Approaching Risk in the coming years – a look at the SRA Risk Outlook 2014/15
At the beginning of this month the Solicitors Regulation Authority (SRA) published the 2014/15 version of their “Risk Outlook” document (Risk Report 2014). This document set out that which the SRA perceives to be the key risks for firms in the coming year and aimed to clarify SRA priorities, help firms manage their risk and explain how the SRA help to manage the risks of practice.
The management of risk is something which lies at the heart of the SRA’s approach to regulation – the premise being that if those in legal practice take a proactive approach to managing risk then this will help to ensure that consumers are protected and the rule of law is supported.
Clearly risks will differ between firms according to the type of work they do, the environment within which they do that work, the people they employ to undertake that work, the clients for whom they act, the processes they employ and to external factors. However, how they approach those risks and the extent to which they anticipate and provide for them can have a major bearing upon the extent to which those risks impact upon clients.
The report comprises two distinct sections –
- an assessment of the drivers for change – in other words those external factors likely to drive risk within firms, and
- the key risks – the priority risks of which all firms should be aware.
Drivers for change
Not all risk comes from within and a key part of the Risk Report 2014 is to those things that are likely to be the external drivers for risk. These include:
Economic drivers – including:
- growth in the UK economy driving demand for legal services;
- growth in the housing market leading to a 30% growth in conveyancing transactions;
- potential interest rate increases raising the cost of borrowing by firms;
- international factors – those firms with overseas clients or offices experiencing problems with an expanding global market and the knock on problems of verifying client identity, the impact upon their work of the laws of other countries and staff competency issues.
Market and firm level drivers – including:
- financial difficulties within law firm including the misuse of assets and client property and problems when winding up a firm;
- problems associated with overly rapid expansion;
- a consolidating legal market including problems with mergers, acquisitions and lateral hires and firm closures;
- the changing nature of competition within the legal sectors and the increase in the variety of legal practice;
- Group Contagion – a particular facet of the problems that arise from growth and larger legal structures is the danger of there being a reputational or financial impact upon one part of a conglomerate (e.g. the legal services provider) as a result of problems experienced by others within the conglomerate structure (e.g. the financial services provider);
- weaknesses in exit planning – including abandoned firms and firms where those involved have failed to provide adequately for an orderly closure;
- changes to the PII market including problems for firms unable to get coverage following the closure of the Assigned Risks Pool and run-off issues; and
- the continuing growth in popularity of fixed fees.
Political and Regulatory drivers – including:
- reform of criminal legal aid;
- changes to personal injury and ban on referral fees;
- changes to the ways in which LLPs are taxed;
- consumer credit licensing and the need for direct licensing by the FCA; and
- changes in the stance adopted by the Courts towards failure to comply with directions.
Regulatory drivers – including:
- SRA changes to accounts and related rules;
- changes to PII provision;
- compensation fund arrangements; and
- changes to training including ongoing training and entry to the profession.
Consumer behaviour and expectations – including:
- meeting the unmet need for legal services;
- how to approach client vulnerability; and
- delivering legal services in a manner capable of being understood.
In addition to looking at the drivers for change, the Risk Report 2014 sets out what the SRA perceive to be the key risks in the coming year.
The Risk Report 2014 groups these risks into two categories:
- Category one – those risks which are regarded as current priority risks believed by the SRA to be widespread, current and posing a significant public risk, and
- Category two – risks which are not as widespread or where the extent of the risk is not as well defined.
Current Priority Risks
The Risk Report 2014 highlights five main current priority risks. These are:
- misuse of money and assets – in particular where client money or assets are put at risk by dishonesty, poor systems and controls and lack of competence;
- money laundering – whilst not a new risk, the techniques employed by those who wish to launder money are becoming more sophisticated and solicitors continue to present an attractive target for criminals;
- bogus firms – a term used to describe situations where criminals take on the identity of law firms in order to steal money or gain access to information. The use of bogus firms takes two main forms – criminals enticing consumers to engage with entirely bogus firms as if they were genuine firms and criminals who steal the identity of genuine firms;
- lack of diversity – the SRA state that they continue to have concerns as to a lack of equality based on gender, ethnicity and socio-economic background; and
- failure to provide a proper standard of service and the quality of service provided to vulnerable clients. The SRA state that evidence shows that clients generally are still failing to receive adequate levels of service and in particular vulnerable clients are not receiving a service which meets their needs.
The Risk Report 2014 highlights three other areas of risk which, whilst not as widespread as the priority risks nevertheless are a cause for concern. These include:
- breach of confidentiality – in particular as a result of information security and cybercrime;
- lack of independence – dominant clients or an over-willingness to accommodate client desires at the expense of professionalism; and
- failure to act with integrity or ethics, including improper or abusive litigation – this includes the misuse of legal proceedings (or the threat to bring proceedings) for unethical gain, exploiting a client or third party’s lack of knowledge of the law or the lack of resources available to them and the manipulation of criminal proceedings.
The full Risk Outlook is available on the SRA web site at www.sra.org.uk/riskoutlook