Risk-based regulation

Introduction

The public has a right to expect us to focus our resources on the solicitors and firms that are most likely to harm their interests as consumers of legal services, and to act promptly and effectively when risks are identified.

Solicitors are entitled to expect their regulator to operate in a proportionate manner, concentrating upon the issues that matter most and not wasting money on work that is inconsequential. Good solicitors appreciate that effective regulation helps to safeguard public confidence in their profession and in the administration of justice.

These complementary expectations are recognised in our strategy, which commits us to "adopt a risk-based approach to regulation". Here, we outline the method we use to assess risk in individual cases.

We accumulate a huge amount of information about solicitors in our daily work. It comes from a wide range of sources, including our own dealings with firms themselves, clients, media review and from other solicitors.

For some years, we have been assessing this intelligence to decide when to mount investigations and the priority that should be attached to each, and which firms should receive advisory visits.

Recently, we have been refining how we classify risk and use the information we receive more consistently, so we can focus our resources more efficiently. This refinement is a continuing process: we learn as we go along. Inevitably, because of the diversity of solicitors' work, it is a complex process. Throughout assessment of risk and deployment of resources, we will be objective, fair and non-discriminatory. Our adherence to process and aims can and will be audited.

By being open about our methods, we wish to encourage ethical behaviour by the profession.

Risk assessment

Allegations of misconduct received by the SRA are now assessed in one unit by applying a consistent classification and scoring mechanism in order to

Process outline

In essence, the process consists of

Process – step by step

The assessment assigns a risk scoring category to an allegation or an issue that is received by the SRA as an item of information or intelligence. These categories are organised by reference to the Code of Conduct, and each category carries with it a score from 1 to 10. The scores indicate the relative seriousness with which the participating units view the category, 1 being the lowest.

Objective impact scores are given values from 2 to 10 and are designed to be considered from one or several standpoints, depending on which is most relevant at the time:

A subjective test is applied in an attempt to ascertain the intent of those who may have breached the rules. This can be difficult and may be classed as "unknown", given the limited information to hand. However, the subjective categories range from "inadvertent" to "deliberate/dishonest", with the subjective impact scores weighted accordingly, again on a range of 2 to 10.

The product of category score x objective score x subjective score is the risk score.

At this point, regulatory history and other background information is considered (see table of regulatory history scores). This may increase the total risk rating score—for example, if there are a number of related and recent matters. The final risk score is then used to categorise the allegation or information into bands of "low", "medium" or "high" risk. Subsequent operational action, whether on-site investigation or desk-based casework, can then be prioritised accordingly.

The risk assessment process is shown below in simple visual terms.

Figure – Risk assessment process for individual cases

Risk assessment process for individual cases category score objective score subjective score relevant scored history

This is the framework which the SRA is using so that staff can apply a consistent, proportionate and transparent approach as they identify and react to risk. Current scoring categories are given in the tables below. We will be continually refining them in the light of experience.

However, it is only a framework. There will be circumstances in which a different approach will be necessary. Two examples of such situations follow:

Risk assessments will not be disclosed in individual cases. There are a number of reasons for this: it may be necessary to protect the source of information; the assessment will usually be carried out before an investigation starts, and we know that different concerns often arise once we begin investigating; and the risk assessment is irrelevant to any formal decision as to whether or not a solicitor has been guilty of misconduct.

From time to time, the framework may also be adjusted to reflect thematic concerns of the SRA Board or other stakeholders. It will also need to take account of the SRA's overall tolerance of risk.

Finally, the initial assessment of incoming information, important though it is to ensure we are consistent and proportionate, is only one element in the overall risk-based approach across the SRA. Systemic risk is assessed on the basis of information about particular problems—such as the prevalence of mortgage fraud—or market conditions.

