Welcome to the latest edition of our Lawyers Liability & Regulatory Update, in which we look back over the last month at key developments affecting lawyers and the professional risks they face.
All regulators are equal, but some are more equal than others
If the SRA brings disciplinary proceedings and is unsuccessful, the default position is that a costs order won't be made against it, unless the proceedings were brought improperly or conducted as a "shambles from start to finish" (Baxendale-Walker).
The rationale behind Baxendale-Walker is that the SRA may be deterred from exercising its public interest function if it is routinely subject to adverse costs orders. The counter-argument goes that solicitor-respondents may feel the need to be overly defensive, accepting fines or other sanctions even where no breach has occurred, for fear of incurring prohibitive irrecoverable costs disputing allegations made against them.
The payment of adverse costs by regulators has now been re-visited in CMA v Flynn. The case involved the Competition and Markets Authority; however, the SRA (and other regulators) intervened. The Supreme Court decided that the UK competition watchdog should not enjoy automatic costs protection and that there is no generally applicable principle that public bodies should enjoy a protected costs position when they lose a case.
This would undoubtedly have caused some alarm at the SRA were it not for a specific acknowledgement in the judgment that Baxendale-Walker is still good law. The crucial distinction, according to the Supreme Court, is that the SRA is funded by the legal profession (predominantly by practising certificate fees) and any adverse costs orders would therefore have to be borne by the profession. Interestingly, the Law Society decided not to intervene in the case.
The position therefore remains that solicitors and firms who are prosecuted by the SRA are required to fund their defence (whether from professional indemnity insurance or their own pocket) without any realistic prospect of recovering those costs. Incidentally, they also risk having to pay the SRA's costs, which are typically recovered from the unsuccessful solicitor when a complaint is upheld.
It is still possible for a costs order to be made against the SRA (and it has happened in some instances) but the threshold the regulator has to meet to avoid such an order remains very low indeed.
The Powerful And The Penalised
With SRA fining powers set to increase by a factor of twelve, we look at the changes being introduced and the impact they will have
On 23 May 2022 the SRA announced its plans to increase its fining powers from £2,000 to £25,000, ignoring recommended caps by the SDT and Law Society. The SRA also plans to strengthen its punitive powers in other respects including a restriction of practice, suspension or strike off rather than a fine (unless there are exceptional circumstances) in cases involving sexual misconduct, discrimination or other forms of harassment.
The impact of recession on professional negligence claims in the wake of Covid-19
It will come as no surprise that we expect there to be an increase in professional negligence claims as the current issues with the economy, including the cost of living at an all-time high and predictions of a recession in the UK, take hold. We take a look at what types of claims can be expected in the wake of the COVID-19 pandemic. We also explore the importance of firms developing an open and supportive culture focussed on effective supervision, collaboration and a proactive approach to dealing with mistakes as soon as they are made as key in limiting their exposure to claims.
Clients in pressure cooker of loans for litigation
According to the Law Gazette, more than a dozen former divorce clients have claimed their solicitors pressured them into taking out loans, over the past decade, with Novitas Loans Limited (Novitas) to raise funds for proceedings. The amounts borrowed reportedly ranged between £20,000 - £350,000, with annual interest rates of between 18%-30%. The SRA is apparently investigating complaints made in respect of such arranged funding.
In a case from 2021, the Financial Ombudsman Service found a solicitor had "pressured" a client into taking up a loan. The same solicitor denied the client and spouse mediation with "no reasonable explanation". It was noted that "Had things gone as they should, Miss H would probably have ended up going to mediation and incurred costs of up to £1,745". As it was, the client borrowed £45,000 at 18% interest to fund the contested proceedings. The debt has since been cancelled.
Separately, another client alleged they were encouraged to take out a £100,000 loan which lasted just four months.
In May, the Law Gazette reported Novitas had put aside £6.22m for potential redress for those who took out loans "related to family and probate litigation".
