Last week there was a lot of activity in the world of financial services as Rachel Reeves set out her Leeds reforms, one of which was to reduce the regulatory burdens imposed by the Senior Managers and Certificate Regime (SM&CR).

The government was elected with a goal of growing the economy. For several economic and political reasons this goal is looking rather distant and indeed, the goodwill and confidence the government enjoyed a year ago is now questionable.

That said, these proposed reforms are not kneejerk reactions; they are subject to consultation and have taken much time in the planning. Their structure is set out in two phases, the first being the period prior to the government’s proposed abolition of certain legal requirements of SM&CR under the Financial Services and Market Act 2000 (FSMA). The Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) have made modest proposals to streamline the existing system over this Phase 1 period. If the government goes ahead with abolishing the legal requirements, then Phase 2 will be the implementation of new rules from the regulators that are aimed at reducing burden and complexity. 

The consultation that has already taken place identified that SM&CR in its existing form had succeeded in improving governance and accountability but that it could be streamlined. It recognised that high regulatory standards are good for the appeal and competitiveness of the City as a global financial services centre but that it has a heavier compliance burden than other financial centres. The FCA has the secondary objective of international competitiveness and growth. This objective has a strong influence on the proposals. The aim of the Treasury and regulators is to reduce the burdens of SM&CR by 50%. 

The proposals to be consulted on:

The government

Senior Managers 

• Reducing the number of Senior Managers, particularly for smaller firms.
• Allowing for certain Senior Manager functions not to require pre-approval by the regulators. Instead, individual firms will have to ensure that persons holding these functions meet fitness and proprietary standards (is this a new certification regime, albeit one much more limited in scope?).

Certification Regime

• Remove the regime from FSMA, specifically:
  • the duty on a firm to ensure that a person is certified as fit and proper to carry out the role;
  • the removal of annual certification.

The FCA

Phase 1 – streamlining

Senior Managers

• The 12 week period allowing cover for a Senior Manager without FCA approval will now apply to a firm making an application for SMF approval rather than having to have that person approved by the regulator within the 12 week period.
• Simplifying Form A and improving the guidance.
• Extending the validity period of criminal record checks from three months to six months.
• Allowing for periodic submissions, ‘at least every six months’ of updates to Statements of Responsibility rather than having to do so at the time of each change.
• Clarifying the role of an SMF7 – group entity Senior Manager, and the more general SMF18 – other overall responsibility.
• Raising the threshold for classifying as an Enhanced SM&CR firm.

The Certification Regime

The scope of it will not yet be reduced but:

• removal of duplication in certification; someone does not need to be certified twice for separate functions.

The Code of Conduct

• Clarification that where someone is suspended in order to carry out an investigation into a potential Conduct Rule breach, this is not reportable in itself as a Conduct Rule breach under SUP 15.11.

Regulatory references

• These are unlikely to be pared back immediately – but a previous employer will now have four weeks to respond to a reference request in order to speed up the new employer’s recruitment process. 

Phase 2

The core to the reforms:

• reducing the number of Senior Manager roles;
• not all Senior Manager roles will need pre-approval by the regulator;
• the Senior Manager application process will be further streamlined;
• Statements of Responsibility and Prescribed Responsibilities will be simplified; and
• designing a streamlined regime to replace the current process of certification. 

The PRA

The PRA consultation paper broadly reflects that of the FCA but does not agree with the four week window for regulatory references saying that a firm needs adequate time to prepare the reference. It also wants to clarify that current annual certification can use internal systems and formats.

Overview

Above all else it is the anticipated removal of the Certification Regime that is of note. The consultation suggested that the existing regime covers too many roles. The FCA supports the intention of the Treasury to replace the Certification Regime and aims to achieve a situation where fitness and propriety is ensured but without burdening firms.

It is hard to believe we will return to such a light touch of regulation that the infamous ‘bad apples’ can revert to the short-termism and poor behaviour that led to previous financial crises. We anticipate that the obligation will be on firms to ensure that they have effective management and policies in place even if there is not a certification process. There will still be adequate supervision. It will be interesting to see how the future regulatory references will look, and whether they will be quite so prescribed?

For now, let us hope the government and the regulators get it right and reach their goal of ‘proportionality’. The existing regime has been shown to work but the administrative burdens of it are well-known. We have all experienced the potential recruit from overseas being worried as to what will be required of them. But it would be a mistake if anyone believes that oversight and supervision will be done away with.

At the start of this month the government published its paper on tackling non-financial misconduct in financial services. If it was ever needed in the first place, there is now going to be unambiguous clarification that harassment, discrimination and bullying will be a breach of the Code of Conduct, if connected – albeit indirectly – to the workplace. In any event, such behaviour will call into question fitness and propriety. 

So, let us see how long the next regulatory regime lasts, but for now any responses to these proposals should be with the government and/ or regulators by 7 October.

Top 50 law firm Penningtons Manches Cooper is delighted to announce the appointment of Naomi Roper, to strengthen its banking and finance team and housing sector practice.

