Delivering outcomes-focused regulation
30 November 2010
This policy statement, which you can download above, builds on our April consultation paper Outcomes-focused regulation: Transforming the SRA's regulation of legal services, and takes account of the responses we received to that consultation. The statement sits alongside our more recent consultation paper The Architecture of Change Part 2 – the new SRA Handbook. The Handbook sets out the ethical standards we expect of individual solicitors and law firms and the outcomes we expect them to achieve for their clients. This statement sets out how we will regulate to ensure that individuals and organisations achieve the high standards the public and individual clients expect.
The contents of the document are outlined below.
Section 1 of this statement sets out our approach to the regulation of individuals and firms delivering legal services. It explains why we are adopting outcomes-focused regulation (OFR) and a risk-based approach to regulation and how this approach will operate in practice.
Section 2 of the statement sets out details of our internal development programme which will transform the SRA into an outcomes-focused regulator. This programme focuses on:
- the development needs of our staff, our core OFR regulatory tools (risk assessment, authorisation, supervision, enforcement and formal standard and competency setting), and the organisational structure of the SRA; and
- reforming our business processes and our IT systems to support the new way of working.
The programme is well developed, and is on target to deliver the transformation needed in time for the delivery of our new regulatory approach in October 2011.
This paper covers the key transformation activities we are undertaking in preparation for October 2011, and there are other longer-term reforms which will be of equal importance in establishing the SRA as a leading regulator, fit for the future. These other elements, including our engagement with consumers and the recently announced review of education and training, are covered in Section 3.
Annex A summarises the responses we received to the questions we asked in our April consultation and our comments on those responses. We are grateful to those respondents who offered their views and opinions. Generally there was a considerable amount of support for the idea of a risk-based outcomes-focused regulatory system.
Annex B gives further information on our approach to risk-based regulation, for those interested in a greater level of technicality.
Annex C provides an update to our guidance on Preparing for alternative business structures, to replace guidance issued in July 2009. This provides further information for organisations wishing to prepare for an application to be licensed as an ABS on the preparatory steps they might take at this stage.
Annex D is a preparatory Cost Benefit Analysis (CBA) of OFR which was undertaken during the summer and early autumn. Further CBA work will be needed as the details of the new regulatory regime are developed.
Annex E sets out a summary of the responses we received to the April 2010 Consultation on the SRA's Enforcement Strategy.
Annex F sets out a series of case studies, involving "model" firms, which illustrate the combined effect on our stakeholders' experience of interacting with us following the implementation of risk-based OFR and our transformation programme.
Annex G shows the interim SRA management structure.
1 The Solicitors Regulation Authority (SRA) regulates individuals (solicitors and others managing law firms) and organisations delivering legal services. We regulate in the public interest and in the interests of the consumers of legal services.
2 This Policy Statement builds on our April consultation paper, Outcomes-focused regulation: Transforming the SRA's regulation of legal services, and takes account of the responses we received to that consultation. The Statement sits alongside our more recent consultation paper, The Architecture of Change Part 2 – the new SRA Handbook. The Handbook sets out the ethical standards we expect of individual solicitors and law firms and the outcomes we expect them to achieve for their clients. This Statement sets out how we will regulate to ensure that individuals and organisations achieve the high standards the public and individual clients expect.
A changing environment
3 The legal services market, and those involved in it, are in a period of significant change. There are three significant drivers of change which form the context for this Statement.
4 A very significant element of the current change process is driven by individual solicitors and by law firms themselves. Law firms are seeking to develop new ways to attract and engage with clients, delivering new products and services and developing new business structures to improve service delivery, efficiency and to take advantage of new technology. Legal service providers are also not only focused on delivering services in England and Wales : there has been a very significant growth in the export of legal services as firms have entered overseas markets.
5 The individuals and firms we regulate are changing, and changing rapidly. We welcome this innovation and drive to find new ways to better meet client needs. For us, these changes present new challenges both to ensure that our regulatory approach does not, unnecessarily, stifle positive business development and competition and to ensure that we retain the ability to regulate these new approaches effectively in the public and client interest. Our approach to regulation cannot, and should not, stay static in such a rapidly developing environment.
A changed regulatory framework
6 The Legal Services Act 2007 both implemented significant changes to the structure of legal services regulation in England and Wales and created the opportunity for new types of organisation, alternative business structures (ABS), to enter the legal service market. The 2007 Act provides clear objectives for the regulators of legal services, both for the oversight regulator, the Legal Services Board (LSB), and for the frontline regulators, including the SRA.
7 The SRA intends to seek approval from the Legal Services Board (LSB) to regulate ABS from 6 October 2011. We believe that ABS will present new opportunities to individual solicitors and to firms and provide benefits to the public and consumers through increased competition and the development of new services and new means of accessing those services.
A changing SRA
8 The third driver of change comes from the SRA itself. First, because there is a need for us to review our approach to regulation in the context of the significant changes to the legal services market, largely driven by our regulated community itself, and by the new regulatory framework within which we operate. Second, because we ourselves recognise that we need to change our approach to regulation and to the way we communicate and interact with consumers and those we regulate. Equally we need to change, quite fundamentally, the nature of our organisation itself if we are to achieve our objective of becoming a respected, diverse, modern, effective, fair and efficient legal services regulator in the new environment.
9 In implementing the changes to the SRA set out in this paper, we recognise that, in the past, the regulation of solicitors has been too heavily focused on the administrative application of rules and taking action against breaches of those rules. In the future there will be a greater emphasis on seeking to work with firms to ensure positive outcomes for clients, including constructive engagement with firms seeking to put things right where those outcomes have not been achieved. In serving the public interest, we must also ensure that the work we have been undertaking to understand and address the disproportionate involvement of some sections of the regulated community in our procedures is carried through, to demonstrate that our outcomes are scrupulously fair. Similarly, we recognise that we need to develop and improve the capabilities of our staff and our underlying systems and processes, including IT systems.
