In depth: Axiom Ince report makes grim reading for defiant SRA

Perhaps the SRA’s top decision-makers do not read the Gazette, while rank-and-file employees do. Regular perusal of our pages would leave no one in any doubt of the apparent sui generis risks to clients of so-called ‘accumulator’ firms – small businesses which string together acquisitions to grow at breakneck pace.

Several accumulators had already crashed in chaos before the regulator decided it was worth collating data on them, even though its own staff had been waving a red flag for years. By the time the SRA took proper notice, it was much too late. At Axiom Ince, the client account millions had long since begun vanishing into the ether.

In its response to last week’s long-awaited independent report published by the Legal Services Board, the SRA seized on one sentence of praise in an 11-page summary: ‘The report acknowledges the excellent work by the SRA in uncovering and investigating the alleged fraud.’

The rest, unfortunately, details a catalogue of errors and missed opportunities which arguably led to that alleged fraud coming to light much later than it should have done.

The alleged misappropriation of funds from the client account may have begun as long ago as 2019, the report, by Northern Ireland firm Carson McDowell, states. Yet the SRA failed to spot it during an October 2022 investigation into Axiom over an unrelated matter, because it did not conduct an effective accounts check. The forensic investigation officer did not follow standard procedure ‘because they did not check off each account balance against the relevant bank statements and did not obtain a confirmatory bank letter’. Those omissions ‘were not picked up’ in the internal managerial review process.

‘It is clear that the investigation in October 2022 was an opportunity missed,’ says the report.

Staff at the Cube had been pointing to the need to identify and focus on ‘accumulators’ for years. Yet Carson McDowell’s investigators found ‘no evidence’ the SRA properly considered this until January 2023, when it prepared a briefing note. By that time it had already made three expensive and high-profile interventions into accumulator firms – Kingly in 2020, Pure Legal in 2021 and Metamorph in 2022.

From January 2023, the SRA identified eight accumulator firms that had made two or more acquisitions in the previous year. Axiom was one of the eight, but the SRA did nothing further in terms of additional monitoring or investigation.

Forward to March 2023 and the SRA assessed Axiom as ‘medium-risk’. This was an ‘inadequate’ rating which ‘failed to consider the risk of such a large firm having only one owner [Pragnesh Modhwadia] who also held all of the compliance roles’. Again, the SRA took no further steps.

In perhaps it most pointed phrase, the report comments that the SRA first met Modhwadia (pictured above) in July 2023, when it became clear that ‘he was a very engaging and charismatic individual’. He must have been.

In April 2023, Axiom Ince purchased the much larger firm Ince Gordon Dadds, which had been forced into administration. No red flag. The SRA ‘did not consider the wider risks’ of this deal, ensuring only that client files and monies were successfully transferred. There was ‘no real consideration’ of how client interests and funds would be safeguarded. Had the SRA conducted an effective assessment of the proposed deal, that could have helped reveal the alleged fraud.

In July 2023 Axiom purchased another much larger firm, Plexus Legal, also in administration. No red flag. The SRA gave ‘no consideration’ to the suitability of the purchase.

The watchdog finally uncovered the alleged fraud in July 2023, intervening into the practice of three directors in August. But, to put a colloquial interpretation on this development, it went off half-cocked. It did not intervene into the firm as a whole until October.

No formal record exists of the August meeting which decided on a partial intervention, but prior emails between SRA staff expressed resourcing concerns about a full-scale shutdown. Senior managers interviewed for the report insisted scale was not a factor. Whether scale was a factor or not remains ‘unclear’, conveniently.

The decision to partially intervene was taken despite knowledge of alleged dishonesty at Axiom and that significant payments appeared to have been made to fund the firm’s business from the client account. The partial intervention – after which more millions were drained from the client account – ‘did not adequately protect client money’. As a result, some clients of the firm have been prejudiced because they would have received money from Axiom’s client account but will now have to seek to recover their loss from another source, ‘such as the SRA Compensation Fund or Axiom’s professional indemnity insurers’.

'With hindsight, the report has highlighted things that we could – rather than just should – have done. But in our view, it is unrealistic to expect regulation to prevent all harms'

Solicitors Regulation Authority

Last week’s report is the biggest setback for the SRA in its 17-year history, and hugely damaging to its credibility among both the regulated community and the public. Few stories about the regulation of solicitors make it into the pages of the national business press. This is one.

Yet at the Cube in Birmingham, ‘je ne regrette rien’ appears to be the prevailing attitude. ‘There is a lot in the report that we do not agree with, including the headline conclusions,’ said the regulator. ‘In particular, it is by no means clear that a different approach would have uncovered the issue sooner. With hindsight, the report has highlighted things that we could – rather than just should – have done. But in our view, it is unrealistic to expect regulation to prevent all harms.’

To recap, those harms include but are not limited to: hundreds of job losses, more than £60 m of missing client money and a 270% rise in contributions to the Compensation Fund.

How the SRA’s sententiousness – even petulance – will aid its cause in the face of pending enforcement action under the Legal Services Act is unclear. One presumably unintended consequence is that the watchdog’s bellicosity makes the story even bigger.

'While the events leading to Axiom’s collapse were happening, the SRA was focused on increasing its fining powers and proposing regulatory expansion'

Richard Atkinson, Law Society

The Law Society is in no doubt where the fault lies. President Richard Atkinson commented: ‘The independent review paints a vivid picture of the SRA’s inadequate and ineffective handling of Axiom. As a result of the SRA’s failure to take all the steps it could or should have taken, Axiom was able to act without intervention, leading to money going missing and huge distress to their clients. Ultimately, it has fallen to the profession as a whole – solicitors and law firms – to shoulder the cost.

‘While the events leading to Axiom’s collapse were happening, the SRA was focused on increasing its fining powers and proposing regulatory expansion rather than tackling the known risks from accumulator-style firms and ensuring its operations were joined up and laser-focused on protecting consumers. The report makes it clear the SRA had the funding, staff and powers to take the necessary action to prevent the alleged wrongdoing.

‘The problems identified in the report can be fixed, but the LSB must insist that the SRA puts its house in order and that the SRA’s management and governance concentrates on its core responsibilities.’

The Legal Services Consumer Panel expressed ‘profound concerns’ about the findings of the report. It urged the SRA and LSB to take decisive action to enhance oversight and accountability, protect client money, review consumer protection measures and mandate more transparency in firm operations.

 

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