Table 1 – Risk scoring category examples

Code of Conduct rule Subsection Risk category Risk score
Rule 1 - Core duties - Integrity Advance fee fraud or high-yield fraud Perpetrator 10
Facilitator 10
Association with organised crime 10
Other suspicious activity 7
Advance fee fraud or high-yield fraud - non-specific allegation 4
Rule 1 - Core duties - Integrity Conviction Non-dishonesty conviction - custodial sentence 10
Dishonesty conviction 10
Non-dishonesty conviction - non-custodial sentence 6
Serious motoring offence 4
Fixed penalty notice / ASBO / CRASBO 7
Routine motoring offence 1
Rule 1 - Core duties - Integrity Money laundering Perpetrator 10
Facilitator 10
Association with organised crime 10
Money suspiciously through client account 7
Breach of money laundering regulations 7
Breach of court order 6
Suspicious activity 5
Cash/unusual settlements 4
Money laundering - non-specific allegation 4
Rule 1 - Core duties - Integrity Mortgages and property Perpetrator 10
Misuse of funds 10
Facilitator 10
Association with organised crime 10
Failure to inform lender of material fact 8
Failure to redeem mortgage 7
Failure to pay stamp duty land tax (SDLT) 7
Awareness of others failing to inform lender of a material fact 6
Failure to register charge/transfer/return deeds 6
Mortgages and property - non-specific allegation 4
Rule 2 - Client relations Client relations Taking unfair advantage - of client for self 7
Overcharging - single case (not probate or power of attorney) 7
Taking secret profit including undisclosed commissions 7
Misleading client 7
Taking unfair advantage - of client for another 6
Acting for seller and buyer 5
Failure to provide client care information at outset or retainer/costs information deficient 5
Contingency fees/breach of conditional fee agreement (CFA) regulations 4
Failure to reply/inform 4
Acting for buyer and lender improperly 4
Incompetence/negligence/delay 4
Investment business 4
Failure to release papers 4
Rule 6 – Equality and diversity Avoiding discrimination Refusal to act 8
Harassment, victimisation or direct discrimination 8
Indirect discrimination or failure to make reasonable adjustment for disability 6
Lack of anti-discrimination policy 4

For a comprehensive table of risk scoring categories, please email report@sra.org.uk.

Table 2 – Objective impact scores

Impact Score
High-profile case (e.g. related to administration of justice, facilitating criminality, public interest, etc.) 10
Systematic, serious and culpable breaches of SRA rules and regulations 8
Serious and culpable breach of SRA rules and regulations 6
Serious breach of SRA rules and regulations 4
Technical breach of SRA rules and regulations 2

Table 3 – Subjective impact scores

Impact Score
Deliberate and/or dishonest 2
Reckless 1.8
Grossly negligent 1.6
Negligent 1.4
Inadvertent 1.2
Unknown 1

Table 4 – Regulatory history scores

History Score
Open Solicitors Disciplinary Tribunal matter 10
Open inspection matter 4
Indemnity default 5
Late accountant's report 3
Subject to potential conditions on practising certificate (section 12 of the Solicitors Act 1974) 4
Conditional practising certificate 10
Outstanding accountant's report 7
Open regulatory investigation 6
Number of open matters to fee earners ratio
Relevant pattern of open complaints 5
Relevant pattern of closed complaints 5
Intelligence indicators number

 

Identified compliance risks

Solicitors are crucial to our efforts to identify and minimise risks to the interests of clients, to maintain professional standards and to safeguard confidence in the profession. We concentrate on the issues likely to pose the greatest risks: solicitors and those responsible for firms' regulatory compliance are often the first to identify them. The purpose of this report is to help you to be alert to issues that might cause problems, by describing the most significant regulatory risks we have encountered in the recent past.

Many of the risks, particularly misuse of client money and probate fraud, are longstanding. Nevertheless, the loss, upset and damage to public confidence in solicitors when things go wrong can be substantial.

We know that the vast majority of solicitors act honestly and responsibly. Although this paper identifies various risks, it is not evidence that overall standards in the profession are either poor or deteriorating. Indeed, the SRA is encouraged by the numbers of solicitors who strive to observe high ethical standards and to provide their clients with an excellent service.

Our concern is to drive out the small minority who are dishonest or incompetent and generally to raise standards.

We investigate firms primarily on the basis of intelligence and are developing a targeted investigative strategy. The risks are grouped under these headings:

Examples are given to aid understanding of the risks and the steps necessary to minimise them.

We plan to revise this report periodically and would be glad to receive suggestions for improvement.

Peter Williamson
Chair, Solicitors Regulation Authority

11 February 2008

 

Financial issues

Misuse of client money

In the context of a profession with over 100,000 practitioners, a tiny but persistent number of solicitors steal or misuse clients' money. This can cause serious problems for partners as well as to clients and the profession generally, because indemnity insurers may not provide cover, particularly if money has been transferred to office account and all partners have benefited through their drawings.

