Legal Compliance Update

Monthly Compliance Update – April 2024

Consultations and reviews seem to be the flavour of the day at the moment, with HM Treasury carrying out a consultation on improving the effectiveness of current money laundering legislation, Members of Parliament (MPs) on the Justice Committee backing a review or legal regulation, and other MPs carrying out a review of the property sector.

It will be interesting to see what comes out of the consultations and reviews, but it is hoped we will see:

• AML Reliance – liability being placed on the entity being relied upon, rather than the entity asking to rely on the client due diligence carried out.
  
  
• Single regulator – a new single legal regulator introduced to make regulation more transparent for consumers and a consistent approach to regulation for practitioners.
  
  
• Referral fees – a ban on referral fees and the removal of improper pressure by referrers on law firms.

Ethics

Professor Richard Moorhead told a recent Legal Services Board conference that ‘apathy’ and ‘ignorance’ were a ‘root cause’ of unethical behaviours that have manifested in issues such as the Post Office scandal, and that lawyers’ lack of interest in ethics may be fuelling an increase in rogue behaviour in the profession. The Post Office scandal had revealed weaknesses in professional rules and highlighted occasions where lawyers were either ignorant about their responsibilities or were ‘too clever by half’.

The next stage of the Public Inquiry looking into the Post Office scandal starts on 9 April, when senior Post Office executives, government ministers, and 15 lawyers will give evidence; the lawyer hearings will provide a real insight into how they operated and whether in fact their conduct was unethical. It is worth watching the previous hearing that involved Jarnail Singh, in-house solicitor, as if his evidence in that hearing is anything to go by, his next hearing will be very interesting!  

New property form (TA6)

The Law Society has updated its property form (TA6) to support National Trading Standards (NTS) guidance on 'material information' required for property listings, but this has drawn significant criticism from conveyancing solicitors, who believe there should have been consultation with them; the Property Lawyers Action Group has been particularly vocal about how the form has increased in size to 32 pages, the liabilities it appears to open conveyancers up to, and whether in fact many of the questions are relevant to them bearing in mind the new information is to assist clients when dealing with estate agents.

The Law Society has said it will review the position and will change the form if it is felt appropriate.

In-house solicitor guidance

As a consequence of the role played by in-house solicitors in the Post Office scandal, and the findings from the  thematic review carried out by the Solicitors Regulation Authority (SRA), the regulator has developed a raft of new resources, and views are now being sought on them before they are formally adopted.

AML due diligence on other parties

We carried out a poll during the webinar asking “Are you conducting AML due diligence on the other party(s) involved in high risk (property, etc.) transactions?”; the results were, 22.3% - Yes, 47.1% - No, and 33.6% - unsure.

We asked the question as we had been approached with a query around sanctions, where carrying out due diligence on the other party is a requirement, but it became apparent that firms may not be applying the same to high risk matters when carrying out AML due diligence; the poll drew a number of questions, which clearly showed a lack of clarity around the rules and how they should be applied.

Property work is regarded as high risk, so enhanced due diligence (EDD) is required as it falls into the definition of “any other case which by its nature can present a higher risk of money laundering or terrorist financing”; the Money Laundering Regulations say in relation to EDD that “depending on the requirements of the case, the enhanced customer due diligence measures required may also include, among other things taking additional measures to understand better the background, ownership and financial situation of the customer, and other parties to the transaction.”

This means that a firm acting for a seller therefore needs to consider carrying out checks on the buyer, but not necessarily to the same extent as they would do on their own client; the SRA has confirmed that the fee for doing this can be passed on to the client as part of their transaction costs (but not a disbursement).

In order to assist we have sent an email to the SRA asking for clarity around the questions received on a ‘no names’ basis and will provide an update in due course; watch this space!

