Outcomes-focused regulation

How will relationship management work?

Introduction

The SRA is transforming its approach to regulation. We are implementing a risk- based, outcomes-focused approach (OFR) which is designed to be proportionate, targeted and effective. OFR is focused on delivering good outcomes for both consumers of legal services and the public interest.

"Proportionate, targeted and effective" means that in certain circumstances it may be appropriate for us to supervise some firms using dedicated resources―an approach we refer to in our consultation papers as relationship management (RM). RM may be one of a range of approaches which we would consider deploying to supervise a firm according to our assessment of the relevant risks.

We are running a pilot of our proposed RM model from Autumn 2010 to Summer 2011. The pilot follows on from a programme of pre-pilot visits we made earlier this year to a small number of commercial firms in the City. The pilot will provide us with a means of trialling various aspects of this form of supervision and an opportunity to consider how it might operate alongside other potential supervisory approaches.

Among the questions we wish to test in the RM pilot are:

• whether it is ever proportionate to supervise any firms using dedicated staff/teams;
• 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 both;
• whether there is a need for specialist supervisory expertise to understand the business model of certain firms; and
• the potential decision-making criteria for applying dedicated supervisory resource to particular firms.

We intend to work with a group of up to 15 firms of a variety of sizes, business types and geographic locations to test our proposed RM model.

This paper outlines the key characteristics of the pilot and explains how you can learn more about it.

What is RM?

Our approach to supervision under OFR is set out in paragraphs 62 to 67 of our April 2010 consultation paper "Outcomes-focused regulation – transforming the SRA's regulation of legal services".

In summary, the aim of our supervisory activity is to help firms improve standards