A report highlighting lapses in law firm oversight has prompted calls for the Solicitors Regulation Authority (SRA) to adjust its inspection practices.
The Carson McDowell report, commissioned by the Legal Services Board, has recommended significant changes to the SRA’s approach to law firm inspections. After analysing the events that led to the closure of Axiom Ince, the report suggests a more proactive regulatory stance is necessary.
Currently, the SRA’s inspection regime is reactive, primarily focusing on responding to issues rather than preventing them. This approach was criticised in the report, which noted that the absence of regular oversight could result in undetected risks, especially concerning client funds. No law firm should operate for extended periods without a visit or contact from the SRA.
The report pointed out that since 2015, firms are only required to deliver an accountant’s report to the SRA if it is qualified. This has created a loophole allowing firms to avoid scrutiny by simply not submitting reports unless absolutely necessary. The recommendation suggests revisiting this rule to ensure all firms send in their accountant’s reports, or at least declare that they have received an unqualified report annually.
Further scrutiny is recommended for accumulator firms, those that have acquired two or more firms within a year. Despite the SRA starting to analyse data on these firms in early 2023, the report found no proactive measures had been taken. This oversight could pose risks to consumers, and the report urges the SRA to conduct inspections where consumer risks appear.
The process by which law firms acquire others has also been called into question. Currently, the SRA does not require prior authorisation or consent unless a new legal entity is created post-acquisition. The report expressed concern about this, as it may not adequately safeguard consumer interests and called for a system to triage and scrutinise risky acquisitions.
Lastly, the effectiveness of interventions as a regulatory tool was debated. Carson McDowell acknowledged the blunt nature of interventions and suggested alternatives such as targeted monitoring over individual practices where dishonesty is suspected. This method could protect client funds without the need for comprehensive interventions.
In light of these findings, the Carson McDowell report suggests a shift towards more proactive and comprehensive oversight by the SRA. The aim is to prevent issues before they arise, safeguarding the interests of consumers and maintaining trust in the legal profession.
