News & Views

The SRA’S Consumer Protection Review - What it means for law firms

This article looks at the SRA’s Consumer Protection Review and its potential impact on regulated firms.

The review was launched in January and is due to run until late 2025. The SRA has already begun to make changes to its operational focus and practices in light of the issues identified in its initial Discussion Paper and more change is on the way. Practitioners need to be aware of the SRA’s increasing oversight of firms, especially those considering mergers, acquisitions, or private equity investment activity, who are now firmly in the SRA’s spotlight.

So what is the Consumer Protection Review all about?

The SRA is reviewing two main areas:

1.  Its policy and operational approaches to identifying and managing risks, including:

• how it identifies sector risks.
• how it monitors firms.
• its approval processes for firms.
• its rules and controls around client money.
• its approach to firms' structures and ownership models.

2.  Its compensation fund arrangements in light of the risks identified.

Why now?

The SRA’s announcement that it is reviewing its consumer protection practices is unsurprising given the criticism it has faced, and will continue to face, as a result of the Axiom Ince situation. When more than £60m of clients’ money goes missing, it would be remiss of any regulator to continue operating without revisiting its approach to identifying and managing risk.

In addition to Axiom Ince, the SRA has alluded to shifting risks in the sector and a substantial increase in the number and size of interventions - last year it carried out more than twice as many interventions as the year before.

What does this mean for the legal sector now?

Accumulator firms and those which have expanded rapidly should be ready for inspection. Largely as a direct result of Axion Ince, the SRA is already progressing a programme of inspections of such firms to ensure that any risks to the public are being appropriately managed. As specialist law firm advisers, we are seeing an increase in clients asking for our support throughout this process.

When considering a law firm merger or acquisition, it is vital that management take heed of the SRA’s recent warning notice which reminds firms that that their clients' interests must remain paramount throughout any such transaction. The SRA has made it clear that where an issue arises as a result of M&A activity, failure to have proper regard to its warning notice is likely to lead to disciplinary action.

The SRA has indicated that it is planning to introduce further checks and controls either during or following an acquisition and we anticipate an announcement on what this will entail before the end of this year. The Legal Services Board is yet to publish its independent review of the Axiom Ince intervention and we can expect that the LSB’s findings will feed into any changes adopted by the SRA in this space.

On 23 July 2024, the SRA confirmed a 200% increase in individual contributions and a 236% increase in firm contributions to the compensation fund for the 2024/25 renewal. This is a significant hike which will inevitably impact the overall cost of legal services. The SRA has made it clear that this is only an interim step and that it is continuing to consider how the compensation fund should operate in the future. It is likely that we will see changes to how fund contributions are apportioned relative to risk.

What does this mean for the legal sector in the longer term?

In the longer term, we can expect to see more significant changes. For example, the SRA has indicated that it will be considering:

• fundamental changes to its Accounts Rules and the circumstances when firms can hold client money, if at all.
• changes to its rules around the criteria for approving firms and role holders and expanding checks into business plans, funding plans and governance structures.
• mandating greater transparency around ownership models and structures.
• changes to how the compensation fund is run, including whether it should introduce a risk-based levy, change how claims are assessed and/or whether consumer redress could be provided by insurance arrangements without the need for a compensation fund.

Industry players had until 1 July 2024 to respond to the SRA’s Discussion Paper and public consultation is due to take place towards the end of this year. Implementation of any proposed changes resulting from the Consumer Protection Review are expected to be in place by the end of 2025.

It remains to be seen whether the SRA will strike the right balance between protecting consumers and supporting innovation in the legal services industry. While private equity and firm restructuring can give rise to risks which need to be effectively managed, regulation must not deter capital from entering the market, as it is this which most often funds innovation.

For further information, please contact Sally Lazar or Joshua Bates.