This is a guest post by Jonathon Bray (www.jonathonbray.com) – risk and compliance advisers to law firms.
COVID and financial stability
At the risk of stating the obvious, COVID has presented significant challenges to all law firms. Home working, remote hearings, not seeing clients, executing documents, banking money, declining turnover (in some cases, but not others), and so on.
Although 2020 saw a hopefully once in a generation change to the way we work, in 2021 firms should now have the systems and controls in place to deal with these challenges. When the pandemic first hit, the SRA was quick to say that they were taking a flexible approach to regulation. That wasn’t an invitation to ignore the rules, but it was an indication that they were not insensitive to the unique position that firms were in.
But it’s been almost a year, and we can already see the SRA gradually getting back to regulation-as-usual. They are not going to be particularly forgiving if firms have failed to deal with obvious high risk areas, such as how to supervise remote teams.
We should all be aware of the areas of our practice that have changed, and make sure that we have addressed associated risks. For example, conveyancers are meeting far fewer clients in person. This has significant implications for AML risk assessments and client due diligence. Have policies been reviewed, forms amended, and training given?
The pandemic has resulted in financial struggles for many firms. Town centre practices that rely on regular footfall are particularly vulnerable.
Regulated firms have to actively monitor their firm’s financial stability and to notify the SRA if there are any indicators of serious financial difficulty. Short of actual insolvency, struggling to make payroll and rent every month are obvious examples of ‘indicators’.
Telling the SRA that your firm is struggling is one of the hardest things to do. It’s only human nature to think of reasons for not reporting. We’re going to trade out of it within a couple of months. There’s a big case likely to settle imminently. We can stretch our suppliers.
That is a dangerous temptation.
One way to avoid this trap is to use an objective tool such as this one we formulated last year. This involves planning in advance with a clear head what your triggers for reporting look like. You can then file your plan away, in the hope that you will never have to use it.
The last couple of years have seen a step change in the SRA’s approach to AML supervision. It’s fair to say that they were a little slow out of the blocks after the implementation of the 2017 Money Laundering Regulations. Since the new AML unit has been set up, they have become increasingly proactive.
First, we had all those spot checks of firm-wide risk assessments. The profession failed that test pretty miserably. So they are now increasing their targeted approach to supervision.
If you are a firm that is caught by the Money Laundering Regulations, you can expect to receive a letter from the regulator asking to see various documents to demonstrate that you are complying. It’s been over three years since the new Regulations were introduced, so excuses are decreasingly likely to be tolerated.
Whereas the first set of SRA reviews were limited to firm wide risk assessments, we are likely to see increasing regulatory interest in:
- Client and Matter level risk assessments
- AML policies
- Client Due Diligence processes
- AML training records
- Regulation 21 audits
If you haven’t come across ‘Regulation 21 audits’ before, you’re not alone. They are the independent audits that firms have to put in place to make sure their AML systems are up to scratch. The SRA says ‘most firms’ should be doing them. These audits can be done in house by someone who isn’t marking their own homework, or can be outsourced (hello!).
And let’s not forget the vexed question of ‘tax advisers’. There has been a significant broadening of the definition of what constitutes ‘tax advice’ recently. Broadly speaking, anything more than signposting a client where there is a tax implication has the potential to be caught by the Regulations.
The implication is that additional areas of law can easily fall into the scope of the Money Laundering Regulations (and all the compliance requirements). Think will-writing, settlement agreements, pensions scheme advice. All have the potential to stray into the new definition, even if you specifically exclude legal tax advice.
That doesn’t mean you can’t do that work any more, but it does mean:
- Some areas of law will be in scope of the Regulations that were previously not
- Therefore the entire range of AML compliance will apply to those areas (e.g. Client Due Diligence)
- Certain sections of the firm will need additional training on AML systems
- You may have to charge more to make some services viable
- Some firms may have to register with the SRA for AML authorisation for the first time
Transparency Rules enforcement
It amazes me that this one still catches firms out. Like them or loathe them, the Transparency Rules have been with us for over two years. They are not difficult to understand or implement. It is easy for the SRA to spot non-compliance (they literally have people visiting firms’ websites to check).
And yet the amount of non-compliance I regularly see is quite concerning. You will have seen reports that the SRA is stepping up its offensive.
