Risk Outlook 2015/2016
An overview of our priority risks
The Risk Outlook 2015/16 provides an overview of risks to the protection of people who use legal services, the operation of the rule of law, and the proper administration of justice.
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Paul Philip - Chief Executive
Our role as a regulator is to protect the public, and to support the rule of law and the proper administration of justice.
Delivering our role means striking a sometimes difficult balance - a balance between freeing up firms to do business, to grow and to innovate, and the maintenance of the quality and public protection that is fundamental to the sector.
A key component in that work is our annual Risk Outlook. It summarises the high priority risks this year, and sets out how we are seeking to manage them. Some of these risks are linked to our regulatory reform programme, which should come as no surprise. From looking at different ways to hold client money to our renewed focus on professional standards, we are looking at what we can do to help to reduce risk while allowing law firms to develop and thrive.
And we are also helping in direct and practical ways, through, for example, notifying the profession about bogus firms, raising awareness of cybercrime and supporting firms to focus on their anti money laundering policies.
Reducing risk is not, of course, just a matter for us. The profession and law firms have the front line responsibility for managing risk in the legal sector - the power to reduce risk in your business is in your own hands. It is in your clients' interests that you do so and there is no doubt that good risk management is part of good business management.
We hope that the Risk Outlook prompts you to think about the issues that we have identified and consider how they affect your firm and the public.
The drivers of change in the legal market
Regulation and legislation
Improper, abusive litigation
The Risk Outlook provides an overview of risks to:
- the protection of people who use legal services
- the operation of the rule of law
- the proper administration of justice.
The purpose of the Risk Outlook is to:
- communicate our view of risk in the legal services market
- demonstrate the priorities to which we will allocate our resources
- explain how we will control these risks and act in the public interest
- help solicitors and firms manage risk.
How firms can use the Risk Outlook
We recognise that the legal services sector is a diverse market, ranging from sole traders to multiple branch firms, to large corporations. Different firms will have different priorities and risks to manage.
The Risk Outlook is divided into two sections. The first sets out the factors that we believe are driving change in the legal market, and the second discusses each of our eight priority risks. We explain why each risk matters to us, the trends we are seeing and the controls we have in place to manage them. Our assessment of risk is based on a wide range of evidence.
We also include case studies which are based on real events. It is important to note that to preserve anonymity many of these studies are taken from one or more real cases with all names and some details changed. Their purpose is to bring the risk to life and to make it quick and easy to understand.
The risks that matter to us will be much the same as the risks that concern anyone working in legal services. For example, providing a proper standard of service, acting with independence and having systems in place to keep information secure makes commercial sense. We hope the Risk Outlook is good for business and is useful to anyone working in legal services.
The Risk Outlook is not intended to be guidance on how to comply with our regulation. For guidance on matters of conduct, please refer to the published guidance on our website or contact our Professional Ethics helpline.
More information on the risks in the Risk Outlook, including further case studies, is available on our website at www.sra.org.uk/risk.
Drivers of change in the legal market
This section sets out our assessment of the following factors which we believe are driving change in the legal services market:
- how people access and use legal services
- the way firms operate and deliver their services
- regulatory reform and legislation
- the economy.
Users of legal services
New methods of delivery may provide better access to legal services
However accessing legal services is still difficult for many people
On-line legal services continue to increase in popularity
Tracker Survey 2014 - data tables for general public sample (Excel, 593kb), Legal Services Consumer Panel, In case of emergency: consumer analysis of legal expenses insurance, Consumer Focus, 2011; Individual consumer needs, Legal Services Board, 2015; 2014; Tracker Survey 2014 briefing note - a changing market Legal Sevices Consumer Panel 2014; FSB Voice of Small Business Index Q1 2015, Federation of Small Businesses, 2015; The report on small firms 2010-2015, The Prime Minister's advisor on enterprise, 2015; Consumer Impact Report 2014, Legal Services Consumer Panel, 2014
Market and firms
A diverse range of legal service providers is beginning to emerge
But in a market that is constantly changing it is important to plan ahead for succession and continuity
SRA data, 2015; Law Society annual professional indemnity insurance survey confirms calm 2014 renewal, Law Society, 2015; SRA regulatory report data, 2015; Regulated population statistics - Breakdown of firm closures by reason, SRA, 2015; MergerLine UK, Jomati Consultants, 2015; 'Merger Mania' - Major new research shows massive consolidation predicted within UK top 200 law firms, Fox Williams, 2015; Unbundling civil legal services, Law Society, 2015
Regulation and legislation
We are currently undertaking a programme of regulatory reform to remove unnecessary regulatory barriers and burdens while promoting high professional standards.
This timeline shows how our regulatory reform has progressed over the last year, as we continue to consult with stakeholders about the future.
- Implementation of reformed rules about participation in separate businesses
Legislative changes and government priorities continue to have a significant impact on the legal services market.
Below we have outlined some of the key changes of the last year.
- Increased international government focus on money laundering, with the sector under increased scrutiny.
- The government removed the requirement for law firms to be regulated by the Financial Conduct Authority for certain consumer credit activities like debt collection, and clients can now pay in up to 12 prearranged instalments before an instalment agreement becomes regulated.
- Reform of legislation around the handling of personal injury cases has continued, with the introduction of the MedCo portal for medical assessment of whiplash, and the banning of inducements to claim.
- The Legal Aid reforms continue to affect many firms and consumers. This year saw the introduction of the new contract process for Criminal Legal Aid, which is driving change in this sector of the market.
- Pension reforms may lead to different types of demand for professional services, including legal services.
