Opening the floodgates

If the measure of a regulator’s virility is the
size of the fines it imposes, then UK regulators are lagging far behind their US counterparts. However, not to be outdone, the UK agencies seem determined to catch up.

It was recently announced that the Financial Conduct Authority (FCA) had fined Barclays Bank a record £284m for Libor benchmark-related failings, and for misleading the regulator. This pales in comparison to the $2.4bn fines imposed against Barclays Bank by the US regulators; however, the FCA figures still dwarf the
highest-ever fine of £3m imposed in the
UK against an accountant by its regulator.

In April 2015, the Financial Reporting Council’s independent tribunal imposed this fine on accountancy firm Deloitte following the collapse
of MG Rover Group. This reflects a significant reduction from the fine of £14m imposed by
the Accountancy and Actuarial Discipline Board’s independent tribunal in July 2014.

Creeping up

However, worryingly for those in the legal profession, the Solicitors Regulation Authority (SRA) seems to be following suit. Fines against solicitors are creeping up. In February 2015,
Nigel Harvie, a sole practitioner, was handed
the biggest fine ever levied by the Solicitors Disciplinary Tribunal (SDT).

In 2005, Harvie convinced a former client
to sign her house over to him for £300,000 in exchange for payment of her care and living costs. Over the next five years, Harvie spent £200,000 on the client’s care until her death in 2010 ended the arrangement.

Two years later the property was valued
at £800,000. The SDT found that Harvie had abused his client’s trust and manipulated her
into a derisory deal by failing to advise her to
take independent advice, and fined him a hefty £305,000. Mr Harvie was also ordered to pay the SRA’s costs of more than £37,000.

Before this case, the largest fine ever imposed by the SDT was £50,000, but the tribunal now has unlimited fining powers.

The SRA’s counterparts in the legal sector
seem to be lagging behind. The Bar Tribunal
and Adjudication Service has the power to impose fines of up to £50,000 against barristers; however, the largest fine we have been able to unearth is a mere £5,335, against a barrister who failed to respond to queries about the manner in which he had charged his client $38,000 for representation in a criminal case.

ILEX Professional Standards (IPS) is currently only able to impose fines up to a maximum of £3,000. However, in November 2014, IPS applied to the Legal Services Board to raise the maximum fine to £50m, to fall in line with the powers of >> >> the Adjudication Panel for the Council
for Licensed Conveyancers (CLC), which
does not currently publicise its disciplinary determinations. It would appear that these regulators are queuing up to impose some record-breaking fines.

The SRA has been persistently pushing for increased levels of fining power, but so far it
has met with little success. In 2010, the SRA’s proposals to have the same powers against traditional law firms as it does for alternative business structures (ABS) – up to £250m for
firms and £50m for individuals – was vetoed
by the Ministry of Justice.

The SRAs current ‘in-house’ fining powers
for misconduct or breaches of regulatory requirements are as follows:

• For solicitors and traditional law firms: up to £2,000;
• For a manager or an employee of an ABS: up to £50m; and
• Against an ABS itself: up to £250m.

Fine increase

Looking to the future is always difficult, but one can say with some certainty that fines against the professional community will increase, and it is not difficult to identify the reasons why.

Accountants have taken up with alacrity the ABS model and will seek to be all things to all men. The risk is that the maximisation of profits will be put ahead of professional ethics and that conflicts of interests will be ignored.

In 2002, Andersen collapsed as a result of
the Enron scandal, which was attributed to
the conflict of interest between its consulting department and its audit team. Accountants risk serious conflicts of interest when providing legal services as well.

Undeterred, however, the ‘big four’ of accounting (KPMG, Deloittes, EY, and PwC)
have already started to bolster their legal divisions. PwC, for instance, now has the
tenth-largest legal department in the world. Areas of law such as compliance, commercial contracts, and employment all fit rather nicely with the services they currently offer, and these ‘one-stop shops’ are likely to be compelling to commercial buyers who could make significant savings by bundling up their tax, accountancy, and legal work.

It will be interesting to see how the Bar gets along with its own ABS model. The Bar Mutual insurer is currently insuring single-person entity Bar ABSs, which are happily taking advantage of the low insurance premiums it offers.

Barristers’ insurance premiums are low as they generally have immunity from law suits because much of their work is conducted in open court. If the Bar seeks to broaden the scope of the services they offer through alternative structures, the risks are bound to increase.

Furthermore, the Bar ABS model may experience a rude awakening when it begins
to encounter the practical difficulties of case management and disclosure, which have traditionally been the domain of the solicitor.Barristers are not yet proficient in the art of managing client expectations and the negotiation of fees.

Conflict with clients is inevitable and it may
be that purchasing insurance in the commercial market will come as a shock if the Bar Mutual decides in the future that it does not want to insure ABSs.

Rogue traders

So, what are likely to be the long-term effects? Self-reporting will certainly increase, and it
may be that the SRA will follow the FCA line of negotiating fines with those firms that are too big to fail. Most of the big firms are likely to protect themselves by throwing individuals to the wolves as ‘rogue traders’, reminiscent of the way that the banks reacted when the Libor debacle broke.

This self-reporting trend has already started, with the number of self-reports from firms increasing from 250 in 2012 to 1,019 in 2013.
It would seem that we are also whistleblowing
on our fellow practitioners, as between 2012
and 2013 there was a 47 per cent rise in the number of solicitor-on-solicitor complaints received by the SRA.

The bigger firms are likely to be able to get
their cheque books out in order to brush aside significant compliance breaches, while smaller firms or individuals will be crippled or struck off for similar or lesser offences.

We can take some solace in the fact that the
US is still winning by a country mile insofar as corporate fines are concerned. Between 2008
and 2014 the Bank of America was fined a total
of £91bn, with a record fine of £16.65bn imposed by the Department of Justice for issuing bad subprime loans.

The SRA has a long way to go to catch up. SJ

John Bechelet, pictured, is head of commercial litigation and Holly Pelham is head of litigation support and knowledge management at Bivonas Law

---