It’s important to appreciate why they are so hung up on this. They are being pressured by the Competition and Markets Authority (CMA) and the Legal Services Board (LSB), which both have more clout than the SRA.
The thinking goes that the legal services market does not operate correctly, partly because people find it difficult to compare the price and service levels. (Although most conveyancers will tell you that clients have no problems shopping around).
They say that by improving price and service ‘transparency’, this should make legal services more accessible.
The upshot is that we can expect to see more CMA scrutiny, translating into tighter SRA supervision and ultimately more regulatory fines and rebukes.
Be warned: our regulators also have an unhealthy obsession with price comparison sites. They seem to think that these are the ultimate way to improve market access, and are prepared to give away all sorts of regulatory data to facilitate.
Let’s just be aware that these sites are not run for the benefit of transparency (they are lead generation machines), and over-reliance on them will mean that individual firms will effectively be in competition with the huge marketing budgets of price comparison sites. There will be a huge downward pressure on consumer legal services with implications for service levels and professionalism.
The ‘new’ SRA Standards and Regulations rulebook has had a year to bed in and we are seeing more and more firms having to grapple with the broadened reporting duties in the Codes of Conduct.
In short, not only do you have to report ‘serious’ breaches of the SRA rules (as before), but also “…any facts or matters that you reasonably believe should be brought to [the SRA’s] attention…”.
This would include potential breaches that have not yet been fully investigated, as well as allegations of misconduct or other serious issues with other solicitors where you might not have the full picture.
As a result, we are increasingly seeing:
- COLPs having to make SRA reports at much earlier stages than before, often with intense internal opposition
- Solicitors and firms feeling compelled to report others when allegations are made
- Others using the threat of reporting as a weapon against opposing firms (not very sensible)
Brexit, practising rights and data flows
The UK’s exit from the EU has had some interesting implications for solicitors. The legal profession was not at the heart of the withdrawal negotiations, but The Law Society did some excellent work in working with the government to highlight the problematic issues.
For the majority of solicitors, any post-Brexit changes to practising rights will pass by without any drama.
For those affected, however, the fall out has been pretty profound. There was lots of scrabbling around at the tail end of 2020 to get European lawyers practising in the UK cross-qualified as solicitors, so that they could continue to trade. Others had to close their doors completely.
If you are a solicitor wishing to practise in another EU country, which was frictionless before 2021, you will now have to check the rules in your destination country. ‘Fly in, fly out’ rights may be affected too.
The other issue which is still to be bottomed out is whether the EU deems the UK to have data protection ‘adequacy’. If it does not, then obtaining data from the EU could become more difficult to facilitate. The UK will be treated like any other third country.
There is also the question of what to do about data between the UK and non-EU countries such as the USA, now that the EU-level mechanisms have fallen away. It gets quite technical at this point, but we have a webinar recording on the topic if you would like access.
If you haven’t revisited your data map (or data processing flows) since Brexit, that is probably a good place to start. This should help you identify whether international data flows are something you need to worry about.
Professional indemnity insurance
And finally, it can’t have escaped your attention that the PII market is having something of a wobble. There is lots of anecdotal evidence of premium rises across the professions (not just solicitors) and a general lack of appetite by insurers to take on risk.
This is an existential problem for some firms, particularly those with a poor claims record or operating in out-of-favour practice areas. They simply may not be able to obtain cover or justify the increased cost. Those affected will be forced to close or merge.
New firms are also finding it hard to obtain insurance due to the market squeeze.
There are a few practical suggestions:
- Make yourself attractive to insurers. Take risk and compliance seriously, invest in it, and be prepared to do the hard work to bring about change. Outsource what you can, but make sure accountability sits with the COLP.
- Get a good insurance broker. If you have been with the same broker for years and they have gotten a little ‘comfortable’ placing your business, is it time for a change. It’s not until you get a good one that you realise they are more than just insurance sales people. (I’m not saying chop and change insurers, which can be counterproductive).
- Think about succession before you need to. If you plan to retire in the next 5-10 years, you should be thinking about succession planning already. Is your business going to be an attractive acquisition – if not, what can you do to change that? Is there ‘new blood’ coming through the business? How should you attract, develop and incentivise future partners? Have you thought about employee ownership as an alternative?
Jonathon Bray, Director