30 June 2015 / by Regulatory/ in
My Fine is Bigger than Yours!
If the measure of a regulator’s virility is the size of the fines it imposes, then the United Kingdom regulators are lagging far behind their United States counterparts. However, not to be outdone, the UK agencies seem determined to catch up. It was recently announced that the Financial Conduct Authority (FCA) had fined Barclays Bank a record £284 million for IBOR benchmark related failings, and for misleading the regulator. This pales in comparison to the $2.4 billion fines imposed against Barclays Bank by the US regulators, however the FCA figures still dwarves the highest ever fine of £3 million imposed in the UK against an accountant by its regulator.
In April 2015, the Financial Reporting Council’s independent tribunal imposed this fine on accountancy firm Deloitte following the collapse of MG Rover Group. This reflects a significant reduction from the fine of £14 million imposed by the Accountancy and Actuarial Discipline Board’s independent tribunal in July 2014.
However, worryingly for those in the legal profession, the Solicitors Regulatory Authority (SRA) seems to be following suit. Fines against solicitors are creeping up. In February 2015, Nigel Harvie, a sole practitioner, was handed the biggest fine ever levied by the Solicitors Disciplinary Tribunal (SDT).
In 2005, Mr Harvie convinced a former client to sign her house over to him for £300,000 in exchange for payment of her care and living costs. Over the next 5 years, Mr Harvie spent £200,000 on the client’s care until her death in 2010 ended the arrangement. Two years later the property was valued at £800,000. The SDT found that Mr Harvie had abused his client’s trust and manipulated her into a derisory deal by failing to advise her to take independent advice, and fined him a hefty £305,000. Mr Harvie was also ordered to pay the SRA’s costs of £37,016.40.
Prior to this case the largest fine ever imposed by the SDT was £50,000, however SDT now has unlimited fining powers.
However the SRA’s counterparts in the legal sector seem to be lagging behind. The Bar Tribunal and Adjudication Service has the power to impose fines of up to £50,000 against barristers, however the largest fine our researches have been able to unearth is a mere £5335, against a barrister who failed to respond to queries about the manner in which he had charged his client $38,000 for representation in a criminal case.
The ILEX Professional Standards (IPS) are currently only able to impose fines up to a maximum of £3000, however in November 2014, IPS applied to the Legal Services Board to raise the maximum fine to £50 million again, to fall in line with the powers of the Adjudication Panel for the Council for Licensed Conveyancers (CLC), which does not currently publicise it’s disciplinary determinations. So it would appear that these regulators are queuing up to impose some record breaking fines.
The SRA itself has been persistently pushing for increased levels of fining power, however so far it has met with little success. In 2010, the SRA’s proposals to have the same powers against traditional law firms as it does for alternative business structures (up to £250m for firms and £50m for individuals) was vetoed by the Ministry of Justice.
The SRAs current “in-house” fining powers for misconduct or breaches of regulatory requirements are as follows:
– for solicitors and traditional law firms: up to £2,000
– for a manager or an employee of an ABS: up to £50 million
– against an ABS itself: up to £250 million
Looking to the future is always difficult but one can say with some certainty that fines against the professional community will increase and it is not difficult to identify the reasons why.
Accountants have taken up with alacrity the Alternative Business Structure (ABS) model and will seek to be all things to all men. The risk is that the maximisation of profits will be put ahead of professional ethics and that conflicts of interests will be ignored.
In 2002, Andersen’s collapsed as a result of the Enron Scandal, which was attributed to the conflict of interest between its consulting department and its audit team. Accountants risk serious conflicts of interest when providing legal services as well.
Undeterred however, the Big Four of accounting (KPMG, Deloittes, EY and PwC) have already started to bolster their legal divisions. PwC, for instance, now has the 10th largest legal department in the world. Areas of law such as compliance, commercial contracts and employment all fit rather nicely with the services they currently offer and these “one-stop shops” are likely to be compelling to commercial buyers who could make significant savings by bundling up their tax, accountancy and legal work.
It will be interesting to see how the Bar gets along with its own ABS model. The Bar Mutual Insurer is currently insuring the single-person Bar entity ABS, who are happily taking advantage of the low insurance premiums it offers. Barristers’ insurance premiums are low because they generally have immunity from law suits because much of their work is conducted in open court. If the Bar seeks to broaden the scope of the services they offer through alternative structures the risks are bound to increase.
Furthermore, the Bar ABS model may experience a rude awakening when it begins to encounter the practical difficulties of case management and disclosure which have traditionally being the domain of the solicitor; nor are barristers yet proficient in the art of managing client expectations and the negotiation of fees. Conflict with clients is inevitable and it may be that purchasing insurance in the commercial market will come as a shock if the Bar Mutual decides in the future that they do not want to insure ABSs.
So what are likely to be the long term effects?
Self reporting will certainly increase, and it may be that the SRA will follow the FCA line of negotiating fines with those firms which are too big to fail. Most of the big firms are likely to protect themselves by throwing individuals to the wolves as “rogue traders” reminiscent of the way that the banks reacted when the LIBOR debacle broke.
This self reporting trend has already started with the number of self- reports from firms increased from 250 in 2012 to 1,019 in 2013; and it would seem we are also whistleblowing on our fellow practitioners, as between 2012 and 2013 there was a 47% increase in the number of solicitor-on-solicitor complaints received by the SRA.
The bigger firms are likely to be able to get their cheque book out in order to brush aside significant compliance breaches whilst smaller firms or individuals will be crippled or struck off for similar or lesser offences.
We can take small solace from the fact that the US is still winning by a country mile insofar as corporate fines are concerned. Between 2008 and 2014 the Bank of America was fined a total of £91 billion, with a record fine of £16.65 billion fine imposed by the Department of Justice in respect of its issuing bad subprime loans.
The SRA has a long way to go to catch up.
First published as part of the Solicitors Journal Half Year Digital Review.