OUTCOMES FOCUSEDREGULATION

WILL IT WORK OR JUST DROWN FIRMS IN RED TAPE?

Brian Rogers, FCMI

Partner (non-lawyer)

OVERVIEW

The Legal Services Act 2007 has provided regulators with the ability to introduce

significant changes to the structure of legal services regulation and the introduction of

Alternative Business Structures (ABS).

The introduction of Outcomes Focused Regulation and the implementation of the new SRA Handbook is part of this change process

OFR OVERVIEW• OFR is:

– A regulatory regime which focuses on high level principles and outcomes

– Designed to create a more robust and efficient regulatory system that is proportionate, targeted, and effective

• The Solicitors Regulation Authority will look at what it will require firms to achieve by way of outcomes, instead of focusing on the failures that have occurred

• The Legal Services Board (LSB) has explicitly chosen OFR as its favoured approach to regulation of ABS – used by the FSA

WHAT IS OFR?

What OFR is• Designed to enable firms to

put clients first, where this doesn’t prejudice the public interest (Davenport Lyons!)

• About achieving the right outcomes for clients

• Flexible

• A move away from prescriptive rules wherever this is appropriate

What OFR isn’t• Light-touch regulation

• A tick-box approach to regulation

• A “one-size-fits-all” approach to regulation

WHAT IS THE AIM OF OFR?

• OFR should:

– Support and encourage the delivery of high quality legal services

– Focus on the important regulatory outcomes that must be achieved while giving firms more flexibility in how they achieve these outcomes

– Deal with emerging risks proactively (ABS, etc.)

SRA VIEW

If a firm is compliant now it won’t need to change, however, if it takes this approach it will not be able to take

advantage of the benefits offered by OFR

THE ROAD TO OFR AND BEYOND – THE FSA STORY!

• Principles-based regulation (PBR) was introduced in 2007 moving away from a focus on rules

• The FSA moved to Outcomes Focused Regulation(OFR) in 2009; the focus on high-level principles under PBR had been found to have contributed to many of the problems that led to the banking crisis

• The FSA found problems with OFR in that firms interpreted the core principles differently, it therefore introduced a system of ‘outcomes testing’ to try and resolve these – this has led to the FSA introducing an enhanced and much more intrusive style of supervision

• “There is a view that people are not frightened of the FSA. I can assure you that this is a view I am determined to correct. People should be very frightened of the FSA” – Hector Sants, Chief Executive, FSA (March 2009)

SRA HANDBOOK

The Handbook will bring together all the SRA’s regulatory requirements into

a single, coherent structure that underpins the regulation of solicitors,

law firms and ABSs

The SRA Handbook will be implemented on a staged basis so

don’t just focus on 6 October!

HANDBOOK CONTENTS

• The Principles• Code of Conduct• Specialist Services Rules• Authorisation Rules• Accounts Rules• Indemnity Insurance Rules/Compensation Fund

Rules• Disciplinary Procedure Rules• All training requirements

SRA HANDBOOKStructure

• You and your client – client care, complaints, conflicts, the court, equality, third parties

• You and your business – management, publicity, fee sharing & referrals

• You and your regulator – co-operation, reporting, investigations

• You and others – fair dealings, undertakings, administration of oaths, Separate Business Rule

• Application, waivers and interpretation

PRINCIPLES TO OUTCOMES

• Mandatory• Must be achieved

Core Principles• Non-mandatory• Guidance

Indicative Behaviours

• Mandatory• Replaces the

rulesOutcomes

THE CORE PRINCIPLES

1. Integrity

2. Independence

3. Best interests of clients

4. Proper standard of service

5. Uphold the rule of law and proper administration of justice

6. Maintenance of the trust the public places in you and the provision of legal services

7. Comply with your legal and regulatory obligations and deal with your regulators and ombudsman in an open, timely and co-operative 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

SRA HANDBOOK IN PRACTICE

CLIENT CARE

CLIENT CARE CORE PRINCIPLES

• Principles relating to client relations

– You must act in the best interests of each client

– You must provide a proper standard of service to your clients

OUTCOMES

• Outcomes achieving the Principles

– Treating clients fairly

– Providing services to clients in a manner which protects their interests in their matter, subject to the proper administration of justice

– Complying with the law and code when deciding whether to act, or terminate instructions

– Ensuring sufficient resources, skills and procedures are in place to carry out a client’s instructions

– Providing clients with a competent service that is delivered in a timely manner and takes account of a client’s needs and circumstances

– Ensuring clients are in a position to make informed decisions about the services they need, how their matter will be handled and the options available to them

– Clients are informed in writing at the outset of their matter of their right to complain and how complaints can be made

INDICATIVE BEHAVIOURS

• Agreeing an appropriate level of service with a client

• Explaining the responsibilities of both parties

• Explaining any arrangements, such as fee sharing or referral arrangements, which are relevant to a client’s instructions

• Having a written complaints procedure and providing a copy to a client who complains

• Considering whether there are any conflicts of interest and informing a client accordingly

