Beware of Greeks Bearing Gifts
Why regulatory reforms may not be all that they may at first appear
Prescription v Uncertainty
The past few months have seen a raft of ostensibly deregulatory proposals coming out of the Solicitors Regulations Authority (SRA). These have included plans to abolish accountant’s reports, reduce professional indemnity insurance levels, remove hours-based targets for ongoing training, remove the need for COLPs and COFAs in smaller firms and widen the routes for entry to the profession.
SRA Chief Executive, Paul Philip, used his speech at the Westminster Legal Policy Forum on 4 September to emphasise the SRA’s commitment to delivering its programme of regulatory reform to support innovation and reduce regulatory burdens. He said that the SRA’s intention was “opening up access to legal services, increasing competition in the market, driving down costs and improving value for money.”
Worthy as these aims no doubt are, there is a hidden burden that is often overlooked by the SRA – and that is hidden cost that is brought about by the increasing lack of certainty.
In those days before outcomes-focused regulation came along, regulation might not have been as enlightened – but at least it was ascertainable. There was a fairly thick, if perhaps somewhat overly detailed and prescriptive, rule book in the form of the Guide to the Professional Conduct of Solicitors, which contained explanations of what was required of a solicitor in most circumstances. There was guidance and explanatory notes issued either online or in the Law Society’s Gazette. Thus, if a firm wanted to know if it was in breach of a particular rule it had only to look to the published sources.
That certainty was, largely, wiped away with the advent of the risk-based approach to regulation. Instead of a clear “you will and you will not” the profession was faced with the somewhat vaguer notion of outcomes that needed to be achieved (which were mandatory), and indicative behaviours that demonstrated that outcomes were being achieved (which were not mandatory). Guidance was removed from the web site and firms were told that they needed to consider how they could “best achieve the Outcomes taking into account the nature of the firm, the particular circumstances and, crucially, the needs of their particular clients.”
Many firms struggled with this new concept, especially many smaller and medium sized practices who lacked the resources to be able to work out what the “nature of the firm” was and how this related to the needs of their clients. For many the old rules, prescriptive as they may have been, suddenly became far preferable to the new, somewhat wishy-washy definitions of duties and obligations.
SRA Regulatory Reforms
The recent reforms announced by the SRA will in many ways take firms further down the path of self-determination and uncertainty.
The aim of the programme of reforms is to:
- remove unnecessary regulatory barriers and restrictions to enable increased competition, innovation and growth to better serve the consumers of legal services;
- reduce unnecessary regulatory burdens and cost on regulated firms; and
- ensure that regulation is properly targeted and proportionate for all solicitors and regulated businesses, particularly small businesses.
The reality is, however, that many firms will simply be unsure of what is required of them and may well fall foul of the regulations simply because they were not aware of what they should be doing or because they believed that removing a specific requirement equated to deregulation.
Take for example the plans in relation to continuing professional development.
The SRA’s plan is to ensure that “solicitors remain competent throughout their working lives while removing the necessity for them to complete a compulsory 16 hours’ training per year.” They will also, as part of the change, remove the requirement for training providers to be authorised by the SRA.
It is inevitable that many solicitors will view the removal of the 16 hours compulsory CPD as a justification for not undertaking training at all. This will be especially so in smaller firms where overheads are high, profits are low and time is at a premium.
However, that is not what the SRA envisage happening. They expect firms to take the time to work out what training they need, to ascertain how often it is needed and for whom, to find the best value provider for that training and to consider the effectiveness of the training they receive in delivering the best service to clients. That, in the eyes of the SRA is a reduction in the regulatory burden whilst for many it will be an increase in the burden since they will need to undertake far more work to ascertain what is needed.
A similar situation may arise in relation to COLPs and COFAs. Paul Philip announced at the Westminster Legal Policy Forum that the SRA were considering whether COLPs and COFAs were required for smaller practices having a compliance officer was “overkill”. Currently all law firms in England and Wales must have a compliance officer for legal practice and a compliance officer for finance and administration (COLP/COFA). However, abolishing the need for the COLP and COFA will not remove the responsibilities that those officers currently perform. It will simply make it less certain as to who is performing them. Indeed, in the words of Paul Philip the SRA was seeking to “create a bit more informality” without removing the accompanying responsibilities.
How should firms be approaching regulatory reform?
Regulatory reform can be a two edged sword.
For those firms who have comprehensive risk and regulatory management procedures in place it will be seen as a blessing – leaving them free to manage their businesses in an effective and client-focused way that achieves their business needs without them needing to jump through irrelevant hoops.
However, for the many firms for whom risk and regulatory management is simply a burden to be avoided wherever possible, changes to the way in which regulation was looked at by the SRA could be a poisoned chalice. They could be lulled into believing that self-regulation was in fact deregulation. That not having to undertake compulsory CPD meant not needing to train. That not having a COLP could equate to not needing to ensure compliance.
It is essential, therefore, that firms look at their policies and procedures towards all aspects of the management and running of the firm and carry out a self-assessment of what is needed, where risks lie and how they should respond to those risks in order to ensure that the interests of clients continue to be protected.
Now more than ever, firms are going to need to think carefully about:
- undertaking formal risk assessments,
- carrying out training needs analyses,
- preparing compliance plans,
- carrying out reviews of the level of indemnity insurance they require, and
- putting in place, and monitoring adherence to, policies dealing with all key aspects of their practices.
Thus, for example, in relation training, firms need to:
- identify the training needs that they have in order to do the kind of work they do,
- assess how those training needs may be addressed,
- record the training that is undertaken and reflect on how that training has addressed the needs of the practice.
Likewise, if the role of COLP and COFA is abolished for small practices they will still need to:
- ensure that the firm, its managers and employees all comply with the terms and conditions of its authorisation, compliance with accounts rules and with relevant statutory obligations;
- record any failure to comply and make such records available to the SRA if required to do so;
- report any material breaches to the SRA as soon as reasonably practical (note also the current requirement for licensed bodies (ABS firms) to report non-material breaches).
The SRA is still going to regulate firms. The SRA is still going to look at how firms are approaching the burden of regulation. The SRA are still going to take action when they perceive that a firm is not regulating itself adequately or is likely to pose a risk to clients. None of the responsibilities are going to be any less – they will simply be less subject to prescriptive regulation and more left to an outcome or risk based evaluation of need to be undertaken by the firm.