The SRA has said it now looks ‘likely’ that solicitors and firms will have to pay extra to plug the financial back hole created by the collapse of Axiom Ince.
In an update, the regulator confirms it is continuing to pursue disciplinary investigations. The SRA said sole shareholder Pragnesh Modhwadia, who was suspended by the SRA in August, is suspected of misusing ‘significant’ amounts of client money, resulting in a shortage on the client account estimated to exceed £60m.
As well as taking disciplinary action, the SRA must also decide how to protect and potentially compensate former clients. The controversial proposal for a levy on the profession to cover an immediate cashflow problem was floated last month and the SRA appears to be moving closer to mandating this.
The update said: ‘It is too early to say how many claims there will be that will need to be met from the compensation fund. More widely, we are seeing a pattern of increased claims on the fund.
‘So although we have not made any decision about what this means for a collection of funds from the profession, it looks likely that, after years of keeping them stable, we will need to increase levies.’
No details were provided on when these levies would be imposed, but it would appear unrealistic to wait until annual contributions are due next October. Compensation fund contributions are collected as part of the annual PC renewal process, and were set most recently at £30 for individuals and £690 for firms.
The update said the SRA’s focus is the public interest and that the regulator had removed the immediate possibility of ongoing harm to the public and the firm’s clients. The six-week delay between Modhwadia’s suspension and intervening in the firm was justified, as it was ‘not in the interests of clients to close the whole firm down immediately’. The SRA reiterated that the Axiom Ince intervention is the biggest ever seen in England and Wales.
Meanwhile, accountants have begun poring over the records of the failed consolidator amid concerns over the SRA’s apparent failure to spot the firm’s impending crisis. Joint administrators from Leonard Curtis were appointed last week to handle the affairs of the national firm, which was shut down last month by the regulator.
One of their tasks will be to establish when any shortage in the client account appeared.
The regulator has consistently stated that it acted within its limited remit with regard to oversight of acquisitions. Axiom DWFM bought Ince & Co and Plexus Legal – both much bigger firms – earlier this year and the SRA responded three weeks after the second deal was announced.
Since then, Axiom Ince has successfully applied for a freezing order worth £64m against Modhwadia, with the solicitor stating in court that the money had been spent on acquisitions, and purchasing or renovating several properties.
The Law Society said this week that the SRA’s response to the crisis must include consultation with solicitors, giving they may be required to pay for it.
Chief executive Ian Jeffery said: ‘As the representative body for the solicitor profession, we are of course greatly concerned that our members could be asked to plug a gap of many millions of pounds in the compensation fund arising from the collapse of just three law firms, which were set up under atypical business models and with their own clear and inherent risks.’
SRA chair Anna Bradley has stated that there may need to be an ‘interim collection’ and acknowledged this would have a ‘big impact’ on firms.
