The Solicitors Regulation Authority (SRA) should ensure proposals for new reporting requirements for firms are evidence-based, proportionate and do not create unnecessary administrative burdens, particularly for smaller firms, the Law Society of England and Wales has warned.
In its response to the regulator’s latest client money consultation, the Law Society said it supports the SRA’s intention to identify risks earlier, but raised concerns about the scope of the proposals and called on the SRA to make more use of the data it already collects from firms.
“We support the SRA’s aim of identifying risks earlier and strengthening consumer protection”, Law Society president Mark Evans said. “The SRA, however, already receives significant amounts of information from firms, and should ensure it makes full use of existing data without any overlap before introducing additional reporting obligations.
“We are also concerned about the risk of regulatory drift through the gradual expansion of reporting requirements. A recent example is the proposal to add a third notifiable event even before the consultation to reform notifications regime has been completed.”
The Client money in legal services: Notifying the SRA of changes to help identify and act on risks consultation, part of the SRA’s ongoing Client money in legal services agenda, asked whether new regulatory requirements should be introduced to require law firms to notify the SRA of prescribed events.
The consultation, which closed on Monday (18th August), highlighted points on which changes to a firm’s profile might indicate the potential of a higher risk of harm to the interests of clients, particularly where firms might be considering merger and acquisition (M&A) activity, or begin to hold client money.
In its response the Law Society said the SRA already collects “substantial information… through existing regulatory processes” which it felt could be utilised more effectively, citing the data collected from practising certificate renewals, accountants’ reports and regulatory history and other supervisory activity.
It also raised concerns about what it describes as “a broad and open-ended prescribed events framework that could be expanded over time without sufficient safeguards” and would place further regulation and compliance requirements on firms, with the impact felt disproportionately by smaller firms and sole practitioners.
“Individual reporting obligations may appear limited on their own”, the response notes. “But their cumulative impact adds to the wider regulatory and economic pressures facing the profession.”
Clarity over ‘notification triggers’, particularly in relation to M&A activity, would be needed, the Law Society added.
The Law Society said it does not support the use of fixed financial penalties in the first instance, instead calling for a “more proportionate approach” that would prioritise guidance, engagement and remediation. However, it acknowledged persistent and deliberate or high risk non-compliance should be subject to sanctions.
Evans added: “While we accept that having timely information about M&As and firms beginning to hold client money could be helpful, the information needs to be used effectively. We therefore encourage the SRA to conduct evidence-backed consultations on any additional notification requirements, demonstrating how they will improve regulatory outcomes without imposing unnecessary burdens on firms.”
The Law Society is calling on the SRA to ensure any future notification requirements are part of a “coherent intelligence-led supervisory model rather than a standalone reporting exercise” with a “tightly scoped and evidence-based approach focused on clearly identified high-risk events”.