 

Watch the April Compliance Update on demand >

Monthly Compliance Update – March 2024

We covered a mixed bag of issues this month including the introduction of the Information Commissioner’s new Legal Services Operational Privacy Certification Scheme (LOCS:23); the aim of the scheme is to help law firms demonstrate compliance with data protection requirements and inspire trust and confidence in clients.

A poll we carried out during the webinar showed that 84.5% of attendees had not previously heard of LOCS:23, and of the 15.43% that had heard of it only 9.42% would look to obtain it, with 77.54% saying they were unsure at this point.

We have approached the Law Society and asked whether it intends to make LOCS part of the Lexcel/CQS accreditations, and if it is, whether it will be a mandatory or optional requirement; Cyber Essentials has been adopted as an optional requirement, so it may take the same approach with LOCS.

AML Update

A number of issues related to anti-money laundering (AML) were covered in the webinar where firm-wide risk assessments will need to be reviewed and updated accordingly, for example:

• The Financial Action Task Force (FATF) has published its annual report for 2022/23
  
  
• The Solicitors Regulation Authority (SRA) has updated its sectoral assessment, with major changes covering:
  • Vendor fraud
  • Pooled client funds
  • Third-party managed accounts
  • Irregular methods of transferring funds

The last month saw a number of firms being sanctioned for various AML breaches, with fines ranging from £3,203 - £23,000; the majority of issues found were around a lack of compliant firm-wide and client and matter risk assessments.

The SRA has made it very clear that it will take action against firms where they have failed to comply with their obligations and that this is because the SRA itself is under pressure to enforce the relevant regulations on those it regulates.

Ethical conduct

The Legal Services Board (LSB) has said that frontline regulators need to look at not just whether firms are complying with rules but also whether they are acting in the public good, with the LSB Chief Executive saying “lawyers may be technically competent but if they then use that in a bullying or harassing way that will not be acting in the public good. Solicitors need to look at how conduct would be perceived by the public, not just to show they are complying with the rules.”

The SRA has started a conversation about the future of client protection arrangements, the extreme end of which could see the end of firms holding client money and of the SRA Compensation Fund.

The consumer protection review essentially aims to answer whether there is more the regulator can do to identify firms that might fail and how to protect consumers when they do.

Regulator performance

The SRA is one of only two of the eight frontline legal regulators to achieve top ratings in the LSB’s latest assessment of its domains. It is notable that the report points out that the assessment period, the eight months to May 2023, misses what may be three key events: the Daily Mail’s ‘sting’ against immigration practitioners, the intervention into Axiom Ince and 'the coming to light of the potential scale of involvement of legal professionals in the miscarriages of justice at the heart of the Post Office scandal'.

A recent article written by Greg Treverton-Jones KC, gave his thoughts around why he believes the SRA is misusing its fining powers it is well worth a read; here is a flavour of what he said, “Over the last fortnight or so, two astonishing decisions have shown how the SRA now uses (or more accurately misuses) the wide-ranging powers to which I drew attention. A Farrer & Co solicitor was ordered to pay £10,105.44 (note the spurious precision in the figure) and £300 costs after he was disqualified for 22 months for driving when his alcohol level was above the legal limit. He had been ordered by magistrates to pay around £2,000 by way of fine, costs and victim surcharge: the fine itself was £1,348.”

Residual balances

A recent case has raised a number of issues around the annual accountants report and whether auditors are carrying out their roles effectively; the case involved a law firm that had held nearly £600,000 in hundreds of residual client balances dating back almost 29 years, with the firm being fined £5,899. Although the issues were eventually identified and reported by an accountant in 2022, why weren’t they identified in the decades before this, especially when the Accounts Rules were more stringent around the lodging of qualified reports.

It will be interesting to see how the firm deals with the balances bearing in mind many of the files will have been destroyed after the normal archive retention period (6/12 years), but then again, if the residual balances were in such a mess perhaps the archive system and data protection procedures are too!

It will also be interesting to see how many complaints the firm will get when it returns the balances and clients complain about why it has taken so long to return them, especially when some of them could have been earning significant amounts of interest or been used for paying bills, mortgages, etc.!

