Background
The commercial and regulatory backdrop against which lawyers' liability risks can be viewed in 2024 is one involving an ever-increasing pace of change. Whilst law firms generally continue to thrive and grow, they face significant challenges giving rise to a range of liability risks.
The business structure and means of ownership of law firms have evolved exponentially since the implementation of the Clementi reforms, including via the introduction of Alternative Business Structures ("ABS"), a little over a decade ago. In the UK, there has been a recent change of government, the economic outlook is uncertain and there is significant geo-political instability and conflict, some giving rise to sanctions.
Rising costs and competition for talent present challenges for firms and the compliance and regulatory burden is increasing, along with a rise in the powers of the SRA. The recent number of high-profile law firm collapses have brought the ethics of lawyers into sharp focus, including at the Post Office Horizon IT enquiry.
Businesses, including law firms, are still adjusting to the evolving landscape of work. The shift towards remote and hybrid models, heightened digitisation – including data storage moving predominantly online - and a rapid integration of technology, such as AI, in the workplace, all present their own challenges and risks. As the avenues for committing financial crime expand, cybercriminals are increasingly targeting data and the financial assets managed by lawyers, posing a growing threat to the legal industry.
SRA's regulatory themes
Unsurprisingly, given the above, the SRA's key regulatory themes have focussed on consumer protection and have included: preventing economic crime, ethical behaviour and cyber security, digitisation and automation.
Preventing Economic Crime: The SRA conducted a systematic review and found that less than half of the files it inspected complied with its guide on assessing the risk attached to a particular client or matter. It issued a warning notice to law firms on 18th October 2023 focussing on the importance of this exercise as a risk management step as well as a way to prevent economic crime via anti-money laundering regulation compliance and checks on client identity and sanctions. Since that time, it has been visiting firms to ensure that they have the necessary policies in place and if not, imposing a fine as a percentage of turnover.
At present, the SRA can fine an ABS up to £250 million and individuals within an ABS up to £50 million, but the maximum fine which can be levied against other entities is £25,000. Under the Economic Crime and Corporate Transparency Act 2023 the SRA has powers to fine relevant entities unlimited amounts for matters occurring after 4 March 2024 in relation to breaches of anti-money laundering regulations, sanctions, financial dishonesty, failure to prevent theft and fraud in relation to client monies. The SRA is currently lobbying the government that it should have unlimited fining powers in relation to all of its regulatory obligations. The consultation proposal closed on 20th September 2024 and the outcome is awaited.
Ethical Behaviour: There have been a number of examples of warnings about the importance of ethical behaviour. The conduct of and within law firms has come under scrutiny in the past year including the importance of having appropriate procedures in place within workplaces to deal with supervision of workloads and looking after the health and wellbeing of colleagues so as to be best placed to remedy matters if an error is made. It has been emphasised that there should be a "no blame culture" and a "speak up environment" with obligations on managers to challenge any adverse behaviours.
Following recent high profile law firm collapses after mergers, the SRA issued a Warning Notice on 17th June 2024. This recognised that mergers, acquisitions and sales were a legitimate strategy for growth and business resilience for law firms, many of whom might face an uncertain future. However, it was emphasised that proper due diligence should be carried out by law firms and that clients' interests should be at the front and centre of any discussions, including the protection of their interests, their files, preserving documents and reconciling client monies.
The Post Office Horizon IT enquiry highlighted the pressures under which in-house lawyers (including in-house lawyers at law firms) may be placed and following a thematic review, draft guidance was issued on 1st March 2024 for consultation. There has been an emphasis on ethical behaviour in litigation and following on from its Conduct in Disputes Guidance in 2022, the SRA updated its guidance in relation to Strategic Lawsuits Against Public Participation ('SLAPPs') on 31st May 2024 emphasising that improper tactics must not be used to stifle genuine claims.
Cyber Security, Digitisation and Automation: In its cyber threat report of the legal sector in June 2023 (the first since 2018): Cyber Threat Report: UK Legal Sector (ncsc.gov.uk) the National Cyber Security Centre warned how the widespread adoption of hybrid working has increased the risks online and has highlighted how the sensitive information and large sums of money law firms often handle can make them particularly attractive targets to criminals. Many of the key methods used involved trying to manipulate personnel within law firms including: phishing emails designed to steal credentials or install malware, business email compromise (BEC) aimed at tricking victims into wiring large sums of money to the attacker, ransomware and other malware that could disrupt operations and steal sensitive information, password attacks, which typically take advantage of poor security practices and supply chain attacks. There are also threats from Nation States, "hacktivists" and potentially individuals within an organisation.
In March 2023 Chat GPT made generative AI widely available. Along with the availability of other Large Language Models ("LLMs"), these advancements have enabled law firms to save significant amounts of time and money for clients by, for example, drafting a contract in minutes or reviewing large quantities of documents in a fraction of the time and more cost-effectively than if this were done by people.
