SRA investigations – are you prepared?

Mergers and acquisitions of firms involve some regulatory involvement, but it’s the potential for firm’s closing down at short notice that will cause the most angst in the Cube. Given that we are currently in the traditional window for PII renewal, there will be a heightened concern that firms are unable to secure cover inside the extended insurance period (30 days from renewal date) and the subsequent cessation period (60 days from the EIP).

For firms that have been unable to secure cover, there’s an obvious stress. Despite this, the usual regulatory obligations remain. Further issues also arise – such as the need to notify the SRA within 5 days of entering the EIP/CP (SRA Indemnity Insurance Rules, rule 8.1).

If a firm does close, common themes that can concern the SRA include:

• Firms failing to make allocation for the storage of archived files – if the storage company isn’t being paid, they won’t hold the papers. One of the most common interventions the SRA undertakes is in this situation. They’ll pass the bill on to the owners of the closed firm.
• Client money – before closure you may have been diligent and sent cheques out to all clients, returning their money. Inevitably, there will be cheques that remain uncashed. That money remains in your client account and will need to be returned (SRA Accounts Rules, rule 2.5)
• Unpaid disbursements – complaints from suppliers that have been chasing payment often end up with the SRA. This can be an early indicator of financial instability, which could engage the firm’s reporting requirements (SRA Code of Conduct for Firms, rule 2.4)
• Complaints – if you haven’t made appropriate provision to deal with client matters (transferring to new firms, agreeing extensions, returning papers to clients) then issues will arise. This is likely to represent a breach of the SRA Codes of Conduct and the Principles.

Closure of the firm does not bring an end to the duties of the Principals, and the SRA will take action against individuals where appropriate. Taking all reasonable steps to close the firm in an orderly manner will minimise the risk of regulatory action.

Aside from the closure of firms, economic uncertainty can lead to an increased risk of fraud. This includes frauds perpetrated by clients (such as money laundering, or property based frauds), or an internal risk where rogue members of staff take advantage of lax internal controls. Firms need to be alert to the following:

• Cheque signing procedures – does the firm have robust systems for authorising payments?
• Does the firm accept cash payments – difficult to monitor (who accepts the cash?)
• Onboarding new staff members – what checks does the firm undertake on new staff (would you know if you were employing someone subject to a section 43 Order?)
• Supervision – does the firm ensure that client matters are dealt with in a competent and timely manner (SCCF, rule 4.2). Do you document file reviews? Can you prove to the SRA that you are complying with this requirement as a firm?

These are the types of questions the SRA will ask if a firm is subject to an investigation, especially so if client money has been lost as part of a fraud.

If you need advice on any issue relating to SRA compliance, including; dealing with an investigation, your reporting requirements, or implementing robust internal systems, we are happy to help. Our Head of Compliance, Richard Esney, is a qualified solicitor who worked for the SRA for 14 years, prior to joining Harding Evans. You can contact Richard here.