The Solicitors Regulation Authority (SRA) must fundamentally reform how it regulates corporate firms to restore the profession’s confidence in the watchdog, a report by former Ministry of Justice (MoJ) civil ­servant Nick Smedley has found.

The Solicitors Regulation Authority (SRA) must fundamentally reform how it regulates corporate firms to restore the profession’s confidence in the watchdog, a report by former Ministry of Justice (MoJ) civil ­servant Nick Smedley has found.

The Law Society ignited a spat with the SRA when it commissioned two separate reports into how the ­profession is regulated last October. It was time, said Law Society president Paul Marsh, for a regulatory review to advise on “what’s needed to achieve good, modern regulation of law firms”.

The SRA rejected the Law Society’s interference, with chairman Peter Williamson accusing the body of confusing its regulatory and representative functions.

The Smedley review was commissioned by the Law Society as a substrand of the wider Hunt review into the future role of regulation. Fundamentally, it questioned whether there should be a separate regulatory regime for firms with large corporate functions.

As The Lawyer revealed last week (23 March), the report recommended that the SRA should establish a corporate group, which would specifically govern major firms with corporate client bases.

Smedley came to this ­conclusion after uncovering some serious criticisms of the regulator in its current form.

“The system does not address the true risks adequately… The gap between the regulator’s skill set and the work of the corporate sector is too wide to enable the SRA to act with confidence and competence,” he states in his report.

The report continues: “The SRA has not paid its staff at the rates which would attract individuals with the highly specialised experience who it absolutely must recruit to operate ­effectively in this sector. Its location in Redditch and Leamington Spa does not help…

“The SRA has entered this sphere of activity with inadequate understanding and limited time to plan, prepare and gear up.”

Smedley warns that the SRA must act now or risk coming under enormous pressure to reform - something that could force the organisation to “turn inwards and lose confidence”.
Failure to act could also mean that the Legal ­Services Board (LSB), the organisation set up to oversee the Law Society and the SRA, would embark on a mission to set up an ­alternative regulator.

“An alternative regulator will be a last resort,” insists City of London Law Society chairman David McIntosh. “It would mean a complete failure for the SRA.”

McIntosh is urging the SRA to engage. “We don’t want the distraction of fighting the regulator,” he says.

Clifford Chance general counsel Chris Perrin adds: “This needs to happen quickly. If there’s an ­inability to provide adequate ­regulation, then that gap needs to be plugged.”
Allen & Overy senior partner David Morley agrees, saying the recommendations are “sensible and practical”.

Most importantly, says Smedley, there must be a fundamental shift from reactive to proactive regulation.

“The regime I hope to see emerge from this report will be swift, targeted, adaptable to change and highly responsive to the market,” he says. “In no sense can this be seen as a light touch.”

The ‘Corporate Group’, as the report terms it, would have a group director who must have “the right skill set, sufficient authority and autonomy to act”, according to the report. That person would oversee a new set of account manager posts, with each account manager covering five firms. The account managers would not be responsible for work carried out for private clients.

The group should be given the powers and sanctions, including issuing suspensions and striking off individuals, to use against those found breaching the rules. In addition, there should be secondments to the Corporate Group from the profession.

Initially the group should deal only with those larger firms dominated by ­corporate clients. If that was successful then the SRA could consider extending the programme to all firms with corporate client bases.

“It would be easy to fall into the trap of merely sellotaping the new group to the edge of what exists already,” Smedley says. “But this could be a missed opportunity. The changes I recommend might unlock new thinking and new aspirations at the SRA.”

Smedley is a diplomat, as this report clearly demonstrates. His report stops short of directly undermining the SRA and only goes so far as to recommend that there be definitive change.
In its response the SRA has been equally diplomatic: “Although this report covers just one sector the corporate legal sector – we’re pleased it highlights the importance of robust, proactive regulation, in the interests of consumers.

“We share Nick Smedley’s view that regulation needs to take account of the wide diversity of legal clients and legal firms, and this forms an important element of the SRA’s published strategy for implementing a new regulatory regime…

“This will be considered in the context of the broader reform of legal regulation set out in the Legal Services Board’s draft business plan and the SRA’s strategy.”

Diplomats should be welcomed in this changing regulatory environment. But what the SRA needs now is some radical thinkers to make sure the regulator keeps the confidence of
the profession.

Key recommendations

Smedley has listed 34 recommendations for modernisation of the SRA, including:

  • A Corporate Regulation Group should be established within the SRA.
  • The rules should apply to all firms handling corporate work, subject to the client’s informed consent.
  • An independent director should head the corporate regulatory function and they should have complete autonomy.
  • There should be a pilot regulatory period for firms with the most corporate clients, which can then be rolled out to smaller firms.
  • The SRA should carry out a root-and-branch review of its own functions.
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  • Some rules are unsuited to the particular conditions of the corporate sector and their interpretation by the SRA is inconsistent.
  • Firms criticised the SRA for its methodology for compliance monitoring and enforcement in the corporate sector.
  • The SRA lacks relevant skills knowledge and experience to regulate the corporate sector.
  • There has been a breakdown in trust and relationships between the corporate sector and the SRA.