Relationship management pilot report
21 October 2011
This document reports on the findings of the relationship management pilot and includes recommendations for the use of relationship management as a supervisory tool going forward.
Executive summary
It is recommended that relationship management as a form of supervision should continue. There are considerable benefits both to the SRA and to firms of a close and continuous interaction which enables effective assessment and management of risks to the SRA's regulatory objectives.
Feedback from firms was overwhelmingly positive and regarded as a welcome change to previous SRA engagement processes.
It is considered proportionate to use a dedicated and specialist supervisory resource; however, it is more appropriate to apply relationship management to larger and global firms that present a greater range of issues that require greater engagement to understand and address.
There is less evidence to support the application of relationship management to smaller firms—the data demonstrates that such firms took up less resource in terms of engagement owing to the fact that the issues such firms presented were less complex and more easily resolved. The risks to our regulatory objectives presented by these firms were assessed as low.
Proportionality arises from a combination of likelihood and impact. Whilst impact can be determined more easily, probability can best be assessed by a process of engagement with firms.
The decision-making criteria for applying dedicated supervisory resource should follow the current SRA risk assessment which includes size of a firm, in terms of people, offices and turnover.
External validation and quality assurance are vital elements of successful supervision and should continue. Arrangements to avoid regulatory capture are necessary and should be reviewed regularly to ensure they remain effective.
Background
The SRA's consultation paper on "Outcome-focused regulation - transforming the SRA's regulation of legal services", recognised that the SRA's regulatory approach needed to change to be more effective, proportionate and targeted. A range of approaches was set out in the consultation paper of which relationship management was one proposed supervisory tool.
The relationship management approach is resource intensive and was initially thought to be most appropriate for large and/or complex commercial firms, but not a practical or proportionate approach to adopt with all firms. In order to develop our thinking about relationship management a series of meetings ("pre-pilot visits") were held between members of the SRA's Corporate Regulation project team and four large City firms to test ideas about its use as a form of supervision.
Between June and August 2010, based on the experiences of the pre-pilot visits, we identified the following key questions that the pilot needed to address:
- First, whether it is ever proportionate to supervise any firms using dedicated staff/teams;
- Secondly, whether proportionality arises from the likelihood of an identified regulatory breach occurring or from the impact that such a breach would have or a combination of the both;
- Thirdly, whether there is a need for specialist supervisory expertise to understand the business model of certain firms; and
- Fourth, the potential decision-making criteria for applying dedicated supervisory resource to particular firms.
In order to advertise the scheme, and so as to attract interest from the widest range of firms, we carried out a series of engagements with our stakeholders. A detailed list of groups contacted and the means of communication adopted is attached at Annex 1. We received expressions of interest to participate in the pilot from over sixty firms, covering the full spectrum of size and geographic location of the profession.
In order to test whether relationship management would work as a new form of supervisory approach, it was decided to include within the pilot a cross-section of firms broadly representative of the different sizes, types of firms and geographic spread that make up the profession as a whole. The relationship management team divided the expressions of interest received into the following categories, Global & City, National1, Regional2, Niche, Local and Sole Practitioner and selected a sample of firms for the pilot from each of these categories.
Risk
Risk was and is the key driver behind the relationship management team's approach to all our regulatory activities. Central to this, and that of the SRA more generally, is the work of the Risk Centre in developing the approach and the processes through which risk will be measured and prioritised throughout our regulatory functions. Key to this will be the production of impact screening that scores firms according to their potential to impact upon our regulatory objectives, and grouping firms into impact bands that will inform the supervisory approach adopted so that it can be tailored to take account of the risk that a particular firm may pose and how that risk is being managed.
Process involved
With no pre-existing relationship management function within the SRA, a basic process-mapping exercise was undertaken to enable a flexible approach to relationship management to be utilised within the wide variety of firms in the pilot.
