Carson McDowell: SRA should triage acquisitions
Law firms should not go “many years” without receiving a visit from the Solicitors Regulation Authority (SRA), the Carson McDowell report for the Legal Services Board has recommended.
Having examined the events leading up to the SRA shutting down Axiom Ince, it went on to analyse the regulator’s systems and processes more broadly and made a series of recommendations aimed at making it more proactive.
These are the key points:
Inspections
The SRA should revise its inspection regime for law firms, the report said. “We understand the reasons for the move in 2015 away from a more prescriptive regime around solicitors’ accounts. We appreciate that such a programme of inspection should therefore be subject to a test of proportionality.
“However, the holding of client money by solicitors creates one of the areas of greatest risk to clients. The resources devoted to this area should therefore be reflective of that risk. The current SRA approach to solicitor accounts is reactive and does not reflect a proactive approach to risk management.”
Whilst the SRA should use a risk-based approach to determine how often individual firms should be inspected, no firm should be able to practise for “many years” without ever being visited or contacted by the SRA, it said.
Accounts rules
The report said the rule, since 2015, that firms only need to deliver an accountant’s report to the SRA when it is qualified “creates an opportunity for firms to choose not to obtain an accountant’s report and thereby hide their financial failings from the SRA with minimal risk of detection”.
It said: “We appreciate the desire to reduce the regulatory burden on firms and the SRA… However, we consider that this does not align comfortably with the risks to clients concerning the holding of client money by solicitors…
“Given the risks associated with the holding of client money, the SRA’s controls and checks regarding same are inadequate and should be reviewed.”
This meant going back to making all firms send their accountant’s report to the SRA, or at least require them to declare at renewal that they received an unqualified report.
Carson McDowell said the SRA should also consider requiring higher-risk firms to engage new accountants periodically.
Accumulator firms
Even after the SRA started to analyse data on them in January 2023, “there is no evidence that this resulted in any proactive steps being taken by the SRA in relation to accumulator firms, whether by increasing their monitoring, applying more stringent regulatory requirements, or carrying out proactive inspections”.
The report said the SRA assumed accumulators were less likely to fail than smaller firms, because they would have good financial and compliance support – but it did not check these assumptions were right.
The regulator has now begun proactive inspections of firms which have bought two or more firms in the past 12 months and the report urged it to undertake inspections of accumulator firms “where it appears that there is a risk to consumers”.
Sale and purchase of law firms
The SRA does not require firms regulated by it to seek its authorisation or consent before acquiring another unless the new firm results in the creation of a new legal entity – it “will often not learn of an acquisition until after it has completed”.
Carson McDowell said: “We are concerned that this does not strike the correct balance between competition, business interests and the protection and promotion of the interests of consumers and public interest.”
Many acquisitions do not create any significant risk to consumers, but some do, the report said.
“It may not be practical or proportionate for the SRA to assess each of those acquisitions. However, in light of the potential risk to clients, we consider that it would be appropriate for the SRA to have a process to triage acquisitions, and to scrutinise those which appear to pose the greatest potential risk to consumers and public interest.”
Interventions
Carson McDowell acknowledged that “intervention is a very blunt tool” and said the SRA should consider an alternative, short of intervention, for circumstances like this, “where you have a number of individuals for whom there is evidence to suggest dishonesty, but potentially not in relation to the wider firm, and where client funds may remain at risk if the full firm is not the subject of an intervention”.
A “perfect blend” could be to carry out an intervention into individual practices coupled with an interim period of monitoring over client accounts, whilst a more detailed investigation takes place. Some SRA staff also suggested that a solicitor manager could be installed during this period.
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