The fallout from the Axiom Ince scandal may continue to descend, but the Solicitors Regulation Authority is pushing ahead with potential reforms that could fundamentally change for good the way law firms operate.
Next week, the regulator will unveil a three-pronged consultation based around consumer protection, asking fundamental questions about the client account, the need to produce accountants’ reports, and the way the compensation fund is paid for.
Each is directly relevant to the events building up to the SRA’s intervention into Axiom Ince, but the regulator this week insisted that its consumer review is not a result of what happened to that firm. Rather, it is concerned that too many firms are being propped up by residual balances in the client account and interest accumulated on those funds. There is also the temptation – as witnessed in several cases before the SDT in recent years – for client money to be used for office expenses or – in the case of Axiom Ince – financing mergers and acquisitions.
One solution might be to scrap the client account altogether, although the SRA concedes that an alternative third-party provider solution is not yet established. ‘The environment in which client accounts are held is very different now,’ said chair Anna Bradley. ‘We are very mindful of the fact that if we were to make a radical change we would need some more development in terms of third-party providers.’
The requirement to send the SRA all accountants’ reports on law firms was removed nine years ago. Today, only reports that have been qualified by an accountant must be submitted. The regulator stresses that this removed a regulatory burden but admits that the ‘light-touch’ approach may have allowed some malpractice to slip through the net.
Sean Hankin, the SRA’s head of forensic investigation and intelligence, told this week’s compliance conference that the number of reports had fallen from 2,000 in 2016 to 500 last year. A fall could be expected due to the shift to outcomes-focused regulation but Hankin said there are cases where firms have not sent qualified accountants’ reports or delayed sending them for years.
‘This was a really complex fraud actually, which everyone who had been engaged with Axiom had failed to identify, whether directors in the firm or the accountants responsible for auditing the firm’
Anna Bradley, SRA chair
Undoubtedly linked to the Axiom Ince scandal is the future of the compensation fund, which has groaned under the potential weight of tens of millions in resulting claims. Solicitors and firms have had to plug the gap, with annual contributions leaping to £90 and £2,220 respectively.
Few want to go on record, but small firm owners at the conference were seething at having to pay so much more for the alleged misconduct at Axiom Ince and the SRA’s failure to respond properly before so much money disappeared. One sole practitioner told the Gazette she thought she had done something wrong when she filled in her practising certificate renewal, and there is general astonishment that firms of all sizes – from the high street to the Square Mile – pay the same contribution. (In practice, larger firms do pay more given that most will cover their individual solicitors’ fees.) But next week the SRA will ask how – and whether – the compensation fund will be financed in future.
If some of the SRA’s proposals are unpalatable, their bitter taste is not going to be marginally sweetened by any remorse over Axiom Ince. Chief executive Paul Philip dismissed the criticisms made in last week’s Legal Services Board report as opinions rather than evidence-based facts, while Bradley described the shortcomings identified as historical given that the SRA had already made remedies. The SRA continues to state that it disagrees with the headline conclusions of the report, but has rejected repeated invitations to explain in detail what was so objectionable.
Asked at the conference whether the SRA had been asleep at the wheel, Bradley said: ‘This was a really complex fraud actually, which everyone who had been engaged with Axiom had failed to identify, whether directors in the firm or the accountants responsible for auditing the firm. We acknowledge there were some things we didn’t do right in terms of following processes and procedures and in many respects that is history for us. We have already taken the action that is required.’
Asked whether she would say sorry to practitioners, Bradley responded: ‘We have said all we are going to say.’
Both Bradley and Philip said this week they intend to remain in situ and oversee change, as they look ahead to implementing the results of the consumer protection consultation in 2025.
Feedback from the profession – both in person and online – suggests that solicitors are not yet quite as ready to move on as the SRA leadership.
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