The economy is recovering
However growth in the legal services market varies across different sectors
Many firms are taking advantage of increased opportunities to grow
When will interest rates rise? UK narrowly avoids deflation as 'inflation' sticks instead, This is money, 2015; Economy tracker: GDP, BBC, 2015; House price index, December 2014, Office for National Statistics, 2015; House price index, February 2015, Office for National Statistics, 2015; Subdued gross mortgage lending in February, Council of Mortgage Lenders, 2015; Labour Market Statistics, March 2015, Office for National Statistics, 2015; Law society statistics on the value of the UK legal market, 2015; UK legal services market report 2015, IRN Research, 2015; SRA turnover data 2015; Regulated population statistics, SRA, 2015,turnover data is currently being validated and may be subject to change; Law firm vacancies rise 48% in 2014, Legal Week, 2015; Law Society statistics
Our priority risks
This section profiles each of our priority risks. Managing these risks helps support the rule of law and the proper administration of justice whilst providing proportionate protections for users of legal services.
Failure to provide a proper standard of service, particularly for vulnerable people
Each year many people who use legal services receive a poor quality service. Examples include providers failing to keep them updated, being unclear about costs, or simply failing to provide work of a competent standard. We see poor quality services as a particularly high risk if vulnerable people are affected. Someone using a legal service could be vulnerable as a result of:
- a limited ability to judge the quality of legal advice. For example, private clients may be more vulnerable to poor service than sophisticated corporate clients with in-house legal expertise
- a stressful situation, for example involvement in a sensitive family matter or ill health as a result of a personal injury
- the effect of a poor outcome leading to a greater impact, such as deportation in an asylum case.
Why this risk matters
People who are unhappy with the service they receive from a solicitor are able to complain to the firm and escalate the complaint to the Legal Ombudsman if it is not resolved. There is also the option to take legal action for professional negligence.
Sometimes poor service may constitute a serious breach of our regulatory requirements. People using legal services are able to report potential misconduct directly to us and we also receive referrals from the Legal Ombudsman. We have information on our website about reporting.1
However, it has been found that vulnerable people are less likely to access these type of protections.2 Additionally, people are not always able to judge the quality of legal services until it is too late and if a vulnerable person is affected, this problem may be even more acute. For example, there is always the risk that a poorly drafted will is only detected after the death of the testator, and as a result the estate is not distributed according to the testator's wishes. Some people would be able to spot discrepancies such as a mistake in the name of a beneficiary, or if their instructions about a trust have not been followed. However, if the person making the will had problems with literacy, they would be much less likely to be able to spot a poorly drafted will and more at risk of a poor outcome. There is a greater need to protect vulnerable people from poor service in the first place and there is also a need to provide them with better access to redress.
Consumer groups recognise this as a problem across the whole economy, not just in legal services:
Choosing the right trader or business is an important decision for us all, but particularly for vulnerable consumers who are significantly impacted by any financial loss and who are less likely to achieve redress if something goes wrong.
Consumer Focus, Tackling consumer vulnerability
Figure 1 illustrates the number of complaints about the quality of legal services. However, these complaints are likely to be the tip of the iceberg. Evidence has shown that 44 percent of people who are dissatisfied with their legal service do not complain. This contrasts with the figures for the service sector as a whole, where only 27 percent of dissatisfied consumers fail to complain.4 Therefore the numbers in figure 1 are likely to represent little more than half the true scale of dissatisfaction. As previously mentioned, vulnerable people are likely to be disproportionately represented among those who do not complain.
Figure 1: 2014 statistics on complaints about law firms3
SRA data (for year to October 2014), Legal Ombudsman data (for year to March 2014)
Understanding the service needs of people using legal services is a key competence for solicitors. We are in the process of large-scale reforms of our approach to education and training through our Training for Tomorrow programme. Our statement of solicitor competence includes the requirement to meet the service needs of people in vulnerable circumstances, which includes providing information in a way that takes account of personal circumstances and any particular vulnerability.5
The main sections of the SRA Handbook relating to standard of service are:
You must provide a proper standard of service to your clients
The service you provide to clients is competent, delivered in a timely manner and takes account of your clients' needs and circumstances
Indicative Behaviour 1.22(c)
Having a written complaints procedure which is responsive to the needs of individual clients, especially those who are vulnerable.
We have undertaken research into what makes clients vulnerable and the barriers faced by different groups of clients, including clients who have hearing difficulties.6 We supply information to the Legal Choices website, which provides a plain English guide to lawyers and legal issues for the general public.7
Ignored by one firm, ably assisted by another
The following case illustrates some of the barriers people with disabilities face when trying to access legal services, and how firms can remove them.
Mrs A needed support in a legal matter. She sent an email to a local law firm, outlining her requirements.
A solicitor replied within minutes, saying he would be happy to help. He asked Mrs A to indicate her availability for an appointment. Mrs A did as requested, also mentioning she was deaf.
A week went by with no contact from the solicitor, so Mrs A emailed the solicitor's receptionist. The receptionist replied, advising she would need to talk to the solicitor before arranging an appointment. Mrs A never heard back from the receptionist or the solicitor.
A friend of Mrs A recommended a firm he had used in the past. When she contacted the firm to explain her situation, they offered to supply a sign language interpreter. Mrs A accepted.
The firm arranged for Mrs A to spend time with her interpreter before her appointment. This enabled the interpreter to understand Mrs A's specific communication needs better. It also allowed Mrs A to build trust in the interpreter.
When Mrs A went to the meeting, she noticed her solicitor was deaf-aware. For instance, the solicitor had added post-it notes next to legal terms which she would normally explain orally.
This meant Mrs A felt fully aware of what the legal documents said, and what she had to do.
Mrs A's matter was concluded successfully. She was left feeling more confident about accessing legal services again.
Misuse of client money
The misuse of client money held by solicitors is a consistent risk to people who use legal services.
The misuse of client money can be the result of:
- failing to act ethically or with integrity
- a lack of competence
- inadequate supervision of individuals with access to client money.
