Legal Compliance Blogs | Teal Compliance

What does an AML audit involve?

Anti-Money Laundering, Audit, Blogs, Legal Compliance / Kayleigh Smale

We love an AML audit and really enjoy reviewing law firms’ policies and procedures to see the different approaches they take in respect of AML. Most of all, we find it extremely interesting to see how a firms’ culture surrounding compliance is changing.

In this blog, we delve into what an AML audit is, and what an AML audit involves.

What is an AML Audit?

The AML audit process is a way to strengthen or improve a firm’s AML programme. It is a way of assessing whether Firm’s AML policies, controls and procedures are up to date, comply with The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR) and are functioning in practice as intended.

What's the purpose of an AML audit?

The purpose of the Audit is to:

Examine and evaluate the adequacy and effectiveness of the policies, controls and procedures adopted by the Firm to ensure compliance with the requirements of the Money Laundering Regulations;
Make recommendations in relation to those policies, controls and procedures; and
Monitor compliance with those recommendations.

Why conduct an AML audit?

There are two types of audit:

Mandatory Audit

Regulation 21 of the MLR requires a relevant person, where appropriate to the size and nature of the business, to establish an independent audit function. This does not necessarily need to be an external audit, however, it will need to be conducted by someone in the firm who is independent of the Risk/Compliance/Anti Money Laundering (AML) function, but equally has enough AML knowledge to be able to conduct the audit. It is important to note that any findings in an Audit Report carried out under regulation 21 are disclosable to the Regulator.

Non-Mandatory Audit (Internal Audit)

A Firm may choose to conduct an internal Money Laundering Audit as routine procedure, being a way of checking whether the Firm’s policies, controls and procedures are up to date and comply with the MLR. The Audit report in these circumstances would remain for internal purposes only and confidential to the firm.

What's does an AML audit involve?

There are four stages involved in an AML audit:

1. Review of policies and procedures

Firstly, a review of all the firm’s AML policies and procedures, Firm Risk Assessment and the Firm’s matter-based Risk Assessment is conducted by the auditor.

When carrying out the review the auditor will assess whether the firm’s AML policies and procedures meet the requirements of the MLR.

The auditor will use a list/table of each specific regulation and check this against the firm’s AML policies and procedures to confirm whether or not the firm has met that requirement.

2. Test

As part of the audit the auditor should test the knowledge, understanding and application of the firm’s processes. This is normally tested through staff interviews and matter file reviews.

Interviews

Interviewing staff will help the auditor assess the staff’s knowledge and understanding of money laundering, money laundering red flags and the firm’s processes.

File reviews

The auditor will carry out a review of files and assess whether the matters comply with the firm’s AML policies and procedures.

The auditor may also request to review some closed files. Reviewing a closed matter will assist the auditor in assessing whether there was on-going monitoring of risk and whether the completion instructions to accounts included information as to risk.

3. The Audit Report

The audit will result in a written report on whether:

The firm’s risk assessment and AML policies, controls and procedures comply with the minimum requirements of the MLR.
Changes which are required as a result of deficiencies identified (if any).

The audit report should:

Set out the law (what specific regulations of the MLR were checked against).
Explain what was examined for that specific regulation.
Document findings of areas of compliance and non-compliance as well as identifying areas for recommended improvement in behaviour and practice. It should be made clear which areas the firm is compliant, non-compliant or partially compliant.
Include an indication of where there are potential failings and a recommended course of action.

4. Review

The firm should conduct a review following an implementation period to establish compliance with the recommendations. As part of the review the auditor will be assessing whether the recommendations have been carried out and whether there is any evidence to show whether they are effective.

Get in touch

If you would like to discuss this further or feel your firm requires an independent AML audit, please get in touch and we’ll be happy to help.

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Anti-Money Laundering – What to expect from an Independent Audit

Anti-Money Laundering, Audit, Blogs, Legal Compliance / Kayleigh Smale

Regulation 21 of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (otherwise known as the Money Laundering Regulations) requires that regulated firms implement certain controls where it is appropriate to the size and nature of the firm. One of those controls is to establish an independent audit function.

The size and nature test requires some objective thought and firms are directed by the Legal Sector Affinity Group’s Guidance to consider a number of factors including the number of staff and offices your firm has, your client demographic, and the nature and complexity of work you undertake. The Solicitors Regulation Authority’s take on it is that most firms (but not all) will need an independent audit. In its latest AML Report of October 2021, the Regulator found that a high number of firms visited (49 out of 69) failed to implement an independent audit where required. For those firms where an audit had been carried out, some common areas of concern were that the reviews were not sufficiently thorough or lacked an element of testing, they weren’t independent, and firms had not implemented the recommendations in a timely way. Such concerns could lead to firms being referred to the SRA’s Investigations Team.

