SRA unlimited fining powers

The biggest development in solicitors' regulation in 2025 is undoubtedly the SRA's new approach to financial penalties.

For the first time in history, the SRA will wield unlimited fining powers, and it proposes to use them in a way which could transform the financial consequences of regulatory breaches.

As recently as 2022, the financial penalty which the SRA could impose on a 'traditional' law firm (as opposed to an Alternative Business Structure ('ABS'), to which a different regime applies) was limited to £2,000. Any greater sanction would require a referral to the SDT. That limit increased to £25,000 in July 2022. (See our previous article on this topic here). But now, less than 3 years later, the SRA has the power (granted by Economic Crime and Corporate Transparency Act 2023 ('ECCTA')) to impose unlimited fines for rule breaches related to economic crime.

The SRA revamped its approach to financial penalties in 2023. Now, the majority of financial penalties are calculated by reference to annual domestic turnover for firms or annual gross income for individuals. The percentages in question can be hefty (over 25% of turnover or 149% of income in the most serious cases), but the £25,000 cap has until now placed a limit on the resulting fines. Removal of that cap will clear the way for the SRA to impose fines at a level which is as yet unheard of for the profession.

The new powers kick in for breaches related to financial crime which took place on or after 4 March 2024. The SRA's fining powers for regulatory breaches unrelated to financial crime remain capped at £25,000 for the time being, although the SRA is pushing for this limit to be removed as well.

To put the new proposals in context, a worked example in the SRA's consultation paper results in a fine of £2,340,000 being imposed on a firm. For comparison, the largest fine ever imposed on a firm by the SDT to date was £500,000. Fines for the largest firms (and even some individuals) could in principle reach even higher.

The SRA's proposals have received stiff opposition from, amongst others, the Law Society and the CLLS, and may well be subject to judicial review. However, wherever things may settle in terms of the details of the approach, the SRA's new powers come from primary legislation and are likely be used in some form or other during the coming months.

Recent decisions

In light of the above, we have been reviewing and considering recent SRA decisions. The SRA's decisions in recent AML compliance cases effectively illustrate its evolving approach in what should be an area of real concern and focus for law firms.

AML is a particularly significant area at the moment, because:

1. Firstly, it is now a major focus area for the SRA (reflected in the sheer number of decisions last year – over 50 firms fined for AML breaches). It is specifically identified as a key priority in the SRA's corporate strategy, and the SRA has set up the AML Proactive Supervision team to inspect and assess AML compliance.
2. Secondly, as above, the SRA acquired the power to levy unlimited fines on firms and individuals in respect of breaches related to financial crime (including breaches relating to AML compliance) under ECCTA. The SRA hasn't used those new powers yet, pending the outcome of a consultation on its new approach to financial penalties. The consultation closed in September and the outcome is expected early this year.

There are common themes across all of the cases we have considered:

1. They all involved failures to carry out the risk assessments (firmwide, client and matter risk assessments) required by AML legislation, and/or failures to adopt suitable policies, controls and procedures to address the risk of money laundering.
2. There was no evidence of any harm being caused to clients or third parties.
3. The firm did not benefit financially from the breaches.
4. The firm cooperated with the SRA and acted promptly to remedy the breaches.

The SRA's financial penalty scale

In order to appreciate the impact of the changes to the SRA's fining powers, it is important to set out and explore the SRA's approach to imposing financial penalties; this is published here. An important point to note at the outset is that the SRA's current approach is to impose fines which represent a percentage of turnover (for firms) or income (for individuals).

Against that background, financial penalties are set following a strict formula:

1. Initially, the SRA determines the seriousness of the breach. It does this as follows:
   
   a. Firstly, the nature of the conduct is assessed as "less serious" or "more serious". In broad terms, "less serious" offences are unintentional one-offs, whereas "more serious" offences are deliberate or reckless, or form part of a pattern.
   
   b. Secondly, the impact of the conduct is assessed as low, medium or high. The SRA will not only look at the harm which was in fact caused by the breach, but also the harm which the breach had the potential to cause.
   
   
2. At each stage, the conduct is given a score: 
   
   a. The "nature" score is either 1 (less serious) or 3 (more serious); and 
   
   b. The "impact" score is either 2 (low), 4 (medium) or 6 (high).
   
   
3. Those scores are then added together to produce a "penalty bracket", which is a range of possible fines expressed as a percentage of annual domestic turnover (for firms) and a percentage of annual gross income (for individuals)
   
   

   Total score	Bracket	% age of turnover (firms)	% age of income (individuals)
   3	A	0.2 – 0.3%	2-3%
   5	B	0.4 – 1.2%	5-11%
   7	C	1.6 – 3.2%	16-49%
   9	D	3.6 – 5%	65-97+%

   
   
   
4. The decision maker will then decide where within the "penalty bracket" the penalty should be set, before being adjusted to take into account things like mitigation, affordability and the removal of any benefit arising out of the conduct. This is referred to as the "basic penalty".
   
   
5. Having set the "basic penalty", the SRA will then:
   
   a. Apply a percentage reduction of up to a maximum of 40% to take account of any mitigating factors; and
   
   b. Adjust the final penalty so as to eliminate financial gain or other benefit obtained as a direct or indirect consequence of the misconduct.