 

Watch the March Compliance Update on demand >

Monthly Compliance Update – February 2024

As anticipated, 2024 is ramping up to be a busy year in terms of regulation and compliance, with the Legal Services Board (LSB) beginning work of identifying gaps in regulation that have allowed unethical and unprofessional conduct to come to the fore; the ongoing fallout from the Post Office scandal is likely to have been a key driver for this.

AML and Sanctions Update

Companies House is starting to implement the major changes introduced by the Economic Crime and Corporate Transparency Act; these will hopefully reduce the way in which it is used by criminals to carry out their activities.

The changes include:

• Greater powers to query information and request supporting evidence
  
  
• Stronger checks on company names
  
  
• New rules for registered office addresses
  
  
• A requirement for all companies to supply a registered email address
  
  
• A requirement for all companies to confirm they’re forming the company for a lawful purpose when they incorporate, and to confirm its intended future activities will be lawful on their confirmation statement
  
  
• The ability to annotate the register when information appears confusing or misleading
  
  
• Taking steps to clean up the register, using data matching to identify and remove inaccurate information
  
  
• Sharing data with other government departments and law enforcement agencies
  
  

HM Treasury has issued a new Advisory Notice on Money Laundering and Terrorist Financing Controls in High-Risk Third Countries; the advice replaces all previous advisory notices issued by HM Treasury on this topic.

A large law firm was recently fined £500,000 after admitting failing to carry out appropriate due diligence on a corporate client for more than four years; the client partner was also fined £11,900.

In another case a firm was fined £23,216 for failing to carry out source of funds checks in a number of property transactions.

It is clear that the Solicitors Regulation Authority (SRA) is using its full fining powers to punish firms, even when the breaches are ‘technical’ and there has been no evidence of harm to clients.

The SRA has written to more than 1,000 law firms that admitted to not having basic controls in place to mitigate sanctions risk; it is providing guidance at this stage but is likely to take enforcement action against firms that fail to act on this.

Axiom Ince Update

The LSB has firmly rejected a call from five local law societies to make its review of the Axiom Ince scandal independent; it is engaging a firm in Northern Ireland to assist with the review. The review is also to look at the SRA’s approach to supervising consolidator firms.

To date, claims worth £33million have been lodged with the Compensation Fund, with claims around a further £33million of missing funds to be confirmed.

Fixed penalty fines

A further eight firms have been issued with fixed fines of £750 for breaching the transparency rules; the SRA’s CEO said, “‘We are here to promote the public interest and it’s essential firms comply with our transparency rules; they help people compare law firms’ services and make informed choices. Those firms that are publishing the correct information rightly expect that we will take action against those who don’t.”

Post Office scandal

The SRA and Bar Standards Board (BSB) have said that they could take action against solicitors over misconduct in the scandal before the public inquiry ends, but have yet to see evidence that requires it.

Those watching the public inquiry will wonder how the regulators can say they have seen no evidence of serious misconduct to justify urgent action, especially when looking at the evidence given by Jarnail Singh (in-house Post Office lawyer), Mandy Talbot (in-house Post Office lawyer),  Stephen Dilley (external Post Office lawyer), and Warwick Tatford (counsel for the Post Office); expert evidence given by Duncan Atkinson KC heard there had been serious misconduct in the way prosecutions had been pursued, with a lack of proper disclosure, failures to follow prosecution rules, and experts witnesses not being properly instructed.

There was another disclosure hearing recently, where the Post Office’s new solicitors, Burges Salmon, gave evidence about further non-disclosure which had led to further delays in hearing from key witnesses; issues raised included:

• Post office didn’t have a full data asset register, so was unaware of data locations; it only started to look at data locations in June 2023, with no explanation as to why.
  
  
• Here were issues with search terms used by solicitors in the disclosure project.
  
  
• The electronic discovery reference model was not used with Microsoft Exchange at the outset.
  
