LSB lays out actions for SRA to avoid another Axiom Ince

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Brown: Decisive action

The Solicitors Regulation Authority (SRA) has been given statutory directions to address the multiple failures in its oversight of Axiom Ince.

The Lord Chancellor, Shabana Mahmood, has also told it “to take accountability” for its failings, in what may be a veiled reference to the regulator’s refusal last year to apologise.

Seven months after the Legal Services Board (LSB) published the independent report by Carson McDowell into the SRA’s actions ahead of Axiom Ince’s collapse and announced that its enforcement action would involve issuing directions to the SRA to take specific actions to avoid a repeat, the detail of those directions has finally been published.

Among the requirements – which are detailed in full at the end of this article – are improved board-level oversight of regulatory risk and intelligence activity, a stronger risk function, stronger regulation of client money, and better oversight of mergers and acquisitions.

Looking back to what went wrong, the LSB said the SRA “failed to take a proactive approach to assessing risk to clients and consumers”.

It also missed an opportunity to identify the alleged wrongdoing within Axiom Ince “owing to a failure to carry out an effective inspection in compliance with its procedures of Axiom Ince’s client accounts, and did not respond to the risks of how Axiom Ince had expanded or how one individual held all the statutory and regulatory compliance roles.

There were also shortcomings in the intervention process.

The directions, issued under section 32 of the Legal Services Act 2007, follow a process which involved the LSB seeking the views of four statutory consultees – the Lady Chief Justice, Baroness Carr, Lord Chancellor Shabana Mahmood, the Competition and Markets Authority, and the Legal Services Consumer Panel – and considering the views of both the SRA and the Law Society.

All the consultees agreed with the need for the LSB to take formal action, with Ms Mahmood saying the collapse of Axiom Ince “has had a significant impact on affected consumers and has negatively affected the trust in the solicitor profession, bringing lawyers’ professional ethics into the spotlight”.

She went on: “This collapse has attracted a lot of interest from the sector and from parliamentarians, and my department has received an increased volume of ministerial correspondence raising profound concerns about this matter over the past year.”

Noting the SRA’s “significant regulatory failings”, Ms Mahmood said it was “important for the SRA to take accountability” for these.

“The Axiom Ince collapse is one of those occasions where careful, risk-based regulation, close supervision and regular monitoring were needed, and it is important that the shortcomings in the SRA’s response identified are appropriately addressed.

“I trust that specific and deliverable changes will help bolster consumer confidence in the legal sector and therefore encourage sector growth.”

In light of the comments, the LSB tightened up the draft directions to make them more specific and certain. An initial reference to changing the SRA’s culture and behaviour was removed, “as this is not practically possible to measure within the timeframe for compliance”.

Catherine Brown, recently confirmed as interim chair of the LSB, said: “’The severity of what happened at Axiom Ince – with £60m in client money missing and 1,400 people losing their jobs – demanded decisive action, and we welcome the SRA’s constructive engagement with us during this statutory process.

“The directions we’ve issued are designed to protect the public and better ensure client funds are properly safeguarded.

“Over the last few months, the SRA has already started making the necessary changes to rebuild public trust and confidence in the regulatory framework that protects people who need legal services.”

The SRA must comply with the directions within 12 months and provide a written report to the LSB on progress every three months. It must also commission an independent external audit or equivalent review no later than 12 months from today to assess and evaluate compliance with and implementation of the directions and identify any procedural or other weaknesses.

In response, the SRA pointed to the extensive consultation it has already carried out on the future of client money in legal services, while its draft 2025/26 business plan detailed “increased investment and resources for an updated and proactive risk-based approach to regulation”.

Chief executive Paul Philip said: “It is essential that we learn from the Axiom Ince case in order to address the rapidly changing sector landscape. We have been working over the past months with the LSB on our plan to address and implement its directions.

“We have already taken action, including consulting on safeguarding client money and addressing the risks that can emerge from concentrations of ownership, management and compliance in a single person. We are also starting to improve our data and market intelligence.”

Andrew Pavlovic, a regulatory partner at City law firm CM Murray, commented that the directions were “along the lines that we have been expecting”, but a lot depended on how the SRA interpreted them, such as how far it would go in seeking notice and information on prospective mergers and acquisitions.