So if you have considered the size and nature test and determined that you need an independent audit, what should you expect from your review? It is key that your audit:

- Is independent from the people in your firm who are involved in setting and following the policies. The Regulations don’t prescribe that your audit must be carried out by a third party; but consider whether you are of a sufficient size to be able to resource a truly independent audit. Do you have staff with the right knowledge and capacity to carry out the audit? Even larger firms who have an audit function may find they do not have the necessary experience in AML.
- Is adequate in its scope and depth in order to give the firm assurance that the policies, controls and procedures they have in place are working. It should include a review of the existing documentation including firm and matter risk assessments and training plans, and a detailed review of how those processes have been implemented through file reviews and interviews with staff members to test understanding. The frequency of the audit should also be considered. Many firms decide to carry out an annual audit based on the size and nature test, but you may also consider focusing more frequent audits on higher risk areas as identified in your firm-wide risk assessment.
- Effectively identifies where processes are working well and roots out any problems with the process or where the process is not being followed. This means having the right person with the right expertise to carry out the audit so they know what they are looking for. It means carrying out an adequate number of interviews and file reviews across all locations and matter types so the Auditor can get a good feel for the firm and the types of issues that are occurring. Staff members from your fee earning teams, finance and any centralised onboarding teams should expect to be interviewed, along with the firm’s MLRO/MLCO. You may also consider focusing more frequent audits on higher risk areas as identified in your firm-wide risk assessment
- Provides feedback on where the firm’s current policies and procedures are not meeting the requirements of the Regulations and makes recommendations for improvement. A written report will provide you with the evidence that an independent audit has been carried out should the Regulator ever ask you for that information. The report should clearly set out the actions that should be taken to rectify any non-compliance. Recommendations should be implemented in a timely way and you should keep a record of the actions taken to meet the recommendations.
- Is part of an ongoing monitoring process to help you continually evaluate and improve compliance with the Regulations. Keep records of independent audits carried out for future reference and to evidence a robust auditing regime.

There is no doubt that an independent audit requires some forwarding planning and investment in resources, whether that be internal resource or if you plan to engage an independent firm to carry out the audit on your behalf. It’s not a tick box exercise. Senior level commitment to the importance of implementing good anti-money laundering controls is therefore crucial and sets the tone for the firm and for the staff whose files may be reviewed or who may be interviewed as part of the audit process. But the reward for your investment is obtaining a real learning opportunity to understand what your firm is doing right and where it can make improvements and effectively manage money laundering risks.

Get in touch

For more information about our independent audit service, get in touch with our experts today.

Photo by Scott Graham on Unsplash

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Do you have to collect CDD on employees of clients?

Anti-Money Laundering, Blogs, Data Protection, Legal Compliance / Amy Bell

This is a question I get asked loads of times!

In fact, last week I had a client who has a policy of asking for ID for employees, and their client refused citing Data Protection concerns. I’m not planning to go into the data protection issues here, but instead whether you have to ask for it.

To get to the answer here, we need to start with the law.

The law requires, in connection with a client who is not a natural person (I prefer using the word human here!) that you need to obtain and verify certain information about entity. For a company that is

name,
company number,
registered office,
the law to which it is subject,
its constitution,
the full names of the board and senior persons responsible for it.

In addition, you need to identify and verify the ultimate beneficial owners.

So, do we need ID from directors, or people who instruct us on behalf of a company?

In the original 2003 Money Laundering Regulation it was a requirement to identify and verify at least 2 directors, but this was removed by the 2007 regulations. I’ve found despite this change many firms still have that process, whether as a legacy from the original regulations or as a risk management measure – so that they have proof a real person is connected with the company. After all, the whole point of passports and utility bills is so you can tell the police which door to knock on, to talk to about the entity.

I think many of the more recent queries I have had come from confusion arising from Money Laundering and Terrorist Financing Regulations, which introduced in 2017 Regulation 28(10).

(10) Where a person (“A”) purports to act on behalf of the customer, the relevant person must—

(a) verify that A is authorised to act on the customer’s behalf;

(b) identify A; and

(c) verify A’s identity on the basis of documents or information in either case obtained from a reliable source which is independent of both A and the customer.

There was concern when this first came in that an employee or director might be thought to be purporting to act on behalf of the client. Fortunately, the Legal Sector Affinity Group Guidance helps here:

Section 6.6

Examples of someone purporting to represent might include:

a parent on behalf of an adult child.
an individual not employed by your client; or
a situation where the instructing persons authority to instruct is not clear or does not make sense.

Section 6.14.9

Someone employed by your client (depending on their position or seniority) or a director of your client may be considered as having apparent or ostensible authority to provide instructions on behalf of the client, though you may seek comfort of this on a risk sensitive basis. They should not be considered to be intermediaries, agents, or representatives. Where it is not clear or apparent what their authority to instruct on behalf of the client is, CDD should not be considered to be complete.

Accordingly, it is now much clearer in that “purports to act” is not intended to mean officers or employees of a company. That said, many firms still do carry out individual CDD on Directors and sometimes on employees instructing who are not directors, and whilst that is not required by the Regulations, it can be useful to provide an audit trail for the client in case you are challenged later on as to why you acted on instructions provided on behalf of the non-human client.

Get in touch

For more information about our AML services, please get in touch with one of our helpful experts.