Naomi, is a leading finance lawyer with an exceptional track record across all types of financing and capital markets transactions and has broad experience in advising both borrowers and lenders.

Her arrival signals a further expansion of the firm’s offering to its housing clients at a time when demand for innovative and sustainable funding solutions is increasing.

She has particular expertise in complex funding and security arrangements, development and off-balance sheet funding, derivatives, intra-group loans, joint venture arrangements and the restructuring of entire loan portfolios.

As a capital markets funding specialist, Naomi has advised clients on bond issuances worth billions of pounds, including through EMTN programmes. She also regularly advises on complex group restructurings, including loan portfolio due diligence and lender consent processes.

Naomi also advises on social and sustainable finance, including green loans, sustainability linked loans and private placement. She contributed to the development of the Sustainability Reporting Standard for Social Housing and the LMA Sustainability Linked Loan Principles for Real Estate Finance. 

She will be based in the firm’s London office and will work closely with colleagues across the housing, banking and finance, and ESG teams.

Linda Storey, head of Penningtons Manches Cooper’s housing team, said: 

“We’re thrilled to welcome Naomi to the firm. She is a truly accomplished practitioner with a fantastic standing, whose appointment reflects the firm’s commitment to providing a full-service offering to housing clients. Her expertise particularly complements the work of our corporate, governance and securitisation and portfolio specialists, allowing us to offer a truly joined up service across all aspects of housing and housing finance.”

John Chater, head of the banking and finance team adds: 

“It’s a pivotal time for the housing sector, and Naomi will be instrumental in supporting clients as they navigate an increasingly complex funding environment. Adding Naomi’s extensive housing sector experience to the existing banking team embodies the firm’s strategic focus and emphasises the breadth and depth of our practices and sectors.”

Commenting on her appointment, Naomi said:

“I’m delighted to be joining Penningtons Manches Cooper at a time of such transformation in the housing sector. The strength of the housing sector and banking and finance team combined with the firm’s reputation for excellence and its collaborative culture make it an ideal platform to support clients. I look forward to contributing towards the delivery of sustainable, affordable housing through innovative, tailored approaches to finance.”

Independent schools are typically registered as charities and therefore adopt a higher standard of practice in their operation. Their insolvency attracts a suite of particular considerations that can be problematic if not planned for.

In this article, PMC’s Restructuring team offers four key factors for insolvency and turneround practitioners at the outset of an appointment over a business within this unique sector. 

1. Identify trust monies 

One of the top priorities after taking appointment – and preferably before if funds are tight – over a school is to identify which monies are held on trust.It is common for ‘cash’ not to be ‘free cash’ as much of it will be advance fee payments or deposits and the status of that money depends on a number of factors. Do not assume that it is available for use until you are sure. 

Funds held on trust do not form part of the business’ assets and should be held separately. Following consultation with solicitors, those funds should then be returned to those who provided said funds on trust. Just because the money is not held in a ringfenced account, that does not always equate to a lack of a trust being present. The devil is in the detail and often the school’s trustees, as laypeople, will not leave the situation obviously accounted for.

There are three types of trusts: express trusts, resulting trusts and constructive trusts. A brief summary of each is set out below:

• Express trusts – the school must have intentionally made it clear to the parents that it wishes to create a trust, detail the specific terms on which the school must hold the funds and set it out in some form of ‘trust’ document. The Terms and Conditions between the parents and the school typically satisfy the test for an express trust. 
• Resulting / Quistclose trusts – where the parents (as the beneficial owners of the funds) transferred those funds to the school for a specific purpose (teaching/education) and for no other purpose. If the school becomes insolvent before applying the funds for that purpose, those funds cannot be used to satisfy its creditors. 
• Constructive trusts – arise through operation of law, regardless of the school’s/parent’s intention. Constructive trusts are often found to prevent unjust retention of funds by the receiving party. Unless there has been some form of misrepresentation, dishonesty or mistake made by the company, a constructive trust will not usually arise.

It is typical in independent schools that overseas students pay fees an academic year in advance and domestic students pay fees a term in advance. As the students are taught, the funds are then drawn down from the trust into the school’s ownership. It would be unusual for student fees not to be considered held on trust. 

Insolvency practitioners should also consider that there are likely to be donated funds in the school’s possession as well. These are typically made from donors to the school and are often for a specific purpose. Where the funds are donated for a particular purpose, they too are likely to be considered trust funds and will need returning to the donors outside the usual operation of the waterfall payment structure to creditors. 

Where funds are donated without a particular purpose they are unlikely to be considered trust funds and can form part of the general assets of the school. Each circumstance is different and legal advice should be considered on whether funds are held on trust or not. 

2. Regulatory reporting

Where an appointment has taken place, it is imperative to check that the Charity Commission (presuming the school is registered as a charity) has been notified. Anything that falls within the definition of a ‘serious incident’ must be reported to the Charity Commission. A ‘serious incident’ includes an insolvency event/process. 

