Learning Outcomes
After studying this article, you will be able to explain the SRA Principles and their role in legal practice, describe the concept of risk-based regulation, and outline how law firms identify, assess, and manage regulatory risks. You will also be able to apply risk management strategies to practical scenarios, including conflicts of interest and anti-money laundering compliance, as required for the SQE1 exam.
SQE1 Syllabus
For SQE1, you are required to understand the principles and risk-based regulation of legal services. This article focuses your revision on:
- the SRA Principles and their application in legal practice
- the concept and operation of risk-based regulation
- how law firms identify, assess, and manage regulatory risks
- the relationship between risk management, compliance, and professional conduct
- practical risk management strategies, including anti-money laundering and conflicts of interest
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.
- What is meant by a "risk-based approach" to regulation in legal practice?
- Which SRA Principle requires solicitors to act in the best interests of each client?
- Name two key steps a law firm should take when implementing risk management procedures.
- In what circumstances must a law firm conduct enhanced due diligence on a client?
Introduction
Effective risk management is central to modern legal practice. Solicitors must comply with the SRA Principles, which set the ethical and professional standards for the profession. The SRA adopts a risk-based approach to regulation, focusing on the most significant threats to regulatory objectives. Law firms are expected to identify, assess, and manage risks to ensure compliance, protect clients, and maintain public trust.
The SRA Principles: The Ethical Basis
The SRA Principles are the core ethical standards that all solicitors and regulated firms must follow. They underpin all aspects of legal practice and guide decision-making in complex situations.
Key Term: SRA Principles The SRA Principles are the fundamental ethical and professional standards that solicitors and regulated firms must uphold in all legal activities.
The current SRA Principles require you to:
- Uphold the rule of law and the proper administration of justice.
- Act in a way that upholds public trust and confidence in the solicitors’ profession and legal services.
- Act with independence.
- Act with honesty.
- Act with integrity.
- Act in a way that encourages equality, diversity, and inclusion.
- Act in the best interests of each client.
These principles are mandatory and apply to all work, whether reserved or unreserved, and to both individuals and entities regulated by the SRA.
Key Term: independence Independence means providing objective advice and representation, free from improper influence by clients, third parties, or personal interests.
Key Term: integrity Integrity requires solicitors to act honestly, fairly, and in accordance with the highest professional standards, even where there is no explicit rule.
Risk-Based Regulation: Focusing on What Matters Most
The SRA regulates solicitors and law firms using a risk-based approach. This means that regulatory resources and attention are directed to areas where the risk of harm to clients, the public, or the rule of law is greatest.
Key Term: risk-based regulation Risk-based regulation is a regulatory strategy that prioritises supervision and enforcement on the basis of the likelihood and impact of risks to regulatory objectives.
The SRA identifies, assesses, and monitors risks at three levels:
- Sector-wide risks: e.g., money laundering, cybercrime, or poor client care.
- Firm-level risks: e.g., inadequate supervision, poor financial controls, or high staff turnover.
- Individual risks: e.g., dishonesty, lack of competence, or conflicts of interest.
The SRA publishes a Risk Outlook each year, highlighting the most significant risks facing the profession. Law firms are expected to consider these risks in their own risk assessments and compliance planning.
Worked Example 1.1
A law firm handles high-value property transactions for overseas clients. The SRA’s Risk Outlook identifies money laundering as a key sector-wide risk. What should the firm do to comply with risk-based regulation?
Answer: The firm should conduct a firm-wide risk assessment, identify property transactions and overseas clients as higher risk, and implement enhanced due diligence and monitoring procedures for these matters.
Risk Assessment and Management in Practice
Law firms must have systems to identify, assess, and manage risks relevant to their business. This is not only good practice but also a regulatory requirement under the SRA Code of Conduct and, for anti-money laundering, under the Money Laundering Regulations 2017.
Firm-Wide Risk Assessment
Firms must regularly assess risks to their business, including:
- the nature of their clients and matters
- the services they provide
- the jurisdictions in which they operate
- delivery channels (e.g., remote instructions)
The assessment must be documented, kept up to date, and made available to the SRA on request.