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Economic Crime (Anti-Money Laundering) Levy

Anti-Money Laundering, Blogs, Legal Compliance / Simon Harbord

With all that is going on at the moment, its quite likely that you are not aware that the Government has introduced the Economic Crime (Anti-Money Laundering) Levy. This previously mooted levy, by way of the Finance Act 2022, achieved Royal Assent on 24^th February.

What is the Economic Crime (Anti-Money Laundering) Levy?

The Government has stated:

‘The Economic Crime (Anti-Money Laundering) Levy (‘the levy’) is part of the government’s wider objective, outlined in the 2019 Economic Crime Plan (ECP), to develop a long-term Sustainable Resourcing Model (SRM) to tackle economic crime’

The levy aims to raise £100 million a year from the AML regulated community to help fund new and improved AML capabilities. The NCA for example has been struggling to cope with all the reports it receives. Extra funding aims to address such problems.The first levy year is almost upon us, as it will run from April 2022 to March 2023, with relevant levy payments first being collected in April 2023 (i.e., payment in arrears). It will not be collected by all AML supervisors with only the Financial Conduct Authority, HMRC and the Gambling Commission being tasked with these duties. For the legal sector (and Accountants too) the HMRC will collect it. When you next plan your budgets, don’t forget to take into account the fact that as of April 2023, you may well be paying this levy in addition to all of your other overheads:

the levy is to be charged on a fixed fee system, based upon your UK revenue
it will be paid by medium, large, and very large AML-regulated entities
small entities (those with UK revenue below £10.2 million) will fortunately be exempt.

An entity is classified as:

medium if its UK revenue for the relevant accounting period is more than £10.2 million but not more than £36 million
large if its UK revenue for the relevant accounting period is more than £36 million but not more than £1 billion
very large if its UK revenue for the relevant accounting period is more than £1 billion.

The levy is to be charged as follows:

medium entities will pay £10,000
large entities £36,000
very large entities £250,000.

In addition to the levy itself, the Government estimates that it will impact an estimated 4,000 businesses, who will need to self-declare their levy status (i.e., whether they are AML regulated, and their UK revenue during the period of accounts that ended in a said financial year) to their relevant collector or be invoiced by their collector. The relevant collector (HMRC, the FCA or the Gambling Commission) for businesses will be the collector that already regulates/supervises them under AML Regulations, so the majority of firms will have an existing relationship with their collecting body.

The exception is c.450 firms who are regulated/supervised by the Professional Body Supervisors (PBSs), who will need to declare their status and make their levy payment to HMRC.

The government is to issue centralised guidance on gov.uk that sets out the process for paying the levy in due course.

Get in touch

To find out more, get in touch with one of our experts today.

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Anti-money laundering top 10 tips

Anti-Money Laundering, Blogs, Legal Compliance / Amy Bell

The legal sector is vulnerable to money laundering – and we’re here to help law firms with compliance and training, and make sure you’re fully equipped to ‘stop the baddies’.

The credibility of a law firm makes it an obvious target for money laundering criminals and having weak processes or staff that aren’t properly trained is like leaving your front door open.

So, here are our top 10 Anti-Money Laundering tips:

1. Evidence

All firms have to show regard to their supervisor’s risk assessment when preparing their own. (Reg 18 (2)). Make sure it is mentioned in the steps you’ve taken in preparing the risk assessment. If your assessment of risk differs with theirs, explain why.

2. Client account focus

In your Firm Risk Assessment, don’t forget to include the risk from the client account. It’s referenced in the National Risk Assessment and the Supervisors Risk Assessment, so it should be in yours. Often the focus is solely on the work types and firms don’t always identify the more generic operational risks. Detail what you do to protect the client account in the risk mitigation section. Also, don’t forget to include or cross reference your accounts procedures (for example, the timing of accepting funds and refusing to provide banking facilities and how you deal with funds from third parties) in your AML policy.

3. Source of funds and source of wealth

Tell people what you want them to do, ask them to record the steps they’ve taken, check that they’ve reviewed the information and most importantly remember their assessment of risk, having considered the information they have. I ask lawyers all the time.

“If I were to look at your files tomorrow, would I be able to see you have considered the source of funds and source of wealth?”

4. Client communication

Help your lawyers with what to say to clients about why your firm carries out Customer Due Diligence (CDD), in particular source of funds and wealth enquiries. If I had a pound for every time I heard the concern that

“Clients will think they are being accused/would be insulted if we asked.”

… Actually, clients don’t mind being asked nearly as much as we think they do – everyone asks all the time. But it does help if you give your lawyers some wording to explain the rationale for the checks. Clients understand this and are often appreciative of your efforts.

5. Timing of verification

You know the law, you must complete the ID&V part of CDD before the establishment of a business relationship or before carrying out a transaction. Some firms won’t issue a file number until it’s done. The Solicitors Regulation Authority certainly seem in favour of that approach.

However, many firms open the file first but require CDD to be completed soon thereafter, using the exception in Regulation 30(3). If you are going to do that, make sure you monitor that ID&V is in fact completed ‘as soon as practicable’. Make sure you can track the files and that CDD is obtained.

