Legal Compliance Update

This month's update covers three significant developments affecting legal practice: the High Court's Mazur ruling on litigation conduct, the SRA's revised approach to client account reform, and proposed changes to Money Laundering Regulations that could fundamentally alter how firms manage client confidentiality.

The Mazur Case: Clarifying Who Can Conduct Litigation

The High Court has ruled that unqualified employees of law firms can support solicitors in conducting litigation, but cannot themselves conduct litigation, even under supervision. This distinction has created significant uncertainty across the sector, particularly among senior qualified non-solicitors who have been conducting litigation for years.

The debate centres on interpretation of the Civil Procedure Rules and the Legal Services Act 2007. The late Andrew Hopper QC, widely regarded as the leading authority on legal services regulation before his death in 2018, previously expressed the view that unauthorised individuals could conduct litigation under appropriate circumstances.

The SRA's Position

Following initial silence that frustrated many practitioners, the SRA has now clarified its stance:

"The judgment did not change the position in law that the Legal Services Act makes it clear that only regulated individuals can conduct litigation as it is a reserved legal activity. Non-authorised individuals can support litigation – as they do in other areas – but only an authorised individual, such as a solicitor, should be conducting litigation."

The SRA acknowledges this differs from guidance provided to at least one firm in December 2024, though it aligns with earlier 2022 guidance.

Crucially, the SRA states: "There is a distinction between conducting litigation and supporting litigation, but the boundary between the two activities will depend on the facts. Being engaged (whether as an employee or other contractor) by an authorised person who is permitted to conduct reserved activities does not automatically confer a right to conduct litigation on an employee or contractor who is not authorised."

What This Means for Firms

The onus falls squarely on firms to satisfy themselves that only authorised individuals are conducting litigation. The SRA recommends documenting your decision-making around supervision arrangements in accordance with their published guidance.

A Senior Costs Judge has already reported that Mazur has been cited in proceedings, raising concerns about potential legal professional privilege complications when these arguments arise.

Next Steps

Whether this decision will face judicial review or other legal challenge remains to be seen. In the meantime, COLPs should:

• Review current litigation handling arrangements
• Identify which staff members are conducting versus supporting litigation
• Document supervision arrangements and decision-making processes
• Consider whether role descriptions and delegation arrangements require revision

SRA Statement on Client Account Reform

Following its consultation on the future of client accounts, the SRA has announced a significant shift in approach:

"Our immediate focus is on making changes to better protect and safeguard client money under the current system. We then plan to return to the longer-term questions of solicitors holding client money and the compensation fund after we have made changes to the current system, when we can give them the robust consideration they need."

Context and Timing

The original consultation appeared to be prompted by the Axiom Ince scandal, where the SRA faced substantial criticism for its regulatory oversight. The regulator's decision to defer fundamental questions about whether solicitors should hold client money at all suggests these complex issues require more thorough consideration than initially anticipated.

The SRA will continue working with stakeholders before returning to longer-term reforms. This phased approach may provide welcome breathing space for firms already managing multiple regulatory changes.

What Firms Should Monitor

COLPs and Finance Partners should watch for the SRA's proposals on immediate safeguarding improvements to current client account arrangements, likely to emerge in the coming months.

Draft Money Laundering Regulations: Confidentiality Concerns

Proposed amendments to the Money Laundering Regulations have clarified—and intensified—concerns about how client due diligence information will be shared with banks operating client accounts.

The Key Change

The draft regulations would require firms to provide details of their 'underlying clients' to banks upon request when managing pooled client accounts (PCAs). Significantly, the draft contains a provision stating this disclosure would not breach 'any restriction, however imposed, on the disclosure of information'.

The Fundamental Issue

This provision raises serious questions about whether firms can reconcile:

• The duty of confidentiality central to the solicitor-client relationship
• Legal professional privilege obligations
• The proposed duty to disclose client information to banks

The Law Society's Response

The Law Society has expressed strong concerns, stating the changes:

"...could cause 'significant and uncertain compliance burdens' for law firms. The changes 'do not enhance the effectiveness of efforts to combat money laundering' and went against the government policy of reducing unnecessary and ineffective compliance burdens."

The Society warns that "the provisions relating to the banking sector are so widely drawn that they are likely to have serious unintended consequences for many in the legal profession."

Most significantly: "The proposals risk being both unfair and unworkable, potentially displacing legal services through removal of PCA services and thereby restricting access to legal services."

What MLROs Should Do Now

• Review your firm's current PCA arrangements and bank relationships
• Begin scenario planning for potential changes to client account operations

HMRC Tax Adviser Registration: Impact on Conveyancers

A development requiring immediate attention: HMRC's requirement for tax advisers to register and meet minimum standards from 1 April 2026 may capture conveyancers who handle Stamp Duty Land Tax matters.

