Lawyers Covered - June 2024

It can be tough for busy lawyers to find enough time to service clients, make it safely through the regulation obstacle course, win new work and keep up-to-date with developments, but we've got you covered! Welcome to the March edition of our Lawyers Liability & Regulatory Update, in which we highlight the last month's key developments affecting lawyers and the professional risks they face.

New SRA warning notices: client account shortfalls and SLAPPs

The SRA have reminded firms to "immediately replace client account shortages" in a press release and new warning notice published on 21 June 2024. A shortage on client account impacts all clients whose money is held in the account, making the account inoperable until the shortage is remedied.

The warning notice quotes from Levy v SRA [2011] EWHC 740 (Admin) in which Mr Justice Cranson said "Client money is sacrosanct, and a proper stewardship in relation to it is vital".  The notice spells out the potential consequences of failing to replace missing money from client account immediately, including the risk of intervention by the SRA and liability for breach of trust. It also indicates that the SRA will consider the transfer of money for fees from a deficient client account as "serious misconduct" which may give rise to disciplinary action. The warning notice is a stark reminder to solicitors that the "buck stops with them": "If you are a manager of the firm, you have a duty to replace missing client money from your own resources. It may be necessary for you to obtain a loan to do this. It is irrelevant that fault may not lie with you personally".

Meanwhile, the SRA updated its warning notice on SLAPPs (Strategic Lawsuits Against Public Participation, or oppressive litigation aimed at deterring legitimate debate) earlier this month to reflect the provisions about SLAPPs (including the new definition) in the Economic Crime and Corporate Transparency Act 2023. The new warning notice is required reading for all litigators, particularly at a time of increased scrutiny on litigation tactics in light of the evidence given to the Post Office Horizon IT public inquiry.

Compulsory mediation now in force for small claims

Parties to small claims will be automatically referred to a one-hour telephone mediation appointment with HMCTS' Small Claims Mediation Service as part of a pilot implemented on 22 May 2024. Read our quick guide to the new pilot scheme here and read more about the MOJ's plans to impose compulsory mediation on all County Court claims here.

Legal Services Board introduces new complaints requirements as complaints against firms increase

The LSB has introduced more extensive requirements for firms dealing with first-tier complaints (FTC) in a bid to tackle the increasing number of complaint cases put before the Legal Ombudsman which were handled inadequately by firms. The SRA found that complaints against firms went up almost a fifth between 2019 and 2023 with almost 40% of these complaints due to delays and failures to keep clients informed.

The new requirements focus on ensuring firms assess FTCs competently, diligently and impartially whilst responding fairly, consistently and promptly. The overall objective for firms must be to resolve FTCs at the earliest possible opportunity. Unlike the current set of rules, the new requirements will become regulatory requirements, subject to SRA enforcement. Firms will likely need to undertake an extensive set of changes to their complaints handling policies and signposting information to adhere to the new requirements. The timeliness with which firms deal with complaints will become public information, although we do not yet know how this will be published.

The new requirements took effect on 16 May 2024 and will lead to changes to the SRA Codes of Conduct and to firms' complaints policies and procedures. Regulators will have 18 months to comply with the new requirements; however, the LSB is encouraging regulators to comply sooner.

SRA backlog on disciplinary cases improving but still significant

Despite making significant progress in reducing its backlog of investigations that have been open for more than two years, the Solicitors Regulation Authority (SRA) continues to fall short of its own key performance indicators (KPIs), set last year.

The SRA set an ambitious goal to resolve 70% of their investigations within 10 months after the initial assessment phase and early resolution process, after acknowledging that serious cases were taking too long to resolve. However, in its latest performance report, the SRA has only resolved between 54% to 65% of cases by this deadline throughout the year. 

The SRA attributed this shortfall to the ongoing integration of their continuous improvement project which was initiated last summer. The project has sought to embed new working practices and move away from regular overtime which, in turn, will form the foundation for the sustainable performance improvements the SRA strives to achieve.

The SRA were however successful in achieving some of their KPI's set last year.  According to its report, the SRA were able to achieve their target of resolving 93% of investigations within 12 months and 95% within 18 months. The 24-month target of 98% was nearly achieved, reaching it in three out of five months. The SRA also reported that the assessment and early resolution team improved, meeting the goal of completing 80% of assessments within two months in three out of five months.

Overall, there has however been a steady decline in the number of active investigations that had been opened for over 24 months, but the SRA has a long way to go to achieve the 70% target.

Insurance proving elusive for new freelance solicitors

There are now 650 freelance solicitors in England and Wales (up from 300 in 2021), most of whom are men (61%) with an average age of 51. Black and British Asian solicitors are better represented in the freelance solicitor cohort, recent SRA figures reveal. Whilst this is a tiny cross-section of practising solicitors (making up less than 1%), these are the trail blazers and their experiences may pave the way for more to join them.

However, difficulty obtaining professional indemnity insurance has been described by the SRA as a "persistent barrier", with a quarter unable to secure cover at all. Although some freelancers asked for support in obtaining insurance, the SRA has not made any such proposals, instead recommending that they adapt their operating model, for example by joining professional associations which offer insurance.

Other insights to be gleaned from the SRA's three year evaluation are:

• The SRA has received fewer complaints regarding freelance solicitors than non-freelance solicitors, although the sample size is probably too small to draw any conclusions.
• The increase in freelance solicitors from 300 to 650 over 3 years indicates to the SRA that freelancing is a "viable and increasingly attractive practising model".
• Only 7 of 51 clients surveyed were aware that their freelance solicitor did not offer the same consumer protection as a traditional law firm.

Hong Kong: Distribution of "surplus funds" on law firm intervention

In the March and October 2021 editions, we reported on the intervention of a law firm that purported to have one of the largest conveyancing practices in Hong Kong. Approximately HK$380 million became vested in the Law Society of Hong Kong on the exercise of its power to close the firm in 2020.  Some three years later comes the case of The Council of the Law Society v Ng & Ors [2024] HKCFI 946. The case decides what should be done with "undistributed funds" after verified claims by former clients have been paid. It appears that after verified claims have been paid approximately HK$22 million will be left undistributed.

The situation is unusual.  Where a law firm in Hong Kong is closed by the regulator following serious accounting errors and/or dishonesty there is usually a deficit such that losses have to be shared by former clients. The regulator is usually left to recoup its substantial costs out of the balance (if any) of the former firm's office accounts and/or from the partners (who may have been adjudged bankrupt).

In The Council of the Law Society v Ng & Ors, the court held as follows:

• Some HK$23 million that the partners had paid into the firm's client accounts following the regulator's demand to rectify a perceived deficit should be repaid as having been paid under a factual mistake – albeit the regulator's demand had been reasonable and lawful. The money will be repaid to one of the partner's trustees in bankruptcy.
• The "undistributed funds" (HK$22 million) can be used the pay the regulator's costs arising out of the legal proceedings and intervention, (in effect) once former clients' verified claims have been paid within six months of the court's order. The court arrived at this conclusion applying English case law (Re Ahmed & Co (a firm) [2006] EWHC 480 (Ch)), a broad discretion pursuant to the court's powers set out in Schedule 2 of the Legal Practitioners Ordinance and in the absence of any verified thirty-party claims to the funds.

The outcome signifies the beginning of the end to the intervention and is a significant success for the Law Society and its members.

Additional contributors this month: Catherine Zakarias-Welch and Sally Lord