Risk Outlook 2014/2015
Autumn 2014 update
This Autumn Update contains a review of new developments related to the risks from our Risk Outlook 2014/15. Accompanying this update are papers on money laundering and bogus firms.
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Managing risk is good for business. Effective risk management includes many things that clients value, such as systems to keep money safe, a positive attitude to diversity, and appropriate protection against crime.
We provide regular updates to our Risk Outlook to keep you informed of key risks. You can then think about your firm's exposure to them, and how you plan to manage them.
By providing you with more information about levels of risk in the legal services market, you will be able to manage these proportionately and cost effectively. We hope that this is of benefit to both you and your clients.
This Autumn Update contains a review of new developments related to the risks from our Risk Outlook 2014/15. Accompanying this update are papers on money laundering and bogus firms. Please view our back catalogue of risk topic papers which are produced to assist law firms in understanding and managing the risks they face.
Current priority risks
Misuse of money or assets
The recent sentencing of those who misused client money at Wolstenholmes has brought protection of client money back to the forefront of many people's minds.1 In another well publicised case, a solicitor was struck off the roll and subsequently given a 12 year custodial sentence for his involvement in large-scale misuse of mortgage funds.2
In the twelve months to August 2014, we received over 140 reports of misuse of money or assets per month. Dealing with these reports takes up a significant proportion of our resources. We are considering what we as a regulator could do to reduce this risk. We recently raised the question of alternatives to solicitors holding client money and future policy work will focus on this issue.3
It is estimated that money laundering in the UK has an annual value of up to £57bn.4 Law firms are one of the key targets for those seeking to launder money.5 If even one percent of this money were laundered through law firms, it would still equate to hundreds of millions of pounds.
In September, we announced a programme of work around effective anti-money laundering compliance, including visits to high-risk firms, support and guidance.6
To help firms manage this risk we have produced 'Cleaning up', a report on money laundering risk and controls. Law firms can use this to understand more about the risks that they might be exposed to and use it as a starting point to assess their systems and controls.
We remain concerned about the number of bogus law firms and the risk they pose to consumers and genuine law firms. The rising trend in bogus firms has continued since publication of the Outlook in July. In the first eight months of 2014, we have already assessed 454 reports of bogus firms, and it is likely that reports this year will exceed the 548 we received in 2013.7
We also published 130 scam alerts in the first eight months of 2014, which is considerably more than the 70 alerts issued over the same period in 2013. This indicates that the potential number of people impacted by bogus firms is increasing. You can find out more about the risk of bogus firms, and what you can do to guard against the harm they cause, in our report In the Shadows: risks associated with bogus firms.
There has been media coverage of the methods used by lenders and their in-house legal teams to recover debts. We have published a warning notice reiterating that in-house teams have a responsibility to accurately represent their position, so as not to mislead consumers.8
Lack of a diverse and representative profession
A diverse and representative profession is beneficial to law firms and consumers. This is something we support and encourage through the reporting of workforce diversity data.
We are pleased with the number of firms that publicise their diversity, recognising the benefits to their reputation and profitability. Evidence shows an increasing number of clients view equality and diversity credentials as a factor in their choice of firm.9 Law firms with a proactive approach to workforce diversity have also been singled out for praise in the legal and national press.10
We will shortly be publishing an online diversity benchmarking tool. This will provide firms with the opportunity to benchmark the diversity of their workforce against groups of firms that share similar characteristics with their own.11 Firms will be able to get more value from their diversity data by being able to understand how they compare with other firms.
The on-line tool will be easy to use and completely anonymous: you will not have to enter any data or register to use it. The benchmarking tool will sit alongside a report containing self-assessment questions for firms who are interested in improving the diversity of their workforce.
Failure to provide a proper standard of service: quality of legal services to vulnerable consumers
Poor quality legal services can cause serious harm to consumers and adversely affect the reputation of the legal profession. The effect of poor service can be severe when it involves vulnerable people, and those using legal services can be vulnerable for a number of different reasons, as outlined in the Risk Outlook 2014/15. This is accompanied by an unwillingness to express dissatisfaction about the legal service received, with research showing that 44 percent of dissatisfied consumers do not complain.12
Since publication of the latest Risk Outlook, our work to address this risk has included considering whether some consumers seeking legal advice on asylum cases may be receiving poor quality advice. A client seeking asylum may face risks to their life or liberty if they are not able to access justice, and so it is important we understand if there is a problem with quality of service for these clients. We are working with specialist agency Migration Work CIC to conduct research on the risks faced by clients in this area of law.13
We are currently reviewing a number of matters referred by the Criminal Cases Review Commission concerning the quality of advice given to defendants seeking asylum. Using the findings from these reviews, we expect to publish ethics guidance on the handling of cases where asylum may be relevant to the client's defence.
