The New Rule Book Consultation
Solicitors Regulation Authority (SRA) consultations are a bit like ships that pass in the night. Few are aware that they exist, fewer care about what they were about and even those who care rarely trouble themselves to respond. In fairness, many probably feel, and possibly rightly, that by the time the SRA issues a consultation it has already made up its mind and is unlikely to let a dozen or so opposing views alter its direction. It could even be that the SRA believe that those who respond probably have too much time on their hands and are therefore not really representative of the profession, or the public, as a whole.
Possibly that is too cynical a view to take. But then again, perhaps it is not. The consultation on the separate business rule which ended on 12 February 2015 and is the most recent consultation for which figures are available, revealed that a mere 19 responses were received and that six of those were from representative bodies on behalf of their members (which included the Law Society and several local law societies). Even that was more than the consultation on the regulation of insolvency practices which received just 17 formal responses. However, the prize for consultation ignoring must surely go to the consultation on proposed changes to the registered European lawyer regime. For that, only seven responses were received.
So few are the responses, in fact, that it would appear that the SRA has given up counting them – or at least given up publishing the results. Of the 25 consultations published and closed since the beginning of 2014, 7 have no reference to the publication of responses at all and two are still the subject of analysis despite having closed on 7 August 2015 and 30 September 2014.
What, you may be asking, is the point of all of these statistics and what has it got to do with the new rule book? Well, it is that a new consultation has been issued which could affect substantially the way in which solicitors practise in the years to come and that if there is no feed back then firms will have only themselves to blame if they then find that the rules are not to their liking.
The new consultation is about the rules which will determine how legal services are provided for the coming decade, at least. It is a consultation that redefines who can practise and through what regulatory vehicles they may do so. It is a consultation which could lead to the end of the traditional legal practice. It is, in other words, about the future of solicitors. Will it be responded to? It would be good if it were, but it will probably not register on the radar of many.
There are in fact two consultations proceeding in tandem – the consultation on the proposed Handbook and a parallel consultation on the Accounts Rules. Here we are going to concentrate on the Handbook consultation.
What is behind the new proposals?
So what is being proposed in the brave new world of the revised rule book and why do we need one?
The SRA rhetoric states that it is “proposing to increase access to legal services by removing unnecessary bureaucracy and freeing up solicitors to work in new markets.”
The SRA wants, it claims, to “open up opportunities for solicitors to freely deliver services outside of regulated firms” and allow solicitors to compete more effectively with the unregulated market for advice on everything from “will writing to advice on social welfare, employment or tax”. It wants “make it easier for solicitors …… to work in this expanding market. This could help push standards up while driving costs down.”
The changes form part of a wider strategy which the SRA is grandly calling its “Looking to the Future” consultation and which will comprise the current Rule Book consultation and, later in the year, a review of the practice framework and authorisation rules. Part of those plans is the radical simplification of the Handbook. That in itself is likely to be welcomed by many. The current Handbook is long and complicated – over 400 pages long and complicated. The Code of Conduct is confusing and uncertain with its Chapters, Outcomes and Indicative Behaviours. The new shorter Handbook will, the SRA state, “focus on principles and professional standards rather than complex, prescriptive rules” and will apparently give firms “clarity about the systems and controls they need to provide good legal services to the public”.
Only time will tell whether solicitors benefit from this or not.
So what will differentiate the new rule book from the old? In the remainder of this article we will look at some of the key differences, why they have been proposed and what the effect of them is likely to be. This is not an exhaustive list of the proposed changes – merely those which may prove the most controversial.
The Overarching Principles
As with the previous Handbook and Code of Conduct, the basis for the regulatory measures put in force was and is to underpin the Principles. In the 2011 Handbook there were ten mandatory principles. The 2017 Handbook is proposing to reduce this to six.
Comparing the two sets of principles,
- Principle 1 of 2011 “uphold the rule of law and the proper administration of justice” is continued as Principle 1 of 2017
- Principle 2 of 2011 “act with integrity” becomes Principle 4 of 2017 “act with honesty and integrity”
- Principle 3 of 2011 “not allow your independence to be compromised” continues as a somewhat strangely worded Principle 3 of 2017 “act with independence”
- Principle 4 “act in the best interests of each client”, Principle 5 “provide a proper standard of service to your clients” and Principle 10 of 20011 “protect client money and assets” become Principle 6 of 2017 “act in the best interest of clients”
- Principle 6 “behave in a way that maintains the trust the public places in you and in the provision of legal services” becomes Principle 2 of 2017 “ensure that your conduct upholds public confidence in the profession and those delivering legal services”
- Principle 7 “comply with your legal and regulatory obligations and deal with your regulators and ombudsmen in an open, timely and co-operative manner” and Principle 8 of 2011 “run your business or carry out your role in the business effectively and in accordance with proper governance and sound financial and risk management principles” have no equivalent in the 2017 Principles; and
- Principle 9 of 2011 “run your business or carry out your role in the business in a way that encourages equality of opportunity and respect for diversity” becomes Principle 5 of 2017 “act in a way that encourages equality, diversity and inclusion”
Where Principles have been lost – as with numbers 7 & 8 from the 2011 Handbook – these have, the SRA say, been embodied in the Codes of Conduct.
