In this series of news alerts, our regulatory and professional discipline partner, Andrew Pavlovic, identifies 3 key regulatory trends which firms and solicitors need to be aware of in 2023. In this third and final alert, Andrew considers the SRA’s changing approach to financial penalties.
In 2023 we can expect to see a significant increase in SRA sanctions for individuals/firms found to have committed regulatory misconduct, be that in relation to cases of economic crime or sexual misconduct. Furthermore the SRA’s internal fining powers have increased, meaning it can now fine traditional law firms and those working in those firms up to £25,000 without having to refer the matter to the Solicitors Disciplinary Tribunal (“SDT”). With greater power comes greater responsibility, resulting in an increasing focus on the robustness of the SRA’s decision making processes and the transparency of its decisions.
Increase in the SRA’s Internal Fining Powers
In July 2022 the SRA’s fining powers increased, enabling them to fine “traditional” law firms (recognised bodies) and individuals who work in those firms up to £25,000 without having to refer the matter to the SDT.
The purpose of the increase is to allow the SRA to deal with “lower” levels of misconduct internally, avoiding the additional stress, time and cost associated with SDT proceedings. Such proceedings were previously required for cases involving a fine of over £2,000, even where the SRA and the respondent had agreed the outcome.
However concerns have been expressed about the transparency and level of detail contained in SRA decisions, as well as the concern about the SRA’s dual role as both prosecutor and adjudicator. Whilst a dissatisfied respondent does have the right to appeal an SRA adjudication decision to the SDT, for commercial and reputational reasons doing so may not be an attractive proposition.
The SRA has now made use of its increased fining powers on a number of occasions. The first occasion was an adjudicator’s decision to fine a solicitor £15,000 for failing to properly manage the affairs of three clients who were the subject of Court of Protection deputyship orders, with the published decision containing a concerning lack of detail about the underlying facts of the case and the basis for the financial penalty (commented on at the time here).
In a more recent adjudicator’s decision, a solicitor was fined £6,000 for her conduct of a probate matter, as well as her handling of a complaint raised by the beneficiaries of the estate. Whilst further detail was contained in this decision, including an assessment of the seriousness of the conduct and an explanation as to why the level of the fine was considered appropriate, the summary of the misconduct itself is contained in three short paragraphs which make it difficult to establish the gravity of the offence.
In addition to adjudicator’s decisions, the SRA has entered into regulatory settlements above the previous level of £2,000, including a regulatory settlement agreement in which a firm was fined £20,000 for a series of AML failings, including a failure to have in place a proper firm wide AML risk assessment and a failure to carry out source of funds checks, despite the firm conducting a substantial amount of conveyancing work.
The SDT and the SRA have recently published a joint statement in which they set out the type of cases that they would expect to be dealt with by either (1) the SRA, using its increased fining powers or (2) a referral to the SDT. Examples of cases that the SRA has indicated will fall within its new jurisdiction include SRA Accounts Rule or other conduct breaches which are caused by poor/inadequate practice, where there is no deliberate intent or wilful disregard for the rules. Examples of cases where referrals to the SDT will still commonly be made include allegations of dishonesty, sexual misconduct, and failures by law firms to address toxic working environments (among others). Whilst some have questioned whether it is appropriate for the SDT/SRA to be issuing a “joint” statement, given their respective roles, the statement provides a useful indication to practitioners and the profession as to type of cases which will continue to be referred to the SDT.
Means Tested Fines for Firms and Individuals
The SRA has introduced new fining bands, due to come in later this year, in which all firms will now be fined by reference to their turnover, up to a maximum of 5%. The previous maximum was 2.5%, with turnover based fines only applied to firms with a turnover over £2 million. The SRA have argued that this increase brings it closer to other regulators such as the Financial Conduct Authority and the Financial Reporting Council, who regularly levy much larger fines to financial and accountancy firms where misconduct has been established.
Perhaps more controversially, the SRA will also be taking into account an individual’s means when exercising its fining powers, meaning that a partner with an annual income of £500,000 could be fined as much as £805,000 for the most serious misconduct. This change has been justified on the basis that previous fines issued by either the SRA or the SDT on individuals for serious misconduct have tended to be in the region of £25,000 – £50,000, which does not sufficiently deter those on a higher income, and fails to distinguish between those at high street or city firms.
These rule changes will primarily apply to the SRA’s ability to fine licensed bodies and those working in those bodies, where their fining powers are already significant, but presumably will also reflect the fines that they will seek the SDT to apply.
Unlimited Fines for Cases of Economic Crime
The Economic Crime and Corporate Transparency Bill, currently working its way through parliament, is set to give the SRA the power to issue unlimited fines to firms and individuals where there has been (1) a failure to prevent or detect economic crime; or (2) an act or omission which has the effect of inhibiting the prevention or detection of economic crime. The definition of “economic crime” is wide, and will increase the already significant focus which most firms put on client due diligence and AML/source of funds checks.
If, as expected, the bill becomes law, it is anticipated that the SRA will publish guidance setting out the levels of fines it would expect to impose for certain offences. The SDT/SRA’s joint statement, referred to above, expressly provides that it will be revised if the Bill is enacted to set out the type of cases which are expected to fall within their respective jurisdictions.
Finally, the SRA’s recently updated enforcement strategy states the SRA’s position that individuals found to have committed sexual misconduct (or other forms of discrimination/harassment) should ordinarily be either suspended from practice or struck off the roll, with fines being an unsuitable penalty for such cases unless there are exceptional circumstances. The enforcement strategy states that exceptional circumstances are likely to be rare in nature, and would include cases involving one off incidents or remarks which were poorly judged but not ill motivated. Exceptional circumstances will not be found in cases involving an abuse of power or seniority.
This stance reflects the SRA’s view that an individual who commits such misconduct presents a risk to clients/colleagues, and that strong action is necessary to deter such conduct and maintain public confidence in the profession.
Ultimately however it is for the SDT to determine the appropriate sanction. In a recent case, in which the Tribunal’s written findings are awaited, the SDT fined a partner £30,000 for inappropriate and unwanted verbal and physical conduct towards a female solicitor who he had met at a networking function (and who was previously unknown to him). It is reported that the Tribunal found the conduct to be sexually motivated and “significantly serious”, but not serious enough to justify a suspension or strike off. This outcome suggests that, going forwards, the Tribunal may not necessarily agree that a suspension should be the minimum sanction in every case.
It remains to be seen whether giving the SRA enhanced powers will improve the timeliness and efficiency of regulatory decisions, and whether the profession is willing to accept the potential trade off between quicker/cheaper outcomes and a lack of transparency and detail about decisions.
Similarly, time will tell whether enhanced sanctions serve as an effective deterrent and improve behaviours. In many cases, it is the reputational impact of being the subject of regulatory action which is the primary concern of firms and individuals, with some regulatory outcomes having career ending consequences for individuals, regardless of the actual penalty imposed by the SDT.
If you have any questions in relation to SRA sanctions, please contact Andrew Pavlovic, who specialises in professional discipline and regulatory law.