Outcomes focused regulation (OFR) has been hailed by the Solicitors Regulation Authority as regulation in the public interest and for the benefit of clients. In introducing OFR, the SRA has moved away from what it describes as a “detailed and prescriptive rulebook” to one that is “targeted, risk-based” and allows “greater flexibility for firms in how they achieve outcomes (standards of service) for clients.”

But is this in fact the case or have the SRA simply replaced a clear and explained system with one that is full of uncertainties and ambiguities?
The following item looks at the implications of OFR, what it will require and how the SRA will need to adapt its processes to implement it.

What does outcomes-focused regulation involve?

The view which had developed within the SRA (if not within the profession) was that the Solicitors’ Code of Conduct (the Code) was overly prescriptive, too detailed and often misunderstood both by those whom it was intended to regulate and those who were intended to benefit from that regulation. Despite being substantially shorter than the Guide to Professional Conduct which it replaced, and despite being more logical in the way in which it was set out, nevertheless it was felt by the SRA and the Legal Services Board that the Code was still too detailed in many areas and not fit for regulating the legal profession in the brave new world of alternative business structures.

What was needed, it was decided, was a more flexible approach to regulation – one in which firms could determine themselves what was needed to achieve client satisfaction – although within an overall framework of checks and balances.

Enter outcomes focused regulation.

The key aims of OFR are to:

• replace overly detailed, prescriptive regulation with a system whereby firms are provided with principles and outcomes that will inform them as to what they, as a firm, need to implement to ensure that a good standard of service is provided to clients, and
• allow the SRA to concentrate on those firms who cannot, or will not, put things right themselves.

In their own words, the SRA perceive that their approach will include:

• working with firms to focus on acting in a principled manner to deliver good standards of service to clients, rather than compliance with detailed rules;
• a sophisticated desk-based research and analysis capacity to assess potential risks to the regulatory outcomes and support the delivery of targeted proactive regulatory action;
• an approach to authorisation that is risk and evidence based, making sure that legal services are delivered by principled and competent firms and individuals;
• an approach to supervision which encourages firms and individuals to tackle the risks themselves, allowing the SRA to concentrate on those who can’t, or won’t, put things right;
• an approach to enforcement which creates a credible deterrent and is effective, fair and proportionate; and
• concentrating resources on dealing with those firms who pose a serious risk to regulatory objectives, such as protecting and promoting the interests of consumers.

Thus, the move to OFR means that:

• there is a greater emphasis on principles and high level rules,
• there are fewer rules,
• there is the establishment of outcomes that firms must achieve, rather than prescriptive rules which they must not breach,
• firms who can deliver the required outcomes may not always need to do so in a manner prescribed by the SRA,
• firms are expected to take responsibility for identifying and managing risk within their practices and for exercising judgement on how to deliver good outcomes,
• the resources of the SRA can be focused on those firms who are unwilling or unable to manage their own outcomes and client expectations.

Thus, put in a nutshell, firms themselves will become empowered to identify risk and manage client service delivery. Those firms who adequately manage their risk will, as the SRA put it, “experience a less intrusive relationship with the SRA”.

Does this mean no rules and no guidance?

The SRA have given assurances that the move to OFR does not mean the absence of rules and no guidance. Firms will not simply be left to flounder and to create their own interpretations of everything. However, many commentators have, since OFR was introduced, criticised the SRA for the lack of support they have given and condemned the way that many firms have been left to be confused by what exactly are the implications for them.

Many feel that the SRA could have done a great deal more to prepare the profession for OFR and provided much more practical guidance as to what they were expecting of firms – especially the smaller ones without the resources to invest in costly and time-consuming consultancy.

Part of the difficulty that firms are having is that, because there is a no “one-size fits all” approach, there are no off-the-peg solutions. The SRA expects each firm to put in place those provisions which are appropriate to their practice and their clients. Each firm has to assess the risk to their particular practice and deal with that risk.

