SRA Risk Outlook – Spring Update
This month saw the publication of the SRA’s Spring Update to their Risk Outlook which, continues many of the issues raised in the Autumn update.
As in the previous update, there is a clear message that there continues to be a misuse of money and assets, the profession continues to be at risk from cybercrime and bogus firms, money laundering is still a major problem and that diversity issues continue to challenge the SRA.
Misuse of money or assets
The Spring Outlook reveals that, as in Autumn, poor financial controls within firms are continuing to provide opportunities for financial misconduct to occur.
This is not a good time for issues such as this to be coming to the fore. Sir Michael Pitt, chairman of the LSB, told a conference last week that legal regulators are currently looking at ways to prevent solicitors from handling client money, notwithstanding the fact, as the Law Society has pointed out, that the actual number of problem cases is low and that the current system does, in most cases, protect consumers adequately.
The SRA state in their update that they have seen recent cases where “poor systems and controls have been a factor in the misuse of money or assets” and they site failures of training and supervision, as well as failure to control access to accounts and poor accounting systems as being at the root of the problem.
The LSB chairman revealed told the conference that in 2013 there had been more than 140 instances per month of solicitors misusing client money or assets whilst claims on the compensation fund had exceeded £29m. However, the Law Society has pointed out that as a proportion of the overall number of transactions, these figures are actually quite low and that there is a danger that the public as a whole could lose out if the system is changed to address this. Amongst the alternatives to the client account system that are being considered are the French system and the Bar Council’s Barco scheme for an escrow-type service.
The SRA have indicated that they will deal with the issue in more greater depth in July when they publish the 2015 Risk Outlook 2015.
No risk outlook would be complete without a warning about money laundering which remains a major problem for the profession and the SRA.
The SRA have reiterated their warning about the dangers of client account being used as a banking facility and the update refers to the warning notices and case studies that they have produced – including about the problems of firms holding money in escrow where there is no underlying retainer. The warning notice can be found on the SRA web site at www.sra.org.uk/bankingfacility/ This reminds firms, inter alia, that 14.5 of the Solicitors Accounts Rules 2011 provides that:
“You must not provide banking facilities through a client account. Payments into, and transfers or withdrawals from, a client account must be in respect of instructions relating to an underlying transaction (and the funds arising therefrom) or to a service forming part of your normal regulated activities.”
And that that it is not a proper part of a solicitor’s everyday business or practice to operate a banking facility for third parties, whether they are clients of the firm or not.
The problem of bogus firms continues to grow with reports in 2014 being the highest ever with the SRA receiving over 700 reports of bogus firms. The update points out that this is not a problem unique to solicitors. There is national trends in the increase in fraud across the economy.
We carried an article in December 2014 (Avoiding Cyber Scams – www.lawyersdefencegroup.org.uk/avoiding-cyber-scams/) about the growing problems with cyber risks and we pointed out that solicitors are increasingly being used by criminals to perpetuate a fraud, and that even where this took place unwittingly, firms could still be held to be failing to manage risk adequately within the firm. It is vital, therefore, that firms not only have in place a plan for how to deal with such events if and when they arise but that they also take steps to help to make sure that they do not become subject to such actions. Firms have a duty to be proactive in ensuring that this does not happen rather than simply responding to problems when they arise.
Breach of Confidentiality
A related problem also highlighted by the risk update is that of the often inadvertent breach of confidentiality that occurs when firms have information security and cybercrime issues.
Reports have revealed that 69 percent of all UK companies have been hit by cybercrime in 2014 and that it continues to represent a significant threat to the information and money held by law firms. There have been a number of incidents of firms losing substantial amounts of money as a result of online fraudsters targeting client accounts and the hacking of client data can, in many cases be an equally, if not more, costly threat to firms.
In their report “Spiders in the web: The risks of online crime to legal business“ published in March 2014, the SRA stated that “Protecting client confidential information is one of the most essential requirements of any legal business” and they highlighted in particular that those firms acting for corporate clients, “especially those dealing with patent information or in hightech industries, are at increased risk of being targeted in this manner. Commercial espionage is an increased concern, including overseas state-sponsored efforts to obtain business and technological secrets. Some law firms acting in these cases may be viewed by some as a ‘weak link’ to accessing this information.”
An article in Legal Week in 2013 revealed that 12 percent of partners and IT directors in legal firms believed they have been subject to an online attack whilst 80 percent believed they would be at some point in the future. Despite this, only a third thought that their systems could withstand such an attack.
Balancing duties in litigation, and lack of independence
Away from the issues of cybercrime, the report has also highlighted the problem the abuse of legal proceedings for the benefit of the firm or of a client.
The SRA report “Walking the Line – the balancing of duties in litigation” looks at the differing duties owed in litigation, and at the ways in which misconduct can arise. The 2014 Risk Outlook highlighted the issue of firms failing to act with integrity or ethics or engaging in improper or abusive litigation as one of its priority risks.
The report acknowledges that whilst it is expected that solicitors will do their utmost to advance their clients’ cases, they must also remember that they owe duties to the courts, third parties and to the public interest and must not turn into “hired guns” whose only duty is to their client.
The report reminds firms that they have a range of duties which must be balanced and that whilst they do have duties to act in the best interests of each client, they must also not to allow independence to be compromised and they must uphold the rule of law and the proper administration of justice.
Poor standard of service to consumers
Finally, the report highlights that consumer experiences of legal services still remain a priority for the SRA and that whether the market is meeting consumer need, remains an important issue.
The SRA has reaffirmed its commitment to ensuring services provided by solicitors are founded on a strong and effective system of education and training.
To a degree this should not need to be something that firms need to be persuaded of by the SRA. It makes good business sense for firms to keep clients happy – since a happy client is one that is more likely to pay without a problem and more likely to re-instruct the firm in the future. However, those who manage the firm should not assume that just because they believe this that it will happen. Firms must look at all of those who are involved in the service delivery process – from receptionists through to senior partners – and ensure that they have bought in to the client-service ethos.
The SRA Risk Outlook Spring 2015 update can be found at www.sra.org.uk/risk/outlook/risk-outlook-spring-2015-update.page