A serious incident should be reported promptly: “as soon as is reasonably possible after it happens, or immediately after your charity becomes aware of it.” The trustees should have completed this report prior to the appointment but it is crucial to check that this has been actioned. It is possible that in the fast-moving insolvency situation, the trustees may overlook or not be aware of this requirement. 

If a report has not been made to the Charity Commission an insolvency practitioner must do so immediately. 

3. Ensure any merger complies with the charitable purpose of the school 

Due to the nature of independent schools and their charitable purposes, there are additional challenges that they face with any sale/merger out of the insolvency. Insolvency practitioners must make sure that any such transfer of the business still upholds the charitable objectives of the school. 

It is not, therefore, as simple as receiving an offer from, say, a private equity firm. This offer will instead need to be supported with a plan to maintain the spirit of the charitable purpose. The Charity Commission will need to approve any merger/sale and such authority may take time to obtain. The ease in which it can be obtained may well be dictated by whether the Charity Commission has been engaged prior to appointment.

It may be necessary to change the charitable purpose in order to carry out the transfer of the business and maximise the return to creditors. While it is possible to do this, the process is not straightforward by any means and requires an application to the Charity Commission and  may need legal assistance. It will be prudent for an insolvency practitioner to keep this additional possibility in mind when appointed and seeking a possible sale of the business, especially if there is an accelerated sale process being sought as a rescue and timing is paramount. 

4. Reporting to the Charity Commission – trustee conduct and evidence for claims 

As a high percentage of independent schools are also registered as charities, a useful tactic is available to insolvency practitioners to consider making a recommendation/report to the Secretary of State on the trustees conduct where appropriate. 

The Secretary of State has the power to address the failure of leadership and management of the trustees of the school. If such power is exercised successfully, then it may aid the ability of insolvency practitioners to bring a claim against the trustees of the school. The Secretary of State action can be referenced as evidence against the trustee to quicken litigation and leverage a greater settlement for any improper action of the trustee. 

Conclusion

These are just our four top tips for working with independent schools and the sector is laced with school specific nuances and requirements. Whether an IP is retained early on with a view to turneround options or later in order to take a formal appointment, school insolvency leaves much food for thought and there is much to navigate. PMC has particular expertise in educational turneround and insolvency and can offer specialist support on all education and charity issues.

With financial pressures ever increasing in the independent school sector, trustees must be alive to solvency issues now more than ever. Despite typically being laypersons, trustees are expected to have the same knowledge as a professional director and ensure that an independent school does not enter into an academic year without knowing if it will complete it. If an independent school ceases trading partway through the academic year there can be serious repercussions for trustees as this so critically affects the education of students under their care. Those repercussions span both the insolvency and charity regime.

When should a trustee be concerned about solvency?

A prudent trustee is one who, along with their fellow trustees, regularly reviews the financial performance of the school to ensure its ability to continue trading. In that review, if a trustee answers ‘yes’ to one or more of the 15 questions below – as set out by the Charity Commission – then the charity is at risk of insolvency and the trustees will need to examine the charity’s financial situation in more detail and/or obtain professional advice: 

1. Is the cash balance insufficient to pay the debts?
2. Does the cashflow forecast indicate that the school will not be able to pay its debts when they are due?
3. Does the school have more liabilities than assets?
4. Are the school’s current assets plus investments less than its current liabilities?
5. Are the school’s total assets and foreseeable income less than the total liabilities and expected expenditure?
6. Has the auditor or independent examiner raised any going concern issues?
7. Do the last or upcoming accounts state that the charity is not a going concern?
8. Do the trustees need to regularly use reserves because the incoming resources are not enough to meet all of the school’s commitments?
9. Does the school have negative reserves?
10. Are the trustees relying on cash from funds which have been allocated for a particular project (designated funds) for general day to day needs because there are no other funds?
11. Do the trustees need to provide additional security for long-term borrowings?
12. Is the school relying on bank loans with unclear renewal or extension options in order to continue operating?
13. Have the trustees breached the banking covenants or exceeded the borrowing facilities with no immediate means of restoring the situation?
14. Is the school under pressure from creditors who are chasing overdue payments?
15. Does the school have potentially significant contingent liabilities? (In simple terms a contingent liability is money which might be owed if a particular event happens).

Seek professional advice as soon as possible for a rescue plan

The Independent Schools Inspectorate (ISI) is appointed by the Department of Education (DoE) to inspect independent schools in England and reports to the DoE on the extent to which The Education (Independent School Standards) Regulations 2014 are met.

Part 8, ‘Quality of leadership in and management of schools’, sets out the responsibility to actively promote the well-being of pupils, which will be relevant to decisions about how and when to communicate plans to merge or close a school. 

It is clearly not in the interests of pupils for an academic year to be started and not completed. Therefore, if trustees are aware or should be aware that the school will not comfortably complete the academic year then it will be prudent for them to take the appropriate steps to avoid pupils starting it at the school. 

