Townsend: some do succumb to temptation to stray from compliance
The Solicitors Regulation Authority (SRA) has warned law firms under financial pressure against becoming involved in schemes that “manage” the ban on referral fees or promote “improper” ways to avoid stamp duty land tax (SDLT).
In a speech in London yesterday, SRA chief executive Antony Townsend cautioned more generally about “the temptation of straying from the compliance path as the tough economic climate continues”.
While acknowledging that the large majority of legal professionals act scrupulously even when the going is tough, he said that “some will succumb, and this is a real concern for us”.
He said firms might see SDLT schemes “as an easy way to make some extra money, especially those who were previously reliant on conveyancing work.
“Our experience suggests that some firms, particularly those in financial difficulty, are becoming involved in particular schemes when it should be clear that they are either inappropriate or not implemented correctly. Some of these schemes raise potentially serious issues for consumers and it is vital that improper schemes are not promoted or used by law firms.”
He said that in view of the level of concern by HMRC, “we are looking very closely at the conduct of any firm actively involved in these schemes”.
Mr Townsend explained that while the SRA has no issue with firms whose work includes legitimate tax planning, the danger comes from solicitors failing to undertake due diligence.
He continued: “The recent ban on referral fees in personal injury cases also poses risks of a comparable pattern of non-compliance from firms increasingly under financial pressure.”
With the ban little more than two months old, the SRA is currently focusing on “active supervision”, he said. “Generally, firms who have been on the wrong side of the line are working with us cooperatively to put things write. We will, however, take formal enforcement action against any firm failing to co-operate with us and blatantly breaching the ban…
“We cannot approve particular schemes or give ‘safe harbour’ guidance, but we are happy to discuss potential business models and point out any potential pitfalls. There are so many possible variations on how a referral arrangement might work and an infinite number of business models.
“Also, even if a business model appears to be compliant on paper, its actual compliance will depend on how it is implemented in practice. Therefore, it is each firm’s responsibility to review their business models and take responsibility for making sure they comply with the ban.”
Mr Townsend – who is leaving his role later this year – described financial stability as the most serious issue facing the profession.
“We’ve seen that as a result of financial pressures some firms have adopted worrying practices such as significant levels of borrowings over and above the value of the firm, no reduction in partners’ drawings and no reserves left in the business. These poor behaviours are more likely to result in severe financial problems and firms failing in a disorderly way, meaning clients put at risk and regulatory costs rising dramatically.”
The SRA has begun contacting firms designated as ‘high impact’ or in a sector where financial pressures are greater externally, such as heavily involvement in personal injury. “This approach is already paying dividends. By supporting firms at the outset to help them take action to put them back on a sound financial footing, or to become more attractive to a buyer, or to ensure an orderly wind down, we have reduced the number of interventions which everyone in this room pays for…
“As a result we have seen distributable profits retained, partner capitalisation levels increase, and a number of high-impact firms originally placed in our red risk category for financial stability reduced to amber.”
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