SRA code: watchdog sharpens its teeth
11 April 2011 | By Katy Dowell
23 July 2013
4 March 2013
2 May 2013
9 September 2013
3 May 2013
The move by the Solicitors Regulation Authority (SRA) to adopt a new regulatory framework will have a direct impact on every firm in the country, regardless of size.
The SRA has spent 18 months consulting with stakeholders about its future and how this should be conveyed in a new Code of Conduct.
The next six months are critical to the regulator’s success. Nobody wants an unregulated profession and equally there is no appetite for a weak watchdog. It is time for the SRA to go through the painful process of growing some serious teeth.
Last week the SRA issued a press release declaring a “new era” for the profession as it published the new Handbook.
Unless it is blocked by the Legal Services Board, which is highly unlikely, the Handbook will dictate how the profession will be regulated from October. Importantly, the publication also reveals how alternative business structures (ABSs) will be regulated.
“What we hope is that the new Handbook will be suitable for firms right across the spectrum,” proclaims SRA chief executive Antony Townsend. “The old regime was much more tailored towards high street firms and was overprescriptive.”
The SRA acknowledges criticism that it has avoided supervision of the commercial sector in the past. The organisation’s move towards outcomes-focused regulation is expected to generate thematic reviews for firms rather than investigations of individuals.
After being commissioned by the Law Society to assess the state of regulation, former Ministry of Justice civil servant Nick Smedley concluded in 2009 that the regulator was “unfit for purpose”.
“The current arrangements for regulating this vital sector of the UK economy and legal services sector are not robust enough,” Smedley warned at the time. He recommended that a separate division should be established, with the sole purpose of regulating commercial firms.
The SRA’s aspiration has always been to be the Law Society’s chosen regulator for ABSs as well as for traditional firms. It has pitched itself as a single regulator for a united profession.
It is against this backdrop that a review of the organisation’s Code of Conduct was launched and everything was up for discussion.
The challenge the SRA faced was to determine how a regulator with limited resources could supervise adequately a diverse profession while simultaneously preparing for an anticipated influx of new entrants to the sector.
The solution devised by the SRA is to adopt outcomes-focused regulation.
Effectively this means that, rather than dictating the minutest detail of how every aspect of a firm should work, lawyers will be expected to abide by 10 key principles (see box).
Practitioners say the move should be broadly welcomed, despite some obvious criticisms.
“The basis upon which the principles are based has inherent sense - the difficult bit is the interpretation of [the principles],” says Addleshaw Goddard professions partner William Wastie.
“The concern is that outcomes-focused regulation is very broad - it’s very difficult to know whether what you’re doing is right or not,” says Plexus Law managing partner Tim Oliver, who is also president of the Forum of Insurance Lawyers.
Townsend responds by arguing that lawyers, like the SRA, have treated regulation in an over-lawyerly way.
“There’s a general tendency, but particularly among lawyers, to want everything to have complete certainty,” he explains. “Even with the current code we get lots of enquiries about what things mean.”
The principles, he adds, mean that firms can be flexible in their approach to regulation so long as they agree to put clients first.
“We’re dealing with highly trained professionals,” Townsend says. “We need to give them the freedom and responsibility to deal with their clients.”
Wastie says he is a fan of the new approach.
“The SRA wants to cooperate with firms with regard to openness and accountability,” he says.
The question lurking in the background, however, is whether or not the SRA will be able to enforce its regulations in practice.
“People shouldn’t mistake this for light-touch regulation,” warns Townsend.
Fundamentally, the SRA is trying to break away from the constraints of a detailed rule book and get into a position where it can conduct wideranging reviews. According to Oliver, this will mean a big cultural shift.
“The people they currently employ are used to having to deal with the detail and marking people against that,” says Oliver. “I’m assuming going forward that they’ll be hiring people in to help them adapt to the new sector. If they don’t there’ll be nothing different.”
Townsend believes the present staff are being held back by the requirement on them to deal with every matter that arises in detail.
“The current system creates a lot of risk because of the low-level work,” he says.
The thematic approach contrasts starkly with that, as it allows regulators to look more broadly at regulatory matters and prioritise.
“It frees up a lot of resources to deal with high-risk matters,” Townsend claims. “Every regulator gets thousands of pieces of paper coming in every year and the tendency was to do everything. Now we’re going to be focusing on the big issues and dealing with the lower-risk stuff more informally.”
Whether there will be the extra resources to do this is another matter. The SRA seems to be adopting the civil servant mantra of doing more with less.
The terms of the Legal Services Act give the regulator stronger powers to discipline firms, and Townsend insists that it will be using these.
“We’ll be publishing a lot more than we used to,” he adds. “We have the power to reprimand firms publicly and fine them up to £2,000.”
Proportionately, critics argue, that sort of fining power will do little to dent the coffers of the City firms. Nevertheless, the reputational issues that are part and parcel of SRA investigations are expected to be sufficient to deter wrongdoing.
By contrast, ABSs, which have been told what hoops they must jump through before becoming accredited, could be landed with a £500,000 fine if they are found to be guilty of misconduct.
Townsend says that the difference in fining power “simply shows that the new regime is more developed”.
The SRA is pushing for a system whereby problem firms are identified before they encounter troubles. It is clear that the sudden collapse of Halliwells last June weighs heavily on the mind of the watchdog.
A risk model has been established that takes into consideration a firm’s financial health, its history, how its decline might impact on its clients and, more importantly, how it might affect confidence in the profession.
Firms have received letters reminding them of their duty to inform the SRA of their own financial troubles and, in some circumstances, the financial predicaments of others.
“We want to remind them of their obligation to talk to us,” Townsend stresses.
One indicator of financial health is whether or not a firm has been put into the assigned risks pool (ARP) because it has failed to obtain professional indemnity insurance on the open market.
The rules governing these firms have been tightened, with visits from the watch-dog promised to those that have failed to claw their way out of the ARP.
Further changes are expected ahead of the 1 October renewal date, and particular emphasis is expected to be placed on the ARP.
In the past firms have managed to maintain high professional standards while paying lip service to the regulator.
However, with the SRA wanting to maintain its position as regulator of ABSs it has moved to respond to its critics, first by building relations with the City and now by reviewing its rule book.
It may not be to everybody’s taste, but soon the watchdog will begin barking, and everyone needs to be alert to that.
The regulator’s 10 key principles for firms
1. Uphold the rule of law and the proper administration of justice.
2. Act with integrity.
3. Do not allow your independence to be compromised.
4. Act in the best interests of each client.
5. Provide a proper standard of service to your clients.
6. Behave in a way that maintains the trust the public places in you and in the provision of legal services.
7. Comply with your legal and regulatory obligations, and deal with your regulators and ombudsmen in an open, timely and cooperative manner.
8. 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.
9. Run your business or carry out your role in the business in a way that encourages equality of opportunity and respect for diversity.
10. Protect client money and assets.