Reasonableness in licensing – updated approach

OFSI has today published a blogpost, Reasonableness in licensing – updated approach. It provides more clarity on the evidence we require to support licence applications under the legal services and routine holding and maintenance licensing grounds, helping applicants to submit complete, well‑evidenced applications. The blogpost should be read alongside OFSI’s earlier blogpost, Reasonableness in licensing.

The updated guidance:

Reasonableness in licensing – updated approach

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. 

and the original post, from June 2021:

Reasonableness in licensing

If you are applying for a licence from OFSI to release otherwise frozen funds for legal fees or the maintenance of frozen funds or economic resources, you will likely come across the term “reasonableness”.

When issuing a licence to enable the payment of professional fees and expenses for the provision of legal services, OFSI is legally obliged to ensure that those fees and expenses are “reasonable”.

OFSI’s Introduction to licensing blog, which was published in April 2021, set out the key changes to licensing under the Sanctions and Anti Money Laundering Act (the Sanctions Act) that came into effect from 23.00 on 31 December 2020. The following changes to reasonableness now apply:

• Under the legal fees licensing ground, reasonableness now also applies to expenses
• A reasonableness test has been applied to the maintenance of frozen funds and economic resources licensing ground.

OFSI receives many applications where applicants have not provided sufficient evidence of reasonableness or with no evidence at all. This could be because the applicant may not understand the full policy intention behind the regulations that need to be considered in parallel, or the justification submitted may be one-sided in the applicant’s favour. However, OFSI requires a significant level of evidence when scrutinising the reasonableness threshold. This is because the Sanctions Act which gives us the power to issue these licences, also stipulates that legal fees and maintenance of frozen funds should be ‘reasonable’. When we don’t receive the level of detail that we need, we will need to engage with the applicant for these further details. This can invariably cause delays in processing such licence applications and, in some cases, may result in the refusal of the licence application if further information is never provided. OFSI does not want to cause delays to the consideration and issuance of any of our licences, so this blog is aimed at setting out what information we need to consider when identifying if an application is “reasonable”.

Financial sanctions are a foreign policy tool. In the UK they are implemented through UK legislation (which sometimes applies restrictions imposed through the UN) in order to achieve a specific foreign policy or national security objective. Financial sanctions are generally imposed to:

• coerce a regime or individual to change their behaviour;
• constrain a target by denying access to key resources to continue their offending behaviour;
• signal disapproval; and
• protect the value of assets that have been misappropriated from a country until these assets can be repatriated.

As the competent authority for the implementation of financial sanctions in the UK, OFSI has to ensure that any permitted release or use of frozen funds maintains the integrity of the financial sanctions regime, supports the foreign policy ambition and that the  decision to release remains in line with its legal duty under UK law. The term ‘reasonable’ is written in to the Sanctions Act which means there is a legal requirement both for OFSI to assess this and for applicants to provide evidence of why a payment is reasonable.

If you are in possession of an OFSI licence that permitted the use of frozen funds for the payment of legal fees/maintenance under the previous EU regulations,  you may need to provide a new explanation for reasonableness, if that licence requires an amendment. In addition, if you were granted a licence that has now expired after only being partially used, or not used at all, any new application will need to meet the new requirements as set out under the Sanctions Act for the regime. This should include explaining and/or evidencing the reasonableness of the payments. Licence extensions under derogations that have reasonableness written into them will need to undergo ‘reasonableness’ assessments again. This can be done by providing evidence such as previous invoices against the licence to assist OFSI in its determination that the costs remain reasonable and whether all of the licence is being used in the same way  that it was when the licence was initially granted.

The two licensing derogations under the Sanctions Act that include a ‘reasonableness’ test are ‘legal services’ and ‘maintenance of funds or frozen resources’. We have broken them down below and have outlined the types of questions that applicants may wish to consider when applying under these specific licensing grounds.

