Introduction to legal services and regulation - Principles of risk-based regulation

Learning Outcomes

After studying this article, you will be able to explain the principles of risk-based regulation in legal services, describe how the SRA identifies and manages regulatory risks, and outline the key legal frameworks and compliance requirements for solicitors’ firms. You will also be able to apply these principles to practical scenarios and understand their significance for SQE1 assessment.

SQE1 Syllabus

For SQE1, you are required to understand the regulatory approach adopted by the Solicitors Regulation Authority (SRA), including the principles of risk-based regulation and their practical impact on legal practice. In your revision, focus on:

  • the meaning and purpose of risk-based regulation in legal services
  • how the SRA identifies, assesses, and manages regulatory risks
  • the regulatory objectives set out in the Legal Services Act 2007
  • the role of compliance officers and firm-wide risk management
  • the requirements for anti-money laundering risk assessments and controls
  • the practical implications of risk-based regulation for firms of different sizes

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

  1. What is the main purpose of risk-based regulation in the context of legal services?
  2. Name two regulatory objectives that guide the SRA’s risk-based approach.
  3. What is required of a firm under Regulation 18 of the Money Laundering Regulations 2017?
  4. Who is responsible for overseeing risk management and compliance in an SRA-authorised firm?

Introduction

Risk-based regulation is the approach used by legal regulators, especially the SRA, to focus regulatory resources and actions on the areas of greatest risk to the public, clients, and the integrity of legal services. This ensures that compliance efforts are proportionate and effective, and that firms address the most significant threats to consumer protection and professional standards.

Key Term: risk-based regulation
A regulatory approach that allocates resources and attention according to the likelihood and impact of risks to regulatory objectives, focusing on the most serious threats.

Principles of Risk-Based Regulation

Risk-based regulation is built on the idea that not all risks are equal. Regulators must identify, assess, and manage risks in a way that protects the public and upholds the rule of law, while allowing legal services to operate efficiently.

Key Term: regulatory objectives
Statutory goals set out in the Legal Services Act 2007 that guide regulators, including protecting the public interest, supporting the rule of law, and promoting consumer protection.

Key Term: compliance officer
A senior individual in a law firm (COLP or COFA) responsible for ensuring compliance with regulatory requirements and reporting breaches to the SRA.

Risk Identification

The SRA gathers information from various sources to identify risks, including:

  • complaints and disciplinary data
  • market trends and emerging threats (e.g., cybercrime, money laundering)
  • feedback from firms, clients, and stakeholders

Risks can relate to client money, confidentiality, anti-money laundering, or the quality of legal advice.

Risk Assessment

Once identified, risks are assessed based on:

  • Impact: How serious the consequences would be if the risk materialised (e.g., financial loss, harm to clients, reputational damage).
  • Likelihood: The probability that the risk will occur, based on evidence and past incidents.

This enables the SRA to prioritise regulatory action and support.

Risk Mitigation and Controls

Regulators and firms must take steps to reduce identified risks. This may include:

  • issuing guidance or new rules
  • conducting thematic reviews or targeted inspections
  • requiring firms to improve systems and controls
  • providing training and support to staff

Firms must have proportionate policies and procedures to address their particular risks.

Ongoing Monitoring

Risk-based regulation is a continuous process. The SRA and firms must:

  • monitor for new or changing risks
  • review and update risk assessments regularly
  • respond quickly to emerging threats

The SRA publishes an annual Risk Outlook highlighting key risks for the profession.

Legal Frameworks and Regulatory Requirements

Risk-based regulation is underpinned by statutory and regulatory requirements that all solicitors’ firms must follow.

Legal Services Act 2007

The Legal Services Act 2007 sets out the regulatory objectives and the framework for legal services regulation in England and Wales. It requires regulators to act in a way that is compatible with these objectives and to adopt a risk-based approach.

SRA Standards and Regulations

The SRA Standards and Regulations set out the core principles and codes of conduct for solicitors and firms. They require firms to:

  • act with integrity and in the public interest
  • have effective systems for risk management and compliance
  • appoint a Compliance Officer for Legal Practice (COLP) and a Compliance Officer for Finance and Administration (COFA)

Anti-Money Laundering Regulations

The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 impose specific risk-based requirements on law firms, including:

  • conducting a written firm-wide risk assessment (Regulation 18)
  • establishing and maintaining policies, controls, and procedures to manage identified risks (Regulation 19)
  • ensuring that beneficial owners, officers, and managers are approved by the SRA (Regulation 26)

Firms must assess risks relating to their clients, services, and delivery channels, and keep these assessments up to date.

Practical Implications for Legal Service Providers

Risk-based regulation affects all firms, but the approach may differ depending on size and resources.

Small Firms and Sole Practitioners

  • Must focus on key risks relevant to their work (e.g., client money, AML compliance)
  • May use SRA guidance to prioritise compliance efforts
  • Should document risk assessments, even if brief

Medium and Large Firms

  • Need comprehensive risk management systems
  • Appoint dedicated compliance staff
  • Use technology and data analytics to monitor risks

Key Areas of Risk Management

  • Client onboarding: Carry out thorough due diligence and ongoing monitoring
  • Financial controls: Follow SRA Accounts Rules to protect client money
  • Training: Ensure all staff understand regulatory obligations and risk factors
  • Cybersecurity: Invest in secure IT systems and data protection measures

Worked Example 1.1

A small firm specialising in residential conveyancing identifies that property transactions are at high risk for money laundering. What steps should the firm take to comply with risk-based regulation?

Answer: The firm should conduct a written risk assessment focusing on conveyancing, implement robust AML policies, train staff to spot suspicious activity, and monitor transactions for unusual patterns. Enhanced due diligence should be applied to high-risk clients or transactions.

Worked Example 1.2

A medium-sized firm receives a warning from the SRA about increased cybercrime targeting law firms. What should the firm do as part of its risk-based approach?

Answer: The firm should review its IT security, update its risk assessment to include cyber threats, provide staff training on phishing and data protection, and ensure incident response plans are in place.

Exam Warning

For SQE1, be prepared to apply risk-based regulation principles to practical scenarios, such as AML compliance or handling client money. Read questions carefully to identify the specific risks and required controls.

Key Point Checklist

This article has covered the following key knowledge points:

  • Risk-based regulation means focusing regulatory resources on the most serious risks to the public, clients, and the legal system.
  • The SRA identifies, assesses, and manages risks using data, feedback, and market analysis.
  • Regulatory objectives in the Legal Services Act 2007 guide the SRA’s risk-based approach.
  • Firms must conduct written risk assessments and implement proportionate policies and controls.
  • Compliance officers (COLP and COFA) are responsible for overseeing risk management and reporting breaches.
  • Anti-money laundering regulations require firm-wide risk assessments and ongoing monitoring.
  • Risk-based regulation applies to all firms, but the approach may differ depending on size and resources.

Key Terms and Concepts

  • risk-based regulation
  • regulatory objectives
  • compliance officer
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Pleased to share that I have successfully passed the SQE1 exam on 1st attempt. With SQE2 exempted, I’m now one step closer to getting enrolled as a Solicitor of England and Wales! Would like to thank my seniors, colleagues, mentors and friends for all the support during this grueling journey. This is one of the most difficult bar exams in the world to undertake, especially alongside a full time job! So happy to help out any aspirant who may be reading this message! I had prepared from the University of Law SQE Manuals and the AI powered MCQ bank from PastPaperHero.

Saptarshi Chatterjee

Saptarshi Chatterjee

Senior Associate at Trilegal