Regulatory Pulse - 24 April 2025

Welcome to the first edition of RPC Pulse. A concise look at regulatory developments for solicitors, delivered to your inbox every fortnight.

If you have any questions or suggestions for future editions, please do get in touch.

The Last Two Weeks

The Law Society published a blog on steps law firms can take to prepare for the ‘failure to prevent fraud’ offence introduced by the Economic Crime and Corporate Transparency Act 2023, which comes into force this September. Recommendations include appropriate risk assessment, risk-based policies, controls and procedures, and delivering training on the new offence.

Breaches of AML rules continue to be fertile ground for the SRA, which fined eight firms up to 3.2% of turnover (reduced for mitigating factors) over the last fortnight. The largest fine was £36,622, imposed on an ABS. Two more (traditional) firms were referred to the Tribunal for AML breaches, possibly because the SRA wants to impose fines in excess of £25,000. The nature of the breaches is familiar: failures to carry out appropriate firm-wide risk assessments and/or client matter risk assessments, failures to have appropriate policies, controls and procedures in place, and failures to establish source of funds or carry out ongoing monitoring. The recent cases follow a rash of similar decisions over the last 12 months, and a high-profile £300,000 agreed outcome before the Tribunal earlier this year. None of the decisions involved evidence of actual money-laundering taking place.

Meanwhile, a solicitor has been referred to the SDT for alleged inappropriate and unwanted touching and comments towards colleagues, and three solicitors received rebukes for failing to return client funds promptly.

The SDT suspended a former US firm associate for 12 months, having found that he inappropriately touched two female colleagues. He was also ordered to pay £95,000 towards the SRA's costs. A reasoned decision will be published in the coming weeks, and will include analysis of the bounds of the SRA's jurisdiction over conduct outside the workplace.

The SDT published its reasoned decision in the case of a solicitor who failed to engage with a number of complaints to the Legal Ombudsman, and the SRA's subsequent investigation. Whilst the Respondent did not attend the hearing, the SDT detected difficulties in her personal life and noted that she had not practised for 6 years. Criticising the SRA's decision to pursue the case, the SDT commented upon "a disproportionality between what the Respondent had done and the weight of the allegations", and " questioned whether matters could have been resolved by another method i.e. retained in-house by the SRA". The SDT imposed a reprimand.

TheLegal Ombudsman is seeking an 11.4% increase in its budgetnext year. It expects to receive over 10,000 complaints over each of the next two years, following "a step-change in annual output". The Chief Ombudsman commented: "over several years, standards of neither service nor complaints handling have improved in legal services. In some areas, they have worsened."

The Information Commissioner's Office has fined a criminal firm £60,000 after hackers stole client details and leaked them to the dark web. The ICO said: "by focusing its efforts on bringing its systems back online and neglecting to undertake an assessment of the risks posed to data subjects, the firm did not notify the Commissioner until 43 days after the Cyber Incident", rather than the required 72 hours. We understand the firm intends to appeal.

Insight

When imposing fines in-house, the SRA's starting point is a percentage of income (for solicitors) or revenue (for firms). Ranging up to 5% of turnover or 97% of income in the most serious cases, the SRA's approach can result in eye-watering sums, although we are yet to see the full effect due to a £25,000 cap on the SRA's fining powers. (The position is different for ABSs, where the SRA has much greater leeway).

To date, the revenue-based approach hasn't affected larger firms much: given the way its existing guidance works, the SRA effectively lacks the power to fine firms with a turnover above about £21m per year. However, that will all change when the SRA starts to wield unlimited fining powers for breaches relating to financial crime under the Economic Crime and Corporate Transparency Act. Following a consultation last year, the SRA is expected to announce an update on its use of these powers this summer.

Once the new powers come into force, firms and solicitors could see fines imposed at a previously unthinkable level (the consultation paper included a worked example which resulted in a £3,750,000 fine).

For the time being, when the SRA considers a greater fine is appropriate, it refers the matter to the Tribunal. The difficulty, though, is that the Tribunal's approach to fines is far less draconian than that of the SRA.

The Tribunal recently published updated sanctions guidance, making minor tweaks to its existing approach (a modest increase to the fining bands). In an implied rejection of the SRA's approach, the updated guidance does not provide for penalties which scale with income. Although the Tribunal takes the means of respondents into account, the penalties it imposes are generally materially lower than those which the SRA's guidance would produce.

High earners and larger firms are therefore left in a difficult position when seeking to assess their exposure to a financial penalty, or to reach agreement with the Regulator. The Tribunal has been critical of the SRA's proposals and appears unlikely to bring its approach into line with the SRA's approach any time soon. For its part, the SRA continues to pursue unlimited fining powers for all categories of breach, where it enjoys the support of the LSB. The dust has yet to settle, but for the time being the regime seems to be stuck in a rather unsatisfactory muddle.

Foresight

The SRA is expected to publish its response to its consultation on financial penalties later this year. This will give rise to the availability of unlimited fines for breaches related to financial crime which took place on or after 4 March 2024. The SRA's proposals have been controversial and the response may be challenged in the courts.

The Civil Justice Council's consultation on their review of litigation funding following the Supreme Court's decision in PACCAR came to a close on 3 March 2025. A full report is expected by summer 2025, and may contain proposals for changes in the law. In the meantime, the Court of Appeal is due to consider litigation funding agreements (LFAs) based on a multiple of the sum invested early this summer.

The SRA's consultation on client money in legal services closed on 21 February 2025. The consultation included proposals with regard to the holding of client money by law firms and possible moves towards regulatory supervision of M&A activity in the legal sector. The SRA's response is awaited.

Q&A

We would love to hear your questions, comments and suggestions for future topics. Obviously we can't comment on ongoing cases, and the views expressed in RPC Pulse are not to be relied upon as legal advice.