The SRA reports a sharp increase on the part of law firms in the uptake of AI (including generative AI) but it and the Law Society have highlighted that there is as yet no regulatory or legislative framework governing its use or the issues of liability which might arise if the software used creates errors by way of hallucinating or otherwise. It is almost undoubtedly the case that the regulatory framework, including who is liable for what, will develop in parallel with the use of LLMs by law firms.
Importantly whilst the Minimum Terms and Conditions of Professional Indemnity Insurance for Solicitors ("MTCs") would cover third party client losses following a cyber-attack, the MTCs would not cover the law firm's own losses. It was reported that a not insignificant proportion of law firms do not have any independent cyber insurance and it is likely that the appetite for this type of cover will grow.
Risks from different work types
Commercial and Residential Property: This continues to be viewed as a source of professional negligence claims and this (often undervalued) field of legal work is one which faces change and uncertainty.
Issues remain over the known unknowns and unknown unknowns arising from the introduction of the Building Safety Act 2022. Notwithstanding guidance issued by the Law Society in February of this year, it is reported that some law firms do not feel confident taking on work involving properties potentially affected by the Act.
The new guidance released by National Trading Standards Estate and Letting Agency Team ('NTSELAT') on material information in the conveyancing process resulted in a longer pre-contract enquiry form being drafted by the Law Society (TA6) for use as part of its Conveyancing Quality Scheme. It was felt by some parts of the profession that the requirements of the TA6 would increase the liabilities of conveyancers, and the proposed introduction of the form has been delayed until January 2025 pending a consultation with the profession which is ongoing.
The extension and enfranchisement of leases has historically given rise to a number of claims against solicitors given the technical requirements involved. Shortly before the new government was elected, the Leasehold and Freehold Reform Act became law with provisions making it easier and cheaper for leaseholders to buy the freehold of properties, increase standard lease extension terms to 990 years and provide greater transparency over service charges. Further changes to the law in this area are proposed (as highlighted in the Kings speech on 17 July 2024) in the form of the draft Leasehold and Commonhold Reform Bill. This proposes changes including capping ground rents and severely restricting the sale of new leasehold flats. It is not thought that the introduction of these changes will make this area of work any more straightforward.
The risks from Climate Change potentially affect many areas of legal work and the Law Society issued generic guidance in April 2023 to assist solicitors in recognising the impacts of climate change and it has said that it will issue Sector Specific Guidance at some point in the future. The Law Society is currently consulting on a Practice Guidance Note for conveyancers about the Climate Change Risks. The consultation closes on 31st October 2024 and the guidance for Conveyancers will follow.
Claims from property transactions involving fractional investments, including student accommodation, hotels and care homes continue to arise despite SRA Warning Notices having been issued in 2013, 2015, 2017 and, most recently, in 2020.
Wills, Trusts and Probate: With an increasingly elderly population and blended families, there are ever increasing numbers of disputes concerning wills and probate, including issues of mental capacity and claims under the Inheritance (Provision for Family and Dependants) Act 1975 ('IPFDA') as well as disputes between beneficiaries and issues over the payment of tax due from estates.
Trusts are often used in private client work including in relation to the ownership of assets (including property) and in tax planning. A Trust Corporation may be used, and a Law Society Practice Note was issued in relation to these (including the legal and regulatory requirements involved) on 27th June 2024.
Litigation: We are seeing a number of claims against solicitors by the liquidators and administrators of companies, with the headline values increasing. It was reported in July 2024 that there has been an increase in the number of company insolvencies compared with last year and it is not expected that this trend will reduce, particularly when combined with the developed litigation funding market targeted specifically at insolvency practitioners for both ATE cover and third-party litigation funding.
It is not known whether claims will follow but guidance notices have been issued to solicitors about what their focus should be in pursuing claims in relation to mass emissions and high-volume financial services.
On a back to basics note in litigation, this year has seen a very high number of reported decisions concerning the technical requirements for issuing and serving legal proceedings with the courts making it clear that if a mistake is made in relation to service of proceedings, this is unlikely to be excused. See by way of example Goodfellow v Warren Boyes & Archer (A Firm) [2024] EWHC 2015
In relation to litigation over climate change issues, guidance was issued by the Law Society in October last year in relation to Climate Risk Governance and Greenwashing Risks. Corporate lawyers may face claims about advice given in relation to inaccurate statements made about overambitious company commitments, pro– environmental claims about a business or its products or inaccurate disclosure of climate change risks.
Conclusions
Given the dynamic commercial and regulatory background in which lawyers are operating in England and Wales, the professional liability risks facing law firms in 2024 can no longer be assessed, as may historically have been the case, by focussing principally on a practice's fee income, type of work carried out and financial controls. The risks faced by a practice should be viewed additionally and holistically through many separate lenses, including, considering workplace culture, working patterns, the values of its leaders, the profile of its clients, its financial stability, its use of technology and its resilience to a cyber-attack.
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