Guest post by Matthew Kain, chief executive of Kain Knight
Kain: Increasingly important role for costs lawyers
More than 1,600 individuals appear on the UK government sanctions list. For those named on the list, designated under the Sanctions and Anti-Money Laundering Act 2018, good legal advice is imperative.
So, how do law firms deal with legal costs when applying for specialist licences to be paid for work that is undertaken on behalf of these sanctioned clients?
In practice, the Office of Financial Sanctions Implementation (OFSI), part of HM Treasury, enforces financial sanctions, primarily through asset freezes on designated individuals and entities. It also determines whether law firms can advise sanctioned individuals or entities, and the mandatory licence requirements in order to do so.
The OFSI website is clear: “Where a transaction involves a person or organisation who is subject to financial sanctions (whether directly or indirectly), you must obtain a licence to allow the activity to take place without breaching financial sanctions.”
According to the Solicitors Regulation Authority (SRA), law firms must not therefore undertake paid work for a designated person unless they have been granted a licence by the OFSI to provide legal services or receive payment from designated individuals.
For law firms that are instructed in sanctions matters, this can cause significant practical challenges, particularly when licence approval is required before any payment can be made by the client.
Licence applications can also be legally and commercially complex, as well as time consuming. In certain circumstances, the UN will need to approve them or be made aware of them, according to the government’s own website.
When applying for a legal fees general licence (GL) to provide legal services, the OFSI outlines criteria for law firm costs.
Notably, all fees and expenses must be deemed reasonable. The two licensing derogations under the Sanctions Act that include a ‘reasonableness’ test are legal services and maintenance of funds or frozen resources. Capped payments also apply.
Currently, GLs include a £500,000 cap for pre-designation work and a £500,000 cap for post-designation work.
In applying the reasonableness test, independent legal costs specialists are frequently instructed to assess appropriate fee levels by reviewing and certifying legal costs. Updated OFSI guidance published in March 2026 confirms that, in certain circumstances, applicants will now be expected to provide an independent costs draftsperson’s report (CDPR) to support the assessment of reasonableness.
Under the updated approach, OFSI will require a CDPR where total legal fees and counsel’s fees exceed £2m (inclusive of VAT) within any six-month period for law firms, or £1m (inclusive of VAT) for counsel instructed directly.
Applicants may also choose to provide a CDPR voluntarily where complexity or value makes independent assessment helpful in demonstrating that costs are reasonable.
According to the OFSI, independence in the assessment of legal costs submitted to the OFSI is maintained “through a rigorous, evidence-based reasonableness test, often benchmarking against independent standards like the Supreme Court Cost Guidelines (SCCG)”.
When the applicant submits fee estimates, the OFSI then “scrutinises these submissions to ensure they are necessary, proportionate, and not intended to circumvent sanctions”.
Reasonableness, of course, can be highly subjective. To apply objective reasoning, the OFSI confirms that it “requires a significant level of evidence when scrutinising the reasonableness threshold”.
This reflects the evidential burden placed on applicants to demonstrate that proposed costs are necessary, proportionate and reasonable in the context of the work undertaken.
Independent costs lawyers therefore play an increasingly important role in supporting licence applications by providing objective, evidence-based assessments of legal costs.
Regulated by the Costs Lawyer Standards Board, which was established in 2011, they are able to provide independent expert analysis to support the reasonableness of proposed fees.
The question of independence arises in practice when firms prepare costs information for OFSI licence applications. An independent costs review can be seen as providing reassurance in relation to the likely costs that will be incurred.
Unlike an in-house costs team, an independent costs lawyer operates independently of the parties involved, providing an objective assessment of whether the legal costs claimed are both reasonable and proportionate to the scale and scope of the work undertaken.
OFSI’s updated guidance confirms that, despite its name, any CDPR must be prepared by an independent practising costs lawyer who is not part of the legal team delivering the underlying work.
Even where a CDPR concludes that costs are reasonable, OFSI retains discretion in determining whether the evidential threshold has been met and may licence a reduced amount or decline certain costs where it considers further justification is required.
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