Donovan: The SRA should be relieved it’s not regulated by the SRA
Criticism of the Solicitors Regulation Authority (SRA) poured in yesterday in the wake of the report into how it dealt with Axiom Ince.
Though the SRA came out fighting in response, there was little sympathy for its position, along with some concern for what potential new rules on approving mergers and acquisitions might mean.
Law Society president Richard Atkinson said the Carson McDowell review “paints a vivid picture of the SRA’s inadequate and ineffective handling of Axiom”.
He continued: “As a result of the SRA’s failure to take all the steps it could or should have taken, Axiom was able to act without intervention, leading to money going missing and huge distress to their clients.
“Ultimately, it has fallen to the profession as a whole – solicitors and law firms – to shoulder the cost through a substantial increase in contributions to the Compensation Fund.”
He argued that the SRA had instead been focused on “increasing its fining powers and proposing regulatory expansion [taking on the regulation of CILEX members] rather than tackling the known risks from accumulator-style firms and ensuring its operations were joined up and laser focused on protecting consumers…
“The problems identified in the report can be fixed, but the LSB must insist that the SRA puts its house in order and that the SRA’s management and governance concentrates on its core responsibilities.”
The Legal Services Consumer Panel expressed “profound concerns” about the findings, which chair Tom Hayhoe said revealed “systemic flaws that require immediate attention” from both the SRA and the Legal Services Board (LSB) as the oversight regulator.
“This report serves as a wake-up call for the entire legal services landscape. The SRA’s oversight in the Axiom Ince case has not only left client funds at risk but shaken the very foundation of trust that underpins the legal profession.
“Consumers deserve regulatory bodies that act with urgency, transparency, and an unwavering commitment to protection. The failures identified here demand immediate and decisive reform to ensure that consumer interests are safeguarded at every level.”
Mr Hayhoe called on the SRA and LSB to urgently address “targeted oversight measures for firms classified as high risk”, the robustness of systems to protect client money – “or they must overhaul the current framework governing firms’ ability to hold clients’ money” – and consumer protection mechanisms that provided effective recourse for clients who experienced loss.
Andrew Donovan, managing director of the Compliance Officer, said the report made him feel that “the SRA is fortunate to not be regulated by the SRA”.
He explained: “If a law firm had failed to act ‘adequately, effectively and efficiently’ and had overseen a ‘missed opportunity’ in connection with such a huge scandal, it would surely be facing greater regulatory action than the SRA now is.”
The SRA’s claim that it could not understand the basis for enforcement action was “really disappointing”, he continued.
“The facts and failings are quite clearly laid out in the report. For an organisation that routinely takes enforcement action for relatively innocuous failings, this purported inability to understand the rationale for regulatory action is hard to believe and, I’m afraid to say has at least a whiff of hubris about it.
“There doesn’t seem to have been any acknowledgment of any wrongdoing by the SRA despite the LSB decision that enforcement action is needed, which the SRA does not appear to be challenging legally.”
By contrast, he noted that the report highlighted individual SRA staff “quietly and diligently conducting excellent work”, including one who had wanted to make changes to how accumulator firms were monitored and regulated eight years earlier.
“It is to be hoped that behind closed doors the response at the SRA demonstrates greater humility and reflection, such that in the future it does not take a catastrophe like this to simply give staff the tools they’re asking for.”
Regulatory solicitor Jayne Willetts, who runs an eponymous law firm in Birmingham, also found the SRA’s response “deeply disappointing” – contesting the conclusions and making “an ill-disguised attempt to steer us back to its proposal to stop law firms holding client money”.
She added: “The profession and our clients expect more from an organisation that was only set up in 2007 and which has generated a great deal of hostility in a very short time.
“A move back to its core work of regulation and enforcement and a demonstration of some humility, accountability, and transparency would go a long way to restoring confidence in the SRA.”
David Gilmore, founder of compliance advisers DG Legal, said the “relatively light touch” of SRA regulation, compared to other sectors, meant it was “entirely possible” for a solicitor to go their entire career without ever being visited by their regulator.
“For that reason, it is inevitable that eventually things will go wrong somewhere. I think there will be some pressure on the SRA to be more proactive, but they’ll have to think through how as they don’t have the resource to visit everybody.”
However, legal regulatory expert Iain Miller, a partner at City firm Kingsley Napley, cautioned that the regulators “will need to ensure that the Axiom issue does not lead to introducing changes that inhibit the growing trend of consolidation in the law firm market through mergers and acquisitions”.
Part of this was driven by the need for greater capital to fund artificial intelligence and other technology that delivers benefits to clients, he went on.
“Axiom was a traditional law firm (not an ABS) that had particular high-risk features. It is the latest in a long line of law firm frauds that stretch back decades and have resulted in significant losses to insurers and the SRA Compensation Fund.
“If the SRA becomes overly involved in acquisitions and mergers, then the risk is this will have a chilling effect on the market. Any action needs to be targeted at firms that involve clear risks.”
Mr Miller said the report showed too that the intervention power was no longer fit for purpose. “This was designed a century ago in a world where firms were limited to 20 partners. It is not apt to deal with large law firms and this clearly hindered the SRA’s decision making.
“The LSB have made clear that they are open to considering a better statutory scheme. There is an urgent need to design a modern scheme that can deal with cases like Axiom swiftly and effectively.”
For another legal regulation specialist, Paul Bennett, a partner at Bennett Briegal, the report contained “a very significant oversight”, namely the LSB’s “conflicted role as the oversight regulator who approved the current SRA rulebook”.
This was “a clear signal that its thinking is flawed”, he argued. “What lessons has the LSB overlooked by marking its own homework? Legal regulation and the protection of client money has failed in the circumstances of, an apparently lone wolf individual taking advantage of the systemic weaknesses of the SRA regime.”
These weaknesses were “a joint responsibility” and an investigation into the LSB might be warranted too.
Mr Bennett was also concerned about controls on law firm acquisitions, which he argued would lead to “more law firm failures, more cost to the SRA and more interventions”.
He added: “The era of an expanding remit for the SRA should now end. The SRA need to be more focused, do less in terms of regulatory areas and try and win the trust of the profession and the public by focusing on the 0.01% of problem practitioners; the 99.9% should have confidence in them and ultimately currently do not.”
In a separate response, Philip Barden, partner at London firm Devonshires, who acts for the remaining Axiom directors and the administrators, said: “It’s important for people to understand that the remaining 12 Axiom directors are completely innocent and knew nothing about any misconduct or fraud that was happening at the firm.
“They spent six weeks working around the clock to mitigate the impact of the fraud on clients and staff, and through their efforts clients were rehoused and more than 1,100 jobs were saved.
“Action is being taken to recover as much of the £64m losses as possible and we are hopeful of a significant recovery although the process is complex and may take some time to achieve.”
Real question is whether a profession can continue to make good fraud when it is so unprotected by its Regulator. We’ve become a bank of last resort for the fraud industry