I see many policies which say the CDD must be obtained in, say, seven or 14 days, or work must stop – but it’s not always clear how that is managed. Is it a system issue – the file locks to prevent any further work – or is it manual, with compliance checking and chasing? Whatever it is, include it in your written procedure and be ready to show an auditor/the regulator the records of the monitoring.

6. CDD on existing clients

Something I hear all the time is:

“We will rely on existing client due diligence unless we become aware of a change in the client’s identity, risk profile or there is a three year gap in instructions”.

That’s because it is in the guidance. However, in theory, for an existing client that instructs once every two years, the CDD would never be refreshed if the lawyer doesn’t ‘become aware’ of a change. When considering a private individual, they are unlikely to change their identify, but a company could, and their beneficial owners could. So, where you don’t act for the beneficial owners, how would you know? I have always preferred to give the CDD a ‘shelf life’ – the longest we will rely on existing CDD is x months/years and then we will refresh. I would also capture the consideration of whether the fee earner thinks anything has changed in the matter risk assessment.

7. ‘purports to act’

The regulations require that, where a person purports to act on behalf of the customer, you verify the person’s authority to act and ID&V them. Some people have taken that to mean a director, but, if you look at the guidance for the legal sector, it refers to a ‘representative’. Most firms take the view that a director does not ‘purport’ to act, they do act for the company. Usually, I see firms apply Regulation 28(10) when they have an agent or attorney situation. That said, I’m still a fan of ID&V-ing at least one director because I like to know a ‘real’ person is attached to the corporate client.

8. Information for clients

The Money Laundering Regulations 2017 were amended by the Data Protection Act 2018. Make sure you’re giving your clients the required information.

9. Know your searches

Know how your electronic verification searches work. Many firms now have electronic verification of ID as part of their CDD processes. I was an early adopter in 2006 and I’m still a big fan but I say be careful. I find that many people can’t explain to me how they work, what they are checking and how many matches are required to pass.

Is it checking what you think it’s checking?

Sometimes, I see examples of CDD searches passing with the wrong date of birth included! Also, if the contract with the provider was agreed with the previous MLRO and you are the new one, make sure you are fully briefed.

10. Certifying copy ID

Be careful who you ask to certify copy ID. I prefer to rely on someone who is either well briefed or is familiar with the AML legislation, like lawyers or accountants. Also, you (or indeed the police) may want to speak to the certifier in the future so make sure it’s someone who can be traced.

That’s going to be difficult if you rely on post office or bank counter staff. Make sure they’ve signed and dated the certification and their name is printed in a way that you can read it.

I find giving the client an explanation of requirements that they can then hand to the certifier is the most effective way of getting it right.

Get in touch

If there are any burning questions or issues you want to discuss, our Ask Teal service can help. Simply contact one of our team of experts today.

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Two women, one advising the other on paperwork

Think you’re not a Tax Adviser? Think again!

Anti-Money Laundering, Blogs, Legal Compliance, Regulatory Compliance / Balkar Bains

On 23 November 2020 the SRA released guidance that may have been missed by many of you.

What’s the purpose of the SRA Guidance?

The purpose of the guidance was to draw to the attention of firms the need to consider whether they fell within the new definition of a tax adviser under The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (‘the regulations’) which, on 10th January 2020, widened the scope to be:

“a firm or sole practitioner who by way of business provides material aid, or assistance or advice, in connection with the tax affairs of other persons, whether provided directly or through a third party, when providing such services.”

What’s the consequence of the SRA Guidance?

The consequence of the guidance issued in November 2020 was that:

“If the change in definition to tax advisers that came into force on 10 January 2020 brought your firm into scope of the regulations, you must tell us and apply for approval of your beneficial officers owners and managers before 10 January 2021”

For those of you who don’t ordinarily provide tax advice, the pertinent words in the new definition of a tax adviser are “provides material aid, or assistance…, in connection with the tax affairs of other persons, whether provided directly or through a third party, when providing such services.”

The SRA defines material aid and assistance as ‘Non-advisory services that are in scope and that will help the client to comply with their tax responsibilities eg filing papers with HMRC on behalf of a client’.

The SRA’s broad definition of through a third party includes the instruction of a tax specialist, accountant etc on behalf of your client.

In short completing and/or filing an IHT form on behalf of your client, instructing an accountant on behalf of your client to advise on the tax implications of a matrimonial or employment settlement, or drafting a trust to manage a PI settlement will all likely fall within the scope of being a tax adviser.

What you need to do

If you believe you fall within the scope you will need to give consideration to whether your CDD processes (particularly within your private client, matrimonial, and litigation and employment departments) satisfy the requirements of the regulations.

If you are a firm that already provides tax advice, and particularly where you are instructed by another professional on behalf of their client, you may be in scope of the regulations to the extent that you will need to consider carrying out appropriate CDD on the underlying client. According to the SRA the question of ‘who is the client’ when services are provided via a third party is clear, it is always the person whose tax affairs are the subject of the advice, assistance or material aid.

