Miller: Regime would be vulnerable to legal challenge
The Solicitors Regulation Authority’s (SRA) proposed reform of its fining powers is arbitrary, not fit for purpose, and inconsistent with its legal obligations, City solicitors have warned.
The City of London Law Society (CLLS) urged the regulator to rethink its plans, which include penalty bands for progressively more serious misconduct and a minimum fine levels for each.
For firms, this would be £5,000 in the lowest band, rising to £500,000 in the highest, and for individuals, £2,500 and £100,000 respectively.
The SRA consultation also laid out how it intends to apply its new unlimited fining power in cases involving economic crime, which it said was likely to lead to more fines exceeding 5% of a firm’s turnover.
The CLLS response argued that the proposed regime was so flawed that it would be vulnerable to judicial review.
“In addition, any respondent to the exercise of the SRA’s powers under the proposed scheme would be entitled to raise by way of a defence the lawfulness of the scheme.
“As such the SRA’s current course will, absent any reconsideration, lead to years of cost and uncertainly for the profession and thereby undermine the regulatory objectives in section 1 of the Legal Services Act.”
Leading regulatory specialist Iain Miller, chair of the CLLS professional rules and regulatory committee, which drew up the response, said: “The more we went into the SRA paper, the more confused it became.
“It looks as if the SRA has offered a policy without thinking through its ramifications, without a clear grasp of the essentials, and without any proper consideration of the underlying law. We urge the SRA to reconsider its proposals.”
The committee said the SRA has never “grappled with the question of how law firms work” – as a result, it has never properly addressed, first, what level of fine might achieve the intended purpose.
“It is a notable feature of SRA’s approach that it appears to entirely discount the deterrent effect of reputational impact of its enforcement action even though it is often the most important issue for firms, those that work for them, and their clients.”
Second, it has failed to consider at what level might a fine tend to undermine the economic viability of a law firm.
Schooling the SRA on how the profits of a partnership are what the partners take home, the CLLS said large fines would depress a profit pool “disproportionately”.
It explained: “A fine of 5% of turnover is of course 25% of the profit of a firm with a 20% profit margin. That means partners will earn 25% less. Profit will not be divided equally and it is possible the loss to partners will not reflect their involvement in the relevant matters.”
This could have a significant knock-on effect across a firm.
When it came to individuals, “we remain concerned that the SRA’s approach of using gross income is excessive as it produces figures that it would be beyond the means of individuals…
“The SRA has not explained as part of its approach why fining someone an amount that would be equivalent to say 12 months’ gross salary is an appropriate exercise of their statutory power when Parliament has provided for the SDT [Solicitors Disciplinary Tribunal] to have not only unlimited fining powers but also the power to suspend and to strike off a solicitor.”
Income-based fines also did not signal how serious misconduct actually was.
Further, the SRA’s proposals went too far by including fines for behaviours “that the common law (and the SDT’s sanctions guidance) would regard as suitable for a suspension or strike off”.
Other problems included not explaining why minimum fines are necessary, why it was appropriate “to move from a position where a fine of over 5% of turnover is an exception to one where a fine of over 25% of turnover is an exception”, and why aggravating and mitigating factors would only shift a penalty “within the band”.
“We are not aware of any similar scheme which limits the impact of aggravating and mitigating factors in this way.”
More broadly, the CLLS said it has “a collective concern in relation to the quality of the SRA’s decision making in relation to its enforcement cases”.
The response went on: “Not only do cases take an excessive amount of time to resolve but there seems to be a general institutional drive to assess facts as being at the most serious end of the spectrum…
“We note that a decision-making process that was conceived when the SRA did not have any power to fine is being used to make decisions that will involve substantial fines which in some cases could be into the multiple of millions.
“This casual approach to procedural fairness which is inconsistent with the approach by other regulators such as the FCA causes us deep concern.”
Colin Passmore, chair of the CLLS, added: “The CLLS cannot agree with a policy which so many of our specialist lawyers consider is fundamentally flawed. We cannot see how the SRA can now continue to proceed with its proposed approach.
“That said, we are more than prepared to work with the SRA to help produce a more sensible and proportionate policy.”
Leave a Comment