Lawyers Covered - August 2025

It can be tough for busy lawyers to find enough time to service clients, make it safely through the regulation obstacle course, win new work and keep up-to-date with developments, but we've got you covered! Welcome to our August 2025 edition of our Lawyers Liability & Regulatory Update, in which we highlight the last month's key developments affecting lawyers and the professional risks they face.

Notify in haste, avoid repenting at leisure

The rules for notifying a claim to the Solicitors' Compensation Fund (Fund) are set out on the SRA website. This is a discretionary fund operated by the SRA and intended to be a fund of last resort. The SRA reserves the right to refuse a payment where it felt that the loss was 'capable of being made good' or could be 'appropriately compensated by some other means'.

In most circumstances, where an individual finds him/herself financially disadvantaged as a result of the actions of a solicitor, he/she will be able to bring a claim against that firm which will be covered by that firm's insurance. Claims to the Fund tend to be made in the, relatively, rare circumstances where that solicitor/ firm is declined cover on the basis of dishonesty.

A decision on dishonesty (where all partners/ members are required to have participated in that dishonesty) may take some time to be established – particularly when there may appear to be an innocent partner on the face of the firm's website (who is only later found to be a sham partner). However, Rule 15 still requires notification to the Fund within 12 months of the date that the applicant first becomes 'aware, or should reasonably have become aware, of the loss'. It's worth noting that 'loss' is not a defined term and does not require the applicant to have exhausted any claim against a firm before notification.

What does this mean? To avoid a risk of the SRA rejecting a claim, firms notifying claims on behalf of clients should adopt a cautious approach to the question of knowledge of any potential loss and notify early, even if there is a claim to be made which might be covered by insurance, if there is any hint of dishonesty, even in circumstances where there appears to be an innocent partner. The SRA may turn the claim away at that stage since it is a Fund of last resort but at least it will not then be able to argue, when the claim is re-notified several years later (after the relevant insurers exclude cover) that the claim was not notified within the required 12 months.

Legal Ombudsman's Proposed Case Fee Increase

As discussed in last month's edition, The Legal Ombudsman (LeO) is developing a new complaint handling procedure for law firms (the Model Complaints Resolution Procedure) to guide law firms in resolving client complaints effectively at the first tier in-house complaints handling, which you can read again here. 

The Legal Ombudsman's services are free to consumers. It is funded by the legal sector, by way of a levy contribution and case fees. Case fees are applicable when a complaint to the Legal Ombudsman is upheld and the Legal Ombudsman determines that the law firm did not take prior reasonable steps to resolve the complaint. Thus, part of the rationale for the case fee is to incentivise law firms to provide a high quality of service and to handle first-tier complaints appropriately, without being so high as to be punitive.

The case fees are currently £400 per case and have been since 2010 when the scheme was set up. The Office for Legal Complaints is consulting on proposed changes to the Legal Ombudsman's case fee structure and has proposed an inflationary increase in the case fee to £600 per case, taking effect from 1 April 2026 (but with cases received by the Legal Ombudsman prior to 1 April 2026 being subject to the current case fee). The consultation will end on 10 September 2025. Any proposed increase in the case fee must be approved by the Legal Services Board and Lord Chancellor before it takes effect. It is hoped the higher case fee will provide further incentive to increase the standard of first-tier complaint resolution.

SRA consulting on continuing competence checks

As solicitors with busy caseloads and deadlines to keep, it is important not to lose sight of the need to reflect on areas of competence and, equally, areas where we can improve. Every solicitor is required, at the point of renewing their practising certificate, to confirm that they have reflected on their skills and development areas as well as their professional ethics obligations. The SRA has announced it will be consulting on ways to improve its continuing competence regime, in light of the findings of its third annual review in this area.

While the SRA's 2025 Assessment found that "most solicitors keep their knowledge and skills up to date" and "firms have effective systems and controls in place", they did identify "wider shortcomings in how some solicitors approach their obligation to maintain their competence"

In particular, the regulator cited "limited evidence to suggest that solicitors were regularly carrying out learning and development to keep their understanding of their ethical and professional obligations up to date". We await details of how the SRA proposes to address the shortcomings identified, but we think it is likely that the SRA's consultation may lead to increased scrutiny on solicitors' declarations of continuing competence to ensure that solicitors are not simply ticking a box – the declaration of continuing competence should be the product of a continuing effort to reflect on one's practice and address "identified learning and development needs".

The SRA acknowledges that the majority of firms and solicitors are complying with their duties in this regard but, all the same, we suggest that firms continue to ensure their continuous development/training/reflections on practice are well-documented and that ongoing training records are kept. We will continue to monitor the SRA consultation for any further developments.