And, not forgetting your obligations to the SRA, you should also give consideration to informing the SRA and seeking the appropriate approval of your beneficial officers, owners and managers by completing the FA10 (for firms newly authorised or newly in scope of AML authorisation) or FA10b (for firms who already have AML authorisation) as soon as possible.

Read the full SRA Guidance.

Get in touch

If you’re still unsure and would like further guidance or support, why not find out about our Ask Teal service which covers all things compliance. Alternatively contact one of our experts today.

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Money bag with the letters AML on the front and a magnifying glass

New AML Guidance needs a careful review

Anti-Money Laundering, Blogs, Legal Compliance / Amy Bell

On 20th January 2021 the Legal Sector Affinity Group (LSAG) finally issued their new draft AML guidance for law firms.

Since 2017 LSAG have agreed to issue one sector wide piece of guidance rather than different versions for each type of lawyer.

We were told to expect this guidance with both the Law Society of England and Wales and the Solicitors Regulation Authority talking about the project at events last year. However, it’s no surprise it’s taken a while to finalise since it does represent a comprehensive refresh of the existing guidance.

Part one (which applies generally to all legal professionals) is some 212 pages (about 50 more than the previous version) while part two contains specific guidance for Barristers and Notaries, but that is yet to be released.

Only a couple of pages in, you can detect a change in emphasis in the guidance, from focusing previously mainly on interpretation of the legislation for the sector to now setting out the Regulators expectations of good practice.

Practices must now pay attention to the parts of the guidance which LSAG think they should be doing, and if a practice decides to deviate from that, they need to be prepared to explain why. Clearly MLROs and MLCOs are going to have to consider this guidance carefully to ensure they’ve picked up all the areas of mandatory and recommended practice and that they can demonstrate they’ve thought about what is appropriate for their firm. This is not a small task!

That said, the guidance really is very good at setting out in some detail how to comply. In my experience many firms will welcome this additional detail, particularly for example the table listing out how to approach screening of staff, and a clear remit for senior management and nominated officers in the firm.

There are new chapters on the use of Technology and Internal Controls and a rewrite of the Privilege content.

With any new piece of writing which is over 81000 words long, there are some minor inconsistencies which will be resolved hopefully in the next draft. From our brief reading of the document there are some differences between early parts of the document (in the compliance principles) and the more detailed parts of the document further on. Therefore, we recommend reading the document cover to cover to ensure you pick everything up.

Conspicuous by its absence is the recent SRA Guidance on Tax Advisers, which if you’re not aware, could have some very substantial implications for the way your firm operates. It’s not that easy to find, but you can view it here.

Do consider this at the same time as the guidance because it may be that for parts of your practice where you’d previously not considered the need to comply with the Regulations (Family Law, Employment and Litigation specifically) you may now have to.

One point we should make is that the guidance is draft, and it could be some months before it receives Treasury approval. From experience, any changes are likely to be minor but you should be aware of the possibility, particularly if you’re investing in new solutions.

Get in touch

We’ve put together a package of support to help law firms implement the new guidance.

If you need any support, please contact our experts today.

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A look at the new Freelance Solicitor Model

Anti-Money Laundering, Blogs, Legal Compliance, Regulatory Compliance / Gill Crennell

In November 2019, the SRA introduced a new model of operating for so-called ‘freelance solicitors’. The intention of the freelance solicitor model was to allow solicitors greater flexibility when providing services. We were told that the changes took place as the regulator felt that the previous arrangements created an unnecessary and restrictive ‘artificial entity’ model around solicitors operating as individuals. Prior to the changes, sole practitioners were required to have their practice authorised as a ‘recognised sole practice’.

What is a Freelancer?

A good starting point is to look at what the SRA means by ‘freelance solicitor’. This term is used to describe a self-employed solicitor who:

is practising on their own;
doesn’t employ anyone else in connection with the services they provide;
is practising in their own name (rather than using a trading name or through a service company);
is engaged directly by the client with fees payable directly to the solicitor;
and without that practice being authorised. So, essentially, we’re talking about individuals who are genuinely self-employed.

Rules and Regulations

Freelancers are subject to various rules and regulations. The three key ones to note are as follows:

The SRA Authorisation of Individuals Regulations 2019 (the Regulations)

You must have practised as a solicitor for a minimum of three years since admission or registration.
You are self-employed and practise in your own name, and not through a trading name or service company.
You must take out and maintain indemnity insurance that provides adequate and appropriate cover in respect of all of the services that you provide or have provided (this includes both reserved and unreserved legal services), and that takes into account any alternative arrangements you or your clients may make.
You are not permitted to employ anyone.
You are engaged directly by the client, and the client pays their fees directly to you.
You may only hold client money in limited circumstances, i.e. when it’s for payments on account of costs and disbursements that you have not yet billed where:
1. any money held for disbursements relates to costs and expenses incurred by you on behalf of your client and for which you are liable, and
2. you have told the client in advance where and how that money will be held.