Two Codes of Conduct
Possibly the most fundamental change, aside from brevity, is that there will now be two separate Codes of Conduct – one for individual solicitors, no matter where they practice, and one for firms. The former will major on professional standards and the behaviour expected of solicitors, the latter will concentrate on the business systems and controls that firms need to put in place.
The reason for this change is one of clarity. The current Code of Conduct confusingly refers all the time to “you” which can mean, inter alia:
- any person intending to be a solicitor,
- a solicitor or a REL
- a sole practitioner
- a partner
- a director of a company
- a recognised body
- a licensed body,
- a manager in a regulated body, or even
- an employee in a sole practitioner whose practice should be a recognised sole practice but has not been authorised by the SRA
and the only way in which you can decide which “you” is being referred to is from the context in which it is used.
The SRA believe that by making the Code shorter and breaking it into two parts that it will become clearer as to what are individual responsibilities and, as is covered shortly, if solicitors are to be permitted to provide services through alternative legal service providers, then there needs to be a clear statement as to what their responsibilities are. Clearly, if the SRA cannot regulate the entity then it must be able to regulate those solicitors who operate through a non-SRA regulated entity.
Another reason for having two Codes is that the current Code does not and cannot reflect the increasing complexity of the post Legal Services Act legal market. The manner in which legal services are provided has moved on considerably since the 2011 Code was introduced and by having a Code which focuses on core professional standards and behaviours, the SRA is able to regulate all solicitors, wherever they work.
Code for Solicitors
The SRA are keen to stress that the new Code continues to be drafted in an outcomes focused way – in other words it attempts to set out what the outcome of a particular provision should look like rather than prescribing the individual steps to create that outcome. Thus, as before, it is more in the hands of the individual as to what they should or should not do to achieve that outcome. To further “simplify” matters, the new Code does not contain any of the Indicative Behaviours to be found in the current Code. The SRA state that many were confused as to the standing of the Indicative Behaviours with many seeing them as rigid requirements rather than indicators. However, where appropriate some of the Indicative Behaviours have become standards in their own right.
The overall emphasis, therefore, is on brevity and simplicity. This is good in one respect in that it makes the Code easier to read and digest. However, our experience is that many solicitors like certainty and that many would rather have a definitive “do this” or “don’t do that” kind of Code rather than a “do what you think is appropriate in the circumstances to achieve this result” – especially as the latter contains the unspoken “and if we the SRA don’t think you have done it right then you will be punished even though we did not say what right was”.
Code for Firms
The SRA state that they have drafted the Code for Firms in an outcomes based way so as to provide sufficient flexibility to enable them to regulate all the varying forms that solicitors practices now take.
This Code will cover a range of firm related matters including:
- compliance and business systems,
- information requirements,
- ethical practice,
- conflict, and
The SRA acknowledge that inevitably there will be some overlap – most noticeably in areas such conflict, complaints and client information/identification. It is not yet clear which will take precedence in the event that there is a conflict between the two Code versions.
COLPs and COFAs
It may be recalled that some time ago a suggestion was circulated that the roles of the COLP and COFA might be downgraded with the result that small firms or sole practitioners would not need to make such an appointment.
Since then, the SRA have been listening to feedback and have, they say, found that many firms have found the COLP and COFA roles to be useful in achieving regulatory compliance. For that reason, the roles of COLP and COFA will be retained under the new rules although there may be some changes in the way in which they operate in the interests of reduced bureaucracy.
Where Solicitors Can Practise
One of the main changes which will affect the way in which solicitors in the future can practise is to be found in that part of the consultation looking at the Practice Framework Rules (PFR).
The current PFR places restrictions upon where solicitors may practise – requiring that they only provide legal services to the public through an organisation authorised by the SRA. The SRA’s view at present is that this is to be restrictively interpreted but that, going forward,it is concerned that the restriction is too narrow and prescriptive and prevents organisations responding to consumer demands and from developing in such a way as to meet the changing needs of the public.