10 We provide more detail on these changes in this Statement. We see these changes as critical to improving the confidence in our ability to regulate fairly, efficiently and effectively in the public interest. At the heart of these changes is a reformed organisational structure clearly centred upon three core functions:
- Authorisation – ensuring that those who enter the regulated system are fit to do so;
- Supervision – ensuring that those in the system remain fit to deliver legal services; and
- Enforcement – taking formal regulatory action where firms or individuals prove unwilling or incapable of meeting the required standards.
Section 1 – Outcomes-focused and risk-based regulation
21 The legal services market is not static. In the introduction to this Statement we identified key externally driven changes (business-driven change and changes in the regulatory framework) which mean that the individuals and, legal businesses we regulate are evolving rapidly. We predict that the pace of evolution will accelerate in the coming years as the market continues to adapt to the changing business environment, the increasing expectations of consumers, the opportunities presented by new technology and a globalised market for legal services (including overseas outsourcing), and the introduction of ABS.
22 We are clear that a rules-based approach to regulation is inappropriate in such a changing environment. Given our primary responsibility to regulate in the public interest and in the interests of consumers, a rules-based approach creates a focus on strict compliance with the rules rather than on the primary aim of achieving positive outcomes for clients. It also results in a concentration upon low-risk issues, which diverts finite resources from those risks which most affect the public interest and consumers. This has a negative effect both on the firms we regulate, and our capacity to engage constructively with those firms, to the ultimate detriment to consumers.
23 Such an approach runs a significant risk of stifling innovation and the development of more consumer focused services delivered through more flexible and efficient business models. It also creates a reactive approach to evolving opportunities and risks, with the focus being on amending existing rules, or creating new rules, to address problems that have already arisen.
24 Our recent consultation paper, The Architecture of Change Part 2 – the new SRA Handbook, sets out the principles which will deliver our outcomes-focused approach. The Handbook provides a clear focus on the achievement of positive outcomes for consumers and gives firms flexibility to decide how those outcomes can best be achieved taking into account the particular characteristics of their business and their clients.
25 In our view, the introduction of OFR marks a step change in our approach to regulation and in our relationship with the regulated community. It places a primacy, not simply on compliance with rules, but on achieving the required outcomes for clients underpinned by a strong ethical framework. Primary responsibility for achieving these outcomes, and for operating ethical and effective systems and processes that enable outcomes to be achieved, now more clearly lies with the individuals and the firms we regulate.
26 We understand that some solicitors and other legal providers are concerned at the move away from detailed rules to regulation based on principles and outcomes. However, as we have already indicated, detailed rules may frequently not be aligned with the way firms want to carry on their business, leading in some cases to firms doing certain things for the purposes of the rules, rather than for any genuine reason for the benefit of consumers or the public interest. In addition, it is unrealistic to expect that a detailed set of rules can be comprehensive in covering all of the situations that may arise in the delivery of an area as complex as the delivery of legal services.
27 Furthermore, our experience is that detailed rules frequently do not provide the certainty which is claimed for them. Much of our current work is spent debating with those we regulate the application of detailed rules to particular circumstances, rather than concentrating upon the outcomes for clients and the public interest. This is bad for firms, bad for consumers, and bad for regulation.
28 However, there is clearly another underlying reason for the unease with the new approach; and this has been expressed to us both explicitly and implicitly. This is that rules are seen as not simply providing clarity for individual solicitors and firms but also as a "protective barrier" against the actions of a regulator whose approach and response to particular circumstances has not in the past been trusted. We recognise this and are committed to addressing the underlying causes for these concerns. We set out steps that we are taking to achieve the necessar1y changes elsewhere in this statement. However, our future approach will be one where we will constructively engage with firms who seek to achieve the necessary outcomes for clients and take responsibility for addressing any weaknesses or failures in approach, or underlying systems and processes.
29 We do not aim to "catch firms out" but to ensure that compliance is achieved, risks managed and any weaknesses addressed. The corollary of this is that where firms knowingly or recklessly fail in their responsibilities or show no commitment to achieving compliance, we will take swift and appropriate action to protect individual consumers and the public. In all this work, we shall take decisions on the basis of explicit criteria; and we shall publish data to demonstrate the impact of our decisions upon different groups of consumers and the regulated community. Building upon our published Equality and Diversity Strategy, we will assess the impacts of our policies, and address issues of disproportionality wherever they occur.
30 The move to OFR also has to be seen in the context of risk-based regulation, which is discussed in greater detail below and in Annex B. Risk based regulation has implications for both firms and for the SRA. For firms, we expect to see a strong focus on the identification of risk and to see them take responsibility for managing those risks effectively. We expect firms to be forward-looking, so that they try to identify emerging risks before they occur. This will also be the SRA's focus, including a greater interaction with firms about risks. We will, for example, be publishing a Risk Outlook on a periodic basis. The Risk Outlook will inform firms about the particular risks we are concerned about. The Outlook will not be a set of rules: firms will be able to see what behaviours and outcomes we are concerned about and will be able to act on them. We will also be proactive in discussing with firms what risks they foresee. Working in this way with firms will help firms in meeting their responsibilities to achieve the required outcomes.
A risk-based approach to regulation (RBR)
31 The SRA is becoming an increasingly risk-based regulator. This section explains what steps we are taking to embed risk management in the SRA.
32 Under OFR, the SRA will move its attention towards the achievement by firms of mandatory outcomes, rather than compliance with detailed rules. The SRA is seeking to ensure that those we regulate understand and take seriously their professional responsibility towards their clients and the public, which is what the outcomes require.
33 A risk-based approach means that we seek to identify the risks to meeting our regulatory objectives. This emphasis on "risks to objectives" is both deliberate and important in understanding our risk-based approach. For example:
- we will use our assessment of present and emerging risks to inform our policy development, so that our regulatory framework and approaches adapt more rapidly to changes in the external environment and seek to ensure potential negative impacts on consumers are prevented rather than addressed after the event
- we will use our assessment of risk in our processes for authorising new firms to ensure that applications for authorisation that present the highest risk receive appropriately high levels of scrutiny
- we will use our assessment of the risks posed by individual solicitors and existing firms to inform the allocation of our supervisory resources and identify the most appropriate approach to supervision – with those firms posing the highest potential risk to our regulatory objectives receiving an appropriately higher level of supervisory resource.