Instead, trustees should seek immediate professional advice from insolvency solicitors and insolvency practitioners who will work in tandem to advise the school on the best way forward. If a rescue plan cannot be established, trustees will be advised to notify the parents of all pupils so that alternative arrangements can be made for their education in the forthcoming academic year. 

Risks to trustees

If any of the above trigger points are met then trustees need to act promptly or else risk committing a series of offences that are as alarming as they sound including but not limited to:

• Regulatory action taken by the Secretary of State to address failures relating to the quality of leadership in or management of a school. This extends to governors as well as employees in management positions.
• Trustee disqualification proceedings.
• Wrongful trading, where a trustee who allows a school to continue trading when there is no reasonable prospect that it can avoid going into insolvent liquidation or administration may be personally required to contribute to the school’s assets to the extent of the amount lost as a result of that conduct.
• Misfeasance, if, in the course of winding up a school, it appears that a trustee or former trustee has misapplied, retained or become accountable for any money or other property of the school, or been guilty of any misfeasance or breach of any other fiduciary or other duty, the court may order the trustee to personally repay the money or property with interest or contribute such sum to the school’s assets by way of compensation as the court thinks just.

Avoiding personal liability as a trustee

There are several steps that a trustee can take to minimise the risk of incurring personal liability including:

• Ensure the charity can meet its financial obligations, particularly before agreeing to any contract or substantial borrowing.
• Ensure the charity can meet any obligations to staff pension schemes.
• Hold regular trustee meetings and keep proper records of decisions made and the reasons for those decisions.
• Ensure you prevent conflicts of interest from affecting decisions.
• Ensure any transactions with and benefits to trustees or connected persons are properly authorised.
• Take appropriate advice from a suitably qualified person when you need to.
• If you delegate any powers, give clear written instructions and make sure the instructions are being followed.
• Ensure the charity has effective management and financial controls.
• Keep receipts and records of income and expenditure.
• Receive regular financial reports.
• File accounts on time.
• The Charity Commission and the courts can relieve trustees from liability if they have acted honestly and reasonably and have not benefited from their actions. 

Summary 

Current law and regulation make it crystal clear that trustees must be prudent in their approach to conducting the business of the school and furthering its charitable purposes. Regular review of the school’s finances will go a long way in ensuring that the trustees are taking the right action at the right time. 

It is imperative that trustees take professional advice as early as possible and act accordingly if any of the insolvency triggers are met. Failure to take such action is likely to lead to a trustee personally pursued for any insolvency-related offence that is established. 

Trustees acting reasonably and in the interests of the school will not usually be found personally liable for an insolvency-related offence. It should be noted that burying their head in the sand and avoiding looking at finances and financial issues is not a legal defence to a claim and, therefore, all trustees must be proactive in their management of an independent charitable school. 

If there one piece of advice to take away from this article, it is that early intervention is the best form of prevention and protection and the easiest way to reduce the stress and pressure of financial challenges.

As it heads towards the parliamentary summer recess, the government has been busy making final changes to its flagship Employment Rights Bill, which is now expected to receive royal assent in early autumn. In addition to the changes – examined in more detail below – the government has also published an implementation ‘roadmap’, setting out dates for many of the proposals, which it states will ‘allow employers, workers, trade unions and other stakeholders to plan ahead to ensure that they can prepare for these important reforms’.

Implementation road map

Autumn 2025
We now know that as soon as the Bill is enacted, many of the proposals relating to trade unions and industrial action will come into force. This will include repealing the ill-fated minimum service levels legislation and much of the Trade Union Act, introduced by the previous government, and enhancing protection from unfair dismissal for those taking part in official industrial action. 

April 2026
Among other changes, April 2026 will see the following measures:

• doubling of the maximum period of the protective award for collective redundancies;
• paternity leave and unpaid parental leave to become a ‘day one’ right;
• removal of the lower earnings limit and waiting time for statutory sick pay;
• additional trade union measures, including simplifying the recognition process and making changes to the ballot process; and
• the introduction of the Fair Work Agency.

October 2026
In October next year, the following proposals will be introduced:

• a clampdown on the practice of fire and rehire;
• strengthening of the duty to prevent sexual harassment in the workplace;
• changes to time limits for employment tribunal claims; and
• further trade union measures, including enhancing protections for trade union representatives and protecting workers against detriment for taking industrial action.

Not before 2027 
The government has confirmed that the headline proposal that unfair dismissal will become a day one right will not be implemented before 2027. Similarly, the provisions for improved access to flexible working, restrictions on the use of zero-hours contracts and enhanced dismissal protection for pregnant women and new mothers will not come into force any earlier than 2027.

Latest changes

On 7 July 2025, the government tabled a number of amendments to the Bill which will be considered this month by the House of Lords. Key changes to the original proposals include:

Fire and rehire
It was originally proposed that it would be automatically unfair to dismiss someone either for refusing to agree to a variation in their terms and conditions of employment, or in order to replace them with someone on varied terms and conditions performing substantially the same activities. Previously, it did not matter what the nature of the proposed variation was. Under the amended provisions, the new right will only apply when the proposed variation is a ‘restricted variation’. Restricted variations are defined in detail, but essentially relate to any terms relating to the employee’s pay, hours and holidays. 