Key Term: risk assessment A risk assessment is a structured process to identify and evaluate potential threats to regulatory compliance, client interests, or the firm’s business.
Policies, Controls, and Procedures
Firms must implement appropriate policies and controls to mitigate identified risks. These may include:
- client due diligence (CDD) and enhanced due diligence (EDD) procedures
- internal reporting mechanisms (e.g., a Money Laundering Reporting Officer)
- staff training on risk awareness and compliance
- regular audits and monitoring of compliance
Key Term: client due diligence (CDD) CDD is the process of verifying a client’s identity and assessing the risk they pose, especially in relation to money laundering or terrorist financing.
Key Term: enhanced due diligence (EDD) EDD is additional scrutiny and verification required for higher-risk clients or transactions, such as those involving politically exposed persons or high-risk jurisdictions.
Worked Example 1.2
A firm is instructed to act for a new client based in a country identified as high-risk for money laundering. What steps should the firm take?
Answer: The firm should apply enhanced due diligence, including verifying the client’s identity with independent sources, understanding the source of funds, and obtaining senior management approval before proceeding.
Managing Conflicts of Interest
Conflicts of interest are a key regulatory risk. Solicitors must not act where there is a conflict, or significant risk of conflict, between their own interests and those of a client, or between two or more clients.
Key Term: conflict of interest A conflict of interest arises where a solicitor’s duty to act in the best interests of a client conflicts, or may conflict, with another duty or personal interest.
Firms must have systems to identify and manage conflicts, including clear procedures for checking new matters and ongoing monitoring.
Worked Example 1.3
A solicitor is asked to act for both the buyer and seller in a business sale. Is this permitted?
Answer: Generally, no. Acting for both sides creates a significant risk of conflict. Only in rare cases where the clients have a substantially common interest and all conditions for informed consent are met may a solicitor act for both.
Anti-Money Laundering and Risk Management
Law firms are subject to strict anti-money laundering (AML) obligations. A risk-based approach is required by the Money Laundering Regulations 2017 and enforced by the SRA.
Firms must:
- conduct risk assessments for clients and matters
- apply CDD and EDD as appropriate
- monitor transactions for suspicious activity
- report suspicions to the firm’s MLRO and, if necessary, to the National Crime Agency (NCA)
- keep records of due diligence and reports
Failure to comply can result in regulatory action, criminal penalties, and reputational damage.
Exam Warning
Failing to conduct proper risk assessments or to apply enhanced due diligence in high-risk situations is a common cause of regulatory breaches. For SQE1, be alert to scenarios where a firm overlooks AML risks or does not escalate concerns appropriately.
Data Protection and Confidentiality
Risk management also includes protecting client data and maintaining confidentiality. Firms must comply with the Data Protection Act 2018 and GDPR, as well as the SRA Principles.
- Implement strong data security measures (e.g., encryption, access controls)
- Train staff on data protection and confidentiality
- Have procedures for responding to data breaches
A breach of confidentiality or data protection can lead to regulatory sanctions and loss of client trust.
Professional Indemnity Insurance and Risk
All SRA-regulated firms must maintain adequate and appropriate professional indemnity insurance (PII). Effective risk management can reduce the likelihood of claims and may influence insurance premiums.
- Review claims history and address recurring issues
- Ensure robust supervision and quality control
- Disclose all relevant risks to insurers
Key Term: professional indemnity insurance (PII) PII is insurance that covers legal practices against claims for losses caused by professional negligence or breaches of duty.
Key Point Checklist
This article has covered the following key knowledge points:
- The SRA Principles are the core ethical standards for solicitors and regulated firms.
- Risk-based regulation directs regulatory attention to the most significant risks.
- Law firms must conduct firm-wide and matter-specific risk assessments.
- Effective risk management includes policies, controls, and staff training.
- Conflicts of interest and anti-money laundering are key regulatory risks.
- Data protection and confidentiality are essential components of risk management.
- Professional indemnity insurance is required and linked to risk management practices.
Key Terms and Concepts
- SRA Principles
- independence
- integrity
- risk-based regulation
- risk assessment
- client due diligence (CDD)
- enhanced due diligence (EDD)
- conflict of interest
- professional indemnity insurance (PII)
