A Brave New Regulatory World

A Brave New Regulatory World


As 2015 draws to a close, it is perhaps as good a time as any to reflect on what the regulatory world might hold for solicitors in the year to come and perhaps to speculate on whether it will be any better, worse or just the same old same old.

For the busy solicitor struggling to keep a practice going and still satisfy the needs of clients, the regulatory shenanigans of the Solicitors Regulation Authority (SRA) may seem the least of his or her problems.  After all, regulations come and go (as it would seem do regulators) but clients, banks, landlords, insurers and impossible workloads are here to stay.  Nevertheless, what happens at the SRA, Legal Services Board (LSB), Bar Council and Ministry of Justice does have a bearing, at the very least, on how client services are delivered and how much time a solicitor has to spend dealing with regulatory, as opposed to client, matters.

The following, is, therefore, more by way of a discourse on some of the things more likely to affect firms that are on the horizon, rather than in any way an in-depth review of where we are going as a profession.

A New Regulatory Model

The end of November saw the SRA publish its new vision for the future – one in which it said there would be “a fundamental shift away from prescriptive rules in favour of protecting the public by setting out the principles solicitors should follow.”

You might be forgiven for wondering how much this differed from the old vision for the future.  Back in 2010, the consultation Outcomes-focused regulation – transforming the SRA’s regulation of legal services opened with the words “The SRA is transforming its approach to regulation for the benefit of consumers” and went on to say “Our current rule book is too detailed and prescriptive and doesn’t help either the profession or ourselves to get the best regulatory outcomes or develop a relationship based on trust and confidence. It needs to support and not hinder innovation for the benefit of consumers and encourage a much stronger focus by firms and by us on the overall quality of legal services.”  So not so much radical shift as imperceptible nuance, you might think.

The SRA have indicated that the review of the proposed “changes” will be phased and, as a first stab, they have produced a position paper in which they focus on the future, simplification of overall approach and the Handbook. The aim, they state, is “to give legal firms greater freedom to run their businesses as they need to” by, for example:

  • removing “restrictions on where solicitors can work so that they can provide services such as legal advice more widely”
  • increasing choice and access to services for the public,
  • helping the public chose the legal service that is right for them,
  • enabling the public to have a greater understanding of the protections that are in place,
  • focusing regulatory measures on the areas of greatest risk, and
  • producing a new-look Handbook, with much briefer guidance and resources.

Having given everyone time to ignore the position paper fully, they will then launch a formal consultation on the proposed changes in spring next year, which will also probably be largely ignored, followed by further ignored consultations as part of a phased review over the following eighteen months.

Cynicism aside, it would appear that both the LSB and the SRA have, rightly or wrongly, come to the conclusion that, amongst other things, it is the Handbook in its current form that is preventing firms from developing their business in an innovative way and thus preventing the SRA from meeting certain of the Legal Services Act’s key objectives, such as improving access to justice and promoting competition. It is, the SRA have said, “too large, complex and detailed and needs regular amendment just to stand still.”

Among the proposals for consideration will be:

  • a review of the SRA Principles,
  • a plan to strip out the indicative behaviours from the Code and remove much of the detail in the outcomes,
  • to make the Accounts Rules more principles based,
  • to move away from a “one-size-fits-all” approach and instead to address the needs of different types of business model and legal activity,
  • getting rid of the “one stop shop” approach for the handbook – especially the significant amounts of material copied from case law and legislation, and
  • making issues such as the handling of client money more in tune with a world of electronic banking.

There is a danger, of course, that all that these changes will do is to introduce a further layer of uncertainty over and above that which was introduced by the last round of changes.  For the busy practitioner without the time to give to philosophical regulatory speculation, it is always easier to have prescriptive rules with clear interpretations rather than vague principles with little detail.   Yes, a more flexible approach helps those businesses trying to deliver legal services in new and innovative ways.  However, lack of detail does not do a great deal for the traditional practice servicing traditional clients in traditional ways.

Perhaps that is the point, however.  Perhaps it is those traditional practices that are seen as not delivering services in the way the public wants.

The position paper states, for example, that the SRA believes that the public and businesses using legal services:

“should be able to choose from three core options:

  • access to legal services in unauthorised businesses, protected by consumer law (currently exists);
  • access to regulated solicitors in unauthorised business (currently restricted); and
  • access to fully regulated firms employing regulated solicitors (currently exists).”

thus freeing up regulated solicitors and businesses to compete by allowing them to offer a range of services from which consumers can choose.

Quite how far that is the case remains open to some doubt still.  Hopefully it is a factor which will be explored over the coming months.