That does not mean to say that there are no rules – the new SRA Code of Conduct contains, amongst the general principles and high level objectives, a number of quite prescriptive requirements – especially in those areas deemed to be high-risk. The problem is that it is not immediately obvious where those rules are and the extent to which they are rules and not just examples of principles.

The rules as a whole are contained within the Solicitors Handbook – a lengthy document which in printed form extends to well over 500 pages. This covers not just the SRA Code of Conduct but encompasses the Accounts Rules, various authorisation and practising rules (such as the Practice Framework Rules, Authorisation Rules and Practising Regulations), client protection provisions such as the Indemnity Insurance Rules and Compensation Fund Rules, rules dealing with discipline and cost recovery and finally the specialist rules such as those which apply to property selling and financial services.

The SRA Code of Conduct

The key element in the move to a principles-based system is clearly the new SRA Code of Conduct (the Code). Rather than being a prescriptive set of rules, this is made up of a number of high-level mandatory principles, followed by a series of Chapters dealing with specific aspects of regulation. These chapters are made up of outcomes which define what it is expected that a firm will achieve plus indicative behaviours which are examples of what the SRA will be looking for in order to evidence compliance with the outcomes.

Whilst indicative behaviours will not be mandatory, nevertheless the absence of an indicative behaviour will act as warning to the SRA that it needs to ensure that the firm is achieving the outcome notwithstanding the absence of the behaviour.

You will find more information about the Code of Conduct elsewhere on this web site.

How will OFR operate in practice?

An important element in OFR is that of managing risk – both in terms of the firm itself and how the SRA interfaces with the firms which it regulates.
The SRA have stated that their approach to regulating the profession will involve encouraging firms to identify, manage and mitigate those risks involved in meeting the various requirements of the Handbook allowing them to concentrate on those who can’t or don’t manage risks.

Their expectation is that firms will be “forward-looking and able to identify emerging risks”, although how that risk is dealt with will vary depending on the way in which the firm practises.

In managing risk, the SRA will look at a range of intelligences including information supplied by firms, information from consumers, market intelligence, trends and economic factors to assess where risk lies most and will direct its regulatory activities at addressing those risks.

In particular, the SRA will look at:

• risks to overall regulatory objectives posed by the wider economic environment ? e.g. a down-turn in the economy,
• risks posed by individuals and firms who are not complying with over-arching regulatory principles,
• risks posed by individuals and firms who are not achieving required outcomes,
• the likely impact that events may have upon the way in which firms deal with consumers and issues which are in the public good.

In addition to assessing risk, the SRA will use the processes of authorisation and re-authorisation as a means for ensuring that only those firms who operate in the best interests of clients are permitted to deliver legal services. They will adopt a risk-based approach to authorisation and will more rigorously check individuals and firms, not just when they are setting up, but on a regular basis.

Thus, if a new firm is setting up, the SRA will analyse information about its proposed structure, its governance and its planned systems for compliance.

The SRA will consider whether conditions or limitations should be placed upon the firm’s ability to practice and in doing so will consider issues such as the extent of any external influence on the firm, the firm’s business model and how it proposes to obtain business.

In addition, the SRA will continue to exercise supervisory activities aimed at helping firms to improve standards, reduce risks and enhance the reputation of legal services providers. Thus, firms will be assessed on the quality of their systems and not just on whether they possess a system. It is intended that this assessment will take place through a nominated individual within the firm.

The extent to which the SRA exercises supervision of a firm will depend upon a number of factors including:

• the risk posed by the firm,
• the size of the firm,
• the firm’s approach to risk management,
• positive engagement with the SRA,
• the firm’s compliance history, and
• the firm’s ability and willingness to put things right.

In the case of the larger and more complex firms, there are likely to be dedicated supervisory staff who will have regular one-to-one contact with these firms and who will establish an ongoing dialogue with supervisors and nominated individuals.

Firms that present a particular perceived risk – for example firms in the assigned risks pool – may have temporary intensive relationship management system imposed upon them until such time as it is perceived that they no longer pose a threat.

