OFSI legal fee licences and independent costs assessment
Key takeaways
- Law firms must assess OFSI licensing before undertaking paid work for designated persons to avoid prohibited transactions.
- OFSI licences and general licences limit payments to designated persons and impose conditions, caps, and record-keeping obligations.
- Provide evidence-based justification for fees, including scope, time estimates, hourly rates, counsel costs and proportionality analysis.
- Obtain an independent costs review or CDPR for substantial or high-value matters that exceed OFSI thresholds or within six months.
- Firms acting for sanctioned clients must document the licensing position early, retain detailed cost records and anticipate OFSI discretion.
OFSI legal fee licences and independent costs assessment
The United Kingdom sanctions framework imposes strict restrictions on dealings with individuals and entities that are subject to financial sanctions. Persons designated under the Sanctions and Anti-Money Laundering Act 2018 may be subject to asset freezes and related prohibitions.
For law firms, this creates a specific compliance issue. A designated person may require legal advice, but a law firm cannot usually receive payment for that advice unless the relevant licensing requirements are satisfied.
The Office of Financial Sanctions Implementation (OFSI), which is part of HM Treasury, is responsible for implementing and enforcing financial sanctions in the United Kingdom. In practice, OFSI determines when a licence is required and whether payment for legal services may be authorised.
Where legal work involves a designated person or entity, a law firm must assess whether an OFSI licence is required before providing paid services or receiving payment.
Why an OFSI licence may be required
Financial sanctions restrict access to funds and economic resources. A payment made by, on behalf of, or for the benefit of a designated person may therefore amount to a prohibited transaction unless a licence authorises it.
The Solicitors Regulation Authority (SRA) expects law firms to comply with the UK sanctions regime. A firm should not undertake paid work for a designated person unless the work and the receipt of payment are permitted, including where OFSI has granted the relevant licence.
This can create practical difficulties. A client may need urgent legal advice, but the firm may be unable to receive payment until the licensing position has been resolved.
The core issue is not whether a sanctioned person may receive legal advice, but whether the legal work and the payment for that work are authorised under the sanctions regime.
Legal fees for general licences
OFSI may issue licences permitting activity that financial sanctions would otherwise prohibit. In the context of legal services, this may include permission for a law firm to act for a designated person and to receive payment for that work.
Where a legal fees general licence applies, it will usually contain conditions. These may relate to the type of work covered, the relevant period, the amount that may be paid, reporting obligations, record-keeping, and the evidence that must be retained or provided.
Current general licence arrangements include financial caps for work carried out before and after designation. These caps are important because a firm must ensure that proposed fees fall within the permitted framework or are otherwise covered by a specific licence.
All legal fees and related expenses must be capable of being justified as reasonable.
The reasonableness test
A recurring issue in OFSI licensing is whether the proposed legal costs are reasonable. This is particularly relevant in complex sanctions, litigation, corporate, regulatory or cross-border matters, where the scope and value of the legal work may be substantial.
The reasonableness assessment is not limited to the total amount claimed. It may involve consideration of:
- the nature of the legal work;
- the complexity of the matter;
- the seniority and number of lawyers involved;
- the time required;
- counsel’s fees;
- urgency;
- the volume of documents;
- the level of legal and regulatory risk;
- whether the work is proportionate to the issues.
Applicants must be able to show that the proposed costs are necessary, proportionate and reasonable in the context of the work to be undertaken.
This evidence-based approach is important because OFSI must ensure that licence applications are not used to undermine the effectiveness of financial sanctions.
Independent costs review
An independent costs review may assist where legal fees are substantial, complex or likely to attract scrutiny. Its purpose is to provide an external assessment of whether the proposed fees are reasonable and proportionate.
The review is usually carried out by an independent costs lawyer or another suitably qualified costs specialist. The reviewer may consider the proposed fees, workstreams, hourly rates, time estimates, counsel’s fees, disbursements, and the overall scope of the engagement.
The value of an independent cost review lies in its objectivity. It separates the legal team seeking payment from the assessment of whether the proposed costs are justified.