A respected partner was producing an impressive fee income—until it was found that he was actually not sending the bills to clients. The bills were being paid by transferring money from estates of which he was the sole executor. There was a shortfall on client account of £300,000. The firm's insurers were extremely reluctant to cover the loss, because the money misused by the partner had been paid into office account and the other partners had therefore benefited. The partners had to replace the shortfall themselves to avoid being closed down by the SRA.

Some solicitors have misused client funds because they felt under pressure to meet billing or fee collection targets. Firms with strong target-driven cultures need to avoid putting too much pressure on their staff and their partners, which might also lead to pressure to overcharge.

Secret profits

Clients' money is also at risk from solicitors who take even small amounts of secret profit. When solicitors charge for "disbursements" they can recover only what they have paid out for the client. Some solicitors add a mark-up, but still describe the full figure as a disbursement.

This often happens with telegraphic transfer fees and searches in conveyancing transactions. There is no doubt that it is unacceptable to describe a charge as a disbursement when it is not and particularly when some of it is kept by the solicitor.

Another way of taking a secret profit is to charge clients for a disbursement paid to a company providing searches for conveyancing transactions, the solicitors receiving just under £20 from the firm for each search. The solicitors may argue that this is "commission" because small amounts of commission (less than £20) do not have to be paid to clients, but this is not a genuine commission arrangement and is an improper way for a solicitor to take clients' money indirectly.

Arrangements like this are seen in various contexts. The amounts can be bigger. In personal injury cases, clients sign standard terms which say that the solicitors can keep £200 commission from insurance companies. The clients are often not told that this money belongs to them and there is no reason why the solicitor should keep it.

The Fraud Act 2006 criminalises the taking of secret profits. A solicitor who "dishonestly fails to disclose to another person information which he is under a legal duty to disclose" with a view to making a gain will be guilty of fraud, because solicitors are required to tell clients about money they receive when acting for them.

Impropriety in dealing with probate

Theft and serious overcharging by solicitors acting in a representative capacity such as executor of an estate (but also under powers of attorney) continue to pose a high risk.

The numbers of reports to the SRA of possible irregularity in probate cases increased from 6 in 2004 to 31 in 2005, 52 in 2006 and 65 in 2007. This problem is particularly insidious because it can take place over many years without detection. Beneficiaries, especially charities, are unaware that their money has been stolen. Sometimes solicitors or their employees take a long-term view by drafting wills to enable them to steal money from estates in later years.

Persistently, there are cases of unfair advantage being taken of elderly clients. Danger signs to watch out for include:

Failure to take required steps to prevent money laundering

Many solicitors are still not doing enough to prevent money launderers from transferring the proceeds of crime anonymously through client accounts.

Whether principals realise it or not, client accounts are being abused—sometimes on a massive scale.

A two-partner firm of solicitors received over 700 payments totalling £193 million into its client account in just over eight months. The receipts were matched with payments out. The firm was not giving legal advice about any underlying transaction. It was proved that this was part of a scheme to launder the proceeds of fraud. A non-solicitor working for the firm was convicted of money laundering and sentenced to six years' imprisonment. The partners were also prosecuted, but acquitted. Their firm had been closed down by intervention, with significant financial impact on them. They were suspended for one year by the Solicitors Disciplinary Tribunal, and the SRA has appealed against the leniency of the sentence.

There have been several previous cases, with solicitors being imprisoned for up to seven years.

A solicitor should not allow his client account to be used where there is no underlying transaction, except where he is certain that he is holding and disbursing money on behalf of a client for a proper purpose. It is not a proper part of a solicitor's job to operate a banking facility for third parties, whether or not they are clients.

Failure to protect mortgage lender clients

Mortgage fraud is increasing. Reports of suspected mortgage fraud to the SRA Fraud Intelligence Unit rose from 85 in 2004 to 105 in 2005, 215 in 2006 and 293 in 2007. Some solicitors are failing to warn lenders about suspicious features of transactions.

In the early 1990s, the solicitors' profession was at the centre of the massive losses caused by mortgage fraud. This led to the highest-ever grants from the Compensation Fund: £29 million in one year. It is vital that this does not re-occur. The SRA is acutely aware of the threat of mortgage fraud and will continue to discipline solicitors who take improper risks. We may need to take particularly strong regulatory action as a warning to those who are tempted to get involved. We will continue to share information with lenders when it is right to do so.

