SRA warns over rise in dishonest misuse of client assets

The number of reports of dishonest misuse of client assets rose to an all-time high in the summer, reaching 420 over three months, according to figures released by the Solicitors Regulation Authority.

More than 140 reports were made to the SRA in each of the months of July, August and September, the regulator said in its updated Risk Outlook published earlier this week.

Financial difficulty was "a key factor that can create an environment where client money or assets are more likely to be misused," the SRA said, adding that the connection between the two was "borne out by recent increases in reports of misuse of client money".

The report goes on: "Before the outlook was published we had already started to see an increase in this risk. Since then we have dealt with even more cases, with July, August and September 2013 seeing large volumes of reports of this risk."

The 140 or more reports made in each of these months occurred "against a backdrop of increased financial difficulty in firms" and gave the regulator "concern that risks to client money and assets are increasing".

The updated outlook builds on the results of an engagement programme over the summer with 2,000 firms, which found that 100 - 5 per cent - appeared to experience serious financial difficulty.

The findings, repeated in the latest outlook, include firms taking a "naïve approach" to financial management and "over-dominant partners" being a frequent cause of financial failure.

Despite a more promising outlook for the UK economy, the SRA added, the risk of financial difficulty for law firms will be ongoing, "partly as a result of the fundamental weaknesses we have identified in the financial management of many firms we regulate".

Alongside the main update, the regulator also warned of the risk of group contagion, where the liabilities, losses or other events affecting one member of a group of firms could affect a regulated entity within that group.

"This risk is particularly an issue in conglomerate business structures, but is relevant to many firms in a group structure or marketing collective," it said in 'Catching a chill: law firms and risks of group contagion'.

Risks associated with outsourcing, including cloud computing, also came out as emerging concerns.

"Cloud computing can control the risk of breach of confidentiality by eliminating the need for USB sticks or for confidential files on laptops," the SRA said in 'Silver linings: cloud computing, law firms and risks', but "it can also increase the risk if communications with the provider are not secure".

It also reminded firms using cloud computing that they should comply with the Code of Conduct and the Data Protection Act.