There will continue to be risk-based audits of firms who are not subject to relationship management. It is still not certain that all firms will automatically receive an audit visit. Possibly those firms that do not present a risk may not be visited, possibly they will receive a far less in depth visit.

It is not intended that the SRA will hold itself out as being able to approve the risk management procedures of individual firms. However, where they see examples of good risk management they may publish information about it as an example to other firms.

In addition to these systems, the SRA plan to use a number of other tools to achieve regulatory compliance, including:

• “Dear Managing Partner” letters to alert senior management in firms to our views on specific matters and our expectations of firms in relation to those matters;
• road shows on particular themes;
• remedial plans for individual firms to support their improvement of standards;
• mystery shopping to identify firms who may not be delivering good standards;
• unannounced visits or visits with little notice; and
• where a firm is in financial difficulties, overseeing the management and resolution of those difficulties, including an orderly wind-down if necessary.

What are the risks of OFR?

Inevitably there are risks in the move to any new system and OFR is no exception.

The very nature of the system means that there is likely to be both ambiguity and uncertainty. The very essence of OFR is that it deals with broad principles which, by their very nature, can be ill-defined and capable of various interpretations. The test of the adequacy of the system will come when the interpretation of the SRA differs from that of the firm, yet each genuinely believes that the outcomes have been satisfied.

Thus, although the system is dealing with broad principles and outcomes, it must nevertheless be such that those who are regulated can be sure of that which is expected of them and can be certain that when they make an interpretation of risk, that it is an interpretation within the parameters that the SRA would regard as acceptable.

To achieve this, therefore, there will need to be some interpretative content as well as pure principles. Hopefully the indicative behaviours and guidance will be adequate to provide this. However, if the indicative behaviours become too rigidly followed by either the regulator or the regulated, then the system will move away again from an outcomes-focused one and back to prescriptive system.

The risks, therefore, lie mainly in:

• ensuring that both those who are regulated and the consumer understand what the regulations are intended to achieve,
• ensuring that those who are regulated know when it is required to achieve an outcome,
• ensuring that the consumer knows when an outcome has not been achieved,
• achieving a balance between prescription and principle,
• ensuring that enforcement is proportionate and allows that there may be more than one viewpoint,
• ensuring that there is sufficient guidance,
• acquiring good intelligence as to who is managing risk well and who is not, and
• providing advance intelligence to those who are regulated if there is a change in the views as to enforcement or a raising or lowering of the risks involved in any particular regulated area.

To achieve the SRA is going to have to become more holistic in the way in which it approaches regulation. The feeling in the past among many practitioners is that, if they are subject to an SRA investigation then, even if the SRA do not find that the thing they came to investigate is incorrect, they will go out of their way to find something else. This approach has got to be changed.

If a firm has satisfied clients, is not in breach of major rules, is acting honestly, fairly and not to the detriment of clients, then the SRA should at worst be simply pointing the firm in the right direction.

Summary

Approached sensibly and with adequate support for those practices most likely to have problems in moving towards an OFR system, then there is no reason why OFR should not work. The growth in the number of firms, and the future complexities of the legal market place, means that regulators across the board are not going to be able to continue to work on a prescriptive system where breaches are weeded out and punished.

OFR can work, but care must be taken to ensure that the outcomes are sensible and achievable and actually deliver genuine benefits to the consumers of legal services. Outcomes which do not deliver a perceptible benefit to the consumer must be avoided. Every rule must be tested with the question – is this really necessary to protect the public or are there other, more light-touch ways in which the same outcome could be achieved?

Above all, however, the SRA must ensure that the way in which it administers the new system is fair, proportionate and takes account of the change in emphasis. If it continues to adopt the heavy-handed, over regulated approach which it has at present, where those in practice can be penalised for failings they were unaware existed, then it will not work and the SRA will not win the trust of the profession and the public.

(revised December 2011)

The move to outcomes focused regulation has been accompanied by the publication of a new definitive source of those rules and regulations by which solicitors, recognised bodies, alternative business structures and everyone else involved in a solicitors’ practice must abide. This is the Solicitors Handbook.

