SRA Discussion Paper On Consumer Protections 28 June 2024

Leeds Law Society Response to SRA Discussion Paper On Consumer Protections
28 June 2024

About Leeds Law Society
Leeds Law Society is an independent body for solicitors in Leeds and Leeds districts. We are run
by our members, and our role is to be the voice of local solicitor members and associate
Background to the SRA’s Review and this Response
In February 2024, in response to what it said were ‘shifting risks in the sector’, the Solicitors
Regulation Authority (SRA) published a discussion paper, entitled Protecting the public: our
consumer protection review (the Review).
The stated aim of the Review is to seek ideas on how the SRA can better manage or mitigate risks
to consumers, particularly to: (i) ensure that consumers are appropriately protected when using
regulated law firms; (ii) maintain public confidence and trust in legal services; and (iii) find the right
balance to support a competitive legal market that enables consumer choice while keeping costs
The Review covers two main areas: (i) policy and operational approaches to identifying and
managing risks; and (ii) the Compensation Fund arrangements in light of identified risks.
The Solicitor’s Compensation Fund is a discretionary fund operated by the SRA. All solicitors
contribute to the fund through a levy added to the practising certificate fee. The Compensation
Fund has come to recent attention following the failure of law firm Axiom Ince, with suspected
misuse of money in client account leading to a shortfall estimated to exceed £60m, leading to
significant calls on the Compensation Fund.
The SRA is seeking input and insight from stakeholders to improve its approach to consumer
protection in terms of its policy and procedures; and to ensure the approach is fit for the changing
legal landscape.
Our Response
We note at the outset that the SRA has provided relatively limited information about some of the
SRA’s current policy and operational approaches. We have therefore sought to keep this
1 We are a representative body, and the views expressed within this Response are not necessarily the views
of the individual members or directors of Leeds Law Society.

Response to some high-level comments and suggestions at this early stage, appreciating that the
Review is an ongoing process.
We therefore seek to outline:-