A generic suite of work programmes were designed in line with the SRA Risk Framework to ensure a consistent yet flexible approach to engagement with firms. Engagement with firms was flexible, tailored to suit individual firms, but in a way which enabled key risks to be captured and discussed typically using a general agenda which was then narrowed down to focus on the key issues that arose in relation to a particular firm.
Validation
Validation of the whole relationship management engagement process was an important element of the pilot, ensuring that the work of the team was of a high standard and in line with the overall approach to supervision of firms namely, that it was effective, proportionate, intrusive and sceptical. This aspect of the pilot is described in greater detail below.
Engagement
How it worked in practice including data on levels of engagement
In practice our engagement with firms within the relationship management pilot could be broken down into stages which ran as a cycle of engagement. The stages were set out in the November Policy Statement ("Delivering outcomes-focused regulation") and are described in Annex 2 of this Report.
Meetings with firms
- All meetings commenced with a set agenda aligned with the Risk Centre and the key risks to the SRA's regulatory objectives.
- The initial meetings with firms involved them providing relationship managers with information about different aspects of the firm such as its business model, the risk management and finance/accounting functions, handling of conflicts etc., allowing relationship managers to get a detailed knowledge of the firm.
- After the initial meetings, how engagement proceeded very much depended on the nature, size, sophistication of firms, and the complexity of systems and processes and the risk profile of, and risk issues presented by, different firms. This demonstrates the very considerable flexibility of relationship management and its ability to adapt according to the particular firm and the risk areas identified.
- A wide range of stakeholders were met at firms, and this again very much depended on the size and complexity of firms and their systems. Where firms had risk and compliance departments we met members of those teams as well as senior management. Smaller firms would usually be represented by partners responsible for compliance and professional indemnity insurance.
Continuing stakeholder engagement
In addition to the events and communications described above, the Relationship Management team has undertaken a wide range of other stakeholder activity during the last 12 months. A list detailing the continuing stakeholder engagement the Relationship Management team participated in is included at Annex 3. We found such engagement to be a key activity and proved to be a very fruitful and useful way of reaching large sectors of the regulated community as well as key stakeholders within firms. We envisage there will be a continued need for it going forward.
Data on levels of engagement
| Sector |
Total hours (percentage) |
| National firms |
36% |
| Global/City |
34% |
| Regional firms |
14% |
| Local firms |
3% |
| Niche |
5% |
| Sole practitioner |
8% |
Engagement data analysis
During the course of the relationship management pilot we have collected data detailing both the resources taken up by each firm within the pilot and also of the issues relating to risk identified by each participant. The data collected has also been analysed to discern what benefit and/or advantages the relationship management process has brought to the supervisory function. A more detailed analysis of time utilised by a sample of firms from different sectors within the pilot can be found at Annex 4.
Resource commitment
During the course of engagement with the pilot firms it quickly became apparent that the firms that fall within the Global/City and National categories of the pilot were taking up a significant proportion of the relationship management team resource. This can be demonstrated by the fact that of the 73 engagement visits to firms conducted over the course of the pilot, 51 were to Global/City and National firms (73 per cent), whereas these firms made up 63 per cent of the pilot.
The resource commitment to the Global/City and National sector was also reflected in the number of hours of actual time recorded by the relationship management team, 70 per cent of all recorded time being allocated to this sector of the market. The reason for this being reflected in the often complex business structures, commoditised type work streams and large numbers of client matters that necessitated considerable amounts of preparation pre and review post engagement visits.
Firms categorised as Regional constituted 16 per cent of the pilot but 13 per cent of engagement visits and 14 per cent of recorded time. Niche practices were 21 per cent of the pilot and accounted for 14 per cent of engagement visits and 16 per cent of recorded time. The data shows that there is a clear division between the amount of resource take up between the Global/City and National firms and those pilot firms that fell within the Regional to Niche categories.
As part of good regulation we should ensure that there is continuous cost benefit assessment of this supervisory approach.