34 This approach will extend to us dealing in a risk-based way with regulatory breaches, whether by individual solicitors or by regulated firms, that have already taken place. Identifying and investigating breaches of regulatory requirements will continue to be a part of our work but our approach and response to any particular breach will be informed by the relative risk that any breach presents and we will take proportionate responses.
35 Across our operational activities, risk assessment will be a key factor in the allocation of our finite resources. We are developing and implementing a new organisational model around three key operational functions: authorisation, supervision and enforcement. These three functions can be categorised in risk management terms as follows.
- Authorisation - Authorisation will assess the risks that applicant firms and individuals present, minimising the extent to which unsuitable firms and individuals are able to enter the regulated community.
- Supervision - Supervision will monitor, anticipate and manage down the unacceptable risks that firms and individuals present to our regulatory objectives.
- Enforcement - Enforcement will use various tools to deal with cases where a deterrent is needed, and firms cannot or will not deal appropriately with risks. In the worst cases firms and / or individuals will be removed from the regulated community.
36 In Section Two of this Statement we have set out further information about each of these core operational functions and the Risk Centre and how they will operate as part of our new regulatory approach.
The Risk Centre
37 Our assessment of risk in all its aspects, from those systemic risks that we identify and which require an overarching policy response through to individual solicitor and firm level risks will be informed by work undertaken by our new Risk Centre. The Centre is now developing the approach and the processes through which risk will be measured and prioritised throughout our regulatory functions. The purpose of this development work is to ensure that we have the capacity and capability to assess the potential ‘impact' and ‘probability' of risks at all levels.
38 At one level the Risk Centre will be considering ‘thematic' risks. These are risks caused by the behaviour of groups of firms, firms delivering a particular category of service, or emerging external risks. So, for example, we may notice that certain firms in a particular sector of the legal services market are engaging in an activity that is leading to poor outcomes for consumers. This may be a new kind of fraud, for example. Each firm may or may not be high risk in nature. However, the activity of a number of them may reveal a problem that we need to address. Risks of this kind may be addressed by forming a dedicated team from the relevant specialists in the SRA. We may also, if necessary, employ external expertise to assist. We will certainly seek to engage with expert members of the profession to help us understand and analyse the nature and magnitude of the risk and identify options for appropriate regulatory responses.
39 Our approach to Risk will take account of both the probability of something going wrong and the impact of any such event should it happen. In considering "impact" in this context, we are concerned with the potential impact against the achievement of regulatory objectives, such as consumer protection. Therefore, if a particular firm is assessed as high risk, this may mean that we have concerns that the firm will behave poorly, or it may also be the case that we have no concerns about the operation of the firm but that if the firm were to behave poorly it would have a significant impact on our capacity to deliver our regulatory objectives. The risk rating of a firm will feed through to the type of supervision we will apply to the firm. The higher risk firms will receive relatively more of our attention and resource than the lower risk firms.
40 There is a third kind of risk that we face, namely our own operational risks, the risks presented by failures in our own internal systems.
41 These three different types of risk: firm-based risks, thematic risks and operational risks will need to be considered together. The risks that we consider to be the highest risks overall will receive resource to deal with them.
42 Finally, however effective our forward-looking risk analysis and assessment is there will always be occasions where we need to react to events. For example, a complaint, or series of complaints, or information from the police may identify that there is an issue that needs to be addressed immediately. Where this is the case we will apply the resources necessary to address the situation and take effective action, in accordance with our overall policies and proportionate to the issue that has arisen.
43 In order to analyse and assess risk, the Risk Centre (and the core operational functions) will use information received from:
- all stakeholders;
- firms through reporting and notification and continuing contact;
- intelligence gathering activities, including liaison with law enforcement agencies;
- other regulators.
44 We will require information from firms as follows:
- Firms will need to notify the SRA about changes that occur in relation to the firm. The specific notification requirements are detailed in the new Handbook (see particularly the Code, the Authorisation Rules, the Practice Framework Rules, the Accounts Rules and the Practising Regulations). In the main the new notification requirements, as part of the new Handbook, come into force on 6 October 2011.
- Firms will also have to provide information to the SRA as a condition of authorisation. Firms will provide information in a prescribed form and more information on the detail of this will be published by the SRA in the coming months.
- Risk-based regulation depends on the SRA collecting data from firms, and so we will be collecting certain information as a matter of urgency and ahead of the first full reporting round in October 2012, as part of 2011 renewal requirements and for authorisation purposes. Again, we will publish details of what this is likely to involve over the coming months.
- Additional requests for information may be made as part of thematic reviews or during the supervision process.
45 Our new, risk-based approach to regulation differs from the historic approach of the SRA, and indeed most regulators. Under the historic approach, resources were largely deployed in reacting to crystallised risks, events which had already happened. In addition, those risks were primarily defined as breaches of rules (non compliance), rather than their effect on desired outcomes. This is a very reactive way of working and the result of that approach in the case of the SRA and many other regulators was an insufficient focus on tight authorisation processes (to reduce scope for unacceptable risks), and the deployment of disproportionate resources in responding to breaches, some of them very minor, rather than in pre-empting unacceptable risks.
46 The historic approach has also been to direct much resource reactively to dealing with individual complaints about solicitors rather than robustly treating complaints against solicitors as evidence to assess whether an entity, individual or group of entities poses an unacceptable risk to achieving our public interest and consumer protection objectives.
47 In order to become an outcomes-focused, risk-based regulator, the SRA will be:
- resolute in acting against and deterring risks that are beyond our risk tolerance;
- brave enough to tolerate risks assessed as low; and
- capable of focusing our resources upon the identification and pre-emption of risks.
48 We will remove a large amount of regulatory activity from issues that matter little and target our resources on both prospective and realised higher-level risks. We will make intelligent decisions about the intensity of supervision of categories of firms and individuals.
49 In order to focus our efforts on the risks that matter, we will exclude lower level risks from substantive action. We will deal sensitively and courteously with people who wish action to be taken against firms or individuals, but where we have concluded that the information they have provided does not justify the use of our finite resources we will explain why our approach is appropriate. We will, in other words, become equally good at deciding what not to do as we will be in deciding what we should do.