  • What are the concerns of Leeds Law Society arising from the SRA’s consumer protection
  • What are our suggested reforms / areas for further consideration?
    At the outset, we note that there is some potential ambiguity as to the scope of the Review, in
    particular, what the SRA means by ‘consumers’.
    For the avoidance of doubt, we consider that the Review should address protections for ‘those
    who consume legal services’, rather than a narrower group being individuals ‘acting for purposes
    that are wholly or mainly outside that individual’s trade, business, craft or profession.’ (i.e. the
    definition used in the Consumer Rights Act 2015).
    A focus on the latter group alone risks skewing the SRA’s focus when identifying risks, and where
    any increase in regulation might be most effective.
  1. Risk identification and mitigation
    As noted above, there is currently only limited information available about the SRA’s risk
    assessment procedures.
    Nevertheless, we suggest that the SRA investigates the following areas further:-
  • Greater collaboration with other entities likely to hold information which would assist in
    identifying risks / steps which could be taken in mitigation, i.e. accountancy regulators,
    law enforcement, and financial institutions.
  • Introducing protocols with banks where client money is held aimed at safeguarding client
  • Further guidance to firms on risk management and self-regulation, and consider as a
    safety net the annual reporting via the CoLP and CoFA roles.
  1. Authorisation and approval of entities
    We are concerned that the current process for authorisation and approval of entities does not
    provide adequate regulatory control so as to prevent firm collapse, or worse, fraud. The SRA has
    very recently issued a new warning notice on mergers, acquisitions and sales of law firms 2
    however the onus of that warning notice is very much on self-regulation.
    Whilst we are concerned to ensure that M&A activity amongst regulated firms is not unreasonably
    inhibited, we consider that this is an area in which greater oversight from the regulator would act
    as an appropriate check on regulated entities coming into being without having adequate systems
    and controls in place.
    2 17 June 2024:-
    Such entities pose systemic risk, not merely through the Compensation Fund but also through
    increased calls on professional indemnity insurance, and (when such entities fail) damage to
    public confidence in the profession. To the extent that firms are exposed to increased costs, these
    are likely ultimately passed on to consumers.
    The SRA will be aware of the move towards ‘Twin Peaks’ regulation in the financial sector
    in/around 2013, which saw the Financial Services Authority (FSA) disbanded and replaced with
    the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA). The focus of the
    PRA is broadly to ensure financial stability, with the FCA focusing on conduct of business.
    We do not suggest that the SRA should necessarily be split in the same way that the FSA was, but
    we would advocate a greater focus on identifying and minimising large-scale risk. We would
    encourage the SRA in its review to consider what can be learnt from the reform to the financial
    sector and how this could be implemented in the legal sector.
    With that in mind, we would suggest:-
  • Reviewing procedures for authorising and approving entities, including more robust due
    diligence into financial viability before acquisitions or mergers.
  • Requesting business plans, risk assessments, and draft policies during authorisations to
    identify red flags early.
  • Scrutinising reverse takeovers of larger firms by smaller ones.
  • Using an external practitioner panel or acquiring/accessing SRA in-house skills to properly
    assess financial viability during authorisations, a review of fee levies for authorisation and
    approval of entities would meet administrative costs of the same.
  • Making detailed inquiries when an acquiring firm lacks experience in the acquired firm’s
    work type areas.
  1. Monitoring and Supervision
    Linked to the above, we are concerned that the SRA is not monitoring firms closely enough, relying
    too heavily on self-regulation which works well for day-to-day conduct but which can prove
    inadequate for larger risks, where rogue actors can have an outsize impact.
    We suggest:-
  • Reintroducing a supportive compliance advice team to increase oversight where high risk
    is identified.
  • Improving the speed of SRA investigations into high-risk firms/individuals to prevent
    situations like Axiom Ince.
  1. Compensation Fund
    We consider the Solicitor’s Compensation Fund to be an important feature of the solicitor’s
    profession, even if not widely known about by those engaging solicitors. Clients can (generally)
    take it as read that a solicitor’s client account is a very safe place for money to be located, and
    client accounts are vital for a large amount of work undertaken by solicitors. Without access to
    client accounts (or some equivalent), this would lead to significant slow-downs in the manner in
    which work could be undertaken. The levy is currently raised both on a per-firm and a per-solicitor
    basis, at a flat rate. This has a disproportionate effect on smaller firms.
    Accordingly, we oppose:-
  • Further artificially limiting or capping who can claim on the Compensation Fund, as grants
    are already discretionary.
  • Reducing the £2m maximum payout, as this could lead to unanticipated injustices and so
    undermine consumer protection and public confidence.
  • Risk-based firm contributions, as this is likely to be complicated to implement without
    generating significant additional net contribution towards the Compensation Fund, and
    could disadvantage smaller firms, creating access to justice issues.
    We suggest:
  • Recalibrating caps on connected claims may be needed, using a flexible approach.
  • A review of the manner in which contributions are made may be worthwhile:-
  • Costs levied per-firm could be calculated in accordance with data already
    available to the SRA, such as number of partners per firm, maintaining
    proportionality of payment versus affordability.
  • We would query the basis for raising a levy against firms at all. An alternative would
    be to raise the entirety of the contributions to the Compensation Fund on a persolicitor basis. This would keep contributions proportionate to firm size and
    reflects that the majority of firms meet the annual practising certificate and fund
    contribution costs3
  1. Approach to solicitors working in-house
    In addition to the above, we consider the SRA should be clearer about its approach to the
    assessment of risk in relation to in-house solicitors, particularly as these are spread between
    commercial, third-sector, and public sector entities. A number of these already have their own
    regulatory environment, for example the statutory role of a ‘Monitoring Officer’ (frequently a
    lawyer) within local government.
    This is relevant both to the SRA’s approach to identifying risks (adopting the definition we note
    above, these in-house solicitors’ clients are of course still ‘consumers’ in the broad sense). This
    is also relevant to how the SRA approaches the levy. For solicitors working in the public sector, it
    is likely that their contributions to the levy will effectively be paid for by their employers and so
    ultimately from the public purse.
    In-house solicitors contributing to the Solicitor’s Compensation Fund is consistent with them still
    being part of a single profession. Nevertheless, the nature of that contribution and its calculation
    would benefit from being explored further as part of the SRA’s review.
    Leeds Law Society, 28 June 2024
    3 To the extent that this gave rise to a concern that the costs would fall on individual solicitors, the
    contribution could instead be calculated on a solicitors-per-firm basis and raised from firms