Legal Compliance Update

April saw the publication of the latest Legal Sector Affinity Group (LSAG) guidance, which took  effect on 23 April 2025; the updated guidance consolidates many of the changes that have been made in the anti-money laundering sector since the last guidance was published in 2023.

However, this should not stop firms from reading the guidance and updating their firmwide risk assessments (FWRA) and associated documents and training accordingly. Helpfully, the guidance now has a specific section showing the 2025 amendments and updates (see pages 221-228).

So, what are the key changes to the guidance?

Here they are:

• Wording used for beneficial owner shareholders changed from “25% or more” to “more than 25%”
• New definition of a high-risk third country
• Additional information about the Economic Crime Levy
• Additional information about supply chain risk
• New subsections relating to The Register of Overseas Entities, De minimis exemption and mixed property transactions
• Updated guidance where you receive contributions from third parties towards source of funds
• New regulation on domestic PEPs

However, we found two key errors in the guidance, which have been reported to the Solicitors Regulation Authority (SRA); the guidance will be updated in due course. The errors are:

• 6.14.4 – appears in the amendments (top of p223) but not in the main guidance
• 16.4 – these defences don’t appear in the main guidance (towards the bottom of p226)

Don’t forget that when you update your FWRA you need to keep a record of previous versions; the SRA has found a number of firms wanting over the last few years as they couldn’t produce previous versions going back many years!

Own-interest conflicts and handling complaints

We recently asked the SRA for clarity around whether an own-interest conflict could arise in the handling of a complaint, and after some going back and forth finally received clarification:

"A solicitor must not act if they have an own interest conflict or a significant risk of an own interest conflict (Paragraph 6.1 of the Code). An “own interest conflict” will arise where the solicitor’s personal interests, or their firm’s interests, conflict with those of a client.

Whether an own interest conflict exists is a matter for the solicitor’s professional judgment taking all of the circumstances into account. But normally it is rare for there not to be an own interest conflict where the solicitor or firm has made an error or failed to do something which could give rise to a negligence claim.

However, a complaint about poor service does not necessarily mean a solicitor has been negligent or that an own interest conflict exists. The solicitor will need to consider the circumstances of the complaint to decide whether a conflict does exist."

It is clear from the final paragraph that the SRA foresees that in some cases there could be an own-interest conflict, but leaves this, as usual, for firms to determine where this might be!

We have updated our complaints policy template to cover this point and have provided a suggested way of assessing whether an own-interest conflict may arise, for example, such a conflict probably won’t arise where there has just been a delay and only an apology is warranted, whereas a more serious complaint that could result in a fee reduction, compensation, potential referral to the Legal Ombudsman (LeO) may be considered to create such a conflict, as a firm will most likely be wanting to get rid of the complaint by rejecting it, or settling it for as little as it can get away with!  

To ensure a fair and independent view is taken over a complaint, some firms engage external consultants, and this may be a solution for those where there is an actual or serious risk of a self-interest conflict.

The takeaway from this is, update your complaints procedure to include a new initial step for when a complaint is received, which consists of assessing whether an own-interest conflict exists and what to do if there is one; update your complaints handling training for staff as well.

SRA review of the COLP regime

I attended a recent webinar run by the Legal Services Board (LSB) and during the discussion it was said that the SRA would be carrying out a review of the Compliance Officer for Legal Practice (COLP) regime to see whether it was fit for purpose, and whether any lessons could be learned from the financial services sector in relation to its Senior Managers regime.

The Senior Managers regime covers:

• A Statement of Responsibilities
• Regulatory references
• Criminal records checks
• Specific conduct rules

Firm partners and managers must be confident that their existing COLPs are undertaking their roles effectively, as liability for compliance is on a joint and several basis; COLPs cannot be seen as sacrificial lambs!

To assess whether COLPs are doing the ‘right thing’, each partner/manager should ask themselves a simple question, “Would I be happy to take over the role immediately?”; if the answer is ‘no’, then I suspect it is because of a fear of the consequences of getting it wrong, or the COLP has just been left to get on with everything with no effective oversight, or they know the COLP has just been filling the position to enhance their CV or career prospects and know there will be gaps in compliance!