50 There is further information about our risk-based approach in Annex B to this paper.
Cost Benefit Analysis
51 At Annex D is a preparatory Cost Benefit Analysis framework (CBA) of OFR which was undertaken during the summer and early autumn. Further CBA work will be needed as the details of the new regulatory regime are developed. The preparatory CBA work to date has been extremely useful in developing our understanding of how firms believe our new approach will affect them and the exercise of asking firms to begin to think about the costs of OFR has brought to light misconceptions about the way in which the new system will work. For example, some firms felt that the introduction of a Compliance Officer for Legal Practice (COLP) might require significant expenditure on new systems to enable the COLP to attest definitively to the firm's compliance with required outcomes. In fact, a COLP's responsibilities will be to ensure that the firm puts in place appropriate systems and controls for compliance and to oversee the operation of those systems and controls. The ultimate responsibility for a firm's compliance will remain with the governing body of the firm, as it does now.
Section 2 – Our transformation
52 Integral to our new approach to regulation is a fundamental change to the SRA as an organisation. The SRA is making a step-change in its leadership, culture, ways of working and underlying business systems and processes. This is partly in response to the need to operate differently in a changing external environment but principally it is driven by our own recognition of a need to become a better, more effective and efficient organisation so as to regulate in the public interest and to achieve our strategic ambition of being a respected regulator and the leading regulator of legal services.
53 We are implementing a series of far-reaching internal changes which are essential for us to have the capacity and capability to deliver an outcomes-focused and risk-based approach to regulation. We are focusing on:
- people and culture;
- organisational structures; and
- underlying business processes and IT systems,
in an integrated programme of change, aligned with the implementation of OFR, risk-based regulation and our application to become a licensing authority for ABS. We are developing an organisation from one previously focused on administrative processes and the creation and application of rules, to one that can make risk-based judgments which will ensure that regulated individuals and organisations are maintaining high standards of ethical behaviour in line with our Principles and delivering positive outcomes for clients. Fundamental to our success will be the establishment of a culture where all our staff are able to communicate openly and effectively with consumers and our regulated community and develop appropriate relationships to encourage compliance but, where necessary, take the necessary steps to enforce compliance. Built into this work will be our commitment to increasing the expertise and diversity of our staff.
People and culture
54 In our new working model there will be better co-ordination and communication between our staff and external individuals and organisations. Silos will be broken down and unnecessary handoffs between teams will be minimised. Our staff will be expected to be more flexible, taking on different roles depending on need and risk. Flexible working will be supported by:
- Job profiles – roles with similar characteristics, skills and knowledge requirements will be grouped into job profiles, allowing us to move people between roles. This will also provide enhanced career prospects for our able staff, increasing our ability to recruit and retain high quality staff.
- Horizontal management and reporting – We will encourage staff to develop new skills and work across traditional boundaries. This may mean dual reporting lines for some, possibly many, people. This will also contribute to a ‘whole SRA' way of thinking.
- We will further develop behavioural and technical competencies in all recruitment, development and performance management.
- Assessment centres will provide each member of staff with a picture of their skills, the extent to which they meet the new behavioural competencies and areas for development, so we can focus training and support in the right places and identify staff with high potential.
55 Staff behavioural competency assessments have begun. By the end of March 2011 all SRA staff will have been assessed against our new behavioural competencies, received feedback, and been advised on their personal development. Staff will need to demonstrate their ability to operate in the new environment, and will be helped to do so.
56 The two diagrams below illustrate how we intend our functional responsibilities to be grouped and interact.
Level 1: Target Operating Model
Level 2: The core functions
Strategy and coordination
Ensures SMT strategic decisions are translated into regulatory strategy and operational practice, coordinates outcomes delivery and ensures horizontal management and working across the organisation.
Administer and approve requests for Compensation Fund, manage claims and payments. Manage interventions.
Makes rules and risk-based authorisation decisions and collects income.
Manage contact with external stakeholders of the SRA through telephone, self service and web-portal.
Policy and standards enforcement
Develop coherent, informed and evidence based regulatory policy and set standards for the training of solicitors. Setting regulatory standards for an internal and external.
Produces risk analysis to underpin risk-based decision-making across the SRA.
Provide risk-based formal investigation of regulated entities and police the perimeter.
Provide risk-based oversight of the entire regulated community.
Provide cross-cutting legal advice and support to the whole SRA. Conduct litigation, advise in proposed enforcement action and authorise and prosecute SDT cases. Provide adjudication service.
57 This will lead to a new organisational structure for the SRA. Much of the strategic thinking and planning for this has already been completed and a clear picture of the functions we will deliver has been mapped out. An Interim Management Structure was implemented in November 2010 (see Annex G). This will encourage existing teams to work together more closely and move more smoothly to the future structure we need to deliver OFR next year. Work is under way to complete the design of the SRA future structure which will put in place the new organisational structure, with clear responsibilities and accountabilities, needed to deliver our new regulatory approach. Details will be announced in January 2011.
58 In Section One, we referred to our core operational functions of Authorisation, Supervision and Enforcement and how they will operate within the context of a risk-based approach to regulation. Set out below is further detail about how these functions will operate within a transformed SRA.
59 Authorisation is the function which considers applications from individuals to become solicitors or managers of firms, and from organisations to be recognised as approved suppliers of legal services. We will protect the public by delivering a transparent, evidence based decision making function which ensures that only those able to demonstrate that they meet the required standards are authorised to provide legal services. This will include decisions in respect of the initial and continuing authorisation of a firm. It will also include decisions on admission where an individual qualifies or is registered with the SRA and on applications to renew individuals' rights to practise.
60 Authorisation will ensure that entrants to the legal market are appropriately vetted and assessed to check that they meet the required standards and that those that do not are refused entry. Our objective is to identify risks accurately at the point of entry to inform both the initial authorisation decision and the supervision required for those who are approved. This is in contrast to the historic process, in which identity and qualification checks were insufficiently rigorous, and in which firms were allowed to enter the market with little, if any, assessment of the risks which they might pose.
