SRA and Law Society at odds as compensation fund levy looms over Axiom Ince intervention

Solicitors Regulation Authority concedes additional levies are likely as law soc flags ‘atypical’ business model of collapsed firm

Battle lines are being drawn between the Solicitors Regulation Authority (SRA) and solicitors’ representative bodies over the likelihood of a levy on the profession to pay for claims arising from the collapse of Axiom Ince. 
Having first mooted the possibility of an ‘interim’ levy last month, the SRA conceded in a blog post last Thursday (2 November) that an increase in levies to the Compensation Fund – the profession’s discretionary fund of last resort for cases involving fraud – was “likely” in the wake of its largest-ever intervention into a law firm.
The update came hard on the heels of calls by the Law Society of England and Wales and the City of London Law Society for the profession to be consulted on the SRA’s plans and for it to account for its actions in the run up to its closure of Axiom Ince on 3 October
Attention has focused on Axiom Ince’s acquisition out of administration of venerable shipping practice Ince & Co in May and national insurance firm Plexus in July, only for the SRA to discover a client account shortage of more than £60m in August when it suspended managing partner Pragnesh Modhwadia for suspected dishonesty.
The SRA has also pointed to its intervention into two other so-called law firm consolidator businesses – Metamorph and Kingly – over the past three years as a reason for the mooted levy increases.
Law Society CEO Ian Jeffery said the society was “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”.
He added: “We would expect the profession to be consulted before any decision is made by the SRA on its approach to these exceptional compensation questions, given that our members would be required to pay for it and it is their collective reputation at stake.”
He went on to call for a “transparent, accountable, proportionate, consistent and targeted” approach by the SRA.
The Law Society’s stance has received backing from the City of London Law Society, which represents the UK’s largest law firms.
Its president, Colin Passmore, said: “The profession deserves to be consulted. When that happens, the profession also deserves to be provided with an appropriate level of explanation of how these collapses occurred, bearing in mind that they caused, it seems, substantial losses to the firms’ creditors but also the loss of so many jobs (both legal and in business services) with all the attendant worry and stress that results from that.” 
Throwing further light on its actions, the SRA’s blog said when it intervened in managing partner Modhwadia’s practice on 15 August it “was not in the interests of clients to close the whole firm down immediately”.
It added: “We worked with the remaining directors to achieve as orderly closure as possible in the circumstances, including identifying where clients’ matters could be moved to other firms. We then intervened into the rest of the firm on 2 October.”
The blog explained: “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.”
Andrew Pavlovic, an SRA specialist partner at London firm CM Murray, said while the Law Society’s comments reflected its role as a representative body, the SRA had wider obligations – namely, to serve the public interest and protect consumers of legal services.
Comments about “atypical business models” and “clear and inherent risks” of the intervened firms, Pavlovic said, could be interpreted as a suggestion that clients who instructed them assumed a level of risk in doing so. 
However, he added that the risks of wider regulatory fallout needed to be considered given the “potential for significant damage to the reputation of the profession if [the fund] fails to meet the purported client shortfall, albeit that there remain other avenues for recovery, such as through insurance”, or the action taken against Axiom Ince’s former managing director.
In a blog posted on 12 October, Anna Bradley, chair of the SRA board, wrote: “We are reviewing what actions we could take to reduce the probability of similar failures in the future. We take a risk-based approach to regulation, so we would need to make sure that any changes in our approach are well targeted and do not result in unjustified burdens on the sector. These aren’t simple questions and resolving them will need careful thought and engagement with the sector.”

Email your news and story ideas to: [email protected]