ABS countdown | Why did the SRA want to bring its fining powers more in line with the SDT?

Whatever your point of view, it is difficult to find any logical sense in the current situation regarding the fines to which solicitors could be subject under the present, slightly disjointed, regulatory system.

Theoretically, depending upon your corporate structure and how the Solicitors Regulation Authority (SRA) views your regulatory transgressions, you could be subject to different processes with maximum fines of £2,000, £250m or an unlimited amount. Please form an orderly queue in front of the one you would prefer.

The SRA has announced, in a new consultation paper, that it is currently in discussions with the Ministry of Justice (MoJ) as to what increases might be made in the SRA’s fining powers for “traditional” (non-ABS) firms of solicitors. This is a little surprising since it was only in October 2012 that the MoJ rejected the SRA’s application to increase the amount it can fine such firms from £2,000 to what is likely to be a purely theoretical maximum of £250m. So why is the SRA so desperate to change the current regime and why does it apply in such an uneven fashion in the first place? The knee-jerk assumption that the SRA would stand to benefit financially would not be justified, since all fines are paid to the Treasury.

Since March 2012 the SRA has regulated two categories of law firm – traditional and ABS. The regulator has made no secret of the fact that it would like to have a level playing field between the two, but fining powers have been an exception. Traditional firms can be fined up to £2,000 by the SRA, but if it considers a weightier penalty more appropriate it can refer the case to the Solicitors Disciplinary Tribunal (SDT), which has unlimited fining powers. Where ABSs are concerned, the Legal Services Act permits the SRA to impose fines of up to £250m for firms and £50m for individuals, the thinking being that ABSs may have non-lawyer owners or managers which are part of much bigger entities with the potential for misdemeanours of much greater magnitude.

Three-step process

Both the SDT and the Law Society opposed the SRA attempt to “equalize” the two separate systems and the MoJ agreed last October, but the new SRA consultation paper seeks to justify equalisation on the plausible basis that this would improve the consistency, fairness and transparency of decision making and “assist decision makers to determine specific figures”.

The regulator has proposed a three-step process for the determination of fines, which would take account of the nature and impact of the conduct, mitigating factors, and the profit or gain which might have been made as a result of the misconduct. The regulator also argues that for firms of “greater means”, fines might be calculated by reference to profit or, perhaps more suitably, as a percentage of turnover or the excess of domestic turnover over a defined threshold. So, assuming a five per cent basis of calculation, a firm with a turnover of £2m could in extreme circumstances be facing a fine of £100,000; and the relatively small number of firms with turnover of £100m, could be facing fines of up to £5m.

These proposed new maxima will seem eye-watering to most traditional firms, and putting them into perspective, it might be noted that fines levied by the SDT, for all its unlimited powers, averaged just £7,471 in 2011. The largest single fine was £35,000 in 2011 and £50,000 in 2012.

Be afraid

Solicitors might therefore be forgiven for wondering whether the SRA has a hidden agenda beyond the desire for tidiness and uniformity. The regulator is clearly worried about the effects of the Legal Services Act and the significant changes in who owns and manages law firms, and it might perhaps be intending a warning that outcomes-focused regulation, for all its vagueness, must be taken seriously. Some senior SRA regulators had a previous life at the Financial Services Authority, whose erstwhile CEO Sir Hector Sants warned regulated firms, with a fine disregard for his grammar, to “be afraid, be very afraid”.

A perhaps more practical reason might be that the SRA has been under constant criticism by some groups for what is perceived as bias in its enforcement activities against firms from minority ethnic groups, who are more numerous in the sole practitioner and small firms which represent 86 per cent of the total population of law firms. The SRA is acutely conscious of diversity and ethnicity issues and might be hoping that the proposed new system will help to avoid accusations of subjective decision making on fines, which is at the core of this criticism.

Most solicitors will agree that more clarity and transparency on fines is absolutely essential. Equally, they may think that the levels of possible fines contemplated are unjustifiably high.