The Solicitors Regulation Authority has admitted that it received complaints about the now infamous Axiom DWFM over recent years - but said they contained nothing to suggest a major problem.

In the wake of the Serious Fraud Office announcing an investigation into the firm and the arrest of seven individuals, the regulator has given more details about what it knew in the build-up to its collapse.

The SFO said £66m of client money is missing. The SRA has indicated solicitors may be required to pay a one-off levy to cover potential client claims against the compensation fund.

But the regulator continues to insist it could not have foreseen the scale of the issue at Axiom Ince and that it took ‘prompt action’ after first becoming aware of a shortage in the client account.

In a wide-ranging statement, the SRA said complaints about Axiom over the years were ‘nothing out of the ordinary.

‘We visited the firm last year to investigate a self-report by the firm about another solicitor in relation to immigration work, but neither this complaint – or any others – were linked to the issues we uncovered with the client account or the suspected dishonesty that led to the intervention,’ the statement said. 

The SRA said that before July, apart from any individuals who may have been complicit, ’no one was aware of or identified issues with the client account.

‘This includes partners in the firm, accountants, banks or auditors. It was not raised in any of the accountant’s reports – these must be produced annually by an independent accountant who must highlight if a firm has not met our rules, and if client money is at risk.’

The SRA said the suspected dishonesty and missing client money were uncovered in late-July. Former managing partner Pragnesh Modhwadia and two other directors were suspended on 10 August. It is understood that the acquisition of Ince prompted an enquiry from the SRA and a subsequent visit by its forensic investigation team. The regulator said the accounts appeared on their face to be ‘well-ordered’ and that the nature of the suspected dishonesty was ‘sophisticated' and included falsified bank statements and letters.

Axiom acquired Ince Group and Plexus Legal – both much larger firms – this year. The SRA said it assesses the risks of a takeover of a case-by-case basis. It may also ask for assurances about how the public is being protected and can impose conditions on how a firm operates or who holds senior roles.

In this case, it was deemed ‘unusual’ to take over a firm such as Ince which was larger and doing specialist work in which Axiom was not experienced.

The SRA said: ‘Therefore, we visited the firm to check all was in order and assess whether we needed to take further steps to manage risks. This is when we identified the issue of the significant shortage in the client account.’

The SRA board will meet in December to review the risks posed by what are referred to as accumulator firms, which could lead to a change in regulatory approach. In the meantime, it has increased scrutiny of firms classified as accumulators and will start inspections of such practices.

A decision has not been made on a levy against the profession, though the regulator has said that a levy ‘looks likely’.