Risk issues
During the pilot the Relationship Management team reviewed areas of risk under the broad categories of Instability/Financial Failure, Fraud/Dishonesty, Market Risks, Operational Risks, Competency/Fitness and External Perception with a Low, Medium and High rating matrix applied.
There was a noticeable difference discernable in terms of the risks perceived by, on the one hand, Global/City and National firms and, on the other, the regional/local sector, the former concentrating on loss of key clients and talent retention (both of individuals and teams). Information technology and security relating to client confidentiality figured prominently on virtually all risk registers reviewed. The Regional/Local firms' risk registers concentrated on succession planning and reacting to the current and forthcoming changes in the legal market place, both in terms of regulatory compliance and legislative and commercial developments.
Relationship management impact
On reviewing the data obtained and the feedback from firms with the pilot, it was pleasing to note that the discussions on risk, proposed business models and structures with participant firms had a material impact on how the firms had thought about and planned how they would mitigate risk. With 60 per cent of firms the data indicated that relationship management had this impact and in particular the role the team had in raising issues and areas for discussion in getting the necessary "buy-in" at firms outside the Risk and Compliance specialists at the firms.
Key findings
The key objectives for the Relationship Management team were set out in our paper, "Outcome focused regulation - How will relationship management work?" referred to previously.
Did we achieve our objectives?
Proportionate to use dedicated resource?
One of our main aims was focused on understanding the firms that we engaged with, and the risks they posed to our regulatory objectives. In developing our understanding of these firms we also tested whether it would ever be proportionate to supervise any firms using dedicated teams.
There was less evidence to support the application of relationship management to smaller firms. The issues identified and the resolution of these could be addressed through alternative methods of supervision. However, it would seem more appropriate to apply relationship management to those larger and more complex entities that present a greater range of issues that require greater engagement to understand. This is not because larger firms are inherently more risky but that they are more complex, requiring more detailed understanding, and if, a major event were to occur, the impact on the SRA regulatory objectives would be greater.
Proportionality - from likelihood, impact or both?
Whilst impact on the SRA's ability to deliver its regulatory objectives could be gauged without interaction with the firms, the likelihood of an event occurring could only be adequately assessed via a process of engagement. Gathering data and information on risk management systems and controls enabled us to assess both the likelihood and impact of a breach occurring. Discussions with the firms and in particular the steps the firms had taken to mitigate these risks, enabled informed and more proportionate responses from the Relationship Management team.
Need for specialist supervisory expertise?
As previously stated, the pilot involved a range of entities from complex structures with offices across the globe to traditional partnerships and innovative models such as virtual firms. There are benefits in having a specialist supervisory resource which fundamentally understands the sectors they engage with and crucially the issues that we need to address. A greater understanding of a sector will enable more effective engagement, better risk assessment of both impact and probability, and greater understanding of new and emerging risks. Also, ongoing engagement builds a relationship and trust which then encourages firms and their risk and compliance teams to make contact before problems become serious.
Decision-making criteria for applying dedicated supervisory resource
One of the factors confirmed by the pilot work is that smaller firms will not require dedicated relationship management. Our engagement with these pilot firms illustrated that although in some instances they may not have sophisticated risk departments, in general, they had adequate systems appropriate for their businesses. The risks to our regulatory objectives presented by these firms were assessed as low, compared to the larger firms we engaged with. This supports the SRA's current position that the decision-making criteria for applying dedicated supervisory resource will remain based on the size of a firm, in terms of people, offices and turnover.
Other outputs
General engagement
The Relationship Management team has undertaken general engagement work alongside its pilot engagements.
In October 2010, the SRA announced the appointment of its Chief Adviser on City law firms. From January 2011 we commenced a series of high-level bridgehead meetings with the senior partners and heads of risk and compliance of the largest firms headquartered in London as part of an initiative to build and strengthen the SRA's relationships with these firms. To date there have been 19 of these meetings. The bridgehead visits have been used to initiate general engagement between the visited firms and the Relationship Management team where none already existed. High-level meetings were held to introduce and have led to longer term engagement.
