Firms “risking financial ruin” over SRA prosecutions


Habel: Number of reports to SRA set to increase

Law firms assume – wrongly – that their professional indemnity insurance covers them if they are investigated or prosecuted by the Solicitors Regulation Authority (SRA), research has warned.

As a result, a minority of firms surveyed have directors and officers’ (D&O) insurance – also known as management liability insurance – to cover the costs of regulatory action.

Fewer still have policies that would “trigger at the appropriate time to allow them the sort of help that affords equality of arms with the SRA in an investigation”.

The survey by IRN Research, commissioned by London law firm Leigh Day, polled 200 firms – described as likely to be a somewhat “compliance conscious” – and involved 30 follow-up interviews.

Some 63% said they had MLI, but only 62% of them said it covered both regulatory investigations and prosecutions – 39% of all the firms polled.

Some 24% did not know, while the rest had cover for either an investigation or prosecution. Sole practitioners, often the focus of SRA activity, were the least likely to have MLI.

The SRA removed regulatory defence costs from the mandatory scope of solicitors’ insurance policies in 2010.

Leigh Day said: “This has meant that firms and solicitors have increasingly found themselves exposed to a brutal choice when the SRA has come knocking: fork out significant sums of their own money to defend themselves; or, regardless of the reality of there being any rule breaches or misconduct, close their business (and potentially leave the profession) whilst trying to resolve things with the SRA at as low a financial cost as possible.”

Leigh Day had its own high-profile run-in with the SRA and said having MLI was “the difference between the firm surviving and thriving and being forced to close; it enabled the firm to test the SRA’s case in a way that simply would not have been possible otherwise”.

Its defence costs were £7m, and while the MLI it had covered some of this, a “sizeable balance” still had to be met by the firm’s partners.

“Whilst the case against Leigh Day was particularly complex, every regulatory investigation will have resource implications for those obliged to respond to it.”

SRA’s data from 2017-18 showed it received over 11,500 reports about conduct over the year – a ratio of one report for every 13 practising solicitors or more than one report for every firm. The SRA opened investigations into over 6,000 of these cases.

Gideon Habel, an associate solicitor in Leigh Day’s regulatory & disciplinary team, said: “The recent changes to reporting requirements in the SRA’s new Standards and Regulations mean there will surely be an increase in the number of reports to the SRA.

“At the same time, the SDT has just lowered the burden of proof it applies when deciding cases before it to the civil standard.

“Despite what the SRA says about wanting to put more trust back in solicitors when exercising their professional judgement, we do not see its overall approach changing in the foreseeable future.”

He urged all firms to check their insurance provision and consider whether it would allow them “to build the team of experts you need to help you to respond as decisively and comprehensively” as required when facing an SRA investigation.




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