SRA Publishes Updates on Financial Penalties and Post-Six-Year Negligence Claims

On 15 February 2023, the SRA published two separate updates; one on its updated approach to fines and publishing decisions and another on the rules for post-six-year client protection against negligence claims in readiness for the closure of the current SIF scheme later in 2023. Both followed recent public consultations carried out during 2022 and early 2023.

Updated Guidance On Financial Penalties

Following a consultation process carried out in 2022 (Financial penalties: detail of new approach), the SRA is due to introduce several reforms in 2023, including:

• The introduction of a fixed-penalty regime for lower-level misconduct
• Future fines for both firms and individuals linked directly to bandings based on percentages of income/turnover
• A pilot on the use of personal impact statements for cases involving sexual misconduct, discrimination or any form of harassment

In readiness for the linking of penalties to income/turnover, the SRA has now published guidance on its approach to fines and publishing decisions. According to the “Guidance: The SRA’s approach to financial penalties”, which comes into effect alongside the new rules on 30 May 2023, penalties will be issued by the SRA based on the turnover of the law firm or the annual income of the individual concerned.

The regime will continue to use the four penalty bands (A to D) based on the nature and severity of any misconduct. Band A reflects the least serious breaches, and Band D is for the most serious infringements.

Depending on the nature and seriousness of a breach, penalties levied on firms will range between 0.2% and 5% of their annual domestic turnover. For individuals, fines will range from 2% to 97% (or higher) of their annual gross income.

As the SRA state, “Fines of this level are within the normal range of many other regulators and was supported by the independent economic consultancy we engaged to advise us on the best metric to use for calculating the means of firms”.

The guidance also confirms that an Adjudicator may apply a discount where there is an early admission of misconduct (up to a maximum discount of 40%). Penalty reductions may also be made where there has been an attempt to remedy any harm caused, and there has been strong co-operation with the investigation.

New SRA Rules On SIF / Post Six-Year Negligence Claims

In light of the closure of the Solicitors Indemnity Fund (SIF) in September 2023, the SRA made the decision to continue providing consumer protection for post-six-year negligence claims at the same level of cover as the SIF. As part of the process that will see the Solicitors Indemnity Fund (SIF) come under the control of the SRA, the regulator has now finalised its rules for post-six-year client protection.

According to the SRA, the changes will:

• Make post-six-year protection part of their regulatory arrangements and provide appropriate oversight and governance of the scheme.
• Reduce SIF’s running costs – this is intended to increase the level of funds available for settling claims. The SRA has also stated that they do not expect to levy the profession for more funds to run the scheme in the near future, but they may consult on options for the “fund’s long-term financial arrangements”.

Some of the changes that were initially proposed to the SIF rules have now been amended based on feedback received during the consultation process. This includes changes to the claim process, which will require arbitrators to be appointed by an appropriate independent body.

According to the SRA’s Chief Executive, Paul Philip, “Across all the consultations we have run on post-six-year cover, there has been a consistent theme that both the public and profession value the protections the SIF provides. The SRA-run scheme will provide assurance for all that there is ongoing protection for clients. By running the scheme, we can make sure it runs as efficiently and effectively as possible”.

The proposed changes have been submitted for approval to the Legal Services Board (LSB), and it is expected that the new arrangements will come into force in October 2023.

Final words

Both announcements highlight the pace of change within the SRA following recent public consultations. The key for law firms and practitioners in ensuring ongoing compliance is remaining abreast of all of the regulatory developments as they occur. We will continue to keep you up-to-date with any changes to legal compliance matters throughout 2023.

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