Financial stability
As part of the pilot and general engagement visits, steps were taken to ensure that firms discussed their financial position, including banking and finance arrangements, strategies they were employing to address the economic downturn and understanding current and forecasted budgets. This work has vastly improved our understanding of financing in firms, especially, in the Global/City and Larger firms sector. This has been fed back to the Risk Centre to assist in analysis of risk indicators around financial stability. This work continues to be developed.
Focus on outsourcing
As a result of its research for the pilot and discussions with firms during Summer 2010, the Relationship Management team identified outsourcing (and the related issues of off-shoring and near-shoring) as potentially involving key risks to the SRA's regulatory objectives. The team has, accordingly, focused on outsourcing as an area of particular interest during the last 12 months.
The Relationship Management team has held meetings and discussions with leading outsourcing providers and consultants as a means of better understanding how the outsourcing market might develop and where the greatest risks to the SRA's regulatory objectives might lie.
During the team's pilot and general engagement visits there have been several opportunities to discuss (and assess the risks relating to) the arrangements which particular firms have in place to outsource business and legal processes and, in one or two instances, to use dedicated offshore and near-shore centres which they have established to achieve some of the advantages of outsourcing key processes. This work is ongoing.
Feedback from the pilot firms
Feedback from the pilot firms was overwhelmingly positive. Relationship management was considered a welcome change to previous SRA engagement approaches. A number of firms expressed their views openly during the course of the engagement. A typical example, is the following feedback received from a Larger firm in the pilot:
"The pilot has enabled us to do things differently and look critically at what we are currently doing. Historically, we might have continued a particular path with the knowledge that we could get away with what we perceive as minor issues, however, we are now looking internally at our own weaknesses and have changed our focus."
A recurring theme in the feedback included firms seeing the benefit of the opportunity for firms to explain to us the nature and structure of their businesses, how they address and mitigate risk and raise issues with us, and build a constructive and cooperative relationship. Firms have often said to us that relationship management engagement and SRA interest in compliance and risk has given the compliance and risk teams leverage with senior management to obtain resources and impetus for compliance projects that were proposed but which hadn't been actioned. Many firms were pleased that the SRA was building a bank of knowledge which readily enables us to grasp and address points that are specific to their business models. A point of contact and consistent approach were also welcomed.
With increased general engagement and confidence in the relationship management approach, we found a number of firms were coming forward to self report or discuss issues. We were able to respond quickly and arrange the necessary engagement to address the issues with the firm. This engagement was carried out in addition to the pilot work. A rapid response enabled the firms and the regulator to manage and minimise risks.
Firms also welcomed the initiative in the context of understanding their fast growing and increasingly complex international businesses. There is also an appreciation of the need for the SRA to work with and understand the business models of all the firms to ensure supervision and protection of "brand UK".
Validation and quality assessment
The process of validation sought to establish whether relevant risks were being identified, appropriate evidence obtained and an appropriate and targeted strategy established for each firm. One of the additional objectives of validation was to ascertain to what extent the principles of "Good Supervision"3 were being applied by Relationship Managers. The validation was therefore looking to see that the approach of the Relationship Managers was: intrusive, sceptical, proactive, comprehensive, adaptive and conclusive.
We received detailed feedback to identify development opportunities and key challenges, such as, clearly identifying and focusing on risks presented by the firms, acting consistently and proportionately. All pilot firm files were subject to validation. This process has been crucial to the development of the processes of relationship management. It is vital to continue with this approach, as it not only addresses the principles of good supervision, but is another method of ensuring that regulatory capture is avoided.
Additionally, in line with the SRA's approach to quality assurance assessment, we are developing a process for the assessment of relationship management work.