Separation of Regulatory Functions

Running hand in hand with the proposals for a new regulatory model are the government’s plans to give the SRA a greater degree of independence.

As things stand at present, the SRA is simply an independently managed section within the Law Society.  Thus the Law Society is the regulator operating through the SRA.  Back in 2004, when Sir David Clementi reported his views on the regulatory options facing the profession the end of self-regulation by the profession seemed a step too far for Government to take and so they fudged the question by going for a half-way house solution. The result has been several years of internecine wars between the regulator and the professional body and a situation where no one really trusts the independence of either party.

The proposals are to be found in a paper published by the Treasury entitled “A better deal: boosting competition to bring down bills for families and firms”, in which the government states that it will “launch a consultation by spring 2016 on removing barriers to entry for alternative business models in legal services, and on making legal service regulators independent from their representative bodies. This will create a fairer, more balanced regulatory regime for England and Wales that encourages competition, making it easier for businesses such as supermarkets and estate agents.”

Needless to say, and true to the past few years of organisational rivalry, the SRA and the Law Society have taken differing stances.

Thus, in a press release on December 2, the SRA stated that SRA Board “welcomed the Government proposals to make legal service regulators independent from their representative bodies.”  Chair of the Board, Enid Rowlands, said:

“It is impossible to see how a regulator could have the confidence of the public if it is also the body that represents those who are regulated. The public deserves proper independent regulation, and the profession deserves proper representation. But the two functions must be, and must be seen to be, separate.”

The Law Society, however, have taken a somewhat different stance and have argued for regulation by the profession rather than by what they perceive as effectively government regulation.  They said:

“The legal profession must be free to set the standards and rules under which it operates, and also own legal education and training so that standards are led by the people who practise law.   Enforcement of the rules and standards set by the legal profession, by an independent regulator would also be a further protection of the public and consumer interest.”

At this early stage it is not easy to say who is right – if indeed rightness exists.  It is unlikely that the government will go backwards and unpick the existing level of separation between the Law Society and the SRA – however illusory that might be.  However, the profession does need to have a long and hard think about how independent an independent regulator would be.  Would a regulator inevitably run by a consumer lobby prone to make questionable decisions – allegedly for the hypothetical but non-existent consumer on the Clapham omnibus but really to further promote the consumer lobby – really be in anyone’s interests?

Furthermore, would the Law Society survive were there to be a review of the statutory basis for practising certificate income and its uses, a review which would inevitably look at any claim the Law Society might have to financial support if it were to be re-constituted as a voluntary representative body? Would a Law Society supported entirely by those who chose to be a member continue to exist in any meaningful way?  Given the debate surrounding the scrapping of the Veyo conveyancing portal there are no doubt many who would welcome a root and branch review of the Law Society, its costs and what it does for the profession. However, in the face of a government committed to “making it easier for businesses such as supermarkets and estate agents” to offer legal services, is now really the time?

Consumer Credit Regulations

This week began with an announcement by the SRA that its new model for consumer credit regulation had passed its final hurdle by being approved by the LSB.

The new approach should mean the majority of firms will not have to be regulated by both the Financial Conduct Authority (FCA) and the SRA.  The effect of this will be to reduce the regulatory burden on firms without at the same time reducing client protections and allowing the SRA to undertake consumer credit regulation for firms if their work is an integral part of the legal services being provided.

Whilst some firms will still need to be regulated by the FCA because of the nature of the work they undertake, many will be able to be regulated by the SRA.  The message is, therefore, look at what the SRA can regulated and assess whether or not your firm needs to apply for dual regulation.  This MUST be done before the changes come into effect on 1 April 2016.

The SRA have said that they are developing a toolkit that will help firms get to grips with the regulatory requirements for providing consumer credit services but have not said when this will be available.

Help For Small Firms

Notwithstanding the various calls from other quarters for changes in the way that legal services are provided, the SRA has come out in support of small firms by making changes to the risk outlook and publishing a guide aimed at small firms which offers information on issues specific to smaller businesses, including, new regulatory developments and how these can benefit small firms and updates on the key regulatory issues affecting small firms.  This is in addition to the help they have already provided through a dedicated small firms area on the SRA website, a professional ethics helpline and a team of experts to offer help and advice on compliance issues.