Significantly, restricted variations do not include changes to the employee’s place of work, or to the employee’s duties, meaning that a dismissal and re-engagement to effect such changes will not be automatically unfair. This does not mean, however, that such variations can be made without fear of claims. Rather, in considering the fairness of any dismissal for refusing to agree a variation that is not a restricted variation, a tribunal must take into account a number of specific factors – essentially the same as the reasonableness test that a tribunal would already apply in unfair dismissal cases.

The government has also closed a loophole in the previous provisions by making it clear that the amended rules will apply where the employer replaces employees with non-employees, such as agency workers, as long as they will be carrying out substantially the same activities as the dismissed employee.

As these represent significant changes to the original proposals, a consultation will launch this autumn, before the changes come into force in October 2026.

Bereavement leave
It is proposed that bereavement leave be extended to early miscarriages, ie those that occur before the 24th week of pregnancy.

Non-disclosure agreements (NDAs)
One of the changes that has garnered the most headlines is the government’s proposal to ban so-called NDAs. A new clause 22A will render any provision in an agreement between an employer and a worker void in so far as it purports to prevent the worker from making an allegation or disclosure of information relating to sexual harassment or discrimination in the workplace. 

Announcing the measure, Employment Rights Minister, Justin Madders, commented that these amendments ‘will give millions of workers confidence that inappropriate behaviour in the workplace will be dealt with, not hidden’, with the government press release going on to state that ‘if passed, these rules will mean that any confidentiality clauses in settlement agreements or other agreements that seek to prevent a worker speaking about an allegation of harassment or discrimination will be null and void’. 

Currently employers are prevented from relying on confidentiality provisions where the worker has made a protected disclosure. These new provisions go one step further, by removing the hurdles required to establish that the disclosure is protected, such as being in the public interest or made to specified persons. Furthermore, the new proposal will extend to allegations as well as disclosures of information, and there is no requirement that the allegations are made in good faith.

It is interesting that, according to the wording of the press release, the ban will extend not only to harassment claims, but to all claims that involve an element of discrimination (save for claims relating to a failure to make reasonable adjustments). As many claims will raise allegations of discrimination, whether or not substantiated, this is likely to be of wide application.

While the proposals have been welcomed by campaigners, many have warned that the ban risks unintended negative consequences. If employers are unable to impose confidentiality obligations as part of a settlement, it is likely that far fewer claims will be settled, meaning that victims will be forced to enter into costly and stressful litigation in order to receive any compensation. Many victims of discrimination and harassment will not want to go public about their treatment, and imposing a ban will remove agency from victims who will be left with fewer means of redress. 

It is not yet clear when the proposed ban would come into effect (as the amendment was tabled after the roadmap was published), although the government has made clear that a ban will not be retrospective, and any NDAs entered into before the implementation date will remain in force.

Next steps

We will be closely monitoring the progress of the Bill, including the various consultations, and will be publishing deep dives into the various changes to enable you to prepare in good time. Our first deep dive into the changes, which are expected this autumn, will be published shortly. 

While the opportunities that AI presents for society and businesses are extensive, we must be mindful of the ways fraudsters can leverage these advancements to increase the sophistication and scale of fraud. This article explores the common methods of AI-enabled fraud of which our clients should be aware.

AI and financial scams

Before AI, criminals may have spent a significant amount of time reviewing publicly available data, scouring through people’s bins or searching the ‘dark web’. With the advent of AI, the cost/benefit analysis of fraud is clearly tipping in the scammers’ favour. They can leverage AI to automate their processes to rapidly create deepfakes, fraudulent websites and synthetic identities on a much larger scale than before.

Authorised push payments (APP)

In the UK, authorised push payments (APP) represents over 40% of payment fraud according to a 2024 report by UK Finance. APP is a particular kind of fraud where individuals are targeted, drawn into a fraudster’s web and deceived into transferring money to that person. The fraudster might impersonate a trustworthy figure in a person’s life or job using tactics such as emotional appeals from family members or friends or making urgent requests from colleagues, senior management and CEOs. The proliferation of AI, combined with the convenience of online banking and e-commerce, has created a fertile breeding ground for APP fraud.

The Authorised Push Payment Reimbursement Scheme, which came into force on 7 October 2024, was introduced by the government as part of its strategy to combat APP fraud. The scheme introduces mandatory reimbursements and requires payment service providers (PSPs) to reimburse customers (including individuals and charities but excluding businesses except for micro-enterprises) who are victims of APP fraud. Provided they have not been grossly negligent, victims can claim up to £85,000 in losses if the payment was made by either Faster Payments or CHAPS and specific criteria are met.

Although this is a welcome protection for consumers, the impact will be felt by financial institutions who will need to implement better fraud detection and prevention measures, especially considering that the deepfakes and AI-generated phishing emails described below could potentially perpetuate APP fraud and increase the number of reimbursement claims. 