61 We aim to provide a regulatory environment for those individuals wishing to demonstrate that they are properly qualified and capable of delivering ethical and competent legal services. To achieve this, we will:
- ensure the accuracy of the information we hold on individuals by requiring demonstrable proof of identity and qualifications from all individuals starting or continuing in practice; and
- jointly with other legal services regulators, our approach to education and training.
62 The SRA has already embarked upon a phased programme to verify the identity of those starting or continuing in practice. All regulated individuals (both solicitors and those holding key roles within regulated organisations such as non-solicitor owners and COFAs) will be subject to stringent checks in relation to their identity and qualifications.
63 Our Authorisation function will:
- define the process to be followed for all applications to the SRA for admission into the regulated community;
- provide the infrastructure, systems and processes to enable firms and individuals to submit applications in cost effective and convenient ways;
- use the SRA's developing risk tools to identify the risk posed by applications and apply appropriate methods of assessment;
- authorise or approve applications based on the evidence of how the applicant individual or firm is able to demonstrate likely compliance with the required standards; and
- apply conditions of entry as appropriate and provide information to inform continuing regulation of entrants.
64 Our methodology will be developed as our Risk work progresses but applications will be ranked by risk factors and varying approaches will be applied to complete the necessary assessment based on that risk and the complexity factors which apply. These approaches might include:
- Low risk / complexity - largely or completely automated systems for approval of applications based on applicants' information submitted online and potentially including information checks and vetting processes where appropriate.
- Medium risk / complexity - a range of validation techniques and further enquiries including direct contact with the applicant.
- High risk / complexity - potential for face to face meetings to seek further information, validate what has been provided and explore more closely the implications and risk factors which the application presents.
65 We have established a specialist ABS Team within the Authorisation function to work with those who are interested in applying to become an ABS. The team is also researching possible ABS business and financing models and the possible risk profiles of those models, in order to understand the likely impacts of ABS ahead of their formal launch. The ABS Team is the point of contact for all enquiries relating to ABS.
66 Subject to approval from the Legal Services Board, the SRA will authorise alternative business structures (ABS) from 6 October 2011 and from 6 August 2011 we will be able to accept formal applications. Prospective candidates, particularly those with more complex business and finance structures applications, are strongly advised to approach us well before that date to start informal discussions. See our guidance Preparing for Alternative Business Structures.
67 We are looking at the information that we will need to authorise ABS, and will begin to provide more information on requirements during the first quarter of 2011. We will request a proportionate amount of information from applicants that will allow us to evaluate risk. This will inform our risk-assessment of those firms (see Section 1 and Annex B for details of our work on Risk).
68 Applications for new Legal Disciplinary Practices (LDPs) will automatically become applications for ABS from 6 October 2011. Existing LDPs who wish to become an ABS can also start talking to us about this process during summer 2011, and in August 2011 may apply to us for a passport to become an ABS. In order to be passported, the LDP will have to confirm their managers and owners will not change as a part of the transition to ABS.
69 The SRA will publish a ‘Guide to Authorisations' in early 2011 detailing the requirements for each type of firm considering SRA authorisation. We will provide applicants with examples to illustrate how their applications for authorisation will be dealt with.
70 We expect that in the future the following firms will be authorised as recognised bodies:
- Existing recognised bodies, excluding Legal Disciplinary Practices (LDPs).
- Existing LDPs made up entirely of lawyers.
- Sole Practitioners.
71 If an existing LDP has non-lawyer involvement it will become an alternative business structure. Alternative business structures must be licensed and existing LDP firms will be passported to this status. From March 2013 we expect the SRA will be able to authorise a number of designated special bodies such as not-for-profit advice organisations.
72 The Supervision function is the risk-based oversight of the entire regulated community. For most firms, their main continuing relationship with the SRA will be with supervision teams. Supervision will encourage and support firms to deal with their own risks, help improve standards, and provide the required outcomes for clients. We will achieve this by means of risk-based supervision and constructive engagement with all regulated firms. In particular, we will not be seeking to "catch firms out" or undertake ‘fishing expeditions' to seek any breaches. Referrals for enforcement action will only be taken where a firm is unwilling or incapable of making the necessary improvements, or where the issue is so grave that formal sanctions are required to maintain public confidence or to act as a deterrent.
73 Supervision will:
- undertake desk based firm supervision or visits, maintain close and continuous involvement, or any combination of these, depending on events, themes and the risk rating of firms;
- conduct detailed assessments of firms' systems, controls and governance arrangements; and
- deliver constructive engagement to encourage firms to find and implement their own solutions to problems.
74 All firms will be supervised according to a risk assessment. There will be a variety of supervisory approaches, tailored to the nature of the firm and its work. So for example, we might take a closer supervisory interest in a large firm that has many vulnerable clients and holds a substantial amount of client money, even if the controls in place in the firm mean that it is well-managed. This would make it sensible for us to use some of our limited resources to understand the nature of the firm, its business and the challenges it faces. The fact that the SRA considers that a firm requires higher intensity supervision is not therefore an indication that the SRA has concerns about the firm's viability or its motives. We are considering the following three main approaches to supervision:
- Low intensity supervision of firms - The SRA will contact the firm as required. For example, we may contact or visit a firm as a result of an event, such as a partner leaving, or as part of a thematic review designed to examine or improve standards in a particular area. At this point, we do not envisage low risk firms being subject to periodic inspections.
- Medium intensity supervision of firms – The SRA will supervise using desk based or visit based supervision. We are exploring the use of a periodic inspection regime on a frequency of around three to seven years and this approach will be informed by both our 2011 supervision pilot activity and the baselining exercise (see later section on Baselining).
- High intensity supervision of firms - The firm will have a closer and in some cases continuous experience of supervision. Firms may be subject to regular periodic inspection.
75 Firms may receive a visit as a result of:
- The periodic visit programme;
- Event driven reports; or
- Thematic reviews.
76 We will also conduct random visits to provide us with a ‘control' group which may help us refine our supervisory approach. Visits will be tailored to the circumstances of each firm.
77 Firms under close and continuous supervision will require specific work because of the higher level of risk they present. To address these points effectively we will produce a tailored supervisory strategy. This is a detailed plan setting out the matters to be addressed and the method of engagement with the firm.
