SRA “should have done more” to prevent Axiom Ince, says LSB report

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Kershaw: SRA’s actions have damanged confidence in legal services regulation

The Solicitors Regulation Authority (SRA) “did not take all the steps it could or should have taken” ahead of the collapse of Axiom Ince, the review commissioned by Legal Services Board (LSB) declared today.

Saying the SRA has “adversely impacted on confidence and trust in the regulation of legal services”, the LSB is now to begin enforcement action, which will involve issuing directions to the SRA to take specific actions to avoid a repeat.

Axiom Ince ceased trading in October 2023 with around £60m in client money missing, putting 1,400 people out of work. The Serious Fraud Office is investigating what happened.

The LSB commissioned Northern Irish law firm Carson McDowell last December to conduct an independent review of the SRA’s actions leading up to this, and the long-awaited headline findings are that the SRA did not act “adequately, effectively and efficiently”, and “did not take all the steps it could or should have taken”.

As a result, “the SRA’s actions and omissions in this matter necessitate change in its procedures to mitigate the possibility of a similar situation arising again”.

This will be only the second time in its 15-year existence that the oversight regulator has used the enforcement powers provided by the Legal Services Act 2007; in 2018, it issued the Law Society with a censure over its governance arrangements relating to the SRA.

Directions are the second most ‘lenient’ action the LSB can take, after performance targets and monitoring, and before public censure. Its ultimate sanction is to withdraw a regulator’s authorisation.

The LSB issued a statement yesterday under embargo until 9.30am today but not the report, which was only published at that time.

The statement said: “The LSB board has considered the independent report and its findings. In the light of the impact on the achievement of the regulatory objectives set out in the Legal Services Act, which include promoting the public interest and protecting the interests of consumers, the board decided to initiate action in accordance with its enforcement policy.

“Having considered all the options available to it, the Board agreed to initiate the process to set directions under section 32 of the Act. The directions, if imposed, would be aimed at requiring the SRA to make changes to better achieve the regulatory objectives.”

Under the Act, the LSB must consult the Lord Chancellor, the Competition and Markets Authority, the Legal Services Consumer Panel and the Lady Chief Justice before imposing directions.

The SRA and the Law Society will be able to make representations before any final decision is taken on whether directions should be imposed and, if so, in what terms.

LSB chair Alan Kershaw said: “The Axiom Ince case has caused significant consumer detriment. Our decision to commission a thorough independent review reflected the importance of understanding the SRA’s actions leading up to its intervention in the firm. It was essential to uncover what went wrong to reduce the risk of it happening again.

“The review found that the SRA did not act efficiently and effectively or take all the steps it could and should have, to lessen the impact of what had occurred. The SRA’s actions and omissions have in our view adversely impacted on confidence and trust in the regulation of legal services.”

In response, SRA chief executive Paul Philip stressed that at the heart of Axiom Ince was “a suspected complex and well-hidden fraud carried out by a solicitor”.

He noted that the report “recognises our ‘excellent work’ in uncovering the suspected fraud”, which Axiom Ince’s auditors had not.

“However, there is a lot in the report that we do not agree with, including the headline conclusions. In particular, it is by no means clear that a different approach would have uncovered the issue sooner.

“With hindsight, the report has highlighted things that we could – rather than just should – have done. But in our view, it is unrealistic to expect regulation to prevent all harms.”

Mr Philip argued that, while the SRA accepted there were things it might, in retrospect, have done differently, “in our view they don’t go to the heart of the matter”.

He continued: “With the market changing rapidly, we need to respond. We will be consulting soon on changes to better protect clients’ money. This will include exploring the more radical solution of whether we should stop law firms holding client money.”

This refers to the consultation following the consultation phase of the consumer protection review launched at the start of this year.

Mr Philip also highlighted how the SRA was trying to improve how it used the data it held to spot patterns – “for instance, where certain types of firm or areas of work present higher risks to the public. This work will take time, but we are increasing investment in technology and resource so we can move as quickly as possible to improve how we do this”.

Earlier this year, the LSB extended the probe to include what happened with the collapse of SSB Law as well. A spokesman explained that work on this was “paused” to complete the Axiom review, but it was now recommencing. “We are reviewing the scope in light of the Axiom review,” he added.

Check back soon for a full report on the now published LSB review.