Lawyers Covered - January 2024
We hope 2024 has started well for all of you. A new year but some things remain constant - lawyers continue to face a wide range of challenges, and we are here to help guide you through them. So, 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. Castle caper condoned? Court of Appeal rules on dishonest condonation and aggregation under solicitors policy in Discovery Land v AXIS
On 15 January 2024 the Court of Appeal handed down judgment in Discovery Land Company LLC and others v Axis Specialty Europe SE [2024] EWCA Civ 7.
The case concerns the ability of a solicitors’ insurer to decline cover for a claim on grounds of dishonesty and, in particular, the meaning of “condonation” of dishonesty. It also concerns how the aggregation clause operates in a solicitors’ professional indemnity insurance policy.
2. Friends without benefits
Helping friends and family with legal issues often doesn't pay and, in the case of one solicitor, resulted in an SRA fine and a hefty costs liability.
Jane Moir, a solicitor with over 30 years' experience in residential conveyancing and commercial property, conducted several conveyancing matters for close family friends while working from home during lockdown. She did not charge for her services and, on all but one occasion, advised her clients that she did not have professional indemnity insurance to cover any potential liabilities.
In November 2019, the SRA Handbook was replaced by the SRA Standards and Regulations. According to Ms Moir's self-report to the SRA, she was unaware whilst conducting the transactions (which included receiving client monies into a business account not classed as a client account in accordance with the SRA Accounts Rules 2019) that it was no longer permissible for solicitors to act for friends and family in circumstances where payment was not taken and the "clients" were aware no insurance was in place.
In fining Ms Moir £768 and requiring her to pay £4,000 in costs, the SRA acknowledged that she did not accept payment for the work which she undertook and so it could not be inferred that she was putting her own interests above those of her client. However, they considered that the seriousness of her conduct, coupled with her admitted failure to keep up to date with changing rules and regulations (despite her experience), created a risk of harm to the public and could undermine the reputation of the legal profession.
Perhaps an example to bear in mind the next time a friend asks for help getting out of a parking ticket…
3. Courts put a pin in solicitors' attempts to inflate guideline hourly rates
The recent High Court decision in Otto & Ors v Inner Mongolia Happy Lamb Catering Management Company Ltd & Ors [2023] EWHC 3151 (Ch) confirms that inflation and remote working are not compelling justifications to allow for rates in excess of the national guideline hourly rates (GHR).
The GHR vary depending on a combination of the fee earner's experience and the geographic location of the fee earner's firm.
The basis of the petitioner's justification for increased rates were:
- the UK legal services industry had experienced inflation in excess of 20% since the GHR were set; and
- due to increased remote working, the location of fee earners had become less relevant than it was when the GHR were set.
The High Court rejected the petitioner's first argument on the basis that setting rates based on cost and price inflation which fluctuates so frequently was impractical for the purposes of assessing costs. The High Court also added that it was not within the cost-assessing Court's remit to set new rates based on a mathematical recalculation that accounts for inflation.
The High Court also rejected the second argument on the basis that even remote fee earners had a central base, and there would be overheads arising out of that base built into their costs; therefore, the location of the fee earner's base was still relevant to their rate.
Since the High Court's decision, the GHR have been increased. You can find out in our article HERE what the new rates are and how rates will be uplifted in the future.
4. SRA's fixed penalty fines for diversity and transparency reporting failures
On 9 January 2024, the SRA issued nine more fixed penalties as part of its new financial penalty regime. The regime was introduced in 2023 to allow the SRA to deal with minor and non-complex breaches of its rules in a timely and effective manner. Eight firms have been issued a penalty of £750 for failing to comply with the SRA's transparency rules and a ninth firm was issued a penalty of £750 for failing to submit its diversity data upon request.
The SRA's transparency and reporting rules are designed to help clients consider and compare law firms' services across the sector and allow clients to make informed choices. With regards to diversity data, the SRA's Chief Executive has stated that "providing data is not difficult to do, but it is a regulatory requirement". Indeed, rule 1.5 of the SRA's Code of Conduct for Firms expressly states that a firm must "monitor, report and publish workforce diversity data". Diversity data is important for the sector as it provides it with an understanding of the progress that has been made, as well as setting a benchmark for firms.