Recommendations
We recommend that relationship management as a form of supervision should continue, as we believe there are considerable benefits both to the SRA and to firms arising from the close and continuous interaction that is achieved in terms of managing the risks to the SRA's regulatory objectives. Nevertheless, it is resource intensive and due to resource constraints cannot be applied to all the entities regulated by the SRA.
Risk impact – who will it apply to?
We recommend that relationship management is best applied to entities that represent the highest risk to the SRA achieving its regulatory objectives. This is because relationship management offers a close and continuous interaction which can be applied proportionately and flexibly depending on the specific risks identified and the mitigating factors in place. Risk will be determined as a function of impact (on the ability to meet regulatory objectives) and probability (of the risk occurring).
Impact will be based on the size of an entity, with some cross checking against the amount of client funds held and the vulnerability of the clients served. The size of an entity is likely to be determined by its turnover and number of offices.
The firms that would come under relationship management is dependent on our risk appetite which is determined by the cut-off point in the risk impact scores assigned to firms, and below which relationship management would not be used to supervise firms.
How will firms be split into City/Large/Overlap
The highest impact firms are Larger firms and Global/City firms. These two categories of firms use different business models, raise different issues and pose different risks. We consider that the most effective way of supervising and engaging with these firms is by having separate teams of relationship managers dedicated to each. This will ensure specialist knowledge and expertise in relation to each sector is built up and will aid more effective monitoring and engagement with firms.
We consider, however, that there should be a "dotted line" between the two teams so that there is effective knowledge sharing, development opportunities for Relationship Managers and perhaps most importantly, effective and flexible management of resource.
Should also apply to some alternative business structures
The current approach to measuring risk which is described above will inevitably mean that those alternative business structures which are the largest will fall into relationship management.
Annexes
1. Pre-pilot stakeholder engagement
The Relationship Management project team undertook the following stakeholder engagement to advertise the pilot and to attract interest in it from a wide range of firms.
- attendance at the SRA's OFR roadshows and other conferences relating to risk and compliance issues as a means of effecting introductions to law firms' General Counsel and Risk Directors/Partners;
- production of a leaflet, "How will relationship management work?" in both printed and PDF form;
- writing articles and news items which appeared in SRA Updates, The Law Society Gazette and on the Legal Futures website, several of which were re-reported in other legal periodicals and newsletters. The articles/items indicated that the Relationship Management team was looking for small and medium-sized firms to participate in the pilot;
- broadcasting a Twitter "tweet" about relationship management;
- meetings with representatives of the black and minority ethnic (BME), Lawyers with Disability and Women Solicitors sections;
- a presentation to BME solicitors in Birmingham;
- presentations to groups of risk partners and managers in Bristol, Birmingham and Manchester;
- meetings with a number of firms which had expressed an interest in OFR-related issues; and
- broadcasting webinars relating to relationship management.
As a result of this stakeholder engagement, the Relationship Management team received expressions of interest to participate in the pilot from over 60 firms.
2. Stages of engagement
Stage 0 – Initial contact with firms to discuss possible inclusion in the relationship management pilot (RMP) and what it would entail, (check that the potential participant firm meets the relationship management eligibility criteria) and poses sufficiently significant risk to our regulatory objectives to justify supervision by relationship management (RM). Once firms agreed to participate, they were sent a formal engagement letter allocating relationship managers to participant firms and attaching an information sheet on how relationship management would work.
Stage 1 – Risk Assessment - included the following stages: obtain/confirm basic data about the participant firm using desk-based review including information from the Risk Centre and media scans.
Stage 2 – Initial Engagement - involved obtaining more detailed information from participants about the firm's business model, governance and arrangements for compliance and risk management etc (similar to a pre-pilot visit), meetings often involved receiving a form of Risk Register or Risk Matrix capturing the firms own assessment of risks for the RM's to review, as well as other relevant documents e.g. policies and procedures.
