Compliance is a crucial aspect of running a successful law firm, and it is essential to ensure that a firm’s reputation, ability to serve clients, and bottom line are protected. So, adhering to the rules and regulations set forth by regulatory bodies such as the Solicitors Regulation Authority (SRA) in the UK is important which is why we have summarised in this article the top 5 SRA Compliance topics for 2023 and what we think is important for your firm to consider this year.
This guide is not just about avoiding fines and penalties but about understanding the trends and challenges that are happening all around the world that can affect you (sometimes without you knowing). By adhering to new regulations and understanding regulatory bodies’ concerns, firms can demonstrate their commitment to professional conduct and ethical behaviour by implementing risk-based processes and technology that can help to run a more compliant and client-centric firm.
In this article, we look to the year ahead and explore the top 5 SRA compliance topics for 2023, and discuss how firms can take proactive steps to ensure they are in compliance with the SRA’s regulations and requirements. We will explore implementing and maintaining appropriate systems and procedures in this article.
We base this article on recent news, guides and the SRA outlook on 2023 from the SRA Compliance Conference 2022 in Birmingham. At the conference, the focus was on AML, law firm cultures, transparency, sanctions, diversity, and the changing economy.
As such, it is important for law firms to stay up to date on the latest compliance topics that the SRA is focusing on.
Here are a five key compliance areas that we think law firms should be particularly aware of this year:
1.SRA Fining Powers
In 2020, the SRA’s power to fine firms and individuals without referring them to the Solicitors Disciplinary Tribunal (SDT) was increased from £2,000 to £25,000. This change aims to reduce costs in disciplinary proceedings and enable the SRA to deal with cases more quickly. The Solicitors Regulation Authority announced that they will take a more robust approach to enforcing its transparency rules after it was revealed that compliance has been low. It seems the SRA has some merit for the increase in fines with a staggering 252 reports of suspected AML breaches made to the SRA during the 2021/22 time period leading to 29 fines were issued totalling £286,976. However, SRA fines still seem to be on the lighter side for AML breaches such as Leeds based firm Hallam Solicitors which was fined £2,000 after failing a proactive AML inspection hence the increase in the future.
The transparency rules is another area where the SRA has issued warning about an increase in fines. Transparency rules have been in place for four years and an update from SRA CEO Paul Philip has indicated that enforcement will now recommence.
“Longer term we will also be looking to utilise the proposed new fining powers as part of this enforcement exercise.”
He stated that the SRA will be undertaking a review of the websites of around 2,500 firms that had previously provided declarations of compliance and that they will be taking a more robust enforcement approach.
2. Register of Overseas Entities
The Economic Crime (Transparency and Enforcement) Act 2022 requires overseas entities to register their beneficial owners by January 31, 2023. Failing to do so is a criminal offense. Law firms may be asked to act as “verification agents” for their clients, which carries significant risks and responsibilities. Property lawyers will also need to factor in offshore ownership when advising clients on transactions.
The new Register will require overseas entities to declare their beneficial owners and/or managing officers. Companies House has now confirmed that before an overseas entity registers its beneficial owners or managing officers on the new Register, a UK-supervised ‘relevant person’ will need to verify the required information about them. The relevant person cannot be family member or close associate of the individual concerned.
The relevant person includes but not limited to:
-auditors, insolvency practitioners, external accountants and tax advisers
-independent legal professionals
-trust or company service providers
-estate agents and letting agents
However, there is no obligation on law firms to take on this verification work as you can outsource the verification to a company which can verify the identity of your clients.
3. Anti-Money Laundering (AML)
The SRA continues to closely monitor firms’ compliance with AML regulations. A huge focus from the recent SRA Compliance Conference was Anti Money Laundering in the legal sector.
The SRA have a supervision unit that can conduct visits and remote reviews to assess firms’ compliance. Those who fail assessments may face fines and public naming and shaming. Firms should be prepared for the possibility of an SRA visit and should ensure that their AML procedures are up to date and effective.
Risks associated with conveyancing and controlling client money is especially a significant area of risk in the legal sector and it should be addressed on the firm-wide risk assessment. Law firms should also consider the use of AML software that can help prevent fraud and deter risk. Software’s that enable the safe and secure identity verification of a client help carry out enhanced due diligence ensuring that you know who you are dealing with. This is the first step in a robust AML process. Innovative solutions have been heavily encouraged by the use of SRA and other institutions such as HM Land Registry and Law Society for the ease of use and detailed verification checks including sanctions screening, Open Banking and biometric based verifications.
Sanctions compliance and AML are often mentioned alongside each other and often the same individuals in a firm may have responsibility for ensuring compliance with both regimes, but we must consider it separately as sanctions are restrictive measures imposed by the government to achieve a specific foreign policy or national security objective such as the recent sanctions on Russians in the UK.
Checking for sanctions is often something that law firms have often overlooked or not actually been aware of how to check sanctions on clients. It’s no easy task to keep up with the ever changing sanctions the UK impose on foreign nationals. The SRA has a detailed guide for SRA-regulated firms, solicitors, registered European lawyers and registered foreign lawyers called ‘Complying with the UK Sanctions Regime’ which can be found here.
However, it’s not just about sanctioned individuals, but sanctions can be imposed on businesses, industries and types of legal services.
Similar to AML compliance, technology can dramatically reduce the risk of not missing sanctions lists. Verify 365 can help with PEPS and Sanctions screening by verifying the clients ID alongside over 3000 global lists on a ongoing basis.
One thing is for sure, sanctions are a top compliance risk in the year ahead and law firms and other financial services must be aware.
5. Cyber Security
With the increasing digitisation of legal practice and client data, firms are exposed to many cyber threats, therefore the SRA is emphasising the importance of maintaining robust and up-to-date cybersecurity systems. This includes not only protecting client data but also internal and confidential data.
With the General Data Protection Regulation (GDPR) and Data protection act 2018 in place, the SRA is placing a significant emphasis on the importance of data protection and data privacy within the legal sector. Law firms need to ensure they have adequate measures in place to protect client data and that they are fully compliant with GDPR and data protection regulations.
Fraud is here to stay. It’s happening all day, every day. Not just in the legal sector. But more than often lawyers fall victim. In 2023, the way law firms need to approach fighting financial crime requires the use of modern AML technology. There is no doubt that law firms that combine effective AML-procedures with advanced AML-technologies, backed with training and supervision, will be able to better protect themselves from fraudulent attacks and money laundering. Firms should be aware that these are not the only compliance topics that the SRA will be focusing on in 2023.
However, by being mindful of these five areas, firms can take proactive steps to ensure that they are in compliance with the SRA’s regulations and requirements.