The Handbook is broken down into 8 main sections:

1. The principles – these are the core, underlying commandments which underpin everything else in the Handbook;
2. The SRA Code of Conduct – this replaces the Solicitors Code of Conduct 2007 – we will look at this in slightly more detail shortly;
3. The Accounts Rules – still in basically the same form as they have always been and still somewhat opaque in the way in which they are written;
4. Authorisation and Practising Requirements – these are the new rules that contain issues such as the appointment of COLPs and COFAs, notification requirements on admission etc. and are made up of:
   • SRA Practice Framework Rules;
   • SRA Authorisation Rules for Legal Services Bodies and Licensable Bodies;
   • SRA Practising Regulations;
   • SRA Recognised Bodies Regulations;
   • Solicitors Keeping of the Roll Regulations;
   • SRA Training Regulations – Part 1 – Qualification Regulations;
   • SRA Training Regulations – Part 2 – Training Provider Regulations;
   • SRA Training Regulations – Part 3 – CPD Regulations;
   • SRA Admission Regulations;
   • SRA Qualified Lawyers Transfer Scheme Regulations;
   • SRA Higher Rights of Audience Regulations; and
   • SRA Suitability Test.
5. Client protection requirements which provide vital financial protections for clients and covers issues such as negligence claims against firms, their managers and their employees, provision for compensation if client money is misappropriated and provisions relating to firm intervention. They comprise:
   • SRA Indemnity Insurance Rules;
   • SRA Indemnity (Enactment) Rules;
   • SRA Indemnity Rules;
   • SRA Compensation Fund Rules; and
   • SRA Intervention Powers (Statutory Trust) Rules.
6. Disciplinary and cost recovery rules – which sets out the SRA’s new approach to fining and disciplining firms through the SRA Disciplinary Procedure Rules and SRA Cost of Investigations Regulations
7. Specialists services rules – dealing with specific activities undertaken by some firms. These comprise:
   • SRA Property Selling Rules,
   • SRA Financial Services (Scope) Rules and the SRA Financial Services (Conduct of Business) Rules, and
   • SRA European Cross-border Practice Rules.
8. Glossary – this provides definitions for the whole handbook.

There are, it has to be admitted, some omissions which would have made the handbook – in its guise as a single work – slightly more useful, for example the Solicitors Act, appropriate extracts from the Legal Services Act and so forth, but on the whole it is better than the previous situation where some things were in the Code and some were in a section called Framework of Practice.

The Principles

It is not possible to have a system of principles-based regulation without principles. The ten principles set out at the beginning of the handbook are therefore all important – and all solicitors should really keep them on a piece of paper pinned to the wall where they can all see them all of the time. They really are that important. Aside from the fact that they govern what is to be found elsewhere in the Code of Conduct, there is always the cynical point of view that if the SRA cannot find anything else against a solicitor or firm they can, if they want to, bring proceedings under any of the ten principles which, it has to be said, are sufficiently vague that almost any activity could be caught.

Under the ten principles, solicitors must:

1. uphold the rule of law and the proper administration of justice – in other words observe obligations to clients, the courts and third parties;
2. act with integrity – personal integrity as well as in relation to work;
3. not allow independence to be compromised – independence means both the solicitors own independence and that of the firm – in particular it means not allowing a firm to become controlled by someone not subject to these rules;
4. act in the best interests of each client – in other words act in good faith, maintain confidentiality and not allow conflicts of interests to arise;
5. provide a proper standard of service to clients – provide services competently, diligently and taking account of the needs of each individual client;
6. behave in a way that maintains the trust the public places in the solicitor and in the provision of legal services – behaviour here means both inside and outside of the practice and not to do anything which damages the public’s faith in solicitors as individuals or the profession;
7. comply with legal and regulatory obligations and deal with regulators and ombudsmen in an open, timely and co-operative manner – this includes all of the reporting and notification requirements in Chapter 10 of the code;
8. run the business or carry out role in the business effectively and in accordance with proper governance and sound financial and risk management principles – specifically expressed to apply equally to managers and employees and to relate specifically to “management of your business” section of the Code;
9. run the business or carry out role in the business in a way that encourages equality of opportunity and respect for diversity – equality requirements impinge upon everyone; and
10. protect client money and assets – a duty upon everyone to ensure that client money and property does not go astray.