Why this risk matters
Clients who have their money misused might suffer financial loss and often significant distress. The misuse of client money diminishes the trust clients and others place in solicitors. We spend significant regulatory resources dealing with this one issue alone.
In 2014 the Compensation Fund made grants totalling £24m. A proportion of these grants were made to clients who had their money misused.8 Although we seek to recover costs from the firms and individuals involved, the sums paid out demonstrate the harm caused and the burden this risk places on the wider profession.
In the last year, we've received an average of 118 reports of misuse of money and assets each month, which is a similar figure to the previous year.
In 2014, we took some form of regulatory action, ranging from monitoring to referring individuals to the Solicitors Disciplinary Tribunal, on almost 300 different matters relating to this risk. We have seen some particularly severe cases involving probate fraud. Vulnerable people have been targeted and estate monies have been misused through theft and by other means such overcharging.
We have also seen cases where a firm's lack of appropriate supervision of just one individual has caused harm both to clients and the ongoing viability of the firm when client money was misused.
We require firms to manage this risk, and firms should put in place systems and controls to protect client money. It is vital to ensure those entrusted with access to client money act with integrity and are appropriately trained and supervised.
We are also taking steps to help control this risk. Protecting people who use legal services is a key theme of our regulatory reform programme. As part of this, we are exploring alternatives to the way firms hold client money, and have consulted on the option of using third parties to hold money.9
Client accounts can be expensive to run, both for firms and also in terms of the costs of regulation associated with us acting when they are misused. Users of legal services do not necessarily require their money to be held by solicitors, where funds can be transferred directly from bank to bank.
We hope that in the future firms and clients have more flexibility when considering how best to manage this risk.
Firm unearths misuse of client money
The following case illustrates the importance of having effective controls on the client account.
Mr A was a senior partner in a medium-sized law firm.
He had taken out a number of personal loans to support his lifestyle. When Mr A could no longer afford his loan repayments, he decided to make unauthorised withdrawals from the firm's client account.
The firm's procedure required all fee-earners to ask the finance department to process transfers out of the client account. To get around this, Mr A obtained the log-in details for the accounting system from a junior finance administrator under the pretext of wanting to monitor transactions on the client account.
Mr A then proceeded to steal funds belonging to a number of clients. He recorded these transactions on the respective client ledgers as payments for further work.
This went undetected until Mr A became unwell and his client files were given to other partners to progress in his absence.
The partners became suspicious when they noticed the payments but could find no evidence to suggest that further work had been carried out, or that clients had been billed for the transfers out of the client account.
An investigation revealed that Mr A had taken almost £500,000 of client money over two years. The firm dismissed Mr A for gross misconduct and reported him to us. The partners replaced the client money and took steps to improve their systems and controls around management of the client account.
When Mr A appeared before the SDT, he was struck off and ordered to pay costs.
Lack of a diverse and representative profession
The lack of a diverse and representative profession is a risk that applies to the whole market, and there are many different ways to approach it. Over the last year, we have seen a number of initiatives designed to reduce barriers to access and progression in law firms, from the increasing profile of professional apprenticeships to diversity access scholarships.10 However, there is still work to be done within the sector to achieve the strong, diverse and effective profession envisaged in the Legal Services Act. 11
Why this risk matters
A diverse and representative profession encourages:
- quality legal services - allowing the best and brightest people to become solicitors and progress in their careers
- the effective administration of justice - solicitors hold an important role in society and should reflect the population they serve
- improved access to services for people of all backgrounds - some people may not choose to seek legal advice if they do not feel they share any social or cultural characteristics with those that work in legal services.
Our Law firm diversity toolkit, published in 2014, includes a paper outlining in more detail how a diverse legal profession supports the public interest and the effective administration of justice.12 For example, the legal sector provides the pool of candidates from which we select our judiciary, which should be comprised of a diverse range of talented people.
"Diversity is sometimes said to be the enemy of merit. I do not agree: provided that diversity is properly invoked, it is not merely consistent with merit: it reinforces merit. I have already explained that the more inclusiveness we have, the bigger the pool of potential judges, and the bigger that pool the higher the quality of judges."
There are a number of key areas where there is evidence of a lack of diversity in law firms.
Lack of diversity of social background, particularly in the highest paying roles
- 43 percent of partners at the largest law firms are privately educated
- For the general solicitor population it is 23 percent and in the general population 7 percent
Political and regulatory changes
- Women make up over half of the newly qualified solicitors, but only 31 percent of partners are women
- Research has shown that firm culture and a lack of flexible working can be factors in this.
Under-representation of Black, Asian and minority ethnic (BAME) solicitors in larger firms
- A higher than average proportion of BAME solicitors work in small firms and sole practices.
- Personal choice is not the only factor; some BAME solicitors have reported facing barriers to accessing jobs at larger firms.
Under-representation of people with disabilities working in law firms
- 16 percent of adults of working age have a limiting long term illness, impairment or disability, compared with only 2 percent working in law firms.
SRA Diversity Toolkit, SRA, 2015; Research by the Independent Schools Council, 2015; Diversity monitoring statistics 2013, SRA, 2014; Obstacles and barriers to the career development of women solicitors, Law Society, 2010; Ethnic diversity in law firms: understanding the barriers, Law Society, 2010; Diversity in the legal profession: workforce data for solicitors' firms in 2014, SRA, 2014
The lack of a diverse and representative profession is a risk that applies at market level, and therefore our approach is to look at changes we can make across the market. For example, our Training for Tomorrow reform programme is looking at how greater flexibility can be introduced to legal education and training without affecting quality. This will help talented people to access the profession through different routes that suit their personal circumstances. We expect these changes to offer more opportunities for people from diverse social backgrounds to train and qualify as solicitors. Although our education and training policy changes are designed to widen access to the profession, it's impact on progression will depend on other developments within firms such as HR practices and firm culture.