“The SRA will need to ensure that these powers are used appropriately to ensure that legitimate mergers and acquisitions are not subject to undue delay and/or frustrated completely.”

Similarly, he added: “There remains a concern that the profession may be unduly impacted through further scrutiny and changes to systems around firms holding client money, in circumstances where the failings were not the fault of the systems and processes but of individuals who appear to have acted dishonestly and a failure of regulation by the SRA.”

The directions

The Legal Services Board directs the Law Society, through its delegated regulatory body the SRA, to:

Governance
Put in place governance changes that deliver demonstrable improvement in regulatory effectiveness and efficiency. These changes must result in a regulatory approach that better protects and promotes the public interest and the interests of consumers and promotes and maintains adherence to the professional principles.

Requirements
The SRA must

1. demonstrate improved board-level oversight of regulatory risk and intelligence activity, including through a clear reporting cycle to the SRA audit and risk committee and board, which also allows for the appropriate escalation of risks,
2. implement procedures to assess the impact of regulatory decisions on the public and consumers, and to enable evaluation of the SRA’s regulatory effectiveness generally, and
3. ensure consistent, accurate and timely records of all significant governance decisions and regulatory decisions are kept and maintained.

Risk
Strengthen risk functions and market intelligence to ensure a proactive and integrated approach to identifying and responding to risk across the legal sector.

Requirements
The SRA must

1. establish and embed a framework for the ongoing, proactive identification and assessment of risks to consumer interests and the public interest, including those arising from firm structures
2. develop risk-based systems and procedures to proactively collect, and analyse market intelligence, including identification and assessment of risks arising from the sale, merger and acquisition of firms,
3. develop effective sharing of market intelligence and regulatory data between internal teams to support timely and efficient authorisation, supervisory and enforcement decisions,
4. use market intelligence to inform regulatory approach and policy development, to ensure that they are effective in identifying and acting on risks, and
5. demonstrate delivery of all of the above requirements, through internal reporting mechanisms and regular reporting to senior leadership.

Supervision
Authorisation
Strengthen the SRA’s authorisation controls to better protect and promote the public interest and the interests of consumers and promote and maintain adherence to the professional principles, to address the concentration of ownership, compliance and management roles in one individual.

Requirement
The SRA must revise its regulatory arrangements and guidance to put in place an effective risk-based approach to protect consumers and the public from potential harm arising from a single individual holding more than one role in a firm or other authorised body e.g. owner, manager, compliance officer for legal practice, compliance officer for finance and administration, and money laundering compliance officer.

Client money
Strengthen the regulation of client money to better protect and promote the public interest and the interests of consumers and promote and maintain adherence to the professional principles.

Requirements
The SRA must

1. use an effective risk-based approach to assess the potential for consumer or market harm arising from firms’ financial stability, including where appropriate through obtaining and reviewing firms’ financial and accounting information, and
2. ensure firms have effective safeguards to protect client money.

Sales, mergers and acquisitions
Introduce oversight mechanisms for firm consolidation activity to better protect and promote the public interest and the interests of consumers and promote and maintain adherence to the professional principles.

Requirements
The SRA must

1. put in place measures to enable more effective risk-based scrutiny of firms undergoing sale, merger or acquisition, including where relevant ensuring that the SRA receives advance notice of such activities,
2. proactively use its powers, including for inspection and provision of information, where sale, merger or acquisition of firms presents or may present serious risk to consumers, including to enable an informed assessment of that risk to be made, and
3. make alterations to its regulatory arrangements where the SRA considers existing arrangements are insufficient to carry out the above functions effectively and efficiently.

Pre-intervention procedures
Improve its capacity to intervene early and proportionately to prevent serious regulatory failures.

Requirements
The SRA must

1. ensure its guidance for making intervention decisions and decisions to investigate concerns require the consideration of the protection and promotion of the public interest and the interests of consumers,
2. implement measures to ensure that proportionate interim protections for consumers and the public can be applied prior to formal intervention, and
3. improve internal procedures, templates, and decision records to ensure evidence is gathered consistently and decisions are auditable.