The SRA's approach to aggravating and mitigating factors

Under the SRA's current approach, its decision makers consider separate mitigating factors at two different stages of the fining process. Firstly, they take into account mitigating factors when determining the appropriate indicative fine. Secondly, after the indicative fine level has been set, they assess whether it is appropriate to reduce (discount) the penalty to take account of further specific mitigating factors. These factors are:

• Making an early admission
• Remedying any harm caused
• Cooperating with our investigation

The decision maker can discount a basic penalty by a sum of up to 40 per cent, but the SRA advises that it will take into account the need to make sure that the penalty remains appropriate and proportionate to uphold public confidence. This is a simplified version of the SRA's old approach, which it considers introduces more clarity and transparency.

The SRA is proposing it moves away from a standalone discounting process. Instead, its decision makers will consider all aggravating and mitigating factors at one stage, when setting the indicative fine level. The SRA intends to amend its guidance to set out the types of factors which it will consider as aggravating or mitigating factors.

The SRA proposes to make it clear in its guidance that it may consider the following aggravating factors when setting the indicative fine:

• Demonstrating a lack of insight or remorse regarding the misconduct.
• Harm or potential harm to vulnerable clients.
• Disregarding our published guidance or warning notices.
• Hindering our investigation.
• Failure to cooperate with our investigation.
• Failure to remedy harm.
• Previous regulatory findings.

And that it may consider the following mitigating factors:

• Taking steps to prevent further misconduct
• Making an early admission

The SRA have reflected on the specific factors that decision makers currently consider as part of our discounting process:

• Respondents who make an early admission of misconduct to the SRA can save costs and stress to witnesses and others involved in the process as well as saving the SRA considerable time and resources. (Mitigating factor).
• The SRA expects all those who have breached its rules to remedy any harm caused by that breach. The SRA will therefore not consider doing so to be a mitigating factor. It will consider a failure to do so to be an aggravating factor.
• Cooperation with SRA investigations is a regulatory obligation. The SRA does not consider meeting this obligation to be a mitigating factor. A failure to cooperate with an SRA investigation would be an aggravating factor. Similarly, deliberately hindering our investigation would be a more serious aggravating factor and may be misconduct in its own right.

Turning back to recent decisions

Going back to the recent decisions discussed above, the basic penalties set by the SRA ranged between 0.8% and 3.6% of annual domestic turnover for the firms in question. The firms were relatively small, so this didn't result in fines at a high. However, they are still a lot higher than the type of fine that we consider we would have seen in comparable circumstances even a couple of years ago.

It's worth highlighting that in most of the cases we have considered, the firm has cooperated fully with the SRA, remedied any breaches promptly, and there was no evidence of any harm being caused to anyone (which we consider means that it was not established that any money-laundering took place). The breaches were all at the level of not having the appropriate paperwork/policies in place. But despite that, the SRA assessed most of the cases as falling within penalty bracket B or C, justifying quite a serious sanction. These heavy sanction in those circumstances are of course surprising, but that is the effect of the SRA's current approach to financial penalties.

General observations

As a basic observation, the level of the fines imposed (on small regional firms) represents the type of step change in the level of SRA fines to be expected in light of the significant changes summarised above.

However, we aren't seeing any really big fines being imposed on larger firms – yet. We suspect that this is because the SRA is not yet using its ECCTA powers to impose fines above £25,000 on (non-ABS) firms, pending the outcome of its recent consultation.

The majority of the firms agreed to imposition of the fine in question, by entering into a regulatory settlement agreement with the SRA. Given how much firepower the SRA now has, it is perhaps understandable they are able to leverage a settlement in a majority of cases.

Issues for the (very near) future

The first and most significant point to make is that soon – perhaps very soon – the SRA will announce the outcome of its consultation on its new financial sanctions guidance, which will include details of how it will use its new powers under the ECCTA.

In addition to reflecting the SRA's new powers, the proposed updated sanctions regime under consultation extends the penalty brackets listed above by adding two new penalty bands – E and F – for the most serious cases. If adopted, the new bands will give the SRA power to levy fines of between 6 – 25% of annual turnover (or an uncapped amount of over 25% of turnover, in the very highest band) on firms, and between 113% - 145% of annual gross income (and again, an uncapped amount in the most serious cases) on individuals.

The consultation has been controversial, and the outcome may well be subject to legal challenge. However, it seems inevitable that at some point the SRA will impose a fine measured in the millions for a breach of AML legislation.

Separately from the new fines regime, the SRA has signalled in its most recent AML Annual Report that it is continuing to ramp up its efforts to ensure AML compliance, and is actively recruiting into its AML function:

"In addition, we are considering how best to respond to our new regulatory objective of promoting the prevention and detection of economic crime under the Economic Crime and Corporate Transparency Act 2023 (ECCTA). Alongside our work relating to AML and sanctions, we will be recruiting to expand our proactive capability. This will make sure we have the right levels of oversight and coordination of the reactive and proactive ways of working that support our fraud prevention work."

So we consider that the trend of more, and bigger, sanctions for AML compliance is only going to accelerate.

Conclusion

Faced with an increasingly active and muscular regulator, there has never been a better time for law firms to review their AML and sanctions compliance functions. We would also encourage firms to review their insurance arrangements and consider whether they have adequate cover in place for regulatory matters.