The fines under the new regime are set out in the SRA Regulatory and Disciplinary Procedure Rules (rule 11.3 – "fixed financial penalties") and prescribe £750 for a first breach and £1,500 for a subsequent breach of the same category within three years of the date of the first penalty (or a continuation of the first breach). Firms are sent notices of potential fines and are provided with the opportunity to put the issue right. In many cases, the threat of penalties is resulting in firms becoming compliant.
You can read more about the latest fines here. The SRA's Code of Conduct for Firms can be found here.
5. Law Society consulting over new draft code for conveyancing
In a property transaction, exchange is the point at which the parties are bound. After that, a defaulting party could face a claim for breach of contract. As technological progress marches onwards, and more practitioners are looking to make use of digital solutions to streamline their practices, the Law Society’s existing formulae for exchange are looking increasingly outdated.
Accordingly, the Law Society proposed a new draft Code for signing and exchanging property contracts, which aims to “modernise the way you do business, save you time and provide much-needed clarity to help you move towards exchanging digitally in a way that’s fit for the 21st century”. The draft Code is currently under consultation.
The Code will need to be followed by members of the Quality Conveyancing Scheme, although other firms will be able to adopt it by agreement in writing.
In summary, the draft Code comprises three protocols:
- the Immediate Exchange Protocol, which replaces the Law Society's Formulae A and B;
- the Release of Contracts Protocol, which replaces Formula C; and
- the Hold to Order Protocol.
However, the current draft Code is lengthy and complicated, detailing various obligations the parties must meet before signing, "immediately before" exchange and after exchange. Compliance may therefore be a laborious process.
As such, whilst the draft Code may well provide greater certainty for practitioners making use of digital technologies, it is more difficult to see how, in its present form, its use would streamline the conveyancing process overall.
That said, the consultation process is ongoing, and stakeholders may have already raised such concerns. It remains to be seen whether the Code, in its final form, can deliver both certainty and efficiency.
6. Hong Kong: Anti-Money Laundering – A missing piece of the regulatory jigsaw for lawyers?
Just as with the regulatory focus on the legal profession's role in combatting money laundering in England and Wales, the Law Society of Hong Kong has been focusing its efforts on the profession's role in Hong Kong. This has helped contribute to a generally positive Financial Action Task Force Follow-up (Re-Rating) Report for Hong Kong in February 2023, following the FATF's Mutual Evaluation Report in September 2019.
In preparation for the FATF Report in 2023 there had been a lot of activity between the Hong Kong government and the representative bodies for lawyers and accountants. A key aspect of the FATF's focus had been on the regulation and supervision of designated non-financial businesses or professions (FATF Recommendation 28).
In 2022, the Law Society of Hong Kong launched a review to develop a money laundering risk assessment for the profession and this was followed by an electronic survey of the profession in preparation for supervisory oversight. This regulatory activity helped contribute to the FATF upgrading Hong Kong's compliance with FATF Recommendation 28 from "partially compliant" to "'largely compliant". However, more is expected – particularly, given that the FATF Report in 2019 recommended proactive supervision and monitoring of the legal profession in Hong Kong.
The lack of proactive regulatory monitoring of lawyers' compliance with the requirements of Practice Direction P (Anti-Money Laundering) and the Anti-Money Laundering and Counter-Terrorist Financing Ordinance has been a missing piece of the regulatory jigsaw. This looks set to change in 2024-25 with the Law Society of Hong Kong due to commence supervision visits of law firms to review their compliance with the profession's anti-money laundering regulatory obligations.
None of this should come as a surprise. The FATF has flagged the issue for some years and the Law Society of Hong Kong wrote to its members in September 2022 stating that it would be "sharpening its supervisory oversight of member firms in relation to AML/Counter Terrorist Financing compliance ". There is likely to be a lot more regulatory activity in the run up to the FATF's next mutual evaluation for Hong Kong (circa 2027).
Additional Contributors: Catherine Zakarias-Welch, Sally Lord & Aimee Talbot