OFSI Updates Licensing Guidance: CDPR Required Above £2M for Law Firms, £1M for Counsel

In June 2021, OFSI published a blogpost, “ Reasonableness in licensing ”, which set out how we assess “reasonableness” when considering licence applications under UK financial sanctions regimes.

This blogpost, “Reasonableness in licensing – updated approach”, updates that guidance and applies across all UK financial sanctions regimes.

You should read this alongside our existing guidance, including the June 2021 Reasonableness in licensing blogpost and OFSI’s general guidance.

Legal services: Costs Draftsperson’s Reports (CDPRs)

OFSI regularly receives applications under the legal fees licensing ground which relate to legal services provided on ongoing and complex matters. Some of these applications request permission for payment of fees in the millions of pounds. It is for the applicant to demonstrate to OFSI that the legal fees and expenses they are requesting payment for are reasonable.

To support OFSI’s assessment of reasonableness in these cases, OFSI will now require an independent Costs Draftsperson’s Report (CDPR) to be submitted as part of the licence application in certain circumstances.

Applicants may also choose to provide a CDPR proactively even where the relevant threshold has not been met but there are other factors which increase the complexity of the application. This may assist OFSI’s assessment of reasonableness.

When a CDPR is required

OFSI will require an independent CDPR in the following cases:

Law firms – where within any six-month period:

• total legal fees and Counsel fees (where instructed via solicitors), including expenses, to be licensed exceed £2,000,000.00 (inclusive of VAT)
  Counsel (instructed directly) – where within any six-month period:

• Counsel related costs, including disbursements, to be licensed exceed £1,000,000.00 (inclusive of VAT).

How the thresholds apply

These thresholds:

• apply per UK law firm or per Counsel,

• are assessed in relation to each designated person, and

• are cumulative across all specific licences and applications in relation to that designated person from the law firm or Counsel.

Applications covering periods longer than six months

Where a single licence application covers a period longer than six months, OFSI will apply the relevant threshold pro rata to reflect the length of the period covered.

For example, an application covering 18 months of legal services would have threshold caps of:

• £6,000,000 (inclusive of VAT) for a UK law firm (i.e., £2,000,000 per six-month period); and

• £3,000,000 (inclusive of VAT) for Counsel (instructed directly) (i.e., £1,000,000 per six-month period).

What to include in your application

When submitting an application, please indicate clearly whether the criteria above apply. For example, you may wish to include a statement such as: “The legal costs exceed £2 million (including VAT) and a CDPR is attached.”

Anticipated (future) costs

OFSI recognises that applicants may seek licences for work already done and also work anticipated in the future. Where legal work is anticipated but not yet incurred, OFSI will accept a CDPR that assesses anticipated costs.

For  long-running legal matters, where it is not feasible to obtain a CDPR covering anticipated costs, applicants are encouraged to consider applying for licences on a quarterly basis, with an enclosed CDPR covering costs incurred during the relevant period.

OFSI will seek to help applicants understand the licencing process, including by directing them to relevant guidance.

Disbursements

Where the threshold requiring a CDPR has been met, OFSI may, on a case-by-case basis and in extenuating circumstances, agree to assess disbursements (excluding Counsel fees or other legal services) without the provision of a CDPR separately in advance of the assessment of the wider legal fees element of the application. Examples include where a disbursement must be paid on a time‑critical basis to avoid prejudice to legal proceedings, and the applicant can provide clear evidence for that disbursement even though the CDPR for the wider legal fees is not yet available.

This is at OFSI’s discretion, and applicants should provide clear supporting evidence for the disbursements in question.

Independence and qualification of the Costs Lawyer

CDPRs must be produced by independent practising Costs Lawyers who:

• are regulated by, and hold a current practising certificate issued by, the Costs Lawyer Standards Board (CLSB);

• comply with the CLSB’s Code of Conduct; and

• are not part of the legal team undertaking the work covered by the OFSI licence application.

How OFSI uses the CDPR and assesses reasonableness

A CDPR is one part of the evidential package that OFSI will consider when assessing whether legal fees and expenses are reasonable. We will look at the CDPR alongside other material you provide.

However, even where a CDPR concludes that costs are reasonable, OFSI may still determine that reasonableness has not been fully demonstrated; license a lower amount than requested; or decline to license certain costs altogether.

OFSI will also continue to assess legal fees in line with our existing guidance and policy, including but not limited to the Reasonableness in Licensing blog and the Permitted travel expenses for sanctions licence applications.