An internal costs team may assist with preparation, but an external review may provide a stronger basis for demonstrating independence, particularly where OFSI expects a separate assessment.
Costs draftsperson’s report
OFSI’s updated approach places greater emphasis on the costs of the draftsperson’s report (CDPR) in certain high-value matters. Although the term refers to a costs draftsperson, OFSI guidance requires the report to be prepared by an independent practising costs lawyer who is not part of the legal team carrying out the underlying work.
A CDPR may be required where total legal fees and counsel’s fees exceed the applicable thresholds within six months. These thresholds are relevant to both law firms and counsel instructed directly.
The report is intended to support the assessment of reasonableness. It should explain the basis on which the proposed fees have been reviewed and whether they are proportionate to the work required.
A CDPR does not bind OFSI. It supports the application, but OFSI retains discretion to approve, reduce or reject the amount sought.
Evidence expected by OFSI
OFSI is likely to expect detailed evidence where substantial legal fees are involved. A general statement that the fees are reasonable will usually be insufficient.
The information may need to address:
- the legal services to be provided;
- the period covered by the proposed fees;
- the identity and role of fee earners;
- hourly rates;
- estimated time;
- counsel’s involvement;
- disbursements;
- VAT;
- the basis for any urgency;
- Why the work cannot reasonably be reduced or carried out at a lower cost;
- How the proposed fees compare with relevant costs guidance or appropriate benchmarks.
The evidential burden rests on the applicant. The firm must be able to justify the figures submitted to OFSI.
Where the evidence is incomplete, OFSI may request further information, approve a lower amount, or decline to license certain costs.
Independence and professional standards
Independence is a central issue in cost assessment. A costs lawyer who prepares a report for an OFSI application should not be part of the legal team providing the advice or conducting the underlying work.
This separation helps ensure the review is not merely a restatement of the firm’s fee proposal. The reviewer should assess costs by reference to the scope of work, relevant standards, proportionality, and the available evidence.
The Costs Lawyer Standards Board regulates costs lawyers in England and Wales. Their role includes preparing, reviewing and advising on legal costs in a professional and evidence-based manner.
For OFSI purposes, the reviewer’s independence can be as important as the content of the cost assessment.
Practical issues for law firms
Law firms instructed by sanctioned clients should consider the licensing and costs position at an early stage. Delay in preparing the required evidence may affect the timing of payment and the firm’s ability to progress the work efficiently.
Firms should consider:
- whether the client is a designated person or is owned or controlled by a designated person;
- whether the work falls within an existing general licence;
- whether a specific licence is required;
- whether fee caps apply;
- whether counsel’s fees are included;
- whether an independent costs review is required;
- whether a CDPR should be obtained voluntarily;
- What evidence must be retained?
A clear cost record is essential. OFSI scrutiny is likely to focus on whether evidence, rather than broad assumptions, supports the proposed costs.
OFSI’s discretion
Even where a law firm provides a detailed application and an independent costs report, OFSI is not required to approve the full amount requested. It may decide that some elements are not sufficiently justified, that further evidence is required, or that the licensed amount should be reduced.
This discretion reflects OFSI’s role in balancing access to legal services with the need to preserve the effectiveness of the sanctions regime.
A licence application should therefore be approached as a regulatory assessment, rather than as a routine approval of legal fees.
The existence of a CDPR may strengthen the application, but it does not remove OFSI’s power to make its own decision.
Conclusion
OFSI licensing is a central compliance issue for law firms acting for sanctioned individuals or entities. Legal services may be permitted, but payment for those services must be handled in accordance with the UK financial sanctions framework.
Where fees are substantial, an independent costs review can assist by providing objective evidence that the proposed charges are necessary, proportionate and reasonable. In higher-value cases, a cost draftsperson’s report may be expected or required.
For law firms, the practical point is clear: legal costs in sanctions matters should be planned, evidenced, and carefully reviewed before they are submitted to OFSI for approval.
