The Legal Services Board (LSB) has initiated enforcement action against the Solicitors Regulation Authority (SRA) after a report highlighted multiple failures in its regulation of law firm Axiom Ince ahead of its collapse amid allegations of fraud at the loss of 1,400 jobs.

The report by Northern Ireland law firm Carson McDowell concludes that the SRA did not “act adequately, effectively and efficiently” or “take all the steps it could or should have taken” in the run-up to the SRA’s discovery in July 2023 that around $64m had been taken from Axiom Ince’s clients account.

In a statement the LSB said a “change in its procedures to mitigate the possibility of a similar situation arising again” was necessary.

The over-arching legal regulator for England and Wales has initiated a process under its powers that could lead it to force the SRA “to make changes to better achieve the regulatory objectives”.

Justifying the decision, LSB chair Alan Kershaw said: “The SRA’s actions and omissions have in our view adversely impacted on confidence and trust in the regulation of legal services.”

The move is humiliating for the SRA, which issued a strong defence of its record, pointing out that “the suspected fraud was not spotted until we picked it up, even though a number of other bodies, including external accountants and auditors were involved with the firm”.

The Axiom Ince scandal first hit the headlines in August 2023 when the SRA suspended three directors before going on to close down the firm in October. On 14 November, the Serious Fraud Office made seven arrests and raided nine sites across the South East of England in connection with the firm’s collapse.

Earlier in 2023, Axiom Ince had acquired two much larger firms out of administration: shipping giant Ince, in April, and national insurance practice Plexus in July.

The report is highly critical of the SRA’s oversight of these deals, arguing that the prior collapse of three other accumulator firms should have prompted a more proactive approach to regulating Axiom Ince, especially as both its targets had run into financial difficulties, were much larger, and practised different areas of law.

It notes that the SRA’s focus when Axiom acquired Ince was “on protecting clients by ensuring the smooth transition of their files and there was no real consideration given to the entity which was going to receive those files and how client interests and funds would be safeguarded”.

The report also highlights as a “missed opportunity” an investigation into Axiom held in October 2022 on an unrelated matter when the lack of adequate procedures meant the investigators “were not required to confirm clients account balances directly with a firm’s bank”.

A third area of criticism focuses on the SRA’s decision initially to intervene in the practices of the three of Axiom Ince’s directors as opposed to the entire firm.

Although the report accepts a partial intervention was reasonable, it says the way it was carried out was “inadequate” because the SRA failed to “communicate effectively with the remaining directors of Axiom” that “client funds were ‘tainted’ by the alleged fraud and those funds must therefore be ringfenced”.

As a result, the report says, “the funds remaining in the client account had significantly reduced by almost £36m” by the time of the full intervention, meaning that some clients were “further prejudiced in comparison to others”.

Law Society president Richard Atkinson said the report painted “a vivid picture of the SRA’s inadequate and ineffective handling of Axiom”. 

He added: “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 through a substantial increase in contributions to the Compensation Fund, which is a vital protection for clients and consumers.”

SRA chief executive Paul Philip said: “There is a lot in the report that we don’t agree with, and we don’t understand the basis for enforcement action. However, we think it is important to focus on working with the LSB and others to tackle future challenges in the legal sector.

“With the market changing rapidly, we need to respond. We will be consulting soon on changes to better protect clients’ money. This will include exploring the more radical solution of whether we should stop law firms holding client money.”

Ahead of its final decision on whether to intervene, the LSB will now consult the Lord Chancellor, the Competition and Markets Authority, the Legal Services Consumer Panel and the Lady Chief Justice while also allowing the Law Society and the SRA to make representations.