78 We are likely to consider the following as standard on each visit to a firm under close and continuous supervision:
- The environmental risks affecting the firm, for example, the economic environment for conveyancing firms.
- The firm's business model, for example the spread of the firm's business, how is it financed, and what services it offers.
- The firm's business processes, for example:
- the firm's structure and ownership
- the extent of any risks posed by staff, including owners or managers
- controls over its financial position
- IT systems
- exposure to legal / litigation risk
- conflict and client care procedures
- quality control and management of client matters;
- The firm's control functions, for example the work done by the COLP and COFA, together with internal audit (if the firm has an internal audit function – many smaller firms will not need one). We will consider the firm's governance arrangements, the strength of the relationship with the SRA (and its other regulators, if any), together with the strength of its management and its internal culture.
79 We are piloting our approach to close and continuous supervision between autumn 2010 and summer 2011. A number of firms expressed a desire to be involved. Six firms are already participating, initial visits began in mid October, and further firms will come into the pilot by the end of 2010. The pilot comprises a range of firms including a sole practitioner, a small commercial and private client practice, and two national firms with different business models.
80 The pilot follows a programme of pre-pilot visits we made earlier this year to a small number of commercial firms in the City. Among the questions we wish to test in the pilot are:
- whether it is ever proportionate to supervise any firms using dedicated staff/teams;
- whether the risk rating of a firm should arise from the likelihood of an identified regulatory breach occurring, or from the impact that such a breach would have, or a combination of both;
- whether there is a need for specialist supervisory expertise to understand the business model and financing structures of certain firms; and
- the potential decision-making criteria for applying dedicated supervisory resource to particular firms.
For more information about the close and continuing supervision pilot, please visit www.sra.org.uk/RM-pilot.
81 We plan to start pilots for desk based supervision and risk based visits in January 2011. We will include a range of firms reflecting the diversity of our regulated community.
82 Our Enforcement function will take transparent, proportionate and consistent enforcement action in accordance with the Enforcement Strategy and published decision making criteria. We will seek to exercise enforcement powers (including unlimited fining powers) transparently, proportionately, fairly and in the public interest.
83 The Enforcement function provides a decision making and advice giving function, based upon legal expertise, including:
- providing general and specialist legal advice and support to other departments of the SRA, including advice and feedback arising from contested cases.
- taking disciplinary action against solicitors and other regulated individuals, conducting litigation and dealing with appeals.
- providing the adjudication function for the SRA, through which enforcement decisions are taken, such as the imposition of fines.
84 In April 2010, we consulted on a draft Enforcement Strategy. We are grateful to all those who responded and for the general support for the approach we proposed. A summary of the responses is at Annex E where we have commented in more detail on some of the points that have been raised. Overall, we do not consider that any changes are required to the Strategy as most of the comments refer to concerns about how it will be operated rather than on the thinking underpinning the strategy itself.
85 The Enforcement Strategy sets out a number of tools to assist us in constructively engaging with firms where it is appropriate to do so. It also sets out when it may be necessary for us to take enforcement action and how we will consider selecting relevant cases.
86 We will take disciplinary action against individuals and firms at the Solicitors Disciplinary Tribunal (SDT) (or the equivalent new tribunal for ABS) where we do not have sufficient powers available ourselves (for example, to suspend or strike a solicitor from the roll).
87 In future the numbers of cases that we may need to prosecute externally should reduce due to:
- the coming into force of our new powers to fine individuals and firms;
- our ability to make all decisions in relation to ABS internally (after October 2011); and
- the work that other units will undertake (such as Supervision) to identify at an earlier stage possible issues of concern and to work with firms to put matters right without the need for formal enforcement action.
88 As a result of the positive responses to the draft Enforcement Strategy included with the April Consultation Paper, we will be progressively implementing this approach alongside the implementation of the Authorisation and Supervision functions as set out in this Statement.
89 We will conduct investigations where necessary, including to seek evidence required for enforcement proceedings. We will concentrate our resources on dealing with those firms who pose a serious risk to regulatory objectives, such as protecting and promoting the interests of consumers and ensuring lawyers act with integrity and in the interests of justice. Investigation is appropriate where supervision does not result in the required improvement because the firm cannot or will not co-operate. Investigations will also arise outside of supervision, for example if a firm is being used for criminal activity.
90 Our investigative methods will include:
- Desk-based investigation;
- On site visits, including interviews;
- Use of investigative powers, including requests for documentation and attendance of persons at formal interview;
- Obtaining, in some cases, documents or information from third parties, including law enforcement agencies; and
- Taking witness statements
91 We are keen to measure the impact of our new regulatory approach over time and to understand whether our regulation in practice is making the difference to the delivery of our objectives, such as consumer protection. Consequently, we are undertaking a baseline analysis of current compliance and attitudes to compliance from which to assess changes in levels of understanding and compliance among those we regulate.
92 To help us examine this, we will shortly begin visiting a number of firms to assess their compliance with and understanding of regulation. We will investigate how a diverse sample of firms' current compliance compares with the principles and outcomes that will be expected of them in the future. We have taken careful account of the approach taken by other regulators. A ‘table of 11' factors will be used together with the use of accredited international standards in our assessments. We are confident that the benefits of baselining will help us to:
- Gauge the level of knowledge within firms about OFR, how prepared they are for the changes ahead and how they aim to ensure that right outcome is achieved for their customers once the new Code is in force.
- Assess whether firms are adhering to the existing rules and regulations. We will map this against what will be expected of firms after October 2011 when the new Code of Conduct and the principles based OFR comes into play.
- Assess why firms comply, how compliant they currently are and how compliant they think their peers are.
- Determine where the current areas of non-compliance are which we can highlight for themed work in the future.
Business processes and IT Systems
93 We are fundamentally changing our IT and process systems to:
- Provide consistent, timely and reliable management information, which can be analysed to help the SRA and the sector improve.
- Make simple day to day processes such as data collection automatic, to deliver the most effective and efficient experience.
- Maintain and enhance the SRA's reputation as an effective regulator.
94 The Programme will deliver a new, integrated IT platform at the end of January 2011 – the first of three important milestones on the road to transforming the SRA's systems and business processes.
