Solicitors may be required to make a one-off payment in order to plug the massive black hole in the Compensation Fund likely to be created by the collapse of national firm Axiom Ince.
An additional levy – on top of the contribution included in the annual practising certificate fee - is being considered by the SRA as it considers how to deal with millions of pounds worth of potential claims from Axiom Ince clients who may have lost money. Another option that could limit the damage is capping the total amount that can be claimed.
Axiom Ince was shut down earlier this month by the regulator, some six weeks after the SRA suspended former managing partner Pragnesh Modhwadia over suspected dishonesty. No allegations have been brought against Modwhadia and no wrongdoing has been proved.
The firm secured a freezing order for £64m against Modhwadia, and his lawyers confirmed in court that the client account money was gone. It was spent on purchasing and renovating properties, and buying the larger firms Ince & Co and Plexus Legal.
It is highly unlikely the Compensation Fund will have to reimburse the full £64m – the firm’s insurers may cover some losses – but in the short-term the SRA faces a major cashflow problem. The fund has just £18m available to distribute and is likely to require a cash injection before the next PC renewal round.
In a media briefing today, SRA leaders said the board met yesterday to discuss options, although nothing has yet been decided.
An ‘in-year’ payment from the profession would fill the financial hole but would naturally be unwelcome among solicitors already facing increased insurance and business costs.
Another option could be to invoke the SRA’s statutory right to limit total payments from the fund on connected applications to a total of £5m. But that would come nowhere to covering the expected claims and would raise serious questions about the client protections offered by the fund and, by implication, the profession.
SRA chief executive Paul Philip said: ‘We are trying to work out how many people are affected and how much they have lost… we are going to have to collect a lot more money.’
Philip revealed the administration costs of the Axiom Ince intervention alone are expected to reach £15m. Asked whether the SRA had been ‘asleep at the wheel’ as Axiom DWFM expanded so rapidly, Philip said: ‘We are very clear we have done everything we should have done. In the last 15 months we have seen much larger firms [being intervened into] that appear to pose a risk not just to the Compensation Fund but the reputation of the profession.
‘We could go and visit all these firms that are growing but we are not an external auditor. If we were to do that it would need a significant expansion in the skills base and staff which would ultimately be added to the PC fee.’
The SRA has said it will look more widely at the Compensation Fund given the unprecedented size of recent interventions. The Axiom Ince, Metamorph and Kingly interventions were comfortably the largest in the regulator’s history, and the board is also set to carry out a review of so-called 'accumulator firms' and their impact on the profession.
Over the last decade, an average of £13m has been paid out from the Compensation Fund annually.
A Law Society spokesperson said: 'Regardless of which way the SRA decides to fund the fallout of Axiom Ince, an appropriate regulatory response is required based on evidence which looks to ensure any additional costs and compliance burdens are proportionate and any reforms address the risks identified from the Axiom Ince debacle.'
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