review of the regulatory environment is necessary; tinkering ‘at the edges’ of spiralling reforms may not be sufficient to plug the gaps left by regulators.

Conclusion

The one thing solicitors and the wider legal profession can be certain of, is the greater appetite of regulators to investigate bad behaviour and enforce the rules, particularly where money laundering is involved. For most practitioners and law firms, anti-money laundering procedures are front and centre of any risk management process and decision-making. Ever-advancing technology is also playing a greater role in preventing, identifying, and evidencing economic criminal activity, offering the sector more and more preventative lines of defence.

Whether the SRA’s new measures will reduce economic crime will become apparent if and when the changes come into force. For sole practitioners and law firms, many will be escalating their compliance and anti-money laundering processes to the top of the corporate agenda. After all, failing to do so could prove more expensive than ever.

[1] £2m and above

[2] More detail is available in our previous article of July 2022: https://beale-law.com/article/feeling-fine-the-sra-increases-its-fining-powers-by-over-1000/

[3] https://www.legalfutures.co.uk/latest-news/philip-sra-will-make-full-use-of-unlimited-fining-power-for-economic-crime

[4] https://www.legalfutures.co.uk/latest-news/philip-sra-will-make-full-use-of-unlimited-fining-power-for-economic-crime

[5] https://www.legalfutures.co.uk/latest-news/philip-sra-will-make-full-use-of-unlimited-fining-power-for-economic-crime

[6] Spotlight on Corruption (October 2022) A Privileged Profession? How the UK’s legal sector escapes effective supervision for money laundering

[7] https://www.sra.org.uk/sra/news/press/three-immigration-firms/

[8] https://www.dailymail.co.uk/news/article-12333013/Immigration-law-firms-LIE-authorities-win-asylum.html

[9] Statement of Ann Bradley, https://www.sra.org.uk/sra/news/press/three-immigration-firms/

[10] City AM Report, https://www.cityam.com/number-of-law-firms-fined-by-sra-increases-following-anti-money-laundering-compliance-crackdown/ (01 August 2022)

[11] Law Society (09 Feb 2023) What’s Changing: Economic Crime and Corporate Transparency Bill https://www.lawsociety.org.uk/topics/anti-money-laundering/economic-crime-and-corporate-transparency-bill

[12] Law Society (17 Feb 2022) SRA plans to increase fining powers twelvefold https://www.lawsociety.org.uk/topics/regulation/sra-plans-to-increase-fining-powers-twelvefold