We require all firms across the market to collect data on the diversity of their staff, and we have published a diversity toolkit to allow them to compare the diversity of their firm with other similar groups of firms. This can help firms review their approach to recruitment, retention and progression, and we have included questions to help firms evaluate their current HR practices.14 This is an optional tool to support firms in improving their approach to diversity.
"A key theme of our regulatory reform agenda is making sure we get the balance right and ensuring the 'regulatory burden' is proportionate for all types of firm. But diversity is of universal importance to every firm, large or small, and it is critical that every firm takes their responsibilities in this area seriously."
SRA law firm diversity toolkit
We are also promoting diversity as one of our core values through activity such as sharing good practice with other regulators, a prominent presence at events such as Birmingham Pride, and engagement with groups such as the Lawyers with Disabilities Division and supporting the 30% Club initiatives.15
Firm responds to female solicitor's concerns about progression
The following case illustrates how firms can take practical step s to respond to staff feedback about inclusive working.
Mr A was a senior partner in a medium-sized firm. He supervised Mrs B, an associate at the firm.
A position as junior partner became available. Mrs B was a consistently high performer, so Mr A urged her to consider applying.
Mrs B declined. She expressed the concern that the current all-male partners may not take a woman seriously, particularly as she was unable to match the number of hours they spent in the office due to her childcare responsibilities.
Mr A was worried by this. The firm's policy reflected the law around flexible working and allowed employees at all levels of seniority to work flexibly, but Mr A was aware there was disconnect between the policy and what seemed to be culturally acceptable. He also appreciated that the lack of a female role model at partner level might affect how younger female employees visualised a career path in the firm.
Mr A shared his concerns with the managing partner. He highlighted that the firm was failing to recognise and respond to their employees' needs, and this may be why the firm had a high staff turnover at associate level.
The firm conducted an anonymous survey to encourage employees to voice their concerns about working practices and progression. The results revealed a number of concerns, including those raised by Mrs B.
In response, the firm launched a change initiative to embed inclusive working practices into its culture. This included increasing support for flexible and remote working. As a result, the firm saw an improvement in employee commitment and motivation.
Law firm tries something different to support a solicitor with a disability
The following case illustrates practical steps firms can take to be more inclusive of solicitors with disabilities, and how this can provide a commercial advantage.
A small law firm received an application from a solicitor who was a wheelchair user. The applicant looked promising on paper. However, the recruiting manager was reluctant to invite him for interview as the office had no wheelchair access.
The recruiting manager raised the matter with a partner of the firm, who suggested the applicant could be interviewed in a local cafe. This was an unusual move for the firm, but they decided to trial it as the applicant appeared particularly promising.
The interview went very well and the firm made an offer. They discussed the adjustments that were required with the applicant, and these were made over the next month.
After this positive experience, the firm decided to use their website to promote themselves as a disability-friendly organisation, for both employees and prospective clients.
They highlighted their now easy-access premises, and took a more active role in encouraging applications from solicitors with disabilities. The firm also started offering further support to disabled clients. This included offering to meet clients at locations that are convenient to them, rather than expecting them to come into the firm's offices.
This proved to be successful, with the firm seeing an increase in client numbers.
This is an example of the business benefits many organisations have realised by implementing good diversity and inclusion practices.
Lack of independence
Our Principles state that those we regulate must not allow their independence to be compromised. Any challenges to a solicitor's professionalism, integrity and independence must be managed effectively.
Independence should not be overridden by the:
- promotion of a client's interests
- acceptance of a client's terms
- a desire to maximise commercial return.
It is important that legal services are free from undue influence. This could include situations when a solicitor responds to pressure:
- on their interpretation of law, or what actions are appropriate in a given situation
- concerning the use of their client account - for example, using this to offer a personal banking facility
- to knowingly mislead the court, or conduct litigation that does not have legal merit.
The issue of independence is equally relevant to in-house solicitors, who may come under pressure from their employers.
Why this risk matters
When independence is undermined, there is likely to be a negative impact on:
- the constitutional principle of the rule of law
- the proper administration of justice.
When a sole client is responsible for a significant proportion of a firm's fee income, challenges to independence may become more likely. Many solicitors are increasingly operating in this environment and they must not allow dominant clients to compromise their independence.
There has also been an increase in the number of businesses that have large and sophisticated in-house legal departments. 16 We have seen more solicitors working in-house, and there is evidence that the role of general counsel is changing and becoming more influential.17
It can be argued that these factors are contributing to an increasingly complex environment where understanding personal and professional duties is paramount. For example, when acting for a corporate client this may mean distinguishing between the interests of the client's shareholders, its management and the individual who commissioned the legal advice. These interests are not always aligned.
There are several SRA Principles that are relevant to the issue of independence:
Uphold the rule of law and the proper administration of justice
Act with integrity
Do not allow your independence to be compromised
Act in the best interest of each client.
We acknowledge that the Principles can, and do, come into conflict with each other. However, when they do, it is the one that best serves the public interest that prevails.18 This is especially the case when the proper administration of justice is at risk. Acting in the public interest may require solicitors to make difficult choices, such as refusing to act for a long-standing client or reporting the misconduct of another solicitor.19
This means those we regulate must accept that their professional duties will sometimes require them to act against their own interest or that of their client.
Through our regulatory reform agenda we have emphasised the importance of professional standards and ethics.20 We intend to consult on professional standards later this year, which should create further debate about some of the challenges solicitors face. We have also commissioned research into solicitor independence. This will explore a number of challenges to independence in the context of modern corporate legal practice.
We will continue to require those we regulate to ensure they prioritise their obligations to act in the public interest, in accordance with their other duties and resist undue influence which may compromise their professional independence.