The facilitation of mortgage frauds by solicitors can be due to incompetence rather than dishonesty. A conveyancing solicitor's obligations to a lender client are clearly set out in the Lenders' Handbook and in rule 3 of the Code of Conduct.

There are signs that the misleading of mortgage lenders is increasing again. Some solicitors are failing to tell lenders that

The secret discounting of sale prices on new-build properties causes concern, particularly because the gross sale price before discount is then registered with HM Land Registry. This could skew national figures for property values. Such discounting appears to be becoming endemic.

The Council of Mortgage Lenders has warned: "[T]he valuation and price paid for new-build properties, especially flats, may not be transparent because of sales incentives offered by the developer. Typical examples are discounted purchase prices, cash backs pre- or post-completion, and marketing allowances. If the incentives are not clear and taken account of in the valuation, then the lender may not be lending on the true value of the property."

There is a danger of a spiralling effect. Inflated registered purchase prices may be relied upon to value other properties nearby. A big downturn in the property market, or any distortion of this nature, could make for a very hard landing.

Some say that the obtaining of mortgages by misleading a lender is really a commercial matter. We do not accept that, because the involvement of solicitors in misleading lenders is a serious risk to the public:

Poor conduct of personal injury or housing disrepair claims

Clients are at risk from a small hard core of practitioners incompetently trying to conduct personal injury or housing disrepair claims.

We see cases in which solicitors

It is not in the best interests of clients to try to pursue unmeritorious claims. It causes inconvenience and exposes them to the risk of costs. It puts defendants, particularly in the public sector, to unnecessary expense. Public confidence in the profession and in the administration of justice is damaged.

One firm of solicitors was referred to the Solicitors Disciplinary Tribunal (SDT) after a complaint from a local authority following the striking out of over 50 housing disrepair cases. The firm also faced wasted costs orders in these and other cases. In another SDT case, approximately 40 per cent of claims were found to have been cancelled by clients, often by telephone. It is worth remembering that the low claim success rate of The Accident Group—less than 30 per cent—was a key factor in its collapse with debts of more than £100 million.

Efficiency, management and administrative competence

Significant risk to clients is caused by inefficient management of solicitors' practices. We are concerned by failures to comply with basic regulatory requirements, to implement effective anti-money laundering procedures and to identify conflicts of interest.

Failure to comply with basic regulatory requirements

Some solicitors prioritise clients' cases so much that they overlook their own regulatory obligations and get into serious difficulty.

Poor regulatory compliance can affect clients. For example, clients whose solicitors act in litigation without a practising certificate cannot recover their costs from the other side.

Failure to supervise staff is a perennial problem for clients and partners. Not only can it give rise to an allegation of failure to supervise, but principals are themselves directly responsible for professional misconduct in their firm. At one extreme, a secretary noticed dormant balances in client account printouts and requisitioned cheques supposedly to pay counsel's fees. The money was in fact being stolen.

Employing a struck off solicitor without the permission of the SRA is a particularly serious regulatory breach. Struck off or suspended solicitors represent an obvious risk to the public.

A law firm employed a struck off solicitor. The permission to employ her required her to work as a litigation clerk, to be strictly supervised by a partner and to work from a particular office. Eventually, she was moved to separate premises where there was no partner present. She also dealt with probate work. Despite complaints about how she was dealing with one probate file, the firm did not initially check her work. Eventually, she was found to have misused large amounts of money and over £220,000 was missing. She was sentenced to three years in prison. A partner in the firm was suspended for 28 days and fined.

There is a continual flow of cases in which practitioners fail to comply with several of their regulatory obligations. Solicitors, either through incompetence or desperation, fail to arrange indemnity insurance. Consequently, any claims they generate fall on the profession through increased premiums. Clients are also severely inconvenienced, because they cannot identify the solicitor's insurer when they need to make a claim. Similarly, some solicitors fail to renew their practising certificates but continue to see clients and conduct cases, without having paid their practising certificate fee or Compensation Fund contribution.

The SDT can take a strong line in such cases and suspend the solicitor until professional obligations have been complied with. In one case, the SDT suspended the solicitor for failing to pay an insurance deductible of £1,500. In another, the solicitor was suspended unless he complied with SRA adjudications within 28 days.