To increase flexibility, the SRA proposed removing that restriction – which is one of the reasons behind having a set of rules aimed at regulating only the individual – and to allow solicitors to offer non-reserved legal services to the public through alternative legal service providers. Unlike at present, those solicitors will be able to hold themselves out as solicitors provided that they make sure that clients understand how those services are provided and regulated.
This flies in the face of previous SRA policy – set out in earlier versions of the separate business rule for example – which was always that the public would not appreciate that the services they were receiving were not “protected” services. Indeed, the Introduction to the 2007 Separate Business Rule (Rule 21) stated that its purpose was to “ensure that members of the public are not confused or misled into believing that a business carried on by a solicitor or REL is regulated by the Solicitors Regulation Authority when it is not”. Either the public have become more discerning or solicitors have become more honest or diligent – but then again ……
Strangely, the SRA have said that they think that this move will strengthen the overall solicitor brand and allow consumers to choose the qualified professionals they need. That remains to be seen.
The SRA then give a long list of what they see as potential impacts that this will have upon the legal services market. Several of the scenarios involve alternative service providers employing solicitors to deliver services currently undertaken by non-qualified staff. The reality may be that they will use the solicitor as a way of persuading the public that they are more solicitor-ish than they really are.
Issues arising from allowing solicitors to practise through non-SRA regulated entities
A number of ramifications arise from a decision to allow solicitors to practise through non-SRA entities.
- (i) Client Money
- One such consequence relates to the holding of client money. Here the SRA proposes that as they will be unable to regulate the holding of client money through alternative legal providers, that the best way is simply to prohibit solicitors from holding client money in their own names and instead the client money will be held by the alternative provider even though the work to which it relates may have been carried out by the solicitor as a solicitor.
It does not take much imagination to see that so far as public protection is concerned this may simply be a disaster waiting to happen. Add to this the fact that the rules for individuals will contain a requirement that individual solicitors, wherever they work, will be placed under a duty to safeguard money and assets entrusted to them by clients during the course of their work, and it can quickly be seen that confusion is bound to arise. The SRA have, in fact, stated that the aim of the drafting is to make solicitors responsible for any personal misconduct relating to those assets.
How does this sit with the potential impacts referred to earlier? Looking at the scenario set out earlier in the consultation, how is a solicitor employed by a legal services provider already delivering legal services through unqualified staff going to ensure that his or her employer – who may be a multi-national or a large financial services provider – deals with any client assets received. What liability will that solicitor be subject to if, unbeknown to him, the client funds are misappropriated by the employer.
- (ii) SRA Compensation Fund
- A further problem of allowing solicitors to practise through non-SRA approved entities is whether the client will have the benefit of the SRA Compensation Fund.
The consultation proposes that clients of solicitors outside of authorised firms will not have the right to make a claim on the Compensation Fund in any circumstances. Three main reasons for this are given.
First claims are usually linked to breaches of the Accounts Rules or misuse of client money and since the accounts rules don’t apply to non-SRA authorised entities, and the individual solicitor does not hold client money, then it would be inappropriate.
Secondly, the SRA don’t want the Compensation Fund to become a first port of call for the clients of firms that the SRA don’t regulate.
Thirdly, because the SRA could not take regulatory action against the alternative provider, there would be nothing it could do to prevent future claims.
- (iii) Professional Indemnity Insurance
- The third area for potential problems arises from the potential lack of PII cover. The stance that the SRA have taken is that they will not require individuals working in alternative providers to have PII but there will be a duty upon them to ensure that their clients understand that they will not have that protection. They plan to leave it to individual solicitors to evaluate risk.
The Code for Individuals
We would like to end this article by looking briefly at the two Codes and what each will contain.
The layout of the two Codes is far simpler and easier to follow than the current complex system of Chapters, Overviews, Outcomes and Indicative Behaviours.
The Code for Individuals is made up of a statement as to the principles followed by eight main sections. These sections deal with:
- The maintenance of trust and acting fairly – which covers:
- not allowing personal views to affect professional relationships
- not taking unfair advantage
- performing undertakings appropriately
- not misleading clients, the court or others
- Dispute resolution and proceedings before courts, tribunals and inquiries – which contains a series of requirements to ensure that proceedings are carried out fairly – for example not tampering with or fabricating evidence or being in contempt.
