Regulation: the SRA seeks powers to levy unlimited fines

In June 2024 the SRA launched its latest consultation seeking feedback from the profession and consumer groups on its revised approach to financial penalties. Practitioners who have been keeping an eye on this subject will know that this is the third consultation issued by the SRA in as many years concerned with the regulator’s fining powers. In November 2021 the SRA issued a consultation proposing:

• an increase to the maximum fine it can issue to traditional law firms and those working in them from £2,000 to £25,000)[1].
• that it be permitted to consider an increased percentage of domestic turnover of a firm when assessing the level of the fine; and
• that fixed penalties be introduced for administrative breaches of its rules, (“the 2021 Proposals”)

Notably, one of the stated justifications for the proposed changes was that the SRA did not consider that its existing fining framework delivered credible deterrence, and that fines at the top-end of the then financial bracket were disproportionately low given the seriousness of the issues being considered.

In August 2022 the SRA issued a consultation setting out how it intended to implement the 2021 Proposals, including the introduction of a new fining framework. Advocating its plan to calculate fines against firms as a percentage of annual turnover, (to a maximum of five percent), the SRA stated that:

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

The SRA went on to set out the percentage applicable in each fining band A to D, with fines in Band A (the least serious misconduct) of between 0.2 and 0.3 percent of turnover, increasing to fines in Band D (the most serious) of between 3.6 and 5.0 percent of turnover.  

Fast-forward 22 months to June this year and the third SRA consultation on financial penalties. The trigger for this latest review of the SRA’s fining powers was the coming into force of the Economic Crime and Corporate Transparency Act 2023 (“ECCTA”) on 4 March 2024, but the regulator’s plans go way beyond alignment with ECCTA.

ECCTA affords the SRA unlimited fining power to sanction all those it regulates in respect of economic crime, for example: money laundering, tax evasion, bribery, fraud and breach of financial sanction arrangements. In general, behaviour which inhibits the prevention or detection of economic crime. In addition to updating its fining framework to accommodate those new powers, the SRA is reviewing the framework to “make sure it remains fit for purpose” and has made representations to the government to grant it unlimited fining powers in relation to all breaches of its rules. One might ask what, over the course of the intervening 22 months, has changed to justify an increase in the fining level for Recognised Bodies from a maximum fine of £25,000 to an unlimited amount. Despite the SRA’s comment that the review involves reflection on its learning from operating the existing framework, one does not find the answer in the consultation paper, nor does one find any data evidencing a deficiency in the current regime.

The proposed reform

The SRA plans to introduce two new fining bands E and F. As mentioned above, there are currently four fining bands, A-D. Fines within the bands are based on a percentage of a firm’s annual domestic turnover (from 0.2 to 5.0 percent) or a percentage of an individual’s gross income (from 2.0 to 97.0 percent). Authorised decision makers have additional powers to impose fines beyond those calculated by reference to the framework, up to the SRA statutory maximum, where necessary to maintain professional standards. There is also the option of referring a firm or individual to the SDT. The new Bands E and F will cover breaches of ECCTA, but not exclusively. Conduct which is determined to be serious in nature and of significant impact could under the SRA’s scoring system result in a Band E or Band F fine. Band E ranges from 6.0 to 10.0 percent of a firm’s annual domestic turnover, and 113 percent to 145 percent of an individual’s income. Band F fines would be upwards of 11% of turn over and upwards of 145 percent of an individual’s income.

With the introduction of the new fining bands the SRA also plans to clarify in what circumstances it will use other metrics to determine the level of fine. The SRA’s current guidance states that in exceptional circumstances the SRA may consider overseas turnover or income from non-legal work. The consultation sets out some illustrative examples of when the SRA considers it appropriate to depart from the usual metric. Readers of the consultation will be alarmed to learn what the SRA considers fair and appropriate under its new proposed fining regime.  

There is a further sting in the tail. Whilst the percentages in bands A-D will remain unchanged, the SRA plans to introduce minimum fines in each band. For firms, the minimum fines will range from £5,000 for Band A increasing to £50,000 for Band D and £500,000 for Band F. For individuals the equivalent figures are £2,500 for Band A, £25,000 for Band D and £100,000 for Band F.

In short, a seismic shift which the SRA seeks to rationalise by asserting (but not evidencing) that the current regime does not represent a credible deterrent against the most serious breaches of its rules. Indeed, in advocating the introduction of minimum fines, (which would take the minimum fine for misconduct falling within bands B and D to double the maximum fine the SRA can currently impose), most of the narrative is concerned with the need for fines imposed for misconduct to be higher than the fixed penalty fines. Since 2022 the SRA has had the power to impose financial penalties for administrative breaches of the rules. Those fixed penalties are set at £750 for a first breach and £1,500 for a second breach within three years. We are not told why the SRA did not feel it necessary to seek the introduction of minimum fines for more serious misconduct when it consulted on fixed penalties in 2022. More pertinently, there is nothing to help us understand why a single-entry level minimum fine of, say, £3,000 for firms and £2,000 for individuals for misconduct that is beyond administrative in nature, would not be sufficient to recognise the conduct as more egregious.

What next?

The consultation closed on 20 September 2024. As yet there is no date for the SRA to publish its response setting out its final position and next steps. The hope is that the proposals will be recognised for what they are - unfair and poorly conceived.

If the SRA does get its way firms and individuals are bound to revisit the protections they have in place, including insurance cover. The FCA Handbook includes a prohibition against insurance that indemnifies a financial penalty the FCA has or may impose under the Financial Service and Markets Act, its purpose being to ensure that financial penalties are a credible deterrent strategy by making individuals and entities liable for their failings. There is no equivalent provision in the SRA Codes of Conduct. However, if the main aims of the SRA’s proposals is to provide a credible deterrent at the same time as maintaining professional standards and upholding public confidence in the profession, it may well consider the imposition of a similar prohibition. Even if the SRA does not follow the FCA’s lead, the profession should not bank on the availability of insurance. Public policy arguments may frustrate cover for fines imposed for breaches of ECCTA, and whilst limited cover may be available to some firms and individuals for fines falling outside of ECCTA, there will be no market available to provide unlimited cover. 

[1] The SRA already had the power to fine an ABS up to £250M and a manager or employee of an ABS up to £50m and the option to refer a traditional law firm or an employee thereof to the SDT if it felt a greater fine warranted. The SDT has had the power to impose unlimited fines since 2011.