Legal Services

It is for the applicant to demonstrate to OFSI that the legal fees and expenses they are requesting payment for are reasonable. OFSI considers that the Solicitors’ guideline hourly rates or the sums that could be expected to be recouped if legal costs were awarded following civil court proceedings, provide a useful starting point for assessing the reasonableness of legal fees and expenses. If you seek fees of a level above those set out in the guideline, you need to demonstrate why those increased fees are reasonable in the given case. Whilst we will consider rates that vary from the guideline, it is a useful benchmark in the assessment of reasonableness.

When applying to for a legal fees and expenses licence, you should consider addressing the following in your application form:

1. Whether the work has already taken place or if it is anticipated work;
2. What the work will involve/has involved;
3. Which fee earner(s) will be/have been involved in the work (and their position(s)/role(s) within the firm, including relevant level of experience);
4. The fee earner(s)’ hourly rate;
5. How many hours each fee earner(s) will be estimated to spend/has already spent on each workstream;
6. Any supporting evidence as to why the involvement and/or the number of hours of the particular fee earner(s) is reasonable and/or proportionate to the nature and complexity of the work;
7. Any expenses that are expected and have been paid out; and
8. If any expenses are expected, why are they necessary.

If you are requesting a licence amendment to permit an increase in the hourly rate of fee earner(s) you should provide a detailed explanation. For example, this may be a breakdown and evidence of the firm’s running costs to explain the proposed increase. When OFSI reviews such amendments, it is not enough to cite for example, “an engagement letter between the DP and the law firm” which provides for an annual increase, nor that it is a “common practice amongst law firms”. As set out in OFSI’s guidance, legal services may be provided without a licence, but any payments for legal services provided, do require a licence.

In terms of legal professional privilege (LPP), OFSI expects legal professionals to carefully ascertain whether LPP applies and which information it applies to. It is not generally considered that fees notes and narratives of work (in generic terms) are privileged as they do not constitute the giving or obtaining of legal advice. OFSI may challenge a blanket assertion of LPP where it is not satisfied that such careful consideration has been made. For example, simply providing the cost of a workstream without providing a breakdown due to LPP is not satisfactory. This is because OFSI is unable to undertake a reasonableness assessment without having a breakdown of the individual legal cost for each area of work.

Maintenance of funds and frozen resources

Under the derogation of ‘Maintenance of funds and frozen resources’, licences may be issued for a number of purposes. These can range from the supply of Covid-related personal protective equipment, to property maintenance. When a licence application or amendment request is submitted under this derogation, sufficient evidence will need to be included for OFSI to make a decision. When applying, you should consider the following in your application form:

1. Provide evidence when submitting your licence application. Appropriate evidence will vary based on what you are applying for.
2. Explain why the proposed activity is necessary. You may wish to explain what the outcome would be should you not receive a licence.
3. Where appropriate, consider obtaining quotes from more than one supplier to ensure that the fees can be demonstrated as reasonable and that you are receiving value for money.
4. If a quote is unable to be obtained, provide an evidence-based estimate. If you are a property management company looking to obtain a licence for a commercial building, you may wish to use quotes from similar-sized commercial buildings as evidence for reasonableness.
5. Provide a breakdown of the proposed payment/work. If you are requesting a licence to pay £100,000 for a change of windows, provide a breakdown of the payment – this could include the exact number of windows you are looking to change, cost of personnel and/or material etc.
6. If you are applying for a licence extension, you will be required to undergo the reasonableness assessment again. This may include reviewing your licence to ensure it is being used.

For any applicant that is submitting a licence application under a derogation that has ‘reasonableness’ written in to the regulations, you should use your own best judgement and not assume OFSI understands the process and practice of the profession when providing your response. We understand that reasonableness may have different meanings in different contexts and applicants should note that just because a payment has been licensed on a previous case, does not automatically mean that it will necessarily be licensed again. This is why OFSI considers each application on a case by case basis and the above pointers serve as a guideline of best practice when engaging with us.

For further information on licensing and financial sanctions implementation, please refer to OFSI’s general guidance.