Lawyers Covered - April 2023
Welcome to the latest edition of our Lawyers Liability & Regulatory Update, in which we look back over the last month at key developments affecting lawyers and the professional risks they face.
1. Friday Afternoon Fraud
Law firms are pressurised environments, and routinely manage urgent transactions involving large sums of money. They are therefore a prime target for phishing frauds aimed at diverting client funds into a fraudster's account. Typically, a so-called "Friday Afternoon" fraud would involve a conveyancing firm holding completion monies receiving an email supposedly from a client requesting the monies to be paid into a different account.
As the computing power of Artificial Intelligence continues to grow exponentially, we consider how generative technology may expand the reach of traditional phishing frauds aimed at law firms.
Read our full article here.
2. SRA consultation on draft rules to restrict excessive fees regarding financial claims
The Solicitors Regulation Authority (SRA) has opened a consultation on new draft rules that will restrict excessive fee charging when firms make compensation claims on behalf of their clients regarding mis-sold financial products and services. Under the Financial Guidance and Claims Act 2018 (the FGCA), the SRA has a statutory duty to make rules ensuring an "appropriate degree of protection for consumers against excessive charges". These new rules, therefore, will introduce important new regulatory safeguards into the SRA Standards and Regulations.
Where a consumer feels they have suffered loss or damage in relation to a financial product or service, they can seek compensation, repayment or another form of restitution in the form of a direct complaint, a regulatory complaint (to, for example, the Financial Ombudsman Service, the Financial Services Compensation Scheme or the Pensions Ombudsman), or a court claim. A representative instructed on any of these constitutes "claims management activity" and this is regulated by the SRA. In some instances, the fees charged for straightforward claims have been excessive.
The proposed rules are designed to respond to any solicitor-represented financial service claim. The key points are:
- The rules do not apply retrospectively
- The maximum percentage rate that may be charged to a client ranges from 15-30% depending on the value of the claim
- Maximum total fees that can be charged are capped in bandings, up to a maximum of £10,000 for redress of £50,000+
- Charges eligible to be made outside the maximum parameters must be reasonable
- Certain activity connected to the preparation of litigation proceedings may be eligible to be charged outside of the maximum parameters.
To assess "reasonableness" the SRA proposes to consider:
- Market rates (hourly rates and success fees)
- Whether activities carried out were necessary and in the client's best interest
- Whether the client gave informed consent
3. Unlimited fining powers for economic crime for SRA under Economic Crime and Corporate Transparency Bill
In July last year, the Solicitor's Regulatory Authority (SRA) was granted increased fining powers. The SRA can now fine traditional law firms, and the individuals who work within them, up to £25,000. This is a significant increase from the previous maximum £2,000 fine. Previously, fines above this amount would need to be investigated by the Solicitors' Disciplinary Tribunal (SDT).
One key area in which we have seen the SRA using these new fining powers is in respect of anti-money laundering (AML) compliance breaches.
In January this year, the SRA issued a record £20,000 fine against a small firm of solicitors, Ferguson Bricknell. This represents the largest fine since last year's increase in the SRA's fining powers. The SRA found that the firm did not have in place a compliant AML firm-wide risk assessment, as required by the Regulation 18 of the Money Laundering, Terrorist Financing (Information on the Payer) Regulations 2017 (MLRs 2017).
In the wake of these increased fining powers, it is possible the SRA will soon also be granted unlimited fining powers in respect of certain economic crimes. The House of Lords is currently considering the Economic Crime and Corporate Transparency Bill, which includes various measures designed to combat economic crime. This includes unlimited fines in relation to disciplinary matters relating to economic crime. This would undoubtedly have a significant impact upon any law firms (and the individuals working within them) facing investigation and enforcement action by the SRA.
Certain bodies have expressed concerns about the further changes to the SRA's fining powers. For example, the Law Society have suggested the proposed unlimited powers would potentially include many more serious or significant cases which currently go before the SDT and which, in the Law Society's view, should continue to do so. The Law Society has urged the government to carefully consider the proportionality of any further increases to the SRA's fining powers. The suggestion is that there has been little evidence of the effectiveness of the most recent changes.
4. Time limits for complaining to LEO are changing
Earlier this month the Legal Ombudsman (LEO) introduced a series of changes regarding the complaints procedure which aim to reduce delays dealing with consumers' complaints. These changes have been much anticipated since the LEO originally published its recovery plan for 2021/22 which we wrote about in our June 2021 edition. This recovery plan was, ultimately, delayed, as discussed in our November 2021 edition, but as of 1 April 2023 the changes outlined below came into effect.
The LEO has introduced several changes to the Scheme Rules. Firstly, the time limit for bringing a complaint has been significantly reduced and is now "one year from the date of the act or omission being complained about" or "one year from the date when the complainant should have realised that there was cause for complaint".
Under the new rules, discretion has been given to the LEO to dismiss or discontinue a complaint if the claim is not considered to be "significant". This change aims to ensure appropriate time and resources are spent in proportion to the complaint.
In addition, if no substantive comments are provided in response to an investigator's case decision, the LEO now has discretion to decline to issue a formal decision. Full details of the changes to the complaints procedure can be found here.
Given the recent introduction of the changes, we are yet to see the effect of the new rules and if the changes will be successful in reducing delays associated with complaints pursued under the Legal Ombudsman Scheme. If the changes result in consumers bringing fewer complaints because of the shorter one-year time limit, it will be interesting to see if more consumers decide to pursue professional negligence claims in court instead.
5. Hong Kong – Legislation to provide for admission of Overseas Lawyers in cases concerning national security
We previously reported on the interpretation of the National Security Law (NSL) in Hong Kong by China's National People's Congress Standing Committee. The interpretation confirmed that the question whether an overseas lawyer not qualified to practise in Hong Kong can appear in a case concerning national security is a matter that requires certification by the Chief Executive of Hong Kong pursuant to Article 47 of the NSL.
On 22 March 2023 the Hong Kong government introduced the Legal Practitioners (Amendment) Bill into the Legislative Council. The Bill proposes to amend section 27(4) of the Legal Practitioners Ordinance (section 27(4)) which allows the High Court to admit in a particular case an overseas lawyer who is not qualified to practice in Hong Kong. The proposed amendments provide that:
- no person shall be admitted pursuant to section 27(4) for a case concerning national security unless there is "exceptional circumstance" – namely, the Chief Executive considers that the person's participation in the case does not involve national security or would not be contrary to the interests of national security;
- a person intending to seek admission pursuant to section 27(4) with respect to a case concerning national security must obtain a "Notice of permission to proceed" from the Chief Executive;
- the High Court must not admit a person pursuant to section 27(4) for a case concerning national security without first obtaining a certificate from the Chief Executive certifying that the person's participation in the case does not involve national security or would not be contrary to the interests of national security; and
- a mechanism for the review of a certificate where there is a material change of circumstances.
The Bill does not affect applications pursuant to section 27(4) in cases not involving national security. The Bill is expected to be passed before the Legislative Council's summer recess.
Additional Contributors: Catherine Zakarias-Welch, Sally Lord & Aimee Talbot
Disclaimer: The information in this publication is for guidance purposes only and does not constitute legal advice. We attempt to ensure that the content is current as at the date of publication, but we do not guarantee that it remains up to date. You should seek legal or other professional advice before acting or relying on any of the content.