Deepfakes

As deepfake technology becomes more accessible and sophisticated, it has become easier for scammers to develop convincing audio and video recordings and harder for individuals and businesses to tell if a request is genuine and identify scams. For example, there have been several instances of deepfake videos of celebrities being used to endorse fake financial investments, including a fraudulent cryptocurrency scheme featuring trusted consumer champion, Martin Lewis.

The most widely reported example of deepfakes in APP fraud occurred last year when an employee in Hong Kong at a multi-national company was duped into authorising payments totalling £20 million to fraudsters. The employee was tricked into participating in a video call with individuals he thought were the company’s chief financial officer and other senior leaders. None of the individuals were real and the fraudsters had used deep fake technology to imitate their likeness.

There is also the cautionary tale of a woman in France who was defrauded of €830,000 after falling in love with an AI-generated Brad Pitt. The fraudsters used deepfake images of the actor, including in a hospital bed, to convince the woman that he needed money to fund cancer treatment as his bank accounts had been frozen during his divorce proceedings with Angelina Jolie. This story highlights how scammers can take advantage of those who are vulnerable by creating a sense of intimacy and connection.

Phishing emails

Traditionally, phishing emails were easy to spot due to their poor spelling, grammar and clunky formatting. However, AI has made it harder for individuals to distinguish between legitimate and fraudulent communications because Natural Language Generation models (NLG), like GPT, can be used to generate professionally crafted and fluently written communications that mimic a genuine business or individual’s tone or writing style.

AI can also be used to analyse the receivers’ online and social media presence to identify their interests. The result is the generation of highly targeted and personalised emails (known as spear phishing) sent en masse to deceive people into revealing sensitive information, make direct payments or installing malicious malware.

AI-generated fraudulent websites

Phishing emails may also direct a victim to a fake website and these counterfeit websites can now be generated easily using AI.  AI has democratised website building, allowing users to build professional-looking websites quickly and without the need for sophisticated coding or computer programming skills. However, scammers are able to capitalise on this accessibility by using AI to create fraudulent websites that mimic legitimate companies or services. Large Language Models (LLMs) can be used to produce convincing text and product descriptions accompanied by realistic AI-generated images, videos and audio.

Key warning signs that a website may be fraudulent include ‘too good to be true’ discounted and limited-time offers on popular items which give consumers a sense of urgency and enticing individuals to make payments or share their personal details.

Synthetic identities

AI could also heighten ‘synthetic fraud’, a type of identity fraud where cyber-criminals create fraudulent identities by combining real and fictitious personal information. For example, a genuine identity card number combined with a fictitious name and date of birth to circumvent credit checks and carry out high-value fraudulent transactions. Financial institutions and businesses may find it difficult to combat this type of fraud because the synthetic identity is not connected to a real person and there is no one to alert the organisation of suspicious activity. Criminals will also build up the credit score of the synthetic identity to make it appear as a genuine customer before committing fraud.

AI fraud in legal proceedings 

There are concern about how deepfake evidence could be used in disputes to damage the credibility and reputation of the other side. A recent article by our family team examines how high-stakes divorces and custody battles can tempt individuals to manipulate evidence. It notes how we are beginning to witness the use of sophisticated fake evidence in these proceedings. For example, in a child custody case in 2020, a deepfake audio clip was submitted as evidence to falsely portray the father as a threat.

The potential reputational damage caused by the spread of AI-generated misinformation and deepfakes is investigated in an article written by our reputation management team. The article warn of how the circulation of this content may give rise to potential defamation or data protection rights claims.

Another detrimental side effect of AI is that it could be used fraudulently to undermine the integrity of evidence and the judicial process. In the High Court case, Crypto Open Patent Alliance v Craig Steven Wright, the court found the defendant had fabricated 47 documents in his quest to convince the court that he was the creator of Bitcoin. The judge ruled that this constituted a serious abuse of the court’s process. While it is unclear if the defendant used ChatGPT, expert analysis of one deleted file which was recovered suggested that the structure and syntax of additional text on the document had been written using software that would not have been available in 2007 when it was alleged they were written.

Meanwhile, in the recent case of Ayinde, R v The London Borough of Haringey, the defendant made an application for a wasted costs order against the claimant’s barrister and Haringey Law Centre on the grounds that they had cited five fake cases. The judge made a wasted cost order and condemned the claimant’s lawyers for their ‘appalling professional misbehaviour’.

The judge, in particular, criticised the fact that the claimant’s solicitor had dismissed the fictitious cases as ‘cosmetic errors’. Although the defendant’s counsel suggested that AI had been used, the judge said that he was not in a position to determine this as the claimant’s barrister was not sworn or cross-examined. Despite this, he said that it would have been negligent on the balance of probabilities if she had used AI and had not verified the authenticity of the authorities identified before citing the cases in the pleadings.