To help reduce the burden on small firms the SRA have also:

  • simplified COLP and COFA procedures so that sole practitioners and lawyer managers at firms with a turnover of less than £600,000 are now automatically deemed suitable for COLP and COFA roles. In other words, firms who fit the criteria no longer need to make a separate application – all that they need to do is to notify the SRA.
  • Streamlined application forms for firms wishing to change their legal entity – for example from sole practice to limited company.
  • Abolished the requirement for solicitors to log a certain number of CPD points or hours of training – although this is still something of a two-edged sword as solicitors are now required to demonstrate that they have maintained competence through training and development in a way that suits them.
  • Introduced a legal apprenticeship scheme.
  • Made changes to the accounts rules by removing the requirement for certain firms who hold client money to submit an accountant’s report to us, unless the report is qualified provided that they fit within certain criteria.

The extent to which these changes will have a genuine positive effect have yet to be seen, although clearly they are steps in the right direction.

The Separate Business Rule

One change in particular which could, potentially, make a substantial difference to the way in which firms are able to offer legal services is the revision that took place earlier in the year of the Separate Business Rule.  We covered this in some detail back in October (The Separate Business Rule – changing the rules of engagement).

Although ostensibly liberalising the way in which solicitors and firms can engage in separate businesses, the rule still falls short of allowing them to do what they like through the new businesses and a liberalisation of the definitions of reserved work are going to be needed before, for example, firms can offer non-regulated alternatives to the traditional law firm in all regards.

That said, the rules are undoubtedly a huge step forward and one which will enable many firms to look closely at what they do through the regulated structure of their law firm and ask whether or not those services could not better and more cheaply be offered through the vehicle of an unregulated business.  Provided that the requirements as to:

  • not undertaking reserved work,
  • having in place safeguards to ensure that clients of the regulated firm are aware of the extent to which the services that the regulated firm and the separate business offer are regulated,
  • not representing the separate business as being regulated by the SRA or any of its services as being regulated by the SRA, and
  • ensuring that clients referred to the separate business are able to give “informed consent”

then there is no reason why firms should not undertake the work that they do in the most cost-effective and efficient ways in which they can.

The Growth in Direct Access to the Bar

One area of potentially negative development for solicitors is that of the likely growth in the direct access sector of the Bar.

Although still not something that the man in the street will either be aware of or, indeed, able to take advantage of, nevertheless direct r public access to barristers is something which is fairly and squarely on the Bar’s agenda and as such is unlikely to go away anytime soon.

This year has seen the launch of the Bar Council’s own Direct Access Portal (www.directaccessportal.co.uk/) which now joins a number of other initiatives including:

and those services offered by individual chambers.

The extent to which this poses a credible threat to solicitors is still the subject of some debate.

Unlike unregulated law firms, barristers are subject to rules which are in many ways equally as strict as those imposed upon solicitors.  For this reason they are unlikely to be able to undercut the costs of solicitor’s firms in many areas (despite the claims made by many of them on their web sites).  However, it is not a threat which can be dismissed because for many “sophisticated” clients the opportunity to go straight to counsel rather than instructing an intermediary is, and will increasingly become, an attractive option.

Firms need, therefore, to look at how direct access barristers are offering services, analyse what there is within that offering that might prove to be attractive to potential clients and try, as far as is possible, to ensure that the services which they offer are as attractive.   That might be ease of contact; it might be he holistic nature of the service; it might even be fixed fees and certainty of cost.

Cyber Security Problems

No review of what the future might hold would be complete without mention of the dangers that are likely to be presented over the coming year by cyber security problems.

Solicitors continue to be one of the favourite soft targets for hackers and cyber criminals – due largely to the fact that they represent most of the countries businesses and yet have probably the least resources to invest in comprehensive security plans and defences.

The range of methods by which cyber criminals are targeting law firms continues to grow and firms must be vigilant to ensure that they do not become the victim of a cyber-attack.  It is a risk which has been highlighted by the Law Society and the SRA and failure to take steps to protect client information and property is likely to be seen by the SRA as a breach of the rules.  Thus firms that are attacked will not only lose clients, they will also suffer reputational breach and the potential of regulatory sanctions.

Not all cyber solutions have to be technological.  Often it is the people in a firm that represent the weakest link and simply ensuring that partners and staff are aware of the dangers and know how to avoid becoming a victim can be as effective as any other method.

Firms are therefore urged to ensure that training takes place, procedures to avoid attack are implemented and that the firm has in place a robust cyber-attack response plan to deal with such an attack in the event that it should happen.


The coming year will not be, for many, one for the faint-hearted.  Yes there are opportunities.  Yes there will be a degree of deregulation. However, there is clearly a will on the part of those in power to increase consumer choice in the way in which legal services are and can be accessed.  That is something that all firms must address.  It may be that they are in a sector which is unlikely to be affected. They may already have put in place plans to address competition.  However, as in most years, complacency should not be an option.

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