The Scope Question

It remains unclear whether simply submitting SDLT returns through the HMRC portal on behalf of clients will trigger the registration requirement. This ambiguity creates genuine uncertainty for conveyancing practices.

An Emerging Trend

Reports suggest some solicitors are now declining to provide tax advice or are terminating retainers where clients request such advice, following heightened scrutiny of property tax matters in recent months.

Action Required

Conveyancing practitioners and COLPs should:

• Monitor HMRC guidance as the April 2026 implementation date approaches
• Review retainer letters and scope of service provisions
• Consider what level of SDLT involvement your firm provides
• Prepare to adjust service offerings or seek registration if required
• Watch for clarification from representative bodies

The distinction between submitting returns as an administrative function versus providing tax advice may prove crucial.

Summary: Key Actions This Month

For COLPs:

• Audit litigation handling arrangements following Mazur
• Document supervision decisions comprehensively
• Monitor SRA announcements on client account safeguards

For MLROs:

• Review MLR consultations and consider responding
• Assess vulnerability to potential PCA banking changes
• Discuss implications with your finance team and banking partners

For Conveyancers:

• Track HMRC guidance on tax adviser registration
• Review SDLT service scope in retainers
• Plan for potential service adjustments by April 2026

These developments collectively represent substantial potential changes to how legal services operate. Firms should engage actively with consultations and ensure compliance frameworks remain flexible enough to adapt as these positions clarify.

High-volume consumer claims

Since the SSB scandal broke, the Solicitors Regulation Authority (SRA) has turned its attention to firms dealing with high-volume consumer claims, and recently said it had uncovered a significant amount of poor practice around litigation funding, referral arrangements, client care, and costs information, leading to it taking the exceptional step of requiring all of these firms to complete a mandatory declaration confirming they are compliant with its rules.

It will be interesting to see how many of these firms will eventually face enforcement action, including misleading the regulator by saying they are compliant when in reality they aren’t; a recent prosecution found a solicitor who misled the SRA to be dishonest!

Money laundering risks – consultant fee-share firms

The SRA has said that, “the decentralised nature of consultant-led law firms carries extra money laundering risks that mean compliance officers may need to be “more interventionist”; these firm structures can be of benefit to firms and solicitors, but their decentralised nature can carry risks. We have noted that it is sometimes difficult for these firms to keep a central anti-money laundering (AML) policy in operation, to monitor compliance, and to ensure a consistent standard across the firm.

Firms’ money laundering compliance and reporting officers (MLCOs/MLROs) “will need to be more vigilant and potentially more interventionist in order to make sure that the firm is not put at risk by non-compliance. Firms should also check the level of AML knowledge of new entrants to the firm and undertake training where needed. A new consultant who previously occupied a partnership role may, for example, be unfamiliar with AML processes because these were delegated to other staff.”

Feedback from ex-consultants suggests that this risk is real, and that some current consultants are leaving themselves exposed to potential enforcement action in the future.

Axiom Ince update

New evidence has recently come to light showing that during the SRA’s investigation it failed to check the firm’s statutory accounts, and failed to identify that audited accounts had not been submitted.

The accountancy practice that looked after the firm’s accounts was recently fined £2,200 for incompetence.

The failure to submit accounts should have raised real concerns for the SRA, leading to immediate action, but the firm was allowed to operate for a number of further months.

This scandal will continue to rumble on, especially as those charged with wrongdoing have pleaded not guilty, and won’t have their case heard until February 2027!

Competence reflection

The SRA is to consult on strengthening its continuing competence requirements over concerns that solicitors are not reflecting properly on what they do; the consultation will focus on reflection and the maintenance of professional ethics.

In its Annual Competence Assessment 2025, the SRA said, “We have also identified wider shortcomings in how some solicitors approach their obligation to maintain their competence. These include solicitors not fully reflecting on all aspects of their practice and limited awareness and use of our warning notices and guidance in maintaining competence. We outline in this report how we will address these issues.”

On the plus side, the SRA also said, “Our monitoring shows that most solicitors keep their knowledge and skills up to date. From the sample of solicitors and firms we engaged with over the last 12 months, we also know that most firms have effective systems and controls in place. And that the solicitors they employ are competent and capable of delivering good quality legal services.

Residual balances

A recent round of audits carried out by a leading firm of accountants has found that over 65% of law firms had broken the rules around residual balances, it said: “It seems to be a persistent challenge to get fee-earners to dedicate time to resolving residual balances, regardless of how significant the issue may be”.

The finding in effect means that over 65% of lawyers had not done their jobs right in the first place, in that they had not closed the client files properly!

A fee is not earned until a file has been properly closed and residual balances returned to the client, and therefore bonus payments based on earned fees should not be made unless these actions have been completed; if bonuses aren’t paid, then residual balances should be reflected in salary reviews.

