The Solicitors Regulation Authority (SRA) has defended its oversight of Axiom Ince in the run up to the firm’s collapse, maintaining that its investigators uncovered “sophisticated” suspected dishonesty that included “falsified bank statements and letters”.

In a detailed statement, issued on the day the Serious Fraud Office (SFO) made seven arrests in connection with around £66m of missing client money, the SRA said it would be mounting a review of the risks posed by so-called ‘accumulator’ law firms like Axiom Ince and two other large firms it has intervened in in recent years, Metamorph and Kingly. It added that it had already stepped up its monitoring of accumulator firms that would include a number of inspections. 

The regulator’s oversight of Axiom Ince has come under considerable scrutiny given the firm’s rapid expansion this year through the purchase out of administration of shipping firm Ince in April and national insurance firm Plexus in July just weeks before its collapse.

The prospect of additional levies on the solicitors’ Compensation Fund due to the collapse of Axiom Ince, Metamorph and Kingly, prompted harsh criticism from the Law Society of England and Wales last month when chief executive Ian Jeffery highlighted the “inherent risks” of the firms’ “atypical business models”.

The first sign of trouble at Axiom Ince came on 10 August when the SRA closed down sole shareholder and managing partner Pragnesh Modhwadia’s practice for suspected dishonesty, subsequently explained as the alleged misuse of “significant amounts of client money, resulting in an account shortage estimated to be more than £60m”.

In today’s statement the SRA said it had uncovered the suspected dishonesty and missing client money in late July. “This was a result of a visit by our forensic investigation team, and further digging behind what on the face of it looked like well-ordered accounts. The nature of the suspected dishonesty was sophisticated and included falsified bank statements and letters,” the SRA said.

It added that “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”.

The SRA said it had visited the firm to check “all was in order and assess whether we needed to take further steps to manage risks” because 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”.

It added that although it was clear Axiom Ince would not survive at the point the alleged fraud was discovered it made sense to keep the firm open for a short period and work with its directors “to achieve as orderly a closure as possible in the circumstances”.

The SRA said that in the short term it was “working through the best way to compensate current claims while also ensuring the [Compensation] Fund remains financially viable” adding that it was “too early to say how many claims there will be from Axiom that will need to be met from the Compensation Fund” given that it was not known how much would be covered by the firm’s insurance.

It also promised a review of its supervision of accumulator firms. “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. In the meantime, we have increased our scrutiny of firms we have classified as accumulators and will commence inspections of a number of such firms.”