Failure to act with integrity: improper or abusive litigation
Improper or abusive litigation is the misuse of legal proceedings to gain an unfair advantage or benefit for a client, or in some cases the solicitor.
Litigation is a reserved legal activity and a highly visible aspect of legal practice. Although solicitors must fearlessly advance their clients' cases, they are not 'hired guns' whose only duty is to their client. Solicitors also owe duties to the courts, third parties and to the public interest. It is the public interest, especially the public interest in the proper administration of justice, that should prevail where these duties conflict.21 It is not always straightforward to navigate this line.
Why this risk matters
Solicitors are officers of the court, and trust and confidence in the legal system will help the market operate in a way that benefits all of its stakeholders.
In some cases, an excess of zeal in the pursuit of a client's interest has led solicitors to disregard their wider duties. Clear-cut cases are relatively rare, but we have seen cases of solicitors taking unfair advantage of an opponent, misleading the court, or taking actions that lead to grossly disproportionate costs. When this happens, public confidence in the legal system that underpins the rule of law is put at risk.
Examples of improper or abusive litigation where the solicitor has pursued their client's interest, to the detriment of other duties, include:
- predatory litigation against third parties, where the solicitor uses the threat of litigation to obtain settlement, often from several opponents, on cases that have no real merit, but where the cost of settlement is less than the financial, emotional or reputational cost of fighting the claim
- abuse of the litigation process for purposes that are not directly connected to resolving a specific dispute, for example by incurring unmanageable costs for a client's commercial rival
- taking unfair advantage of a third party, for example, by exploiting another party's procedural errors or lack of legal knowledge in certain circumstances
- misleading the court, where the solicitor knowingly or recklessly gives false information to the court or permits it to be given
- excessive litigation, where the solicitor fails to consider their other duties when following a client's wish to pursue aggressive or speculative litigation.
We have also seen instances where the solicitor fails to act in their client's interest:
- predatory litigation, where clients are induced to proceed with litigation where there is little or no legal merit, or where litigation is not actually required
- taking on weak or unwinnable cases, where a solicitor accepts instructions without making the potential costs and risks clear to the client.
Our report Walking the line: Balancing duties in litigation provides more detail about how improper or abusive litigation tends to occur.
We monitor the scale of this risk by analysing the number and type of matters reported to us. Reports are often made to us by courts, clients and other parties to litigation. For example, reports of solicitors misleading the courts have broadly increased in recent years.
We have also seen a number of judges highlight improper use of court process as a key risk to the proper administration of justice.
"Something must be done about the problems highlighted by this and by too many similar cases. We simply cannot go on as we are. The expenditure of costs on the scale exemplified by this and by too many other such cases is a scandal which must somehow be brought under control."
Lord Justice Munby discussing excessive costs
Many cases of improper or abusive litigation involve a fundamental failure to act with integrity and ethics. Serious cases go to the Solicitors Disciplinary Tribunal and solicitors have been struck off for this type of activity.
Other cases are a result of failure to understand and appropriately balance different duties. We provide information to solicitors with ethical dilemmas through our Professional Ethics helpline.
Maintaining the high ethical standards that the public is entitled to expect is a critical task for us. This is a key purpose of our ongoing work to reform legal education and training. Our Competence Statement captures the key activities required of a solicitor to maintain these standards.22
There will always be complex situations where maintaining the correct balance between duties is not simple, and all matters must be decided on the individual facts. However, it is important for solicitors to recognise their wider duties and not to rationalise misconduct on the mistaken basis that their only duty is to their client.
In balancing their duties to clients, the court, third parties and to the public interest, solicitors' surest guides are their integrity and independence.
Solicitor attempts to mislead the court and a third party
The following case illustrates the serious nature of misleading, and the importance of solicitors behaving in a way that maintains the trust the public places in them.
Mr A was an experienced solicitor in a small regional firm, acting for the claimant in a personal injury case.
He failed to provide medical evidence to the court when due. The court ordered that the claimant would be barred from using medical evidence in the claim if it was not provided within a set period. As the deadline approached, Mr A was reminded by the opposing firm that the medical evidence was still outstanding.
Mr A prepared letters to the opposing firm and the court, claiming to enclose copies of the medical evidence. He dated the letters with a date one day before the deadline. He retained these copies on his file and, when chased by the opposing firm, sent these copy letters to them claiming to have sent them on time.
Mr A's supervisor saw the opposing firm's letter. She checked the firm's case management system, which records the dates on which documents are created and modified. She found that the two letters had both been created three days after the day Mr A said they were. In light of the evidence, Mr A admitted backdating the letters.
The firm dismissed Mr A for gross misconduct and reported the incident to us. When the case went before the Solicitors Disciplinary Tribunal, Mr A was struck off the Roll for dishonest conduct and ordered to pay costs.
Information security and cybercrime
Keeping the affairs and assets of clients confidential and secure is a well established professional responsibility.
This is not a new challenge. The Information Commissioners Office (ICO) noted that solicitors were at significant risk of data loss due to their reliance on paper files containing highly sensitive information.23 Security of paper-based systems is always limited as paper can be lost, requires archiving and cannot be encrypted.
These risks can be managed through effective use of IT, but this also comes with challenges. However, if well managed, IT systems benefit both the firm and its clients.
Why this risk matters
Users of legal services increasingly expect the convenience and speed that IT can provide. We do not want to deter firms from using IT to meet these expectations, or prevent them from taking advantage of other business efficiencies that can be achieved through modern technology.
We want to ensure that when firms take advantage of these opportunities, they manage the risks that cybercrime presents to their clients' money and confidential information. This is a regulatory requirement, both from ourselves and the ICO. In addition, a cyber attack could damage a firm's reputation and put off potential clients. Therefore management of this risk should also be viewed as good business management.
