Lawyers Covered - December 2024

What could be more festive than our December edition of Lawyers Covered – so here it is, a gift from the Lawyers Liability and Regulatory Group at RPC, to all of you, our lovely readers! And it’s a bumper edition with links to 3 full articles as well as our usual snippets. Happy holidays!

Second successful challenge to an SRA intervention in 20 years

Interventions are perhaps the most draconian power available to the SRA and can have devastating effects on the reputation of the practice and its principals. The recent High Court decision of Santers Solicitors Limited and Martyn Howard Santer v The Law Society of England and Wales and Solicitors Regulation Authority Limited [2024] EWHC (Ch) 3003 saw the court overturn the SRA's intervention in a regulated law firm: only the second decision of its kind in 20 years. This serves as a reminder to the regulator to wield its power proportionately. Read our analysis here.

SRA mulls abolishing client accounts

The SRA have launched a trio of consultations on how client money is held which will run until 21 February 2025.

The consultations form part of the SRA's ongoing Consumer Protection Review which aims to reassess the risk landscape of the legal sector in light of recent big firm failures, often involving misappropriation of client funds. Client funds held by firms include not only legal fees, but also large sums tied to significant life events for many clients, such as settlements from personal injury claims or the purchase price of a property. These large-scale failures have not only strained the compensation fund but have served as a wake-up call to the inherent risks associated with firms holding client money. The consultations therefore consider proposals aimed at strengthening safeguards around how consumer money is held and providing more sustainable safety nets which can alleviate reliance on the compensation fund as one of the only sources of redress where clients do suffer losses.

The SRA are proposing to move away from firms holding client money towards alternative models in order to manage risks that have materialised in recent years. The SRA are considering adopting a more prescriptive approach not only to how money is held but also how money is moved between client and office accounts; how advance fees may be requested; timeframes within which residual balances must be reconciled and how interest is retained or accounted to the client.

The proposed regulatory changes, if implemented, would radically re-shape the way client funds are held and managed. Firms may be required to adopt alternative methods of holding client funds such as using Third Party Managed Accounts (TPMAs) and be required to account for interest on client funds to the client.

The SRA recognises that these proposals would mark a substantial shift from the way client accounts are currently managed and that these changes would need to be implemented over time. In any case, these consultations and the Consumer Review carried out earlier this year signal a wave of regulatory changes to come in relation to the management of client money. The Law Society is working on its response to the consultation, but has already indicated that it supports the continued use of client accounts and warned against radical change.

Share your views on this important issue with the SRA by responding to the consultations here.

New guidance for in-house lawyers to combat pressure to misuse privilege

The Post Office scandal shone a bright light on the misuse of legal privilege. Here, we observed Royal Mail allegedly manipulating correspondence to disguise it as litigation-related and evade disclosure under litigation privilege. Additionally, Royal Mail copied lawyers in to emails, seemingly to hide behind the 'veil' of legal advice privilege. Following surveys and roundtables, the SRA has collaborated with in-house lawyers to develop new guidance on privilege.

The guidance recognises that privilege is complex, particularly for in-house lawyers. The dual role these lawyers play in their workplace mean that legal and non-legal matters often overlap.

Key takeaways:

1. Privilege belongs to the 'client'. It is the client who can assert privilege and, in turn, waive privilege. Therefore, in-house lawyers must correctly identify their client in relation to any given instructions.
2. In-house lawyers must explain to their client, from the outset, what constitutes privileged information. It is also important to explain the situations where: (1) they might be under an obligation to report matters externally; (2) privilege might be overridden; and (3) the lawyer might need to seek independent advice on privilege.
3. Legal privilege may be lost if the lawyer is involved in or aware of wrongdoing. Labels should not be used improperly to claim privilege if the necessary criteria are not met.
4. Privilege may apply to documents in internal investigations if they have a legal purpose, but this will only attach to communications between in-house lawyers and their client.
5. All regulated individuals must report serious concerns regarding the conduct or behaviour of solicitors and authorised firms to the SRA.

Practical advice

We understand the important and influential role in-house lawyers play in helping organisations to behave legally, fairly, and ethically. The new guidance on privilege for in-house lawyers makes it clear that the SRA is trying to come up with ‘practical ways’ of helping in-house lawyers to balance business demands against conflicts, challenges and pressures faced with their legal code of conduct. All in-house lawyers, and those that advise them, should read the guidance in detail.

Details of new offence of failure to prevent fraud set out in government guidance

Law firms continue to be attractive targets to fraudsters due to the amount of money held in a typical client account (see our article above). The new offence of failure to prevent fraud will therefore not have escaped the notice of Risk & Compliance teams.  The new offence is not due to come into force until 1 September 2025, but key guidance enabling firms to implement processes to avoid liability under the Act was released on 6 November 2024. The new offence applies to organisations that meet at least two of the following criteria: 250 or more employees, a turnover of £36m or more, and/or assets of £18m or more. While only larger firms are likely to be caught by the legislation, all law firms are likely to work with or come into contact with organisations subject to the new offence, whether as the firm's bankers or as clients. Read full analysis from RPC's White Collar Crime experts here.

Can you conscientiously object to working for Big Oil?

