The top three causes of SRA fines

The most common rule breaches and regulatory concerns are outlined below:

1. AML Rule Breaches and Firm- Wide Risk Assessments Failures

The SRA has increased the number of financial penalties being imposed on firms that breach regulatory and AML rules. Firm-Wide Risk Assessments have been mandatory since 2017, however many firms do not have this in place, meaning they are not accurately able to identify where the firms’ risk exposure is, (which means money laundering is less preventable).

Some of the most common AML breaches include:

• Inadequate AML policies and procedures
• Non-compliance with firm-wide risk assessments
• Failure to carry out robust client and/or transactional risk assessments
• Inadequate identification and verification of clients
• Failure to check the source of funds
• Poor staff training
• Little-to-no ongoing monitoring of transactions
• Not reviewing or updating AML policies on an annual basis

The SRA has significantly intensified its response to anti-money laundering rule breaches, with a steep rise in the number of fines being imposed on firms for non- compliance with AML regulations, with fines exceeding £10,000 and, in some instances, exceeding £100,000. The SRA has always been clear that they will impose sanctions against law firms that do not have adequate systems in place to prevent money laundering and will continue to focus in these areas to monitor if firms are meeting their obligations.

3. Account Rule Breaches

The SRA has raised concerns about an increasing number of law firms failing to comply with their obligations under the Accounts Rules. Specifically, the SRA have identified two areas where firms fall short:

Rule 3.3 – Banking Facilities Rule

This states solicitors ‘must not use a client account to provide banking facilities to clients or third parties. Payments into, and transfers or withdrawal, must be in respect of the delivery of regulated services’. This rule was introduced initially in 2004 to specifically address the problem that some law firms were providing clients with banking facilities when they did not have access to one. For example, paying monies to a non-client or an unrelated party to a transaction such as sending monies due to a beneficiary to another person as they beneficiary does not hold a UK bank account.

Rule 12 – Accountants’ Reports

Any firm that has an active client account has an obligation under Rule 12 to: 

• Obtain an accountant’s report for that accounting period within six months of the end of the period. 
• Deliver it to the regulator within six months of the end of the accounting period if the accountant’s report is qualified to show a failure to comply with these rules, such that money belonging to clients or third parties is, or has been, or is likely to be placed, at risk. 
• There are some exemptions for firms to obtain a report, for example, if all of the money held in the client account has been received from the Legal Aid Agency.

To ensure compliance with these rules, firms must establish appropriate systems and controls that align with the nature and volume of client transactions and the amount of client money held or received.

Failure to follow the rules could result in disciplinary action which may result in a fine, suspension or strike off in cases deemed to be a serious breach.

Firms are advised to ensure they have a documented accounts manual which is communicated to staff and sets out the processes adopted by the Firm and how to avoid a rule breach.