Solicitors who fail to supervise their practices properly are likely to face disciplinary action. The inconvenience and upset to clients can be enormous.

Anti-money laundering compliance

Compliance with the money laundering rules and regulations is not only a financial issue, but also one related to the way the firm is managed and administered.

Solicitors risk criminal prosecution and disciplinary action if their procedures are not fit for purpose. Systems must be robust and practitioners need to be vigilant.

Rule 5 of the Code of Conduct requires solicitors to "make arrangements for the effective management of the firm as whole, and in particular provide for compliance with the Money Laundering Regulations, where applicable".

But many do not comply. About 88 per cent of firms visited by the SRA Practice Standards Unit in 2005 carried out "relevant financial business" within the meaning of the Money Laundering Regulations 2003. However, only about 40 per cent had implemented systems to carry out consistent client identity checks on relevant matters. There was evidence of systematic breach of the regulations in about 11 per cent of firms and of occasional breach in a much higher number.

This is probably a managerial failure, but one which carries substantial risk of harm to the public and the profession.

Conflict of interest

Conflicts of interest can be insidious and invisible to clients. Solicitors who act for clients where there is a conflict breach their fundamental duty of undivided loyalty.

Some solicitors fail to see the obvious. One reason for this is evident from the following SDT findings:

He had acted outside the Solicitors Practice Rules time and time again. This was particularly so in relation to the Rules on conflict of interest. It was apparent from what [he] said to the Tribunal that he had had little knowledge of the relevant Rules and furthermore even at the conclusion of the hearing could not see what he had done wrong. These were not, as [he] suggested, "technical" breaches. [He] had closed his mind to the requirements of modern practice and it seemed to the Tribunal that his mind remained closed. ...[He] said, in his defence that he had an "idiosyncratic and old fashioned approach to a solicitor's practice". This was right and regrettably, dangerously so.

Companies which offer to buy the homes of people who are in financial difficulty may direct distressed sellers towards a recommended solicitor. This raises serious questions about whether the sellers receive truly independent advice.

Even City firms can fail properly to identify conflicts. This was shown when the High Court granted an injunction preventing one from acting in a proposed takeover of Marks & Spencer. The responsible partner was fined £9,000 with £50,000 costs by the SDT in August 2007.

Solicitors' relationships with introducers can sometimes blind them to conflicts between their own and their clients' interests.

A personal injury partner took on over 1,000 cases bought from a claims company (CC). The clients had signed agreements with CC in which they agreed to pay the company up to £5,000 from their damages. The SRA described the agreement as "potentially very prejudicial" to the clients because, as well as providing for the substantial payments to CC, it included clauses such as an indemnity from the client, if the client changed solicitors to a firm not approved by CC, for any financial losses CC suffered. At the SDT the solicitor admitted various allegations, including failure to act in his clients' best interests and failing to recognise that there was a conflict of interest between his firm's interests and those of his clients by virtue of his firm's relationship with CC. He was fined £15,000.

Clients can be at risk because firms often fail to ensure that their arrangements with introducers are properly documented and monitored. Many of the most serious problems with referral arrangements are caused by the introducer rather than the solicitor. Solicitors need to protect their clients competently by ensuring that the introducer is acting properly and lawfully. A starting point is to ensure that introducers are registered with the Claims Management Regulator.

Delay

Delay remains a common problem. It causes inconvenience, upset and sometimes loss to clients.

Serious delay on its own can lead to disciplinary action. It can also trigger panic and a slide into dishonesty. Personal injury solicitors who lie to their clients about the progress of their cases or worse, falsely say the case has been won and pay the "damages" from client account, will probably be struck off. Firms must create a culture in which fee earners can admit to mistakes so that loss, inconvenience and serious distress to clients and inexperienced practitioners can be minimised.

An assistant solicitor was prosecuted at the SDT for unreasonable delay in his caseload. He told clients that cases had been issued when they had not. He showed a client a consent order supposedly concluding a case with a payment to the client of over £50,000. In fact, there had been no settlement. He settled another case after failing to pursue it properly and paid the client £4,500 of his own money. He told the SDT that he found meeting targets difficult and was constantly worried about billing clients. He was struck off.

Another solicitor altered the date of a witness statement by a year because of significant delay. He thought the court might consider the application to be out of date and that further delay would be caused if it required an up to date statement. He accepted that he altered the statement to try to avoid the consequences of delay. He was struck off.