95 By the end of June 2011 the second milestone in the process and IT change programme will be reached – all existing application forms, used by the regulated community in its dealings with the SRA, will be available on the SRA website.
96 The third milestone is to introduce new working practices across the SRA, and to make best use of our data and systems. This will provide process benefits including the implementation of new bulk scanning arrangements. This will be achieved by September 2011.
97 Overall the programme will increase the efficiency and effectiveness of the SRA and provide our staff with the tools they require to operate our new regulatory approach. For consumers and regulated individuals and firms the systems will improve the speed of our interactions, improve the accuracy and quality of information and enable a far greater range of our interactions to be completed electronically. For the SRA the new systems will reduce administrative cost by reducing the number of staff (including the significant numbers of temporary staff taken on each year to manage the current paper-based renewals process) needed to process manual transactions.
Equality and Diversity
98 We have referred above to some of the ways in which we shall ensure that equality and diversity is built into our transformation activities. We are committed to equality of opportunity and recognise, respect and value the diversity of our stakeholders and aim to serve the interests of people from all sections of society. We will continue to implement and further develop our Equality and Diversity Strategy and become an organisation that fully reflects the diverse communities we serve, and values the contributions that all of our employees make to our work.
99 We will regulate in a way that is fair, proportionate, and impartial and in line with our equality duties. We have made sure that we regularly engage and consult with our diverse stakeholders on a range of issues, giving them the opportunity to inform and influence our decision making.
100 We will:
- consider equality and diversity implications when developing our policies;
- ensure, wherever possible, that the services we provide meet the needs and expectations of our stakeholders;
- share our commitment to valuing the diversity of our society with our stakeholders;
- provide real equality of opportunity in the recruitment, development and promotion of all our employees; and
- tackle unfair discrimination where we find it.
101 We use Equality Impact Assessment (EIA) to embed equality and diversity policy into the way we deliver our business. EIA helps us to ensure that equality and diversity remains at the heart of what we do. EIAs have been a way of highlighting excellent practice as well as identifying potential impact. Since 2009, we have assessed almost half of our policies and decisions and are currently assessing the rest. Completed assessments are published on our website to show that the decisions we make across the organisation are transparent, proportionate and fair.
102 Our EIAs have indicated that the SRA needs to improve data collection and monitoring and to work closely with our equality stakeholders, consumers and the public to provide regular and effective support on legal and regulatory matters. We have plans in place to take this forward, including through collaboration with other regulators.
103 At present we operate from three separate sites in the West Midlands and an office in the City of London. This infrastructure creates significant inefficiencies and is a barrier to the highly integrated and flexible working that is necessary for our future success and for the success of our new regulatory approach. In 2012, we aim to combine our West Midlands operations into a new single site in the West Midlands whilst maintaining our City of London office for our work with the large number of London-based firms and other organisations with whom we work.
This move, together with the operational efficiencies flowing from our new processes and computer systems, and the implementation of risk-based OFR will result in us becoming a smaller but more flexible and capable organisation.
Section 3 – Further dimensions of change
The consumer experience
105 As a regulator we are resolutely focused on the public interest and on the interests of the consumers of legal services. Most consumers' experience of the law occurs through consultation with members of the legal profession as part of their everyday lives. Common experiences are the buying and selling of property, making wills and Family Law issues such as divorce. The protection provided by the law is commonly assumed to arise from the application of the law by judges. For the vast majority of people however their experience of the law never gets that far.
106 The SRA therefore understands that when we carry out supervisory or investigative work, there will often be interested parties other than the firm concerned. The SRA will be as transparent as possible about our activities, and will disclose information when it is appropriate to do so. We published details of how we will decide to disclose information in our 2009 paper Transparency, protecting the public, and reasons for investigations .
107 As part of the SRA's transformation, we are developing a Consumer Affairs function, to co-ordinate the SRA's approach to protecting the public – both as individual or business users of legal services. However, this does not mean that, for example, corporate consumers require the same degree or type of protection as individuals.
108 The work of Consumer Affairs will include:
- consumer education - to improve consumer confidence through information on accessing and using legal services;
- consumer empowerment - to enable consumers to better manage their relationships with legal services providers; and
- consumer engagement - to listen to, understand, and learn from consumers and their experiences.
109 These three areas link together; for example, feedback from consumers will inform our approach to consumer education and support.
Providing the right information and support to consumers at the right time
110 Our Contact Centre already handles thousands of calls and queries from consumers and our website provides consumer guidance and information. We will introduce processes to make sure the information we provide on legal services and solicitors is available to consumers when they need it, and in the right format for them, whether this information is provided directly by the SRA or by others, such as solicitors firms or advice agencies.
Understanding the risks facing consumers in accessing and using legal services and taking action to manage these risks
111 Our work in identifying firm-based and thematic risks, described in Section One and Annex B, will also enable us to assess risks to consumers within a particular area of legal work or sector. The level of potential impact on consumers will affect the level of risk allocated to a firm.
Working closely with other regulators
112 Consumers will benefit from a greater range of information about legal services. We are already working with other regulators on consumer issues, and our intention is to develop a consumer network with other regulators. The network will provide a way for consumers who are interested to sign up for newsletters and other resources designed to improve knowledge about and access to legal services.
113 The Legal Ombudsman provides individuals with access to redress. The SRA's Memorandum of Understanding with the Ombudsman supports access to redress for consumers who use legal services provided by firms regulated by us. This provides an important feedback loop between the SRA and the Ombudsman.
114 Where the SRA identifies that a consumer wishes to seek redress, we will refer that person to the Ombudsman. Where the Ombudsman identifies serious breaches of regulation, those cases will be referred to us. Importantly, serious issues identified may be relevant in our consideration of risk. For example, we may decide to begin some work on thematic risks (see Section 1 and Annex B).
115 We are currently agreeing a Framework Memorandum of Understanding (FMOU) with other regulators and professional bodies. This will address:
- the sharing of information between relevant regulators and professional bodies where it is in the public interest to do so;
- identification of areas of regulatory overlap where more than one regulator/professional body regulates a firm; and
- how, as regulators, we can work together to ensure the efficient supervision and investigation of firms and individuals.