SRA Code of Conduct for Solicitors, RELs and RFLs (the Code)

Freelance solicitors are regulated in the same way as other solicitors and are subject to the provisions of the Code.

The Transparency Rules

Those freelancers providing reserved legal services are also subject to the requirements of the Transparency Rules. This includes publishing costs information where they offer any the services listed in the rules, publishing details of their complaints’ procedure, and telling clients that they will not be covered by insurance on the SRA’s minimum terms and conditions and that alternative arrangements are in place.

As a more general rule, freelance solicitors will need to ensure that clients fully understand the implications of their “freelance” status and any additional risks to the client. This should include informing clients if they are unable to benefit from the SRA Compensation Fund.

Other key regulations to think about

Freelance solicitors will also need to consider whether they are an “’independent legal professional” (ILP) for the purposes of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017). The MLR 2017 apply to freelancers providing legal or notarial services to others as part of financial or real property transactions. If you are an ILP, you’ll need to comply with the regulations, which includes having a risk assessment, policies and controls and procedures in place. You’ll also need to separately register with the SRA to comply with the MLR 2017.

What activities can Freelancers undertake?

The Regulations differentiate between those performing reserved legal activities and those just providing non-reserved legal activities – essentially differentiating between the areas of law considered riskier and those of low-risk. As you’d expect, the restrictions are more stringent for those undertaking the former. There are six reserved activities which you’ll find listed at Section 12 and Schedule 2 of the Legal Services Act 2007. If you’re planning to work as a freelancer, it’s important that you familiarise yourself with these:

Exercise of a right of audience
Conduct of litigation
Reserved instrument activities (includes conveyancing and linked matters)
Probate activities
Notarial activities
Administration of oaths

Historically, you’ve only been able to provide these types of services as a solicitor through an entity that is authorised to do so. However, if you’re a solicitor practising on your own account, you can now provide these types of services without needing to be authorised as a recognised sole practitioner if you meet the conditions set out in Regulation 10.2(b) of the Regulations.

More on the Restrictions in Regulation 10.2(b)

Experience: Whilst solicitors solely providing non-reserved legal activities don’t need to meet the three years’ PQE requirement, newly qualified solicitors will need to be mindful of the need to satisfy the competency requirements set out in the Code, which still apply.

Employing others: Despite this restriction, the SRA Ethics guidance (“Preparing to become a sole practitioner or a freelance solicitor”) clarifies that this isn’t intended to stop freelancers from contracting with others to provide pure administrative support to help them to provide their services, so long as they don’t “employ” those people. This would, for example, enable you to work in a Chambers model where the Chambers provides administration and other business support. It would also enable freelancers to receive similar services from a serviced office type arrangement.

It’s also important to note that if you do decide to employ someone to assist you in connection with the services you provide (including a paralegal or secretary), your clients will not benefit from protection under the SRA Compensation Fund (see Regulation 5.2, SRA Compensation Fund Rules) – you must be genuinely practising on your own.

Professional Indemnity Insurance (PII): Another apparent rational for the introduction of the revised regime was the SRA viewing that the high cost of purchasing PII on minimum terms was deterring entry to the market of sole practitioners wanting to practise independently.

Now, freelancers who carry out purely non-reserved activities are not required to have any PII. However, prudent freelancers should consider whether having no cover is in their own, and indeed their clients’ best interests. Conversely, freelancers carrying out reserved legal activities must have “adequate and appropriate insurance” in place, but do not need to comply with the SRA’s minimum terms. Cover must be for all of the work done as a solicitor and not just any reserved activities. When speaking with insurers or brokers, it’s advisable to let them know if you’ll be seeing clients at home or working from home on a regular basis, to make sure you obtain appropriate cover. When arranging cover, factors to think about may include an assessment of maximum probable loss for each work type, your claims history (if any; number/type/value/frequency of client matters) and likely client profiles. You should also record how you reached your decision on the level of cover so you can produce this if asked to demonstrate that you meet the “adequate and appropriate” requirement.

Although the cost of insurance can sometimes be prohibitive, freelancers should also consider taking out run-off cover if they decide to stop practising – at least until the risk of claims has fallen away. If solicitors decide to move back into private practice, this may be something that new employers will look for.

Insurers will undoubtedly be looking closely at the risk and compliance framework that freelancers put in place to ensure that any risks are being properly managed before they offer cover; so this is likely to be a key focus for those wanting to take advantage of the new model of working. Here at Teal we work closely with insurers and can help you to ensure that you have an appropriate framework in place that will satisfy your insurers’ requirements. Please do not hesitate to contact us if we can assist.

Restrictions on holding client money: Given the limitations on holding client money, if a client needs to pay or is due to receive other types of client money (such as damages or money from an estate), a freelance solicitor will need to make alternative arrangements to safeguard these funds – for example via a third party managed account such as Shield Pay.

Structures

As a freelancer solicitor you’re strictly prohibited from adopting any kind of entity structure, such as a limited company, limited liability partnership or partnership and can only operate under your own name. This means that you’ll be personally liable for your actions in the same way as a sole trader.