The days of fee earners throwing billed files into a corner pending closure should have been long gone, but they are clearly alive and well in some firms according to the audit findings!

This month we focused primarily on anti-money laundering (AML) due to the recent publication of the UK’s National Risk Assessment of Money Laundering and Terrorist Financing, jointly developed by HM Treasury and the Home Office; the last assessment was published in 2020.

One of the key observations from the assessment is that ‘the volume of cases of suspected money laundering that involve lawyers has remained high, relative to the small number of regulated professionals’; ‘suspected money laundering’ isn’t a criminal offence under the Money Laundering Regulations, so when are we going to see this “volume” of suspected cases turn into prosecutions for ‘actual’ money laundering!

Following on from the above assessment, the Solicitors Regulation Authority (SRA) has published its own sectoral assessment, identifying the following emerging risks:

• Capital flight from high-risk countries
• Client account issues (using it as a banking facility)
• Poor client due diligence
• Changing firm business models (including decentralized checks undertaken by consultant fee-share firms)
• Technology

Law firm client accounts have also been addressed by the national assessment, with it saying, “client accounts continue to be assessed as high risk as they can be misused by criminals to both move illicit funds and to provide a veil of legitimacy to the proceeds of crime”; the report goes on to say that the emergence of third party management accounts (TPMA) “may, in time, reduce the client account risk”. Many argue that moving from client accounts to TPMAs would just be moving the problem from one place to another and that fraud would not reduce; they also say that putting funds in one or two places increases the risk of cyber crime!

The government wants to improve the anti-money laundering regime by making a number of changes to it, but firms shouldn’t get too excited that it will reduce the day-to-day burdens around firm-wide, client and matter risk assessments, client due diligence, policies, controls and procedures, etc.; the proposed changes will include:

• Clarifying thresholds for Simplified Due Diligence (SDD)
• Refining triggers for Enhanced Due Diligence (EDD)
• Improving guidance on ongoing monitoring

On 31 July 2025, the threshold for submitting a Defence Against Money Laundering Suspicious Activity Report rose to £3,000 from £1,000 in line with the Proceeds of Crime (Money Laundering) (Threshold Amount) Order 2025; this means firms will not commit money laundering offences if the value of the criminal property in the proposed transaction is less than £3,000. One aspect of this is that firms can return money to a client to end the business relationship without committing a criminal offence if the value of the suspected criminal property is below £3,000.

A solicitor has been jailed for his part in helping to run two bogus investment schemes and for money laundering; one of these involved 150 clients and £6m.

Another solicitor has agreed to be struck off for various AML breaches with the Solicitors Disciplinary Tribunal saying it represented ‘widespread and fundamental non-compliance with critical regulations’ amounting to systemic failures. This potentially shows the SRA could be taking a far more robust approach to such breaches as more recent similar cases where only fines were imposed; the breaches were:

·       Inaccurately confirmed to the SRA that his firm had a firm wide risk assessment (FWRA) when it did not.

·       Failed to ensure that the firm had the FWRA or the required policies, controls and procedures (PCPs).

·       Failed to ensure the necessary scrutiny regarding the source of funds of 63 conveyancing clients.

·       Failed to ensure the firm had an adequate system for the application of customer due diligence (CDD) measures.

·       Failed to ensure residual client balances were returned to 54 clients.

·       Failed to obtain an accountant’s report for several accounting periods during which the firm held client money.

It is clear that the solicitor was not in proper control of his firm and it may be the culmination of the different breaches that led to the strike off.

It has become apparent that many firms are not carrying out counter-party due diligence, with some saying they don’t feel it is a matter for them as the firm acting for the counter-party will have undertaken their own due diligence. However, the Legal Sector Affinity Group guidance (5.16.3) says that in the sale/purchase of real property “firms must seek to understand all aspects of the matter, including undertaking appropriate due diligence on the parties involved in line with regulatory requirements, and understanding the source of funds/source of wealth used.”

Another area of concern that the SRA has identified is solicitors’ misunderstandings around sources of funds; the SRA has provided this question with a view to clarifying matters:

Is a source of funds check always required?

a) Yes, you must always carry out a source of funds check, or

b) It is required where necessary, based on a risk-based assessment and specific regulatory triggers (such as PEPs and high-risk third countries), or

c) It is only required if client money passes through your client account.

Correct answer: b

Why: If the client is a politically exposed person, you must apply a source of funds check under regulation 35. If the client or counterparty are established in a high-risk third country, you will need to check source of funds also.

In addition regulation 28(11)(a) requires firms to undertake a source of funds check 'where necessary', though this is not defined in the regulations. We interpret this as requiring a risk-based approach. This means your firm, client and matter risk assessments need to be considered when deciding if it is necessary.

The requirement to do source of funds checks might apply even if no money is coming through your client account.