Building the consumer views into our work
116 We will make sure that the views we collect from consumers include those in vulnerable situations and disadvantaged groups. In our revised Code of Conduct we place emphasis on the need to ensure that those we regulate take account of their client's need and circumstances and, in taking instructions and during the course of the retainer, have proper regard to their client's mental capacity or other vulnerability, such as incapacity or duress. Similarly, in seeking feedback and contributions from consumers we will ensure that such clients' views are represented. We will monitor the impact our work has on all our consumer groups, and this will include continuing and enhancing our equality impact assessment programme.
Comprehensive consumer research programme
117 The SRA has undertaken regular consumer focus surveys and other research from time to time. The findings of our latest consumer focus groups are due to be published during December 2010. As part of our recent work on the Separate Business Rule, the SRA has recently carried out qualitative market research to assess customer understanding of legal services providers and regulation. This has enabled us to capture the reality of the consumer experience, as well as useful statistics. We will use this as a basis for further research and develop a cohesive research programme. We expect that this will cover the quality of legal advice as well as the services provided.
Education and training
118 The key foundation for our regulatory approach is to ensure that the individuals we regulate uphold the highest ethical standards and have the necessary legal competence. Ethical standards are supported by individuals working within a profession and within a community of regulated organisation that themselves maintain high ethical standards. However, an individual's initial legal training is a vital part of establishing the ethical code as well as technical competence.
119 Therefore, alongside the creation of the new Handbook that embeds the OFR approach, the education and training of individuals is an equally important regulatory tool for meeting our regulatory objectives. We believe that formal standards setting is best delivered using a mix of conduct and competency standards.
120 On 19 November 2010 we announced a high profile review of professional education and the regulation of ethics and competence in legal services, alongside other regulators of legal services. We will carry out this work jointly with the Bar Standards Board and the Institute of Legal Executives Professional Standards.
121 The core aims of the review are to ensure that the ethical standards and levels of competence of those delivering legal services in regulated law firms are sufficient to secure a high standard of service for clients, and to support the public interest and the rule of law. The review will build on and feed into the regulators' existing projects in this area.
122 The review will examine:
The educational requirements placed upon individuals entering the sector (including programmes and pathways to professional qualification) and their regulatory function.
The requirements for continuing education for individuals and entities (including Continuous Professional Development, accreditation, and other quality assurance schemes).
The requirements placed upon those delivering approved education to individuals and entities.
123 The following specific questions will be asked:
- What should be the contribution of legal education and training to the delivery of the regulatory objectives set out in the Legal Services Act 2007, taking account of:
- the likely shape of and demands on legal services by 2020 in the light of changing consumer/client demand, technological change and other factors.
- the effects that the shape of legal services may have upon the legal and other skills demanded from different kinds of lawyers and others employed in legal services in the future.
- the need for high-quality, competitive legal services and education and training providers and high ethical standards or lawyers and legal services entities.
- the need to promote social mobility and diversity
- forthcoming changes to the education sector and how these might affect legal education and training.
- How might implementation of the Legal Services Act affect legal education and training?
- To what extent (if any) should the formal regulation of legal education and training be extended to include groups other than those regulated by the Approved Regulators, for example, paralegals?
- What can or should be done to address the issue of career development and mobility between branches of the legal profession?
- What recommendations should be made to the Legal Services Board, the Approved Regulators and other bodies?
124 The regulators plan to appoint an external research team in February 2011. The review is expected to produce significant policy findings at various points before its conclusion.
Further thematic reviews planned for 2011
125 We have also identified a number of thematic reviews that we intend to conduct during 2011. These will inform our approach to regulation in a number of key areas. Further information on these reviews will be published in the first quarter of 2011.
Review of regulatory approach to conveyancing and the holding of client money
126 The independent review of our Financial Protection arrangements undertaken by Charles River Associates (CRA) raised concerns that our underlying approach to the regulation of conveyancing might not, in itself, be providing sufficient protection to consumers. Therefore, in 2011, we will be undertaking a thematic review of our approach to the regulation of conveyancing and the holding of client money.
Financial viability of firms
127 The CRA review, our own analysis of the financial position of a number of firms, including firms in the Assigned Risks Pool (ARP), and concerns about the impact of the current economic climate on firms has identified a need for us to review the extent to which we have sufficient information about the underlying financial viability and capital adequacy of firms. Therefore, in 2011 we will build upon work already undertaken to conclude a review of our approach to this issue which will cover: reporting and notification requirements; the analysis of financial viability and capital adequacy both at a sector level (in the Risk Centre) and an individual firm level (in Authorisation and Supervision); our policies; and our regulatory powers.
The regulation of overseas practice by SRA regulated firms and of foreign lawyers practising in England and Wales
128 The issue of the regulation of the overseas practices of SRA regulated firms has not been the subject of fundamental review for some time, despite the significant increase in overseas practice and the development of increasingly complex underlying business structures to support it. In addition, our approach to the authorisation of Registered Foreign Lawyers (RFL) needs to be reviewed in the light of the planned introduction of ABS in October 2011. This latter issue arises because, at present, in order to be involved in the management of a firm a foreign lawyer needs to become an RFL. The introduction of ABS would provide an alternative route to such an individual and we need to assess the extent to which our current, longstanding, RFL process meshes with the new arrangements.
129 Our review will therefore cover both the regulation of regulated firms practising overseas and the practice in England and Wales of both individual overseas lawyers and overseas firms. It is clear that, at a firm level, these issues often come together (i.e. firms with a significant overseas practice often also have numbers of lawyers from those jurisdictions working in this country as well. The review will require significant input from individuals with experience of overseas practice and with the economic and business skills to analyse the differing business structures and their impact on our ability to regulate effectively.
A. Responses to our April consultation (PDF 90K, 17 pages)
B. Responses to our April consultation – section on enforcement strategy (PDF 42K, 8 pages)
C. Technical detail about the SRA's approach to risk-based regulation (PDF 103K, 5 pages)
D. Preparing for alternative business structures
E. Indicative cost-benefit analysis
F. Complete case studies (PDF 56K, 5 pages)
G. SRA interim management structure