Proposal to divert client account interest to fund free legal services

The Ministry of Justice (MoJ) is looking at whether law firms should give up the interest earned on client accounts, so the money can be used to pay for legal services for people who cannot afford them.

The "Interest on Lawyer’s Client Account" (ILCA) is based on similar schemes called Interest on Lawyer Trust Account (IOLTA), which are used in other jurisdictions, such as the USA, Canada, Australia, and France.

This is, however, not an unexplored avenue. Back in 2011 the MoJ rejected opting for an IOLTA scheme, following a legal aid consultation.  Another proposal was rejected again in 2014, following a recommendation of the Low Commission (a now defunct independent commission examining the impact of legal aid cuts).

The MoJ is participating in roundtable sessions to assess feasibility and to "better understand the implications such a policy could have on legal aid providers”. This involves looking at whether law firms and legal aid providers hold client money, how any interest earned is shared out, what the interest is used for, and how much is given back to clients.

The Law Society published an article (read more here) which sets out their reasons for opposing any proposal to IOLTAs. Their position references the increased cost of business, the risk of avoidance by diverting money or business outside the UK, and level of competition within the sector, among other reasons.

While previous proposals to divert client account interest have not taken off, the outcome of the roundtable discussions is eagerly awaited by firms across the country.

IHT on pension pots – revised approach confirmed 

In the 2024 Autumn Budget, the government confirmed its intention to bring unused pension pots and death benefits within the scope of Inheritance Tax from April 2027. The original proposal would have placed the responsibility for accounting and payment on pension scheme administrators – an approach that prompted significant concern across the pensions and legal sectors. That model has now been dropped. Following consultation, the government confirmed in July 2025 that the obligation to report and settle any tax will instead rest with the personal representatives of the estate or, where relevant, the recipients of the benefits.

Under the revised position, personal representatives will be required to deal with any IHT arising on pensions or death benefits.  The government has also clarified the scope. Death-in-service benefits will remain outside the IHT regime, regardless of whether the scheme is discretionary. Defined contribution pots and lump sum death benefits will be within scope unless an exemption applies. Business and Agricultural Property Relief will not apply, but the usual exemptions for spouses, civil partners and charities will continue to operate.  Further detail is expected in due course, but the underlying approach is now clear.

This change will be relevant to lawyers (and other professional advisers) involved in estate planning or acting as personal representatives. With responsibility for IHT now falling on the estate or the beneficiary, care will be needed to identify when pension benefits are caught and to address any liability appropriately.

HMRC has indicated that further guidance and practical tools will be published ahead of April 2027. In the meantime, many in the industry will be watching closely for the detail.

To read RPC's article on this development please click here.

Hong Kong – Witnesses: Important Court of Appeal judgment on use of "hearsay" evidence

In Sham & Ors v Law Society of Hong [2025] HKCA 676, the Court of Appeal handed down an important judgment on the need for courts and tribunals to consider properly the admissibility of hearsay evidence and the weight to be placed on it in the circumstances of a case.

A Solicitors Disciplinary Tribunal (SDT) had found the appellants liable for serious professional misconduct. Much of the evidence relied on by the regulator consisted of sworn statements that were largely hearsay and relied on the statements of 21 former clients. None of the former clients had been called as witnesses. It appears that the SDT had not adequately considered the appellants' objection concerning the extent of the hearsay evidence and that the former clients had not attended the disciplinary hearing to give evidence.

Hearsay – an out of court statement repeated in court to prove the truth of the out of court statement – is generally admissible in civil proceedings in Hong Kong and is provided for in sections 47-49 of the Evidence Ordinance. The problem in this case appears to have been the SDT's approach to the hearsay evidence – particularly, the statements by persons (former clients) who had not been called as witnesses and, therefore, were not available for questioning at the disciplinary hearing. It also appears that "hearsay notices" had not been served in respect of the statements prior to the disciplinary hearing.

The Court of Appeal allowed the appellants' appeal and remitted the disciplinary proceedings to a new SDT. The judgment is based on principles of fairness – as the following passage illustrates as regards notice of intention to adduce hearsay evidence in the context of statements by witnesses:

"49. ….. Even though no rules have been prescribed under section 47A(1) [of the Evidence Ordinance] for this purpose (in contrast to the English position), as stated by Lam J (as he then was) in Cheung Wei Man Vivien v Centaline Property Agency Ltd & Ors at §14: 'As a matter of common sense and good case preparation and management, hearsay notice should be given well in advance to forewarn the other party so that if necessary, application could be made by him under Order 38 rule 21 [of the Rules of Court] for such witness to be called for cross-examination'."