Cybercrime can affect all firms but there are some factors that may elevate this risk. These include:
- handling client money or large amounts of data
- involvement in high-value litigation
- working on high-profile cases or for well-known clients
- holding information that could be targeted for reasons of industrial espionage.
Cybercrime is an increasingly prevalent threat to modern business practices. The City of London Police Commissioner stated his belief in April 2015 that cybercrime may now be bigger than the drug trade.24
PwC have warned that many law firms believe themselves to be too small or obscure to warrant the attention of professional hackers. However, they note that there is no question that law firms are among the companies being targeted by cyber criminals.25
According to the most recent published ICO figures, reported data breaches increased by 9 percent between the third and fourth quarters of 2014. Solicitors and barristers were the fourth most frequent subjects, ahead of charities and the housing sector and behind only local government, healthcare and education.26
A factor behind this trend is the increased sophistication of the scams and attacks used by cyber criminals. For example:
- attacks using 'ransomware' which encrypt data and demand payment for it to be released back to the firm
- using details gained from hacking the firm to impersonate a bank or client. This is often referred to as the 'Friday afternoon' scam as it often targets conveyancing firms at times when they are likely to be holding significant amounts of money
- using information gained from hacking to impersonate the firm to clients, for example, by modifying bank account details to steal money. This type of attack demonstrates the clear links between cybercrime and the increased risk of bogus firms.
Law firms may be behind businesses in other sectors in terms of preventing and detecting cybercrime. A survey showed that law firms spend less on average than other sectors on internal audits, and that their audit functions typically extend only to traditional financial and operational controls rather than information security. 27
The same survey found that 45 percent of law firms had suffered an information security incident in the preceding 12 months, and that 5 percent were dealing with staff security issues on a weekly basis. 61 percent of those who had incidents had experienced multiple cases of infection by malware, and a third had faced serious repeated attempts to break into their systems.
The professional principles in the Legal Services Act 2007 include a duty to maintain client confidentiality.
Our two most relevant regulatory requirements are:
- Principle 10 - Protect client money and assets
- Outcome 4.1 - Keep the affairs of clients confidential unless disclosure is required or permitted by law or the client consents.
The effective management of this risk is also required by the ICO. They regard legal professionals as data controllers in their own right and therefore consider them legally responsible for the personal information they carry. The ICO can impose fines of up to £500,000 for a serious breach of the Data Protection Act.28
The most effective contribution we can make is to highlight this risk and encourage firms to take sensible steps to manage it.29 This does not need to be expensive. Government Communications Headquarters (GCHQ) estimate that 80 percent of cyber attacks could be prevented if businesses follow simple guidance. They point to basic guidance, such as educating employees to avoid guessable passwords, not opening attachments in unsolicited emails and not using personal email to send and receive work related documents.30
These messages are reinforced by the government's Cyber Streetwise campaign, which provides advice on basic cyber security measures.31 We have also worked with the government on the development of their Cyber Essentials training.32
Law firm successfully withstands sophisticated cyber attack
The following case illustrates how having a secure backup of computer files can help firms counter a sophisticated cyber attack.
When the employees of a law firm arrived at work one day, they turned on their computers and found their desktop wallpaper replaced with a message. It warned that all the firm's office and client files had been encrypted. This meant the contents of the files had been scrambled, so anyone viewing the files would be unable to make sense of them. To regain access, the firm would need a password from the hackers.
The notice told the firm it had two days to pay a ransom. If it failed to pay, the hackers would delete the password and the firm would lose their files forever. It also said the encryption was unbreakable without the password.
The software used for this attack, known as Cryptowall ransomware, affected all three branch offices of the firm as they used a central network.
The firm reported the incident to the Information Commissioners Office and to the police, who said it was likely the attack came through either a malicious email attachment or by visiting a hacked website. Viruses on hacked websites can infect computers whose browsers have not been updated to withstand known threats, or do not have effective antivirus systems.
Fortunately the firm had a secure backup of all of its files, stored separately to its central network. As such, it refused to pay the ransom and the only loss was the time spent in reinstalling its files.
Fraudsters instruct solicitor by pretending to be the client
The following case illustrates the importance of maintaining secure systems, and the harm that can arise to clients if firms fail to do this.
Miss A was acting for a client in the sale of a property. On the day the proceeds of the sale were to be paid into the firm's client account, Miss A received a message from her client's email address. It contained instructions to transfer the funds to the client after receipt, including details of a bank account in the client's name.
After the funds cleared into the firm's client account, Miss A transferred the funds as instructed.
The next day, the client called Miss A to ask whether the firm had received the proceeds from the sale. Miss A replied that the funds had been transferred to the client's personal account, as instructed in the email. However, the client denied emailing instructions to Miss A. They both contacted the bank the funds were sent to, only to be told the funds had subsequently been transferred abroad.
It appeared from the firm's investigation that a fraudster had hacked into the client's email account and sent the instructions to Miss A, under the guise of being the actual client.
This was a sophisticated fraud which would have required knowledge of the identity of Miss A's client, the type of matter Miss A was dealing with, and the stage the matter was at. The fraudsters may have obtained this information by using malicious software that allowed them access to the firm's systems.
The firm reported the matter to us and we are currently looking into it.
Bogus law firms
Bogus law firms are created by criminals to steal money or information.
Some bogus law firms directly target people under the guise of being a genuine law firm or solicitor. Other bogus law firms target genuine law firms with a view to deceiving them into sending money or information.
Why this risk matters
One of the key risks to consumers is the loss of money or confidential information. They may also suffer by receiving poor advice and representation. This is of particular concern because victims of bogus law firms are not covered by the normal regulatory protections that apply when dealing with an SRA regulated firm, such as access to the Compensation Fund.
