SRA Risk Outlook July 2014
The Solicitors Regulation Authority (SRA) has published its second Risk Outlook to show the profession what it believes are the key factors that are affecting or could affect the delivery of competent and ethical legal services. The Authority says the Outlook is playing an ever-increasing role in firms’ planning and strategic thinking.
Current priority risks
Misuse of money or assets
They are seeing a continuation of the trend we reported in the Risk Outlook 2013 of increased numbers of cases of misuse of money or assets. These are a great concern when client money is involved. Some of these cases are caused by poor systems and controls, whilst other cases involve unethical conduct. They have also seen a number of firms where financial difficulty (see below) has been a contributory factor leading to misuse of client money.
Money laundering: inadequate systems and controls over the transfer of money
Law firms can handle large sums of money and can be attractive targets for those wishing to launder the proceeds of crime or otherwise disguise improper transfers of money. Managing this risk has increased in importance over the last year. The SRA has received more reports of suspected money laundering through law firms, and we are investigating some serious cases. They are also concerned about the poor quality of suspicious activity reporting by firms in the legal sector.
The term ‘bogus firm’ is used to describe situations where criminals take on the identity of a law firm in order to steal money or access information. They are are seeing an increasing number of bogus firms, particularly those involving identity thefts of an existing firm or individual. Bogus firms are a risk to consumers losing money or confidential information. It is also in the interests of law firms to safeguard against this risk as it has the potential to lead to reputational damage and other negative impacts.
Lack of a diverse and representative profession
There is limited evidence that improvements are being made to enhance the diversity of the legal services workforce. Making the profession more diverse and representative will lead to benefits in quality and access to justice. The SRA has a clear regulatory rationale to focus on this issue, but it is also in the interest of law firms to ensure they are recruiting and retaining the best talent in their workforce.
Failure to provide a proper standard of service: quality of legal services to vulnerable consumers
There is a range of evidence which suggests the standards of service and quality of legal advice sometimes fall below the level that can reasonably be expected by consumers. This can lead to detrimental impacts on the clients of a law firm, but may also lead to a wider negative effect on the proper administration of justice and rule of law. The impact may be worse when those affected are less able to look after their own interests. There are a wide range of factors and circumstances that could lead to some clients being more vulnerable.
Financial difficulty matters to the SRA because they find it is an underlying cause of many significant risks to the public interest. For instance, financial difficulty can lead to disorderly firm closures. When this occurs the interests of consumers are put at risk. Financial difficulty is often an underlying issue in firms where the SRA encounter misuse of money or assets. They also find it can predicate other key risks, including money laundering and poor standards of service.
Principle 8 requires those the SRA regulate to ‘run your business or carry out your role in the business effectively and in accordance with proper governance and sound financial and risk management principles’.
Over the last year, their engagement with firms has highlighted a range of poor practices associated with firms in financial difficulty including:
- inability to measure or control financial performance
- autocratic senior partners or managers
- a lack of transparency about financial performance at appropriate levels of management
- excessive borrowing and debt
- excessive partner drawings and remuneration in relation to profit and revenue
- inappropriate use of client account
- weak process for collecting on bills for completed work
- inadequate planning and due diligence in connection with diversification of legal practice or acquisitions of other firms.
The factors listed above include issues relating to levels of competence, ineffective systems and controls, and integrity. They have identified these problems in large corporate firms as well as small businesses.
The improvements in the wider economy do not mean financial difficulty will no longer be a problem. There are also risks associated with firms attempting to expand too quickly in an economic recovery. The SRA have seen firms increasingly making lateral hires to expand the services they can offer. There has been mixed success with this approach, with many lateral hires failing to deliver their intended benefits.