Ahead of the festive shut down, we consider what’s on the horizon for 2025. As this is a detailed article, a mince pie is a recommended reading companion.
1. Axiom Ince – the LSB enforcement action against the SRA
On 29 October 2024 the LSB announced it was commencing enforcement action against the SRA, over i) its oversight of Axiom DWFM, a relatively small firm which acquired two much larger firms in distress, Ince & Co and Plexus Law, and, ii) how the SRA effected the intervention into Axiom Ince Limited, once the SRA discovered the huge shortfall on the firm’s client account.
The LSB referred to the report it had commissioned from Carson McDowell LLP (the Report), which found that the SRA did not act “adequately, effectively and efficiently”, and in particular:
- a prior investigation into Axiom DWFM had not been carried out in accordance with the SRA’s procedures;
- there was a failure to adequately assess the risk of “accumulator firms” and the particular risks arising from Axiom DWFM, where one individual held all the compliance roles; and
- the SRA’s focus at the time of Axiom DWFM’S acquisition of Ince and Plexus had been on the two firms in distress and there was a lack of co-ordination between the SRA’s authorisation and enforcement teams to properly assess the risks regarding the acquiring firm.
The Report concluded that the SRA’s actions and omissions in this matter meant that changes in its procedures were necessary. The Report’s topics for change include:
- the SRA’s approach to regulation of solicitors’ accounts and whether more oversight is required;
- the SRA’s approach to accumulator firms and whether it should be required to approve, or at least have the power to veto, acquisitions; and
- the SRA’s approach to interventions, and specifically whether the SRA should be given powers short of intervention, given that the SRA can be reluctant to intervene into firms due to the substantial costs that are commonly incurred.
The LSB enforcement action process could result in the imposition of directions on the SRA, aimed at requiring the SRA to make changes to better achieve its regulatory objectives. Before imposing any directions, the SRA will have an opportunity to make representations and the LSB must consult the Lord Chancellor, the Competition and Markets Authority, the Legal Services Consumer Panel and the Lady Chief Justice.
We wait to see what action will be taken, including whether the directions will incorporate any of the Report’s recommendations, such as requiring high-risk firms to change accountants every three years, increasing the SRA’s scrutiny of acquisitions, or implementing interim protections while interventions take place. As we discussed in our Ten-Minute Talk earlier this year, the SRA has been somewhat indignant in the face of the LSB’s criticism (Listen here).
The Report notes that there are roughly 100 mergers in England and Wales each year. It will be important to ensure that any additional regulatory oversight does not stifle merger activity, particularly where firms are facing financial distress and critical deadlines. It would be counterproductive if firms became less willing to take an opportunity due to the prospect of increased bureaucracy and delay from the SRA, which if it resulted in more firms failing for lack of a white knight merger partner could result in more interventions and greater costs to the profession. We discuss the SRA’s attitude to law firm mergers in our Ten-Minute Talks following the SRA warning notice on law firm mergers and acquisitions in June 2024 (Listen here).
2. SRA Consumer Protection Review
On 14 November 2024, the SRA launched a consultation, seeking the profession’s views on a number of issues arising from Axiom, the most important of which is whether law firms should continue to hold client money. Other aspects of the consultation include the extent to which the SRA should have oversight over firm’s accountant’s reports, and the basis upon which the Compensation Fund should be funded. The consultation is open until 21 February 2025.
In the meantime, on 18 November, the SRA announced that it will be conducting spot checks on firms in early 2025 to see if they had complied with their regulatory obligation to obtain an accountant’s report.
Moving away from law firms holding client money would be a seismic change to the profession. We are likely to get a sense of the direction of travel after February 2025, once the SRA publishes its response to the consultation. From indications to date, the SRA favours firms no longer holding client money. The SRA is likely to face considerable resistance from the profession, particularly in sectors such as private client and conveyancing, where transfers of funds pursuant to undertakings are everyday occurrences. Firms will understandably want to understand what the alternatives would be, and whether those alternatives offer greater certainty and efficiency for clients.
3. High profile SDT cases
The LSB recently approved a 25% increase to the SDT’s budget for 2025. The increase anticipates prosecutions from the SRA being commenced in the SDT from around mid-2025 relating to Axiom and the Post Office Horizon Inquiry. The Post Office matter has been particularly high profile, and there will likely be pressure on the SRA – both from the public and the profession – to take robust action. Notwithstanding this pressure, the SDT will need to assess each case on its merits and make enforcement decisions which stand up to scrutiny.
4. SRA’s AML focus set to continue
The SRA’s AML Report for 2023/2024 was published on 31 October 2024. Per the Report, the SRA took action against 78 firms during the relevant time period and issued 44 fines totalling £556,832. The SRA’s AML focus is set to continue, with the LSB recently publishing for consultation draft guidance on how regulators can comply with the new duty to promote the prevention and detection of economic crime (introduced by the Economic Crime and Corporate Transparency Act 2023). Similarly, per the Report, the SRA’s areas of focus include provision of further AML guidance and bringing enforcement action against non-compliant firms.
In 2025, the High Court is also expected to hear the SRA’s appeal against the decision of the SDT to dismiss allegations made against Dentons UK and Middle East LLP (Dentons). The SDT found that Dentons’ conduct in failing to adequately establish the source of wealth of their client was in breach of the Money Laundering Regulations, but that the breach had been inadvertent and not systemic, and did not reach the threshold of professional misconduct required to engage the SRA Principles/Code of Conduct. The SRA has recently failed to establish misconduct in a number of cases alleging breaches of the money laundering regulations. If the SRA’s appeal is dismissed, the SRA will need to reflect on the position it has been taking, particularly in relation to historical allegations, where the SRA has been criticised for applying too high of a standard including where there is no evidence of money laundering or harm to clients.
5. Fining powers
The SRA recently closed a consultation in which it proposed further changes to its internal fining powers. The consultation was prompted by the fact the SRA now has unlimited fining powers in cases which relate to a failure to prevent or detect economic crime. However, the SRA’s proposed changes went further in a number of respects, proposing (among other things) minimum fines for individuals, that global (rather than UK) turnover should be taken into account when assessing fines, and that credit should not be given to individuals/firms who co-operate with regulatory investigations (on the basis that co-operation is a regulatory requirement). These proposals received negative feedback, and at the recent SRA Compliance Officer Conference, SRA CEO Paul Phillip indicated that the SRA was reconsidering and potentially re-consulting on the proposals.
This re-evaluation is positive. The new fining regime has only been in place since 30 May 2023 and has already raised a number of concerns, and it is unclear why many of the proposed further changes were required. Even if the more controversial proposals are shelved, we expect, at a minimum, some changes or updated guidance outlining how the SRA intends to apply its powers to issue unlimited fines.
If you would like to discuss any of these changes in more detail or have any questions, please contact Regulatory and Professional Discipline Partner Andrew Pavlovic or Associate Liz Pearson.