Costs of obtaining a CDPR

The costs of obtaining a CDPR may be licensed under the legal services licensing ground, subject to the normal reasonableness test. These costs can be included within the main legal services application or sought via a separate licence application.

You may apply for CDPR costs before you submit the primary application, at the same time as an application, or as a separate application after the primary application has been considered. In all cases, OFSI will assess the CDPR costs in the same way as any other legal fees and reasonableness must be demonstrated.

Legal services: Administrative and other additional fees

OFSI sometimes receives legal services licence applications that include an additional administration or similar fee applied as a percentage uplift to the total of fee earners’ charges.

To assess the reasonableness of any such fee, OFSI requires applicants to provide:

• a clear, itemised breakdown of what the administration (or similar) charge covers; and

• supporting evidence demonstrating the basis for, and level of, those costs.
  Where this information is not provided, OFSI will not be able to assess the fee as reasonable and may refuse to license it. Applicants should therefore provide this information at the outset, as it is likely to enable a quicker assessment.

Maintenance of frozen funds and economic resources licensing ground: independent expert reports

For applications under the maintenance of frozen funds and economic resources licensing ground, applicants are encouraged to submit an independent expert report where the requested payments are high value, novel, or complex. For example, this could be payments related to a niche asset (such as a superyacht or racing car) for which expertise is required to determine the maintenance required; or for extraordinary payments which are not routinely required (for example, significant construction works to prevent a building falling into disrepair).

Where an expert report is not provided, OFSI may on a case-by-case basis and at OFSI’s discretion, request one where it is needed to support our assessment of the necessity and reasonableness of the proposed costs.

Type and qualification of the independent expert

The independent expert should have demonstrable and relevant expertise in the area to which the costs relate. This expertise may be demonstrated through relevant experience and/or appropriate professional accreditation.

Examples include, but are not limited to:

• Maritime assets – a marine surveyor or naval architect accredited by a recognised professional body.

• Aviation – an aircraft engineer or aviation asset manager with appropriate professional registration.

• Technical infrastructure / industrial assets – an engineer with chartered status (or equivalent) in the relevant discipline and experience of maintaining comparable assets.
  The expert should:

• be  independent of the applicant and any service provider benefiting from the payments;

• have no financial interest in the proposed works or services, beyond standard professional fees for preparing the report; and

• provide a signed report, prepared and presented in line with the relevant professional/industry standards, setting out the basis for their opinion on the proposed costs and their necessity.

How OFSI uses the report and assesses reasonableness

As with CDPRs, OFSI will treat any independent expert report as part of the overall evidential package. Even if the report supports the proposed costs, OFSI may conclude that costs are not fully justified and license a reduced amount or decline certain costs.

Cost of obtaining independent expert reports

As with CDPR fees, the costs of obtaining an independent expert report may be licensed under the relevant licensing ground, subject to the normal reasonableness test. Applicants may include these costs within the main application or request them via a separate licence application.

OFSI will assess the reasonableness of independent expert fees case-by-case, taking account of the scope, complexity, location, and urgency of the works.

To assist OFSI’s assessment, applicants should provide (as applicable):

• A clear scope of services: what the expert will do, deliverables, and the time period covered.

• How the fee is calculated: whether a fixed fee (and what it covers), or hourly rates and estimated hours (including any fee cap).

• Evidence of market reasonableness: multiple quotes/tenders, or an explanation of why a single provider was selected.

Evidence to demonstrate reasonableness

OFSI will continue to assess reasonableness in line with our existing guidance and policy (see Reasonableness in Licensing).

Evidence submitted to demonstrate reasonableness should be recent and as a general rule, OFSI considers evidence dated within the past 6 months to be appropriate (in relation to the application).

Where evidence is older than 6 months, applicants must provide a clear explanation of:

• why more recent evidence could not be obtained; and

• why the older evidence remains a reliable basis for assessing reasonableness (for example, due to the nature of the market or stability of pricing).

Further information

These updates are intended to enhance transparency around OFSI’s assessment of reasonableness, and to help applicants prepare complete and well evidenced applications. This should support more efficient processing of applications and clearer outcomes.

For further information, you should consult:

• OFSI’s Reasonableness in licensing blogpost;

• the relevant regime-specific and thematic guidance on GOV.UK; and

• the terms of any applicable General Licences.
  If you are unsure how these updates affect your application, you can contact OFSI using the details provided on GOV.UK.

Tags: Licensing

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About OFSI

OFSI helps ensure financial sanctions are properly understood, implemented and enforced in the United Kingdom. This includes the Oil Price Cap on Russian oil.

OFSI is part of HM Treasury.

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