Other priority risks
Breach of confidentiality: Information security and cybercrime
Cybercrime continues to represent a significant threat to the information and money held by law firms. Firms should take sensible security precautions, such as those set out in our cybercrime report Spiders in the web.14
The Information Commissioner's Office (ICO) recently highlighted three security risks to the legal sector: lack of paper file security, lack of digital encryption, and the taking of client information when staff leave a firm.
- in August, the ICO 'sounded the alarm' on data breaches in the legal profession, particularly questioning the state of security of paper files.15 This followed a report that a solicitor at Oxfordshire County Council had lost confidential child protection papers.16 As well as protection of digital information, firms need to consider whether their paper files are appropriately stored and secured
- the Ministry of Justice was recently fined £180,000 over loss of prison data on an unencrypted hard drive.17 A recent survey of US law firms found that only 22 percent encrypted emails18
- a paralegal was also recently fined by the ICO for breaching confidentiality by taking client information when he left the firm. 19
Lack of independence
Law firms have professional duties to act with integrity, uphold the rule of law and the proper administration of justice, act in the best interests of each client, and not allow their independence to be compromised.
To help us gain an improved understanding of the risks associated with a lack of independence, we have recently commissioned independent research to examine how client pressure, firm culture and competition can affect professionalism. We will report the findings of this research in 2015.
Failure to act with integrity or ethics: improper or abusive litigation
Misusing legal proceedings for the benefit of the firm or a client is a risk to the effective administration of justice. Not only can this risk affect access to justice, it has the potential to significantly erode trust in the legal profession and the rule of law.
Since the publication of the Risk Outlook in July, High Court judge Mr Justice Green has stated that it is not acceptable for lawyers to bring 'meritless' judicial reviews in immigration matters. He also commented that 'repeat offenders' who brought a number of meritless claims could have their details passed to both the Legal Aid Agency and to us.20 We view repeated spurious use of judicial reviews, where firms use false or meritless arguments, as a risk in line with this judgement.
1. £13m shortfall, 2,500 dissatisfied clients: former members of legal firm Wolstenholmes get combined 70 years' director disqualifications, The Insolvency Service, 2014
2. Struck-off solicitor jailed for 12 years, Law Society Gazette, 2014
3. Speech: Conveyancing Association – All Members meeting, Solicitors Regulation Authority, 2014
4. Frequently Asked Questions relating to money laundering, Financial Services Authority (now FCA & PRA), 2013
5. Money Laundering and Terrorist Financing Vulnerabilities of Legal Professionals, Financial Action Task Force, 2013
6. SRA steps up anti - money laundering work, Solicitors Regulation Authority, 2014
7. Number of reports is that from 1 January to 31 August 2014.
8. SRA reiterates Code for publicity to in-house teams, Solicitors Regulation Authority, 2014; Warning notice – Employed solicitors: publicity and information provided to third parties, Solicitors Regulation Authority, 2014
9. Diversity and inclusion in law firms: the business case (PDF 15 pages, 460K), Law Society, 2014
10. Examples include: Aldridge, A – Are law firms doing enough to encourage diversity?, The Guardian, 2014; Malpas, J – Law's university challenge – firms have raised their diversity game but the obstacles are daunting, Legal Week, 2014; Medland, D – Barriers to entry: diversity in law firms, International Bar Association, 2014
11. SRA to give firms on-line tool to compare how diverse they are, Legal Futures, 2014
12. Survey: Too many 'silent sufferers' still putting up with bad service from lawyers, Legal Services Consumer Panel, 2014
13. SRA investigating nine criminal law firms over failures in advice to asylum seekers, Legal Futures, 2014
14. Spiders in the web: the risks of online crime to legal business, Solicitors Regulation Authority, 2014
15. Information Commissioner sounds the alarm on data breaches within the legal profession, Information Commissioner's Office, 2014
16. Council solicitor dropped child protection papers in the street, Law Society Gazette, 2014
17. Ministry of Justice fined over prison data loss, BBC News, 2014
18. Survey roundup: law firm email security on trial, The Wall Street Journal, 2014
19. Paralegal fined for taking client information, Law Society Gazette, 2014
20. High Court judge: law firms bringing “meritless” judicial reviews will be referred to SRA, Legal Futures, 2014