Jeffery:
The Law Society has ratcheted up the pressure on the Solicitors Regulation Authority (SRA) over Axiom Ince by saying it is “not sufficiently assured” that the regulator is doing its job properly.
It is particularly unhappy that the SRA did not act more quickly to close down Axiom Ince after it discovered in July 2023 that £57m of client money was missing.
The Law Society is named as the approved regulator of solicitors in the Legal Services Act 2007 and so, although it delegates its regulatory responsibilities to the SRA, Chancery Lane retains a very limited regulatory role.
Under section 28, the Law Society has to ensure its delegated regulatory functions are discharged in a way that is compatible with the regulatory objectives, so far as is reasonably practicable.
To do this, the Legal Services Board’s (LSB) internal governance rules requires each regulatory body to provide information to the approved regulator “as is reasonably required for the approved regulator to be assured of the regulatory body’s compliance”.
The Law Society asked for this information in January and received it in June. Earlier this month, the society’s ruling council decided that the SRA had failed to provide sufficient assurance – the first time this has happened.
In a letter to his SRA counterpart, Paul Philip, Law Society chief executive Ian Jeffery wrote: “The assurance information provided by the SRA indicates that the SRA’s operational, investigative and supervisory approach to the business management of Axiom Ince during the period leading up to its eventual intervention lacked the necessary efficiency to ensure that client funds would be protected.”
He said the information did not provide assurance that the decision not to intervene at once after the SRA had identified a client account shortage of circa £57m gave “due consideration” to the protection of consumers’ interests or the public interest.
The reasons for not intervening were not recorded, he noted. Though the SRA made a limited intervention into the individual practices of certain directors of the firm on 11 August 2023, the SRA board did not receive a formal report relating to the situation until 12 September.
“It is not accepted as sufficient the explanation that this was because the incident was a fast-moving picture or considered to be executive business,” Mr Jeffery said.
“The council also considers that timely reporting of the incident to the SRA board could (and most likely would) have ensured that the necessary steps were taken to prevent what ultimately proved to be a very significant loss.”
The intervention finally took place on 3 October 2023. Last year’s LSB report into the SRA’s handling of Axiom Ince described the decision of whether to intervene in July was “difficult” – given the disruption shutting down the firm could cause clients – and said it was “reasonable” for the SRA to carry out a ‘partial’ intervention initially.
But this had a “greater degree of risk”, as the SRA could not be sure that nobody else was involved. Further, the SRA should have stopped any further transactions into or out of the client account after 27 July – the last date of any alleged misappropriation of funds – but failed to do so; some £36m was paid out in the weeks that followed.
Mr Jeffery said information from the SRA on reforms it was making in response to the Axiom Ince events was “sufficient for the Law Society to be partially assured of the SRA board’s commitment to learn from those events and to rebuild trust in the ability and commitment of the SRA to act in a way which is compatible with the regulatory objectives.”
He said the council had also taken assurance from the statutory directions the LSB has issued the SRA with to take specific actions to avoid a repeat.
But until there was evidence of change, the Law Society did not believe it had sufficient assurance under section 28.
Mr Jeffery demanded to see all information that the SRA provides the LSB to show progress towards compliance with the directions and warned that it may request updated assurance information for future council meetings.
“The council will also monitor and take into consideration the outcome of the LSB’s independent review of the SRA’s regulatory actions leading up to the collapse of SSB Group Ltd,” he added. The date this will be published remains unknown.
Asked what could happen if the situation persisted, a Law Society spokeswoman told Legal Futures: “The LSB’s guidance on the rules recognises that there may be circumstances where ultimately an approved regulator must intervene in the performance of its regulatory functions to ensure compliance with the regulatory objectives in exceptional circumstances where the regulatory body becomes ineffective or ceases to operate.”
This is a long way from happening, however.
An SRA spokesman said: “We are already implementing a robust set of actions to improve our regulatory duties in response to the lessons learned from the Axiom Ince case as set out in the LSB directions.
“This includes consulting with the sector on safeguarding client money, addressing risks that can emerge from concentrations of ownership, management, and compliance in a single person, and improving our approach to data and market intelligence.
“We will continue to work constructively with all stakeholders, including the Law Society, and report regularly to our regulator, the Legal Services Board on the progress we are making in implementing our plan and their directions.”
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