Impact from the winding up of law firm Axiom Ince could be far reaching with a £66 million shortfall in its client account the consumer protection afforded by the compensation fund may be called into question.
According to the Solicitors Regulation Authority (SRA) this is a discretionary fund paid into by firms across the legal profession. “It provides a vital safety net for clients where a solicitor has stolen or not accounted for client money and is not covered by a firm’s professional indemnity insurance,” explained the SRA.
Currently, the SRA is working through the client files to see how much of the £66 million is covered by indemnity insurance.
Given that there has been a substantial increase in the number of claims made on the compensation fund there is a concern that the fund may no longer be financially viable, or as is likely, the SRA will need to raise the levies charged to law firms, which has itself raised the alarm, particularly in smaller practices.
This is expected to increase lawyers’ fees to their clients, including those in the shipping and logistics industries.
For the time being the SRA stated: “In December, the SRA Board will review the risks posed by what are referred to as accumulator firms. We need to understand whether there is now a new systemic risk which would mean we need to adapt our regulatory approach and how we can best proactively identify early warning indicators.”
The future of the compensation fund is a situation that has evolved over the years but has now been thrown into sharp focus by the Axiom Ince fraud case.
Many thought that Ince & Co’s position in the legal market was secured by Axiom DWFM’s acquisition in April this year, which created Axiom Ince, the company’s demise a few months later sent shockwaves through the industry.
In an interview with Samantha Palmer, finance and projects partner at Pinsent Masons, Legal Business reported that the response to what’s next for the newly acquired Ince & Co, Palmer responded, “Very much business as usual.”
Given that Palmer was also the appointed solicitor manager for Ince’s administration and was overseeing all regulatory aspects of its acquisition, it would have been reasonable to assume that nothing out of the ordinary was happening.
On 28 April, two weeks after entering into administration the Ince & Co sale was completed. Four months later the only shareholder in the business, Pragnesh Modhwadia and two of his colleagues, Idnan Liaqat and Shyam Mistry, had been suspended by the Solicitors Regulation Authority (SRA).
Fast forward to 14 November and the Serious Fraud Office (SFO) had raided nine offices, made seven arrests and is embarking on an investigation into a £66 million fraud, at Axiom Ince, with allegations that senior executives had spent client’s money.
In a statement, dated 14 November, the SFO said: “Axiom Ince stopped trading last month when approximately £66 million in client money was found to be missing from its accounts and spent. Investigators will also examine how funds passed from the firm’s client accounts with Barclays to the State Bank of India to fund these purchases.”
The SRA had shut down operations at Axiom Ince in early October Axiom Ince employed 1,400 staff at 14 offices across England and Wales, staff were all laid off in October.
Nick Ephgrave QPM, director at the SFO, said: “There are a number of significant questions that need to be answered: clients from this law firm are missing many millions of pounds and more than 1,400 of its staff have lost their jobs. The impact on those affected is extremely serious.
“This morning [14 November], we have used our specialist powers to obtain important information that will help us get to the bottom of what happened.”
SRA first suspected foul play in late July following a visit to Axiom Ince by the regulator’s forensic investigation team. The team reported what it thought were well ordered accounts at first glance.
“The nature of the suspected dishonesty was sophisticated and included falsified bank statements and letters,” explained the SRA.
At that time there was no indication that the client accounts had issues, including the company’s partners, its accountants and the auditors.
It was not until Axiom acquired Ince Gordon Dadds in April and then Plexus Legal in July that the discrepancies were discovered in Axiom Inces’s accounts.
Explaining the process SRA said: “In this case, it was unusual that Axiom was taking over a larger firm, Ince Gordon Dadds, which was also doing specialist work, shipping law, which Axiom was not experienced in. 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.”
As the shortfall in the accounts was so high it was clear the law firm would not be able to keep trading, but the SRA wanted to protect clients of Axiom Ince, while also trying to understand whether there is systemic risk.
If such a new jeopardy has arisen as a result of the Axiom Ince case, then “It would mean we need to adapt our regulatory approach,” and the SRA would need to identify how it can “proactively identify early warning indicators”.
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