- Service and competence – which covers:
- only acting on the client’s instructions and in accordance with their wishes,
- providing a competent and timely service to clients,
- maintain competence and skills,
- taking account of the needs of the client,
- undertaking effective supervision in an accountable manner, and
- ensuring that those for whom you are responsible are competent to undertake their role
- Client money and assets – account to client for any financial benefit you receive as a result of their instruction, safeguard assets entrusted to you and do not personally hold client money unless you are in an authorised body.
- Referrals, introductions and separate businesses – which covers:
- Provisions to protect clients referred to, and by, you
- Provisions to protect clients where services are offered through a separate business
- Conflict, confidentiality and disclosure – which covers
- Not acting where there is a conflict or a risk of a conflict between you and the client,
- Not acting where there is a client/client conflict except in certain exceptional circumstances,
- That client affairs are kept confidential,
- That information relevant to a client is disclosed to them except in certain exceptional circumstances, and
- That you do not act for a client where that client has an interest adverse to that of another current or former client for whom you hold confidential information except in certain exceptional circumstances.
- Cooperation and accountability – which covers:
- Keeping up to date with law and regulation,
- Decisions and actions can be justified,
- Cooperate with SRA, other regulators, ombudsmen and those who oversee your role,
- Respond promptly to the SRA when required to do so and do not attempt to prevent others from providing information to the SRA,
- Keep SRA informed of changes to information and material breaches,
- Take prompt remedial work when required by SRA to do so, and
- Inform clients promptly of any omissions or mistakes.
- Providing services to the public – which covers:
- Taking appropriate steps to identify clients,
- Handling complaints appropriately and ensuring client aware of right to complain,
- Ensure that clients are provided with information in a way in which they can understand as to how their matter will be handled and the options open to them,
- Provide clients with information as to pricing and overall cost,
- Ensuring the publicity is responsible, and
- Ensuring that clients are aware of any protections available to them.
The Code for Firms
As with the Code for Individuals, the Code for Firms is in a relatively straight forward format comprising an overview of the principles followed by nine main sections. These deal with:
- Maintaining trust and equality and diversity – which covers:
- Not taking unfair advantage,
- Monitoring, reporting and publishing diversity data
- Compliance and business systems – which covers:
- Having in place effective governance structures, arrangements, systems and controls,
- Keeping and maintaining records to demonstrate compliance with SRA regulations,
- Remaining accountable for compliance where work carried out by or through others,
- Actively monitoring financial stability and business viability, and
- Identifing, monitoring and managing material risks
- Cooperation and information requirements – which covers:
- Keeping up to date with law and regulation,
- Cooperating with SRA, other regulators, ombudsmen and those who oversee your role,
- Responding promptly to the SRA when required to do so and providing required information,
- Acting promptly to take remedial actions when required by SRA to do so,
- Informing clients promptly of any omissions or mistakes,
- Notifying the SRA promptly of financial difficulty, insolvency events or change of recorded information,
- Providing the SRA with an annual information report,
- Reporting to the SRA material changes, and
- Reporting to SRA or other regulator details of serious breaches
- Service and Competence – which covers:
- Only acting for clients on their instructions or the instructions of an authorised person,
- Ensuring services provided are competent and timely,
- Ensuring managers and employees are competent to carry out their role, and
- Having an effective system to supervising client matters
- Client money and assets – accounting to clients for any financial benefit received as a result of their instructions and safeguard their money and assets
- Conflict and confidentiality – which covers:
- Not acting where there is a conflict or a risk of a conflict between you and the client
- Not acting where there is a client/client conflict except in certain exceptional circumstances
- Ensuring that client affairs are kept confidential
- Ensuring that information relevant to a client is disclosed to them except in certain exceptional circumstances
- Ensuring that you do not act for a client where that client has an interest adverse to that of another current or former client for whom you hold confidential information except in certain exceptional circumstances.
- Applicable Outcomes in the SRA Code of Conduct for Solicitors and RELs 2017 – this imports provisions from the individual Code into this Code – deals with referrals, introductions and separate businesses and standards which apply when providing services to the public
- Managers in SRA Authorised Firms – stresses joint and several responsibility of managers
- Compliance Officers – contains duties of the COLP and COFA.
The Handbook Consultation provides a new vision for the way in which solicitors will be able to practise in the future. Whether that vision is one which will be achievable in the long term in a way which genuinely protects the interests of the public and clients remains to be seen.
Clearly, there will need to be changes to the Codes before they go live – if only to ensure that they reflect Brexit issues as they apply to registered European lawyers.
The consultation can be accessed at www.sra.org.uk/sra/consultations/code-conduct-consultation.page