Key risks to firms include the damage to reputation from being cloned by a bogus firm or mistakenly dealing with one. There is also the possibility that clients may seek to hold firms liable for losses attributed to having dealt with a bogus law firm.
The number of reports we receive about bogus law firms have continued to increase. In 2014 we received 701 reports. This represents a 28 percent increase on 2013, and a 101 percent increase on 2012. Almost half of all reports of bogus law firms received in 2014 involved the identity theft of a genuine law firm or solicitor. This is in line with national figures which show that identity theft accounts for 41 percent of all fraud in the UK.33
The numbers of scam alerts we issue have also increased. We publicise a scam alert through our Twitter feed and website when we identify cases of bogus law firms and want to warn consumers and firms alike.34 In 2014 we issued 183 alerts.
These trends highlight the need for law firms and solicitors to understand this risk.
We can assist in the identification of bogus law firms and, where possible, we work with others to take action.
Where the identity theft of a genuine firm is involved, we:
- engage with the genuine firm concerned to advise of the situation, ensure they have adequate controls in place and, if appropriate, suggest further measures they could take to protect themselves
- contact the internet service provider of the bogus website to request its removal.
We share information with other regulators and anti-crime agencies to help build up a better picture of bogus activity. This sharing of intelligence is vital to ensure that agencies can work together to make it more difficult for criminals to operate in this way. We also have regulatory powers to take action against individuals who pretend to be solicitors or claim to be regulated by us.
However, we cannot control the risk of bogus law firms by ourselves. We have published guidance and warning notices to raise awareness of bogus law firms.35
Our paper In the shadows: Risks associated with bogus firms discusses bogus law firms in more detail and provides information on how firms can protect themselves and their clients.
Some of the practical steps set out in the report include:
- performing regular internet searches using the names of your firm, your partners and staff to check whether anyone is using your details without authorisation
- ensuring your details on the Law Society's Find a Solicitor web page are accurate and up to date
- regularly reading the scam alerts and warnings about bogus activity on our website
- verifying the identity of the firm of solicitors you are dealing with
If you become suspicious about a law firm or solicitor, contact us immediately.
Fraudsters intercept solicitor-client emails to steal money
The following case illustrates why firms and clients should consider following up on unusual communications, using independent and established means.
Mrs A was being advised by XYZ Solicitors in the purchase of a buy-to-let property.
The day before she was due to send the purchase money to the solicitors, Mrs A emailed them to confirm details of the firm's bank account. She received two replies, both seemingly from her solicitor.
The first email contained the correct bank details. The second email, received minutes later, contained details of an account in the name of XYZ Solicitors but with a different bank. The email explained that the firm was having issues with their usual bank, and asked Mrs A to use their alternate account. This email was sent by fraudsters.
Mrs A called her bank and arranged for the funds to be transferred within 24 hours. She emailed the law firm to confirm this. This email, along with others sent by Mrs A and her solicitors, were deleted by the fraudsters to prevent detection. The fraudsters also sent emails to both parties, assuring them everything was fine.
Three days elapsed, during which time the fraudsters transferred the money abroad. They did this through several smaller transfers to avoid questions from their bank.
The fraud came to light only when XYZ Solicitors called Mrs A to find out what was happening. By the time the fraudsters' banking provider was alerted, all the money was gone. Mrs A's bank refused to refund her as they had acted on her instructions, leaving her to bear the loss.
It emerged that the fraudsters had hacked into the firm's email server, possibly by taking advantage of an outdated antivirus, internet browser or operating system. They had used a bank account in the name of the law firm to make the fraud appear legitimate.
Money laundering - inadequate systems and control over the transfer of money
Law firms can handle large sums of money and can make attractive targets for those wishing to launder the proceeds of crime.
The risk of money laundering is reduced by preventative measures such as the Money Laundering Regulations 200736 and rule 14.5 of the SRA Accounts Rules 2011, which prohibits the passing of money through client account in the absence of a genuine underlying transaction. If law firms fail to meet their legal and regulatory obligations, there is a serious risk to the public interest.
Good anti money laundering systems and controls over client account allow firms to manage this risk and protect their businesses from being used to enable criminal activity.
Why this risk matters
Money laundering is a serious crime and a priority for governments, both in the UK and internationally. Preventing money laundering is clearly in the public interest.
The legal sector has been highlighted as high risk for money laundering by the international body the Financial Action Task Force (FATF), which has increased its scrutiny of the systems and controls law firms have in place to detect, record and report suspicious activity.37
Anti money laundering systems and controls do not have to be expensive, and should be proportionate to risk.
Reports to the SRA of potential money laundering and breach of anti money laundering and breach of anti-money laundering regulations continue to rise; in the last year we received 184 reports.
Over the last year we have conducted a planned programme of visits to examine the systems and controls law firms have in place to prevent money laundering. We saw many examples of good systems and controls, but a small proportion of firms required a second visit to discuss how their systems could be improved. Examples of areas where some firms needed to improve included:
- quality and frequency of training
- quality and consistency of customer due diligence
- risk assessment of individual transactions
- knowledge of when to report a matter to the National Crime Agency (NCA).
Money laundering and inadequate systems and controls are risks affecting a wide range of law firms.
Issues that may be more common in large corporate firms with commercial clients
- Firms who undertake work for high net worth individuals and politically exposed persons (PEPs) need to ensure they have appropriate procedures for carrying out enhanced due diligence.
- Such procedures may include only approving high risk work on a case-by-case basis, and sophisticated understanding of source of funds processes. Further information on appropriately managing the risk of PEPs is available on the FATF website.38
Issues that may be more common in small and medium sized firms, particularly those who do conveyancing
- A local client base built on recommendations will not prevent a criminal from attempting to use a firm to launder money.