Law Society guidance (see link below) envisages that individuals may consider working together with other like-minded solicitors in a Chambers-style arrangement, with practices complementing one another. Each freelancer in the arrangement remains individually regulated and may, for example, just offer non-reserved legal activities, whilst others may offer reserved activities or perhaps offer both.

The process for getting set up as a freelancer

To get started, you will need to notify the SRA that you intend to practise on your own and whether or not you will be providing reserved legal services. If so, the SRA will then check whether you meet the conditions set out in the Regulations mentioned above.

Risks for law firms

Law firms should consider training staff on freelance solicitors and the implications for firms – for example, given the restrictions on holding client money, freelancers will be limited in the undertakings that they will be able to give.

Given the requirements for freelancers to contract personally for services, and the ban on freelancers holding client money, the SRA considers that the arrangements are unlikely to appeal to a sole practitioner who is currently running a business and employing staff and instead, are more likely to appeal to those who wish to undertake ad hoc freelance work or set up in a chambers style model.

When the new model for freelancers was first discussed, it received a considerable amount of negative commentary in the press, mostly relating to lack of regulation. However, as mentioned above, the Code still applies to all freelancers.

The Gazette reported back in early March 2020 just prior to lockdown, that 71 solicitors had already registered with the SRA as freelancers. The model is likely to be attractive to solicitors with a good client following or with small practices – so clearly poses a threat to firms, although quite how extensive the threat will be, only time will tell.

Useful links

Here are some useful links

Law Society Practice Notes – Click here
SRA Freelancer Notification – Click here
SRA Guidance – Preparing to become a sole practitioner or SRA regulated solicitor – Click here
SRA Guidance – Third party managed accounts – Click here
SRA Compensation Fund Rules 2021 – Click here

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Merging under pressure and compliance due diligence

Blogs, Legal Compliance, Regulatory Compliance / Matthew Tasker

There are firms that, for one reason or another, are finding themselves in unexpected commercial difficulties that make their longer term viability questionable. Radical reconstruction by consolidation through merger may be the only alternative to closing doors for good, with all the unsavoury knock-on consequences that this entails.

So now – more than ever – there are likely to be opportunities for merger to the potential benefit of both parties and compliance due diligence is extremely important.

Compliance due diligence

In any potential merger situation, it is becoming increasingly clear that compliance needs to be at the top of the priority list. Overall, it is a great indicator as to the overall management style of the merger target as, on a broader scale, the major regulatory standards are placing an increasing significance on the wider principles of good governance as an underpinning ethos to the compliance that they foster.

So… if you’re an ‘acquiree’, what do you need to do to prepare the firm for marketing, and as an ‘acquirer’ what do you need to look for?

They are actually two sides of the same coin. If you are the firm looking for help through merger, it’s similar to a job interview – prepare, prepare, prepare, and then prepare. This applies to training all levels of staff in what we are doing and why. Make sure that everyone is on board as their future employment may depend on it.

As an acquirer, the due diligence cannot be too thorough, especially in the current climate when many personnel are likely to be dispersed.

The SAR Principles

The overarching standard is of course the SAR Principles, revised and reduced from ten to seven in November 2019. They are as follows and should be thoroughly interrogated:

“You act:

in a way that upholds the constitutional principle of the rule of law, and the proper administration of justice.
in a way that upholds public trust and confidence in the solicitors’ profession and in legal services provided by authorised persons.
with independence.
with honesty.
with integrity.
in a way that encourages equality, diversity and inclusion.
in the best interests of each client.”

In support of these Principles the firm needs to have a COLP and COFA and you should check that the roles are filled by someone who is appropriately qualified and trained – and takes the role seriously.

You are seeking to adduce evidence that the firm not only talks a good talk but actually delivers on those verbal assurances. There will usually be two aspects to the proof needed that there is such delivery.

You will need to check that there are Standard Operating Procedures that are encapsulated in systematised written format. These will, or should, form recognisable parts of the firm’s Operations Manual.

It maybe that there are a number of different manuals though e.g. the Data Protection or Lexcel Manuals. If the Manuals are stored electronically the fact that they’re all in the same ‘Compliance’ area is indicative of how orderly the firm’s management processes are. Hopefully the Manuals will all be assembled ready for inspection – a well organised firm should have sufficient confidence in its systems to know what a merging firm will be looking for.

You will need empirical evidence. This will take the form of findings from interviews, both formal and informal, and from written records relating to inductions, training and Personal Development Reviews or Appraisals. There will be clues as to the effectiveness of the firms’ governance with such items as structural organograms and procedures for escalating responses for incident handling.

Minutes from meetings of all types, and policy review schedules can also be very helpful aside from broader good governance you should check for clear documentation of the firm’s supervisory structures.

There is increasing emphasis being placed on this in the SRA principles as well as the GDPR / DPA legislation.

How do you find it?

The paper (or electronic equivalent) trail is self-explanatory – time consuming but worthwhile. Gathering empirical evidence is more challenging but probably more revealing.

The firm’s COLP and COFA will always be interviewed. Further interviews should be carried out with a good cross-section of all staff and include front and back office staff at all levels. Remember that conversations solely with partners/senior management will give a slanted perspective.