Subsequently, the Ayinde case was referred to the Divisional Court along with another case where there had been suspected use by lawyers of generative AI tools. The claimant’s barrister continued to maintain that she had not used AI in producing the list of cases. While the court said that the threshold for instigating contempt of court proceedings had been reached against the barrister, proceedings were not initiated against her for multiple factors, including that she was very junior. Nevertheless, the court felt it was necessary to refer her to the professional regulator.

The judge in this case issued a stark reminder of the ‘serious implications for the administration of justice and public confidence in the justice system if artificial intelligence is misused’. She urged that those with leadership responsibilities such as heads of chambers, managing partners and regulators must now implement policies and measures to ensure every individual currently providing legal services is aware of how to use AI in compliance with their ethical and professional obligations and duties to the court. Although Ayinde appears to be an example of reckless rather than fraudulent use of AI, it does show how easy it is for AI to be used to extract untrue and misleading information from fictitious cases.

In March 2025, Penningtons Manches Cooper hosted a panel discussion at the firm’s London office, addressing the challenges posed by deepfake evidence in court proceedings. You can read more about this event and watch our post-event panel video here.

AI-assisted cheating in education

A survey by The Higher Education Policy Institute (HEPI) found that more than half of students use AI to help with assessments and 5% were copying and pasting AI-generated content directly into their assignments without modifying their output which most institutions would classify as cheating. AI is here to stay but it is important that students are taught how to use AI ethically.

While plagiarism and collusion have always existed in education, the emergence of AI in this arena has substituted one set of challenges for another. Before the rise of AI, students could buy professionally written papers from ‘essay mill’ companies which could go undetected by examiners and plagiarism detection software. However, now that LLMs like ChatGPT are widely and freely available, students have the technology at their fingertips to produce similar or better-quality assignments and are less likely to seek out the above services.

The opportunities for students to use AI to cheat in assignments could be heightened where students are assessed through unsupervised coursework assignments, particularly since Covid-19.

Last year, researchers at the University of Reading conducted a study in which they submitted 33 unedited AI-written assignments across five psychology undergraduate modules. They found that 94% of the submissions were undetected and the grades received on the assignments were half a grade higher than submissions by actual students.

Unlike conventional plagiarism, where students were likely to copy and paste or paraphrase large sections of original sources, it is difficult for plagiarism software to detect cheating when AI-generated content integrates information seamlessly from multiple sources. This has led educational institutions to adopt Generative AI detection tools such as Turntin’s AI writing detection software to distinguish between human-written and AI-generated text as well as to revert to examination-based assessments and move away from coursework.

Colleges should be aware of the potential copyright issues. The platform terms state that the person who submits a paper grants the software provider a licence to make copies or store the papers on their database for the purposes of plagiarism and/or AI detection. When students upload their own work to plagiarism or AI detection platforms like Turntin, they are able to grant such a licence as they are the owners of the copyright in their papers.

However, issues may arise when college or university staff upload student papers. They are not the owner of the copyright in the paper and they may not have suitable permissions to upload the paper on behalf of the student.  If they have not been granted permission or a licence by the student to upload the paper to the platform, this may constitute copyright infringement and the platform will be operating on the basis of an invalid licence.

AI clearly has the potential to undermine academic integrity, devalue qualifications and de-skill students of crucial critical thinking and evaluation skills. To help students use AI ethically, schools and universities are now implementing clear policies and guidelines on the use of AI in assessments.

This article was co-written with Georgia Morris, trainee solicitor in the employment team.

The background

Weeds present a perennial problem for gardeners and landscapers everywhere. How do you go about removing weeds safely and effectively en masse? Using a trowel takes time; chemical herbicides can have a disastrous effect on the environment; domestic flamethrowers are increasingly popular but those come with their own self-evident risks. 

In 2019, Dennis McCarthy and John Clearwater invented an innovative fix to this problem: a method of shooting a high pressure solution of water and sugar/sugar alcohol at the offending weeds, inducing osmosis to safely destroy their cells while minimising harm to the surrounding environment. A patent was applied for and subsequently granted by the UK IPO in 2022. 

However, there was a problem: McCarthy and Clearwater disagreed over the question of ownership under the terms of a collaboration agreement that they entered together in 2019. There was no question they had invented it together but who was the proper owner of the rights to the patent? This dispute would eventually be heard before the High Court (citation [2024] EWHC 3155 (Ch)) and judgment was handed down in December 2024.

The judgment confirms the golden rule in legal agreements: clarity and certainty of terms are paramount to ensure that differences in interpretation do not require the cost and expense of a court’s intervention as in this case, especially if the differences relate to valuable IP such as a patented invention. 

The collaboration agreement

The inventors’ disagreement is rooted in the interpretation of the collaboration agreement. Collaboration agreements vary wildly but are all, in essence, a declaration where multiple parties make clear their intention to work together on a project or joint venture. Parties use these agreements to set out their common goals or respective roles to keep each other’s information confidential or decide who owns (or will own) which IP. 

Because these agreements are entered into at the start of a collaboration, many items are parked until details such as specific funding or licensing terms become more apparent for which parties can enter separate contracts later on with the risk that these terms represent simply an unenforceable ‘agreement to agree’. 