Stage 3 – Further Engagement - this involved a series of visits based on an assessment of risks informed by data and information gathered at stage 2 and the individual firm's perceptions of risk, often captured in the firm's Risk Register. This stage combined further information gathering and understanding with a discussion of specific risk and compliance issues. It also involved continual media scans to keep abreast of developments at individual firms. During this stage firms tended to raise specific issues with us, resolving these often involved interaction and information from other units of the SRA e.g. Forensic investigations, Ethics and Guidance.
Stage 4 – Review - leading back to Stage 1 this involves a risk assessment using internally developed tools evaluating whether risks had been addressed or mitigated.
3. Stakeholder engagement during the pilot
Members of the team have given OFR-related presentations on 24 occasions at a variety of conferences, roadshows, webinars and group meetings. These have included:
- The Legal Services Act conference - London, September 2010;
- Connect2Law Annual Conference - Manchester, October 2010;
- Regulation and Monitoring of Solicitors Conference - London, October 2010;
- LMS Lexel Quality Forum - London, October 2010;
- Locktons Autumn Solicitors Conference - London, November 2010;
- Relationship Management Webinar for Sole Practitioners and Small Firms, November 2010;
- Devon and Somerset Law Society meeting - Torquay, December 2010;
- Worthing Law Society's AGM - Worthing, February 2011;
- Relationship Management Webinar for Sole Practitioners and Small Firms, February 2011;
- Global LPO Conference - London, March 2011;
- Various SRA OFR Roadshows in May and June 2011;
- Society for Computers and Law - London, June 2011;
- Roadshow recap webinar, June 2011; and
- COLP and COFAs webinar, July 2011.
Team members have also attended the following events and reference group meetings which have provided opportunities to network with general counsel, risk directors and compliance managers from many of the larger firms:
- Law Society conference on outsourcing - London, September 2010;
- Financial Assurance Reference Group meeting - London, September 2010;
- BME / OFR event - Midlands, December 2010;
- Lawyers with Disabilities Division Committee Meeting - London, December 2010;
- SRA Reception - London, January 2011;
- Legal Week - Future of Legal Services Forum - London, April 2011; and
- 4th Compliance for Law Firms event - London, June 2011.
During the same period, members of the Relationship Management team have written or been interviewed in connection with various articles/reports in the following external publications. There have been a number of other articles about the pilot project in internal SRA publications.
- The Law Society Gazette (August 2010);
- Legal Futures (August 2010);
- Legal Week (November 2010);
- Global Business Magazine (June 2011)
4. Examples of time/cost utilisation of specific pilot firms
Global/City firm
| No of engagements |
5 |
| Hours of engagement |
28 |
| Preparation and follow up (hours) |
43.5 |
| Travel time (hours) |
30.5 |
National firm 1
| No of engagements |
9 |
| Hours of engagement |
68.5 |
| Preparation and Follow up (hours) |
36.25 |
| Travel time (hours) |
65.5 |
National firm 2
| No of engagements |
4 |
| Hours of engagement |
30 |
| Preparation and follow up (hours) |
49 |
| Travel time (hours) |
54 |
Sole practitioner firm
| No of engagements |
4 |
| Hours of engagement |
10 |
| Preparation and follow up (hours) |
4 |
| Travel time (hours) |
23 |
Totals
| |
Sole Practitioner 1 |
National Firm 1 |
National Firm 2 |
City/Global |
| Hours of engagement |
10 |
68.5 |
30 |
28 |
| Preparation and follow up (hours) |
4 |
36.25 |
49 |
43.5 |
| Travel time (hours) |
23 |
65.5 |
54 |
30.5 |
| Total time (hours) |
37 |
170.25 |
133 |
102 |
5. Equality impact assessment
View the equality impact assessment on relationship management.
Notes
1 In this report, references to "Large" or "Larger" firms refers to National and Regional firms unless the context suggests otherwise and excludes Niche, Local and Sole Practitioner firms.
3 Ibid
2 Set out in an IMF Staff Position Note (The Making of Good Supervision: Learning to Say "No"), 18 May 2010.