- Anti money laundering knowledge is a key competence for solicitors looking to start a law firm, particularly doing work like conveyancing, which presents a higher risk of money laundering. This is because in smaller firms, a senior partner will usually become the firm's money laundering reporting officer and needs to have the knowledge to carry out this role.
Regulations and legislation
To have anti money laundering controls is a legal obligation, not just a regulatory requirement. In particular, firms are required by law to:
- have a nominated money laundering reporting officer
- have a process setting out when and how to report any suspicious activity they think may indicate money laundering to the NCA, and have a process setting out how they do this
- identify and verify the identity of clients, beneficial owners and the nature of business transactions and keep records of these checks
- train relevant employees.
Money laundering is a high priority for us due to its seriousness. We deal with reports of inappropriate movement of money as a matter of urgency and also liaise with other agencies such as the NCA and HM Treasury.
Further information on this risk can be found in our risk report Cleaning up: law firms and the risk of money laundering and our published warning notices.39
For additional guidance on compliance with our regulation, firms can contact our Professional Ethics Helpline on 0370 606 2577.
Compliance officer detects inappropriate use of client account
The following case illustrates the importance of having a consistent approach to compliance with the Money Laundering Regulations throughout the entire firm.
firm. A year ago, he started acting for XYZ Ltd ('XYZ'). XYZ specialised in purchasing high-value properties and selling them on at a profit. The directors of the company advised that their funding came from profits and bank loans. Their bank statements supported this.
A few months later, the directors told Mr A they were having some difficulties with the company's bank account. They asked if the company could use the firm's client account as a temporary measure. XYZ was one of his most valued and lucrative clients, so he agreed.
Over the next two months, Mr A allowed over 100 deposits and withdrawals on the client account in relation to XYZ, for both personal and business expenses. None of the transactions related to any legal matter in which Mr A was involved.
The transactions were discovered by the firm's compliance officer during a routine file review.
The firm launched an internal investigation and reported the matter to us.
Investigations revealed that XYZ had used the firm's client account to accept substantial investment from a politically exposed person.
Mr A had not been aware of this. Mr A had placed his firm at risk of becoming a professional enabler of money laundering and terrorist financing. The compliance officer had prevented the risk from escalating by spotting it and preventing the firm from continuing to act for XYZ. We are currently investigating Mr A's conduct, and the police are carrying out a separate investigation.
The red flags in this case were that the client asked to use the firm's client account improperly, they used corporate funds to fund personal expenses, and the client account had been used to accept funds from unknown third parties.
1. Reporting an individual or firm, SRA website, 2014
2. Tackling consumer vulnerability, Consumer Focus, 2012
3. All statistics relate to SRA-regulated firms. The Legal Ombudsman provides data for the year April-March, which is different from the SRA practising certificate renewal year of November-October. The number of negligence claims is the number of claims made, not the number of insurance pay outs.
4. Survey: too many 'silent sufferers' still putting up with bad service from lawyers, Legal Services Consumer Panel, 2014
5. Statement of solicitor competence, SRA, 2015
6. Legal choices - silent process: engaging legal services when you do not hear, The Deaf Studies Trust for the SRA, the Legal Services Consumer Panel and Action on Hearing Loss, 2011
8. SRA Regulatory Activities Report, December 2014
9. Improving regulation: Proportionate and targeted measures, SRA, 2015
10. Gordons' pioneering legal apprentices, Business is Great Britain, HM Government, 2015; Law Society seeks 10 exceptional students for scholarship, Law Society, 2015
11. LSA Regulatory objectives, Legal Services Act 2007
12. Using law firm diversity data, SRA, 2014
13. Rainbow Lecture 2014 on Diversity, Neuberger LJ, House of Commons, 12 March 2014
14. SRA Diversity Toolkit, SRA, 2015
15. The 30% Club launched in the UK in 2010 with a goal of 30% women on FTSE-100 boards by end 2015: http://30percentclub.org/
16. The role of in-house solicitors, SRA, 2014
17. Legal risk: definition, management and ethics, UCL Centre for Ethics and Law, Professor R Moor head, Dr S Vaughan, 2015
18. SRA Code of Conduct 2011, Principles, Note 2.2, SRA, 2011
19. Providing information and intelligence to the SRA, SRA, 2015
20. Approach to regulation and its reform, SRA, 2014
21. SRA Code of Conduct 2011, Principles, Note 2.2, SRA, 2011
22. Statement of Solicitor Competence, SRA, 2015
23. Information Commissioner 'sounds the alarm' on data breaches within the legal profession, Information Commissioner's Office, 2014
24. Cyber crime 'could be bigger than drugs trade' warns City of London police chief, London Evening Standard, April 2015
25. Safeguarding your firms from cyber attacks, PwC, 2014
26. Action we've taken: data breach trends, Information Commissioner's Office, 2015
27. Annual Law Firms Survey, PwC, 2014
28. Information Commissioner 'sounds the alarm' on data breaches within the legal profession, Information Commissioner's Office, 2014
29. Spiders in the web: The risks of online crime to legal businesses, SRA, 2014
30. Ten steps to cyber security, GCHQ, 2015
31. Cyber Streetwise, HM Government, 2015
32. Cyber Essentials, HM Government, 2015
33. Fraudscape, CIFAS, 2014
34. See Twitter feed: @sra_solicitors and Scam Alerts
35. Bogus solicitors, SRA, 2014; Warning notice: Bogus law firms and identity theft, SRA, 2012; Risk Outlook 2014/15, SRA, 2014
36. Compliance with which is required by Rule 7.5 of the SRA Code of Conduct 201
37. Money laundering and terrorist financing vulnerabilities of legal professionals, Financial Action Taskforce, 2013
38. FATF Guidance: politically exposed persons, Financial Action Taskforce, 2013
39. Warning notice: money laundering and terrorist financing, SRA, 2014