The Solicitors Regulation Authority’s (SRA) consultation on financial penalties that could have profound implications for law firms across the UK closed on 20 September 2024. This signals a critical milestone for law firms, who should now turn their attention to how best to proactively prepare.
It is important to recognise that these changes are not speculative. The SRA are serious about enforcing these new measures, and the question is not whether they will happen, but how steep the penalties will be.
This consultation has signalled a significant shift in the regulatory landscape, and law firms must act now to prepare. With mounting pressure on the SRA to demonstrate robust enforcement, firms that fail to recognise the gravity of these proposals could find themselves facing substantial financial, reputational and operational consequences.
What are the proposed changes to the SRA’s financial penalty regime?
The proposed changes, which tie fines to firm turnover, could see law firms facing penalties well beyond what many currently expect. Under the new framework, even relatively minor breaches could result in fines amounting to a significant percentage of the firm’s gross income. For large firms, these fines could be astronomical, but it’s the mid-sized and smaller firms that stand to be hit hardest, with penalties potentially destabilising their operations.
Many firms are not yet fully aware of how committed the SRA are to enforcing these changes. Historically, the SRA have lacked the resources, but this has changed. The SRA have increased capacity in their relationship managers and quality assurance managers which has significantly increased the regulator’s ability to conduct visits and investigations The regulator is building the capacity to audit law firms more frequently and with greater scrutiny. Firms that may have previously avoided regulatory visits can no longer assume they will remain under the radar. The SRA confirmed on 26 September 2024 at the Annual Law Society Conference in AML and Financial Crimes that the number of firms who will be audited in the next round will more than double in size from 200 firms to 500 firms. The next round of audits is imminent and will start in January 2025.
The SRA’s data gathering exercise (where all law firms are mandated to answer a series of questions about their practices) is becoming more frequent and asks more in-depth questions not just on AML but also on other risks such as Sanctions. This data gathering exercise enhances the SRA’s leverage of tech enabled systems to increase visibility and ensure they can assess the risks posed by firms they supervise. The increased capacity coupled with increased visibility is dramatically changing the regulatory landscape.
Preparing for a new era of enforcement
Law firms must take action to prepare for the new regulatory environment. The SRA have been clear: the purpose of these penalties is deterrence. With increased scrutiny on areas such as anti-money laundering (AML) compliance, firms should begin by conducting robust and meaningful risk assessments and put in place policies, controls and procedures to manage the risks identified. The SRA’s proposal to extrapolate breaches across a firm’s operations based on a sample of files means that even minor infractions could have far-reaching consequences.
Firms should also be aware that while there may be opportunities to negotiate penalties, the starting point will likely remain high.
Why the change? Why now?
The SRA’s approach to penalties represents a dramatic departure from their previous methods of regulation. Historically, the SRA have been seen as relatively lenient in their enforcement efforts, partly due to resource constraints. However, the new proposals indicate that the SRA are now prepared to take a far more rigorous approach because they are also under pressure from the impact of new legislation (e.g. Economic Crime and Corporate Transparency Act/ECCTA 2023) and the imminent FATF (Financial Action Task Force) evaluation which is due in 2026 The SRA’s focus will be on delivering results, and there will be considerable pressure to demonstrate that the enhanced penalty regime is effective. This means that law firms should expect more frequent and detailed audits.
The introduction of clearer penalty bands may bring some predictability, but it will also significantly raise the stakes for non-compliance. Law firms that do not take these developments seriously risk facing not only financial penalties but the reputational damage that goes with it.
The risk to firms
While the SRA’s objective is clear—enhancing deterrence through stricter penalties—there are concerns about the broader impact on the legal profession. For smaller firms, the introduction of turnover-based penalties could be particularly damaging. There is a real risk that some firms, unable to absorb the cost of fines, may be forced to close or merge with larger firms. This could lead to unintended market consolidation, where only the largest firms are able to manage the regulatory penalties.
Next steps: what firms should do now
Here are the key steps firms should take:
- Carry out a meaningful and robust risk assessment and identify critical compliance gaps.
- Deploy tailored policies, controls and procedures to address the gaps identified
- Provide training to all relevant staff. This is particularly critical as the SRA’s next thematic review is on training and they recognise that there is a positive correlation between training and increase in compliance.
- Stay informed about the consultation outcomes and prepare to implement necessary changes as soon as the new guidelines are confirmed.
The SRA’s financial penalties consultation represents a significant change in how law firms will be regulated.
With significant fines on the horizon, firms must take action now to ensure they are prepared. Those that fail to recognise the importance of this consultation risk facing not only financial penalties but also reputational and operational challenges. The SRA are serious about enforcing these changes, and law firms need to be equally serious in their response.
If your firm has concerns about these proposed changes or would like advice on how to best respond, our team is available to support.
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