SRA consumer protection review discussion paper – Law Society response

The aim of the review was to seek ideas on how the SRA can better manage or mitigate risks to:

• make sure consumers are appropriately protected when using regulated law firms
• maintain public confidence and trust in legal services, and
• find the right balance to support a competitive legal market that enables consumer choice while keeping costs down

The discussion

The review covered two main areas:

1. policy and operational approaches to identifying and managing risks
2. the Compensation Fund arrangements in light of identified risks

The SRA sought ideas on various issues, including:

• enhancing its risk identification process
• its approval process for firms
• how it monitors and supervises firms
• possible restrictions around holding client money and controls around client money
• its approach to firms' structures and ownership models

Our view

We are concerned the SRA's review appears rushed and has come as a reaction to the intervention of the firm Axiom Ince, the biggest intervention ever in England and Wales.

It is unsatisfactory that responses are required before the findings and any recommendations of the Legal Services Board (LSB) commissioned independent review into the SRA's regulatory actions in the lead-up to the collapse of Axiom Ince and the SSB Group.

The SRA has also not provided data and information about its current processes. This limits our ability to provide focused and useful feedback.

Without sight of the outcome of the LSB's review, we also cannot comment on any factual information or recommendations that may emerge.

Despite these limitations, we have used our best efforts to provide constructive suggestions on the issues raised in the discussion paper.

We are of the view that the SRA can make improvements to its current processes, such as its:

• horizon scanning
• intelligence sharing protocols with third parties
• approval process of firms
• monitoring and supervision

Our full response provides suggestions about how these may be achieved.

Risk identification

SRA staff may benefit from external help from a panel of practitioners, auditors and other experts to provide support.

We also have serious concerns about the urgency with which the SRA deals with investigations.

We need more information from the SRA about accumulator firms and interventions before being able to provide greater constructive feedback.

Client accounts

Client accounts are a fundamental tool for the efficient and effective delivery of many types of legal services and the Compensation Fund is a key consumer protection.

Both these elements differentiate solicitors as regulated professionals from unregulated service providers.

Most firms comply with all the rules. Unfortunately, there are an exceptional few who abuse their position and careful consideration should be given to applying appropriate and proportionate safeguards that might reduce risks to consumers.

While the possible alternatives to client accounts such as third-party managed account or escrow provider accounts may look appealing, there are limited benefits.

Our full response goes into a detailed discussion about this.

We suggest that more viable and realistic approaches to mitigate risks could be made by:

• changing SRA procedures to improve monitoring of firms
• introducing better verification processes within firms (as safeguards)
• reintroducing the previous system of reporting accountants
• firms submitting accounts to the regulator on a regular basis

We are concerned the SRA has not viewed the accounts of several firms for a number of years as firms, in certain circumstances, do not have to file accounts.

This could lead to unchecked bad practices, increasing consumer risk.

We suggest the SRA should require all accountants' reports to be submitted, not just those that are qualified.

Firm structure and ownership models

The review also sought to explore the regulatory approach to law firms' structures and ownership models.

By and large, the current firm and ownership models appear to be working well, although we have some concerns around the legal consultancy and accumulator firm models.

Compensation Fund

The Compensation Fund was established by statute to protect consumers of legal services from uninsurable risks.

It is a key protection differentiating solicitors from the unregulated sector.

The suggestions put forward for consideration included:

• further limiting who can make claims on the fund – this is unnecessary, as grants are discretionary and any changes could lead to unjust outcomes that undermine public confidence in the profession
• recalibrating the capping provision – this may be sensible (depending on the proposals). We did not oppose the introduction of a £5 million cap for linked claims, but questioned the lack of evidence for setting it at that level. The SRA has since acknowledged that if the £5 million cap were imposed in relation to Axiom Ince, it would undermine public confidence in the profession
• reducing the maximum payout for a single claim – this is unnecessary, as grants are discretionary and any changes could lead to unjust outcomes that undermine public confidence in the profession
• risk-based contributions for firms – this would be practically unworkable. We also believe it could adversely affect smaller firms, forcing them out of certain areas of work, creating concerns about access to justice
• tightening rules around payments from the fund – we caution this could have perverse outcomes, such as increasing overall costs by requiring claimants to pursue unrecoverable claims in court, then to seek to recover those costs from the Compensation Fund
• phasing out the Compensation Fund – we warn this could lead to unjust outcomes and undermine public confidence in the profession

We will engage with any issues relating to the Compensation Fund that are included in future SRA consultations.

Next steps

The discussion closed on 1 July 2024.

Read the discussion paper on the SRA website

The SRA plans to publish a formal consultation in autumn 2024.