It is clear from recent SRA sanctions around AML non-compliance, that some COLPs (and MLRO/MLCOs) have not been doing their jobs as they should have been, and if the number of cases was extrapolated across the sector, it suggests many other firms are in the same position, even if they hold accreditations (the vast majority of firms sanctioned held and continue to hold CQS or Lexcel, or both)!

ICO visits to law firms

We have become aware that the Information Commissioner’s Office may be visiting some law firms to check on the levels of compliance with data protection legislation; we have been unable to get confirmation of this, but just in case it is true, firms are advised to check that their data protection policies, controls, procedures and training programmes are up to date.

SRA Diversity Date Collection Exercise 2025

The SRA recently announced that it will be collecting diversity data again in the Summer, but has not fixed any dates yet; the last exercise took place in 2023. Frims need to start preparing for the exercise so that when the SRA does confirm the return period they are able to act appropriately.

As in previous years, Access Legal will be providing its data collection tool to assist firms collecting data on an anonymous basis; Find further details here.

What a busy month it’s been for regulators!

The Legal Services Board (LSB) recently published its annual Regulatory Performance Assessment, in which it said that the Solicitors Regulation Authority (SRA) and the Bar Standards Board (BSB) had fallen short of expected standards.

In brief, the finding of ‘insufficient assurance’ means that the LSB has serious concerns which these regulators need to take immediate action to address; the ratings are:

• SRA
  • Well led – partial assurance
  • Effective approach to regulation – partial assurance
  • Operational delivery – insufficient assurance
• BSB
  • Well led - insufficient assurance
  • Effective approach to regulation – partial assurance
  • Operational delivery - insufficient assurance

Both the Law Society and Bar Council have criticised their regulatory arms over the LSB’s assessment that their performance was inadequate and needed urgent improvement, which is somewhat surprising bearing in mind their past comments around being unable to do this due to the Internal Governance Rules (IGRs); as far as I am aware the IGRs have not changed, so what makes it okay to criticise now but not in the past!

The LSB has also proposed new requirements on legal regulators to strengthen ethical standards from the start of lawyers’ careers, but has said that it recognised that this was not a job for regulation alone. It’s CEO has said that, “It must form part of a holistic approach that will transform workplace and leadership culture; equally importantly, our evidence highlights that lawyers need an environment in which they feel supported and empowered to maintain these duties, particularly in the face of competing pressures. This includes fostering strong professional support systems that help practitioners navigate complex ethical decisions.”

A recent report published by the Taskforce on Business Ethics and the Legal Profession has said that law firms should adopt a ‘legitimate provenance of wealth test’ when taking on clients related to kleptocracy, state capture and grand corruption as part of an ethics-based approach that goes beyond legal or regulatory tests; this would require clients to provide “credible explanations” for their money and address gaps in the anti-money laundering (AML) framework. The report recommends a ‘comply or explain’ approach, and not for firms to simply ask “Can we defend this at a tribunal?” but instead “Can we defend this in public?”

It will be interesting to see how firms approach acting for such clients, where what they are being asked to do is lawful but may be considered by some as awful!

The SRA has won its High Court appeal in relation to a recent finding in the Solicitors Disciplinary Tribunal, where a firm said that its breach of the AML regulations was “inadvertent” and did not amount to professional misconduct. The judge said the SRA only had to prove that rule breaches were serious, reprehensible and culpable where such a test was “inherent in the rule in question”.

Other news

The City of London Law Society has said that the SRA's proposals to change how client money is held show further evidence of its instinct to overregulate, and that they threaten to harm the sector. The SRA has said that no firm decision has yet been made on scrapping the client account. Speaking at a recent conference, an SRA executive director said it was important to explore options, but nothing has been decided; she went on to say, ‘It is not a fait accompli but it is important to engage and think about these options, I don’t think there is a question of this happening today or this year but there is the potential for things to be developed.’

A judge recently ruled that a solicitor cannot base a victimisation claim against her law firm at the employment tribunal on it reporting her to the SRA; there has always been a question over whether employees facing disciplinary action could claim their firm had prejudged the outcome of the process because it had complied with its regulatory obligation to report serious misconduct, or other information that the SRA may wish to be made aware of so it can investigate further. This case may provide firms with the comfort they were looking for.