Whilst these principles contain much that was to be found in the principles in the Solicitors Code of Conduct 2007, there are some important differences, which the following table will help to explain:

Some additional points to bear in mind are:

• that it will be regarded as a breach of these principles if any solicitor or other person regulated by the SRA permits anyone else, on their behalf, to do any act which would be a breach of these principles;
• 3 of the principles, numbers 1, 2 & 6 apply outside of the practice – that is to say they regulate how a solicitor, registered European lawyer or registered foreign lawyer behaves outside of the legal practice; and
• that, although the principles are expressed to have general applicability, some will apply more to certain people within a firm than others. Thus, for example:
  • principle 2 “act with integrity “ will apply to everyone in the practice whether they have any involvement with clients or not,
  • principle 5 “provide a proper standard of service to clients” will apply to everyone in the firm who has any dealings, or contact, with clients, but
  • principle 8 “run the business or carry out role in the business effectively and in accordance with proper governance and sound financial and risk management principles” will be of greater relevance to those who manage the business.

A final point is relation to principles is not actually dealt with in the Principles section itself but later in the Code of Conduct, and that is that “Where two or more Principles come into conflict the one which takes precedence is the one which best serves the public interest in the particular circumstances, especially the public interest in the proper administration of justice. Compliance with the Principles is also subject to any overriding legal obligations.” Why this was not included in the section dealing with principles is not clear – but nevertheless it is an important caveat to bear in mind.

The SRA Code of Conduct

The SRA Code of Conduct is an important part of the Handbook and contains guidance as to how the general principles translate into actual practice.

The Code is divided into 5 sections. They are:

• You and your client;
• You and your business;
• You and your regulator;
• You and others;
• Application, waivers and interpretation.

Each section is then divided into chapters each of what deals with a particular regulatory issue. The breakdown is as follows:

Section 1 – You and your client

• Client Care,
• Equality and diversity,
• Conflicts of interests,
• Confidentiality and disclosure,
• Your client and the court, and
• Your client and introductions to third parties

Section 2 – You and your business

• Management of your business,
• Publicity,
• Fee sharing and referrals.

Section 3 – You and your regulator

Section 4 – You and others

• Relations with third parties,
• Separate businesses.

Section 5 – Applications, waivers and interpretations

• Applications and waivers provisions,
• Interpretation,
• Transitional provisions.

Each chapter then follows roughly the same format.

First it provides an overview of what is being dealt with in the Chapter – an introduction as to what is in it and why it is there.

Secondly, the chapter sets out what are known as Outcomes. Outcomes are what the solicitor is expected to achieve in order to comply with the ten principles looked at earlier. They are the “what you must do” rather than the “how you must do it”.

Outcomes are mandatory. All practices must achieve the outcomes. Failure to achieve the outcomes is breach of the rules.

Thirdly there are the Indicative Behaviours. These are (allegedly) non-mandatory examples of the kind of things that need to be done in order to achieve the Outcomes. However, being non-mandatory they do not have to be done provided that which is done still enables the firm to achieve the Outcomes. However, if a firm is not achieving the Outcomes then failure to follow the indicative behaviours will be taken as evidence of that failure.

On the whole, indicative behaviours are positive indicators – e.g. IB (1.4) – explain any arrangements, such as fee sharing or referral arrangements, which are relevant to the client’s instructions. However, some Indicative Behaviours are expressed in the negative – in other words you are likely not to be achieving an outcome if you are following some of the behaviours – e.g. IB (2.5) discriminating unlawfully when accepting or refusing instructions to act for a client.

We will consider each chapter separately elsewhere on the web site.

(revised December 2011)

Outcomes focused regulation (OFR) is, so the Solicitors Regulation Authority tell us, all about putting the client first and achieving the right outcomes for clients. It is appropriate, therefore, that the first chapter of the SRA Code of Conduct (New Code) should deal with the issue of client care.