Multiple clients have also reported that few checks were made regarding affordability. One individual has alleged he was offered a loan on his initial call with his solicitor "even though he had other debts at the time". Other clients have alleged little attempt was made to tell them to take independent legal advice. Any attempt by solicitors to do so was described as "a token effort".
These examples highlight all too clearly the risks that are presented when a solicitor arranges funding for their own client.
SRA shines a light on firms' IT security
Hybrid working and remote working have become part of 'the new normal' in a post-covid world and, consequently, the workplace is more dependent on its IT systems than ever before. The majority of law firms are now utilising technology as part of the services they provide for a more effective and efficient service for their clients.
Whilst these changes are beneficial for law firms, and have provided opportunities for new, fully remote business models - this new era is not without risks and challenges. It comes as no surprise that law firms as holders of client money and sensitive and confidential client information remain prime targets for cyber criminals.
The SRA's Risk Outlook report has highlighted the key types of IT threats now being reported and how it expects these threats will change in the future. Whilst the broader risk landscape has not changed for firms, the SRA is keen to report the clearest view of current and potential cyber and IT risks the market faces.
Phishing and email modification continue to make up the majority of reported incidents to the SRA. Unfortunately, conveyancing remains a regular target due to the amounts of money involved, but attackers are broadening their offensive to other 'less alert' practice areas.
Numbers of ransomware attacks and attacks on third parties and providers are increasing and often have a serious impact on a firm. As artificial-intelligence, voice-modification software, and smart contract and blockchain systems continue to be developed, the sophistication of cybercrime is developing with it. The SRA recognise that some attacks might make it through even the best defences available. It is important, therefore, to consider recovery plans, backups and cyber insurance.
In early 2022, two UK law firms were subjected to blackmail in high profile ransomware attacks after cybercriminals had obtained confidential data by an intrusion into the firms' IT systems. Both firms obtained urgent injunctions against Person(s) Unknown to prevent the publication of the data, but this demonstrates the risk to law firms is a real one. The SRA commented it "expected that file stealing will become a normal part of how ransomware extorts money". Only 18 ransomware attacks were reported in 2021 but the SRA conceded the figure "may not give the true picture of the threat".
The message from the SRA is clear – cybercrime against law firms is increasing in sophistication and in number. Firms need to ensure that their cyber security culture, systems and training are as strong as possible.
Review of hourly rates for taxation of litigation costs
The judiciary administration has recently confirmed the judiciary's decision to maintain the same solicitors' hourly rates for "taxation" (assessment) of costs as between parties to litigation. These hourly rates are set by the judiciary, pursuant to a four-yearly review mechanism adopted in 2017. The previous increase in solicitors' hourly rates took effect on 1st January 2018. The next review is due towards the end of 2025.
Despite increases in clients' own legal costs, the judiciary's decision to maintain the same hourly rates for inter partes taxation likely reflects certain non-inflationary considerations. The Hong Kong economy is still suffering from the impact of COVID-19.
The solicitors' hourly rates used to tax of a receiving party's costs are benchmark rates – they reflect what the courts consider to be reasonable without being binding on the courts. When assessing a party's costs on a taxation, the courts exercise a wide discretion both as regards the type of costs that are recoverable and the hourly rates. The top end of the High Court rates is for a solicitor of over fifteen years qualification (HK$5,800 per hour) – the lower end of the rates is for a trainee solicitor or newly admitted solicitor (HK$1,700/HK$2,600 per hour).
In practice, there is a significant "recoverability gap" between the costs that a successful (receiving) party pays their own solicitor and the costs that they recover from an unsuccessful (paying) party on a court taxation. The "recoverability gap" is likely to increase following the judiciary's decision to maintain the same hourly rates for another four years.
The judiciary's decision has been met with quite a bit of disappointment from various stakeholders. A four-yearly review mechanism looks increasingly out of place given (for example) inflationary pressures and volatile market conditions.