• Ensuring that a client is told, in writing, the name and status of the person(s) dealing with the matter, and the name and status of the person responsible for its overall supervision

NON-COMPLIANCE

• Acting in the following way(s) may tend to show that you have not achieved the outcomes and therefore not complied with the Principles:

• Acting for a client when instructions are given by someone else, or by only one client when you act jointly for others unless you are satisfied that the person providing the instructions has the authority to do so on behalf of all of the clients;

• Ceasing to act for a client without good reason and without providing reasonable notice;

• Entering into unlawful fee arrangements such as an unlawful contingency fee

THE NEW RULES IN ACTION! Referrals

• Introducers informing clients of referral arrangements– No specific requirement but it is probably good practice to ensure

compliance with outcomes

• Introducers giving undertakings to comply with rules– No specific requirement but it will be important to do this to ensure a

solicitor is not put in breach

• Solicitors including clauses in client care letters (independence, confidentiality, freedom of choice, etc)– No specific requirement but will be expected to show clients have been

treated fairly

• Maintenance of central register of referrals– No specific requirement but will be expected in order to show compliance

IS THE SRA HANDBOOK FIT FOR PURPOSE?

– Solicitors should be careful not to assume, that if a particular requirement in the Solicitors’ Code of Conduct 2007 does not appear in the new Code, that it is no longer a relevant consideration - SRA Ethics (April 2011)

– Cross-referrals between lawyers now covered under rule 9 – had not thought of the negative implications of this so watch our Q&A web page for an update - SRA Roadshow (June 2011)

– We could see the SRA having to be more precise in this area than envisaged by the new Handbook. For our part we could consider adding a requirement on CMCs to provide information on the outward bound referrals to fill any potential void created by the Handbook changes - Ministry of Justice (April 2011)

COLPs & COFAs• What are they?

– Compliance Officer for Legal Practice– Compliance Officer for Finance and Administration

• Who are they?– COLP – a SRA approved senior lawyer (can hold COLP & COFA positions)– COFA – a SRA approved senior manager or employee– Deputies and external appointments?

• Why do firms need them?• To oversee risk and compliance within a firm and be the SRA point of contact

• Does my firm have to have them?– All SRA authorised firms must appoint senior, experienced managers to these roles

• Designation (nominate by March 2012 must be in place by Oct 2012)– Must be approved by the SRA (“suitability test” – criminal offences, financial behaviour,

disciplinary record, disqualifications)– Designation only has effect whilst the individual consents (they can refuse!)

KEY RESPONSIBILITIESCOLPs & COFAs

COLP• Take all reasonable steps:

– To ensure that the authorised body complies with all terms and conditions of its authorisation (but not SARs);

– To ensure that the authorised body complies with relevant statutory obligations;

– To record any failure to comply with authorisation or statutory obligations and make such records available to the SRA;

– Report any material failure to the SRA as soon as reasonably practical

COFA• Take all reasonable steps:

– To ensure that the authorised body, its employees and managers, comply with any obligations imposed under the SRA Accounts Rules;

– Keep a record of any failure to comply and make this record available to the SRA;

– Report any material failure to the SRA as soon as reasonably practical

EFFECTIVE COMPLIANCEISSUES TO ADDRESS

• The firm’s work (type of work undertaken & regulatory requirements)

• The firm’s governance & culture (communication/oversight)

• The firm’s infrastructure (reporting lines, risk register, risk mitigation)

• The firm’s policies (fit for purpose, documented, communicated)

• Monitoring and COLP/COFA reporting– Reporting to the SRA; issues to consider:

• How prolonged &/or severe is the problem?• Are clients’ interests &/or monies at risk?• Can the COLP/COFA say that they are being open with the SRA if they keep this

information to themselves?• Is the firm trying to prevent the COLP/COFA from reporting, or is this a difference

of opinion that can be resolved?

COMPLIANCE OFFICERSTRUCK OFF!

• David McGrath – Compliance Officer at ActivTrades PLC – responsible for client monies

• FSA carried out a thematic visit into the management of client assets and money held by firms

• Findings– Firm did not have adequate systems in place to protect client monies;– Risk to clients but no actual loss;– Not a deliberate breach;– No recklessness;– £20,000 fine reduced to £3,000 due to hardship and early settlement;– Prohibition Order preventing him from acting as a Compliance Officer for

life!

SRA WARNING

The SRA has stated that it will come down hard on firms that attempt to use OFR as a

means of cutting corners or avoiding compliance with the SRA Handbook!

SUMMARY

• Read, understand and comply with the new SRA Handbook; don’t throw the 2007 Code away!

• Review your regulatory systems and procedures

• Nominate appropriate staff to be COLPs & COFAs

• Train all staff

• Ensure the firm’s regulatory culture is ‘fit for purpose’

IF YOU HAVE TEN THOUSAND REGULATIONS YOU DESTROY ALL

RESPECT FOR THE LAWWINSTON CHURCHILL

Will the introduction of OFR and the new slimmed-down SRA Handbook do anything to

enhance the respect for the law?