The chapter deals with the issues previously dealt with mainly in the Solicitors’ Code of Conduct 2007 in Rule 2 (Client relations) and Rule 5 (Business management in England and Wales).

The chapter begins by emphasising that it is about “providing a proper standard of service” and ensuring that if a client is not happy with the service they have received, that they know how to complain and that their complaints will be “dealt with promptly and fairly.”

Much of that which is contained in Chapter 1 is a reworking of the provisions to be found in Rule 2 (Client Relations) of the Solicitors Code of Conduct 2007 (2007 Code). There are, however, some differences in the requirements of the two sets of rules. Those differences include:

• the new rule is much shorter and less detailed than Rule 2 in the 2007 Code (especially when one takes account of the comprehensive guidance notes which accompanied Rule 2);
• the new rule contains specific outcomes to treat clients fairly and protect their interests which only really compare with duties in the principles to the 2007 Code;
• the new rule contains a requirement that clients be informed of when they have statutory protections. This provision undoubtedly looks forward to the introduction of alternative business structures where some of the work undertaken by an ABS – for example financial services or property selling work, may not be covered by the SRA protections;
• Outcome 10 places a duty on the solicitor to ensure that the client is aware of their rights to complain to the Legal Ombudsman. Although the guidance notes to Rule 2 of the 2007 Code do refer to the LCS this is effectively a new requirement and reflects the Legal Services Board’s desire to see a strengthening in the complaints procedures;
• Outcome 14 places a duty upon the firm to tell the client that they can challenge a bill
• Outcome 16 requires that client’s be informed should there arise a circumstance whereby they could make a claim against the firm. This is a controversial provision in that it is a duty upon the firm to draw to the client’s attention the firm’s own shortcomings and could, theoretically, lead to a PI insurer avoiding cover;
• detailed guidance as to the information to be provided in relation to conditional fee agreements and publicly funded work no longer a part of the Code; and
• Rule 2.04 (Contingency Fees) in the 2007 Code is no longer dealt with.

The chapter sets out 16 outcomes which firms must achieve. They are to:

1. treat clients fairly,
2. protect a client’s interests whilst observing proper administration of justice,
3. comply with the law and the code when accepting, declining or terminating instructions,
4. ensure adequate resources, skills and procedures to do the work,
5. provide services which are competent, delivered in a timely manner and which take account of the client’s needs and circumstances,
6. only enter into fee agreements that are legal, address the client’s needs and are in best interests of the client,
7. tell the client about any relevant statutory and regulatory protections and how these protect the client’s best interests,
8. ensure clients have the benefit of compulsory professional indemnity insurance and that nothing is done to exclude cover below the minimum level,
9. tell clients at the outset of their right to complain and how to do so,
10. tell clients at the outset and conclusion of a matter of their right to complain to the Legal Ombudsman and how to do so,
11. deal with complaints promptly, fairly, openly and effectively,
12. ensure that clients can make informed decisions about the services they need, how a matter will be handled and the options available to them,
13. ensure clients get best possible information both at the outset and during the matter as to costs,
14. ensure that clients are told of their right to challenge or complain about a bill and the circumstances in which they may be required to pay interest on an unpaid bill,
15. properly account to clients for any financial benefit received,
16. inform clients if an act or omission which could give rise to a claim by them against the firm is discovered.

The correlation between these Outcomes and the requirements of the 2007 Code is as follows:

Indicative behaviours

In addition to the Outcomes (i.e. those things which a firm must achieve if it is to comply with the Code) there are also a number of indicative behaviours which set out the kind of observable actions that the SRA would expect to see (or not see, as appropriate) in a firm that was achieving the outcomes.

Chapter 1 contains some 28 indicative behaviours – some of them quite complex in themselves. To an extent they act as explanatory notes to the outcomes in so far that they set out in more detail what would be expected from those complying with an outcome. The following table sets out what those indicative behaviours are and how they relate to 2007 Code.