Regulatory resignations was the stand out issue of the month, with the Chair of the Legal Services Board (LSB) resigning with immediate effect, and the Chief Executive Officer of the Solicitors Regulation Authority (SRA), who will be leaving the organization towards the end of 2025; these resignations follow on from the recent resignations of the Deputy Chief Executive Officer/GC and Head of Legal at the SRA.

It is unknown why all these resignations have occurred, but some have suggested that it is as a consequence of the criticisms that came out of the Axiom Ince report, the potential criticism that may be coming in the SSB report, and the reputational damage that has been sustained by the SRA over the last few years; others have suggested they have just been coincidental and are merely for career reasons, retirement, or for family reasons! 

Fall-out from Axiom Ince

The SRA has increased its efforts to crackdown on suspected dishonesty and financial irregularities having found these reasons for intervening into firms, with accounts rules breaches being cited in 11 cases in the year October 2023-24; in the previous year there were only four, and only one in 2021/22. Suspected dishonesty interventions increased from 14 to 16 during the last year.

The future of client accounts is still uncertain, but the Legal Services Consumer Panel (LSCP) has come out strongly supporting their demise and replacing them with third party managed accounts (TPMAs); the chair of the LSCP has criticised the SRA for its ‘conservatism’ and ‘resistance to change’, which suggests it may be pressured into taking action many in the profession object to!

Economic crime and sanctions

The government has announced the largest sanctions package against Russia since its invasion of Ukraine in 2022; for the first time, it is also using new powers to target foreign financial institutions supporting Russia’s war machine, including sanctioning of a major Russian bank, disrupting Russia’s use of the international financial system to support its war efforts.

The Office of Trade Sanctions Implementation (OTSI) has issued new guidance detailing its enforcement powers; firms dealing with the following work should pay particular attention to this:

• Legal advisory services – providing advice on corporate structures, contracts, or transactions that could involve sanctioned entities or jurisdictions.
• Trust and company services – setting up companies, trusts, or other legal structures that may be used to evade trade sanctions.
• Client due diligence and risk assessment – ensuring proper checks when dealing with high-risk clients or transactions.
• Litigation and dispute resolution – managing cases involving sanctioned individuals, entities, or assets, where compliance with trade sanctions is required.
• Commercial transactions – handling mergers, acquisitions, or financial arrangements involving restricted goods, technology, or services.

The Financial Action Task Force (FATF) has published its latest annual report (2023/24). One of the most significant achievements has been the substantial shift in the focus on asset recovery globally; this focus aims to ensure that governments prioritise asset recovery, and that illicit proceeds are rapidly frozen, confiscated and recovered. Improvements in this area are essential to remove the profit-incentive from crime and to return money to victims, including the State in cases of tax evasion or corruption.

Firms should ensure they update their firm-wide risk assessments to take account of the above, even if this is just to say they have decided they do not apply to them.

The Law Society has warned that the new statutory duty on lawyers to promote the “prevention and detection of economic crime” should not trigger an “over-zealous” response by the SRA, however, based on its recent fines for procedural breaches of the Money Laundering Regulations, some would argue that it is already being over-zealous in its approach!

First-tier complaints

The SRA has been writing to a randomly selected cross section of 750 firms, requiring Compliance Officers for Legal Practice (COLP) to provide information on how their firms identify and handles first tier complaints.
The SRA is undertaking a programme of work in response to the LSB's policy statement on first tier complaints which requires it and other legal regulators, to pursue specified outcomes. This continues the SRA’s aim to ensure that all firms have procedures in place for the effective, efficient and fair investigation and resolution of complaints.

To be, or not to be …… a solicitor!

The SRA has reopened its investigation into business secretary Jonathan Reynolds who described himself as a solicitor when he was in fact only a trainee solicitor; this was not only on social media but also in conversations and during a statement in the House of Commons. There are calls for the business secretary to be prosecuted for committing a criminal offence under the Solicitors Act 1974 and the Legal Services Act 2007; it will be interesting to see what happens, but if he is able to avoid action it will bring both Acts into serious disrepute.