With ESG high on the agenda across industries and social pressures such as the Just Stop Oil campaign and Extinction Rebellion not only intensifying their activities but specifically targeting law firms, solicitors may be wondering whether they should be applying an "ESG test" to new instructions. The SRA's Code of Conduct provides a guide to the answer, mandating that lawyers act ethically, but the regulator does not go as far as to specify what sorts of matters solicitors should be willing to take on.  And, of course, the rules of natural justice are relevant to this debate: doesn't everyone deserve a lawyer?

For those reviewing whether they wish to accept instructions which might facilitate fossil fuel projects, some comfort is available thanks to Lawyers Are Responsible, a group of prominent lawyers taking action in solidarity with those on the front line of the climate crisis.  The group of over 200 lawyers has obtained and published advice from Counsel concluding that the SRA is unlikely to take action against a solicitor who refuses to take on fossil fuel work for reasons of conscience. The opinion of Claire McCann and Hana Abas of Cloisters Chambers is available to download online and also considers the possible implications of lawyers' rights to exercise their democratic right to peaceful protest outside of the workplace.

CJC recommends reform of the professional negligence pre-action protocol

The Civil Justice Council (CJC) has set out its recommendations for reform of litigation-specific pre-action protocols, including the professional negligence pre-action protocol (the Protocol):

1. The requirement to consider ADR should be reinforced. The CJC recommends new wording to spell out the courts' powers to penalise the parties in costs (or to stay proceedings) for non-engagement with ADR. The CJC also comments that parties choosing to engage in a formal ADR process at the pre-action stage should be exempt from any automatic requirement to engage in mediation after proceedings are issued. However, it will ultimately be for the court to decide whether to order the parties to engage with another round of dispute resolution following the decision in Churchill¹and the resulting changes to the CPR².

1. The "stocktake" process should be formalised. Currently, the protocol requires parties to review their respective positions; consider the evidence and whether proceedings can be avoided; and narrow the issues. The CJC's view is that the current procedure is not structured enough, and the language is too "woolly", which encourages a "light touch" approach to narrowing the issues. The CJC therefore recommends that the parties should be required to complete and file a "stocktake report" to encourage compliance and to assist the courts in managing the dispute more efficiently.

1. The current timeframe for the letter of response should remain the same. The CJC consulted as to whether the response period (3 months from the date of acknowledgment of the letter of claim) should be shortened (to between 14 and 28 days). The strong view (from both claimants and defendants) was that the current timeframe is appropriate having regard to the detailed, complex, and document-heavy nature of many professional negligence disputes.

The CJC's report can be viewed here. The Civil Procedure Rule Committee will now consider how to take forward the CJC's recommendations.

Hong Kong – Update on Hong Kong Lawyers in "Greater Bay Area"

As we reported in May 2022, law firms in Hong Kong are increasingly looking for business opportunities to practise in China's Greater Bay Area (GBA).  The GBA has a gross domestic product of almost US$2 trillion and a population of over 85 million people.  Given the relative cost of living in Hong Kong (compared with the GBA), it is no surprise to see some estimates that, during long weekends and holiday periods, for every one GBA resident visiting Hong Kong two of Hong Kong's 7.5 million residents travel to the GBA. Lawyers often follow where people and business go.

Since 2020-21, Hong Kong practising lawyers who are at least five years qualified (reduced to three years in 2023), permanent residents of Hong Kong and Chinese citizens, have been able to sit for a GBA legal examination.  On passing the examination, completing certain training and becoming registered, a Hong Kong lawyer is able to advise on certain civil and commercial matters in the nine GBA cities. The exam is held annually (2024 being the fourth year) and out of approximately 13,000 Hong Kong practising lawyers approximately 450 (up to this year) have passed the examination and obtained the requisite lawyer's license to practise in the GBA.

On the back of these developments, the Law Society of Hong Kong commissioned the School of Law of Sun Yat-sen University to conduct a research report on business and development opportunities for Hong Kong lawyers in the GBA. The first phase of the report was released earlier this year and is accessible on the homepage of the Law Society's website. The report is some 75 pages long and deals with (among other things):

• the general GBA business environment;
• the status of collaboration between Hong Kong law firms and GBA law firms;
• obstacles to cooperation;
• the demand for Hong Kong qualified "GBA lawyers" in the GBA; and
• the outlook for Hong Kong lawyers in the GBA.

In case you missed it…

Contribution claims between professional advisors are commonplace, and insolvent insureds are becoming more common as the latest insolvency service figures show more insolvencies in the last year than in any of the past 30 years. As such, claims under the Third Parties (Rights Against Insurers) Act 2010 (the 2010 Act) are on the increase. RPC's Will Sefton and Richard Seymour acted in a landmark decision dealing with an important but previously undecided point about the interaction of contribution claims and the 2010 Act.

Riedweg v HCC International Insurance Plc & Anor [2024] EWHC 2805 (Ch) addresses the vexing issue of "same damage" in the context of a 2010 Act claim against the insurer of an insolvent insured and has been variously described by commentators as “critical”, “important”, a “nasty little trap", "predictable" and "robust". Read our analysis here.

¹Churchill v Merthyr Tydfil County Borough Council [2023] EWCA Civ 1416
²See here for more on these changes.

With additional contributors: Aimee Talbot, Sally Lord and Cat Zakarias-Welch.