Opinion: Smedley review highlights SRA’s City deficiencies

The Smedley review of the regulation of corporate legal work reflects increasing concerns about the current regulatory regime, with City firms expressing dissatisfaction for several reasons.

Four stand out: concerns they had raised with the Solicitors Regulation Authority (SRA) were getting insufficient attention; the views they had expressed in response to numerous SRA consultations were felt to be given little weight; at least one investigation into a City firm was felt to be misguided and heavy-handed; and the SRA’s request that City firms help it develop ‘protocols’ for regulating the large firms highlighted the SRA’s lack of understanding of this part of the profession.

These factors exacerbate the lingering sense that City firms pay considerable sums for their regulation, but get little for their money.

It is, therefore, ironic that it was not the City firms that requested a formal review.

However, the Smedley review came at just the right time. The City firms had not formulated their concerns in detail and responding to questions put by Nick Smedley helped with this process. This was certainly true of the firms represented on the City of London Law Society’s (CLSS) committee on professional rules & regulation. To a significant extent, the Smedley report articulates much of what we feel after the probing by Smedley.

One has to sympathise with the SRA. To a large extent, the review highlights deficiencies it inherited from the Law Society, and it has had a huge task in getting to grips with all the issues associated with regulating such a diverse profession, coupled with the advent of LDPs, alternative business structures and the Legal Services Board.

The Smedley report should, therefore, be seen as a well-thought-out proposal for dealing with the challenges that the SRA faces.

Two essential points come out of the report. The first is that the existing regulation for the larger firms serving the corporate sector is missing the mark – the SRA does not understand this sector and its consumer focus does not protect the needs of corporate clients. The second is that this deficiency can be addressed by the creation of a new, autonomous division within the SRA, applying a new style of regulation.

This approach is not ‘light touch’. Indeed, what is notable is that the firms are asking for more regulation. Central to this is that the regulator – through the new division within the SRA – would be staffed by people experienced in this market.

This understanding is crucial to the new approach that Smedley has endorsed because it permits an open, collaborative relationship between the firms and the regulator.

This in turn enables the regulator to focus on avoiding failure in this sector rather than admonishing after the event, and it facilitates the promotion of best practice in compliance in the regulated firms.

Smedley’s recommendation is that this new approach is applied initially to a relatively small number of firms. One prerequisite is that they have an established internal compliance function. But once up and running, the model can be expanded to regulate more firms. This prospect alone should encourage firms to develop their compliance functions.

Before any of this can happen, however, the SRA has to accept Smedley’s report and commit to its implementation. If it does, it can count on significant support from CLLS firms. At the time of writing, the SRA is still considering its response. The report effectively asks the SRA whether it can reinvent itself and embark on this new, fresh approach. The CLLS very much hopes that it will join in the spirit of the times and declare: “Yes we can.”

Chris Perrin, chair of the CLLS committee on professional rules & regulation and Clifford Chance general counsel