  
• As a consequence of the above issues, both external solicitors and the Post Office’s General Counsel had given incorrect disclosure evidence to the High Court/Appeal Court/Inquiry.

 

You can watch the February Compliance Update Webinar on demand here.

Monthly Compliance Update – January 2024

Welcome to 2024, we hope you had a restful and enjoyable festive period.

Our first update of the New Year, covered a number of key topics, including an update to the Money Laundering Regulations that will take effect on 10 January 2024.

The amendment is slightly confusing as it only mentions ‘financial services’, but having checked with the Solicitors Regulation Authority (SRA) it has confirmed that it also applies to those in the legal sector who are regulated for anti-money laundering (AML) purposes; the Legal Sector Affinity Group guidance will be updated in due course to reflect this.

You should ensure you read all of the amendment, and where appropriate, update your firm-wide risk assessment, policies, controls and procedures, and provide staff training; in essence the amendment says:

“For the purpose of the relevant person’s assessment, where a customer or potential customer is a domestic Politically Exposed Person (PEP), or a family member or a known close associate of a domestic PEP:

• The starting point for the assessment is that the customer or potential customer presents a lower level of risk than a non-domestic PEP; and
  
  
• If no enhanced risk factors are present, the extent of enhanced customer due diligence measures to be applied in relation to that customer or potential customer is less that the extent to be applied in the case of a non-domestic PEP.”

Please note that ‘a lower level of risk’ is not the same as saying ‘a low level of risk’.

Sticking with AML, another two firms have been issued with fines for non-compliance, the first was fined £7,900 and the second was fined £3,120; the following are the breaches found:

Firm 1

• The firm lacked a compliant risk assessment for more than five years. The risk assessment provided to the SRA was found not to cover each of the five key areas required. Over the same period, the firm also failed to have in place compliant policies, controls and procedures to mitigate and manage the risks of money laundering and terrorist financing.

Firm 2

• The firm admitted to the SRA that it had been using a general risk assessment as its firm-wide AML assessment. This did not meet the requirements of the regulations as it was not tailored to the firm and did not address key risk factors. The firm’s policies and procedures were also not compliant and found in some parts to lack sufficient detail.

Axiom Ince Scandal

The Legal Services Board (LSB) has launched an independent review of the SRA’s role in the scandal to see whether it should have been aware of it sooner; the LSB has said,  “This was a significant case with considerable consumer detriment. In the board’s view, it will be important for public and professional confidence that any learning can be identified with independence, and that any conclusions that may be drawn are based on an objective assessment of the facts.”

It will be interesting to see what is made of the comments made by the SRA in May 2023, when it said, “We are mindful of the red flags that there may be in a firm that may be growing quickly or acquiring a number of different firms over a short period of time and what the regulatory impact and risks could be; we’ve seen sometimes firms being taken over and consolidated, and sometimes that can be by ‘baddies’”.

In light of the additional funds that may have to be paid by solicitors to cover missing funds, I suspect many will be asking why, if the SRA was aware of such risks, it didn’t carry out enhanced due diligence BEFORE Axiom was allowed to acquire the other firms involved; 2024 will be a very interesting year for the SRA!

Diversity fine

The SRA has issued the first fixed penalty fine to a firm for failing to submit its workforce diversity data within the deadline; the firm was fined £750 for failing to comply with the Code of Conduct for Firms (1.5), which requires them to “monitor, report and publish workforce diversity data, as prescribed”.

Legal Ombudsman change of address

With effect from 22 January 2024, the LeO’s address will be:

• Legal Ombudsman, PO Box 6167, Slough, SL1 0EH

Firms need to update the relevant documents to reflect the change, for example, complaints policy, client care letters, Terms and Conditions, etc. Firms that subscribe to our policy library will see the update reflected in the relevant documents from 22 January 2024.

You can watch the January 2024 Compliance Update webinar on demand here.