In the case of McCarthy and Clearwater, their collaboration agreement was entered into while they were still developing their invention. It broadly contained the standard provisions you would expect, like agreeing to co-operate on research and disclose their knowledge to each other. However, there were four key provisions that would become the subject of dispute: 

• That there were ‘milestones’ McCarthy and Clearwater were to pursue together first, including to i) share their expertise and technology ii) determine if the product is commercially viable iii) run tests, etc.
• That after these ‘milestones’ were achieved, they ‘will agree to proceed to a patent application’.
• That they would incorporate a new jointly owned company together following legal advice.
• That both McCarthy and Clearwater had ‘intent to transfer any IP applied for into the entity at the earliest time’.

The dispute

In late 2019, with their invention developed, the relationship between McCarthy and Clearwater broke down after differences emerged between them about their respective contribution to the project. There was also a divergence in understanding from this point onwards. McCarthy considered the collaboration agreement to continue to bind them both while Clearwater treated it as being ‘void’. 

In March 2020, McCarthy incorporated the company Bionome and was its director and sole shareholder without Clearwater’s direct involvement. McCarthy did so with the understanding that he was taking the lead on setting up the company that would in turn apply for the patent. Bionome subsequently applied for the patent a few weeks later. 

Significantly, Bionome was named as the sole owner on the patent application. Why was Clearwater not named as a joint owner? The starting point of the Patents Act 1977 is that the inventors are the owners unless an agreement says otherwise. McCarthy’s understanding was that the collaboration agreement had the effect of assigning Clearwater’s ownership of the patent from himself to Bionome, given that the clause stated their mutual ‘intent to transfer any IP applied for into the entity at the earliest time’.

Even though Bionome was solely owned by McCarthy, he wished to honour the spirit of collaboration agreement such that, as soon as Bionome became commercially viable, he would transfer an equal shareholding of the company to Clearwater. 

When the patent application was made and Clearwater saw that Bionome was named as the sole owner, he brought a claim in the IPO to be added to the patent as another owner. The IPO decided in Clearwater’s favour, requiring that he be added as a joint owner to the patent. Bionome then appealed to the High Court and it is in those proceedings that judgment was handed down last year.

The judgment

Bionome/McCarthy’s argument on appeal was that the patent should be owned solely by Bionome. The crux of their case was that the collaboration agreement constituted an assignment or a clear agreement to assign Clearwater’s ownership of a part of the patent to a new jointly owned company. Clearwater disagreed and argued that, although the collaboration agreement does state his intention to assign his part ownership of part of the patent to the new company, that intention was contingent on the achievement of various ‘milestones’ which he argued had not been achieved. Therefore, no assignment could have taken place and he, Clearwater, would still own his share of the patent.

The judge upheld the judgment of the IPO and decided in Clearwater’s favour, dismissing Bionome’s appeal. The collaboration agreement did not constitute an assignment nor an agreement to assign Clearwater’s ownership of part of the patent. The agreement’s wording was not nearly explicit enough to create an automatic assignment and it leaves ‘too much uncertainty and too many intervening future steps or pre-conditions’. The decision for McCarthy and Clearwater on whether to assign their rights would arise only after those ‘milestones’ in the agreement were completed and any number of them could have failed.

The judge also rejected Bionome/McCarthy’s argument that Clearwater’s shares in Bionome are held on trust for him by McCarthy and nothing could be found to establish that an actual trust existed at the time. 

The decision requires Clearwater’s name to be added as joint owner to the patent. The judge encouraged the two inventors to resolve their differences out of court if they wished to follow their original intention of jointly controlling and exploiting their invention.

Lessons for collaborators

For those thinking of entering collaboration agreements, it is very important to draft provisions to agree who is or will be entitled not only to any existing IP but to the rights in any subsequent IP that might arise or be developed under the collaboration agreement. 

Any assignment, agreement or other mechanisms must be clearly set out to prevent the kind of dispute that befell McCarthy and Clearwater. Their ‘intent to transfer any IP applied for into the entity at the earliest time’, following a series of ‘milestones’, was too uncertain to have any effect. It is better to use certain and specific wording such as the clause: “I hereby assign and agree to assign…” which was deemed to effect a valid assignment in a similar 2010 case.

In any agreement it is important to distinguish between overarching ‘intentions’ or ‘objectives’ which are non-enforceable and simply give the parties a general sense of direction vs specific clauses and provisions that are clearly drafted and are binding for all parties. McCarthy and Clearwater’s agreement created uncertainty because it was unclear on when or how a jointly owned company would be formed and IP assigned to it and also how any party could go about exiting from the agreement. 

Any collaboration agreement should be drafted with as much specific detail as possible. It should provide clear mechanisms for assignment of IP created for the formation of any new entities and associated shareholdings and also specify clear provisions on variation or termination. 

Please find publicly available the Patent, the first instance IPO decision, and the High Court Judgment.

This article was co-written with Ryan Yao-Smith, trainee solicitor in the commercial, IP and IT team.