Insurances – Appropriate levels of PII insurance will be checked together with the firm’s Complaints and Claims registers in support of this. How these are administered is a good indicator of the general management style of the firm and attitude towards compliance. Appropriate cover in other areas to complement the firm’s Business Continuity Planning will also be checked.

Supervision – From the point of view of supervision checks you should speak to both supervisors and supervisees on whether issues are dealt with on a one-to-one basis or in teams; whether training needs are formally identified and how the training is delivered and monitored. This is especially important in the new era of remote working in which firms are currently operating. This topic has been explored in other recent blogs on the Teal Compliance website.

File Reviews – These are another rich source of data and are a vital part of delivering the quality required by the SAR. Check how often they are carried out and by whom and what happens to the results of the reviews.

Training Schedules and Attendance Records – These are very revealing about the firm’s overall attitude towards compliance and its effective implementation especially when read in conjunction with staff interviews for cross-referencing. The firm’s approach towards conflicts avoidance should be carefully monitored.

The firm’s management of its central Key Dates diary should be similarly examined.

How do you evaluate it?

It is advisable not to rely on just one opinion and to apply some sort of consistent level of scoring on how compliance is being managed.

Results from interviews are likely to be more subjective so a structured series of open questions contained in a questionnaire will help towards achieving consistency.

What is it telling you?

Working on a “RAG” (Red, Amber, Green) method of assessing levels of compliance it would be highly unusual and deeply suspect to come up with a full pack of Greens. It is a useful indicator but not the whole story. What you are really looking for is the overall style of approach to the whole portfolio of regulatory compliance.

Every firm will have setbacks or issues occurring that expose actual or potential weaknesses in a firm’s breach prevention armoury. These are of themselves not necessarily the most important thing. What really matters is, how the firm approaches dealing with the actual or potential issues, and the overall compliance-embracing culture of the firm, and how the firm works to embed and keep embedded this culture at all levels.

If you are in any doubt about carrying out this sort of exercise then you shouldn’t hesitate to ask for outside help. A third pair of eyes can in any event add an element of objectivity that may be difficult to maintain internally when people are either enthusiastically – or unenthusiastically – polarised about a merger project.

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Manager talking to colleague on video call

Managing Risks When Supervising Remotely

Blogs, Legal Compliance, Risk Management / Amy Bell

Effective supervision has always been important from a risk management perspective but never more so than now, when it comes to managing risks when working remotely. Especially if you’re having to grapple with new technology and processes.

SRA Code of Conduct

As it is a requirement of the SRA Code of Conduct for firms to have in place an effective system for supervising client matters, most firms will already have policies and processes in place. However, these processes will need to be reviewed to ensure that they are still workable and effective in light of the remote working and different hours that some staff may be working to fit in around childcare and home schooling.

Supervision process

When reviewing supervision processes, consideration should be given to the following key areas:

Experience of Staff: The staff that are being supervised and their qualifications and level of experience. For example, qualified experienced Solicitors will not need as much day to day supervision or quality checking as a Paralegal or Trainee Solicitor.

Communication: Good clear communication is key as, in the office, some supervision happens informally as Supervisors can overhear a telephone conversation when someone is struggling or can be approached for a quick sense check of a matter that a member of their team is unsure about or they need clarification about a query they have received from a client.

It is important that good communication continues between a supervisor and their team to ensure a high level of work and effectiveness is maintained as well as staff morale.

Consideration should be given to weekly team meetings and one on one meetings being held via Skype or Zoom. Dates and times for these meetings should be agreed in advance and put in everyone’s diaries so staff can plan their work and appointments around them. An agenda should be prepared in advance so all staff know what is going to be discussed and what they need to bring and prepare. This will ensure that these meetings are as productive as possible and valuable time is not wasted.

File Surgeries: Allocating a file surgery day each week can also be an efficient and effective way of ensuring that matters can be supervised and allow both the supervisor and team members to plan and manage their time and work effectively. Staff should be informed of a timeline by which they need to email and confirm to their supervisor the issues they wish to discuss at the file surgery meeting together with the name and file number of the matter if applicable. The supervisor should then acknowledge receipt and allocate a time slot to their team member on the allocated file surgery day for the matter to be discussed over the telephone.

File Reviews: It is important that these reviews continue as these are a very effective way of supervising and of being able to identify any potential issues that could turn into a claim or a complaint if not dealt with. Consideration should be given as to whether the number of file reviews undertaken needs to be increased for some staff. It should be noted that file reviews can also help identify any other office processes and policies which may need to be reviewed and amended as a result of people working remotely.

Checking of Work: Supervisors should inform their team on the process for the checking of work before it is sent to clients. Confirmation should be given to each team member of the process that needs to be followed and when the supervisor will need to receive the work by together with the timescale for them reviewing the work and returning it. This will help staff be able to effectively manage key dates and timelines as well as client’s expectations.

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If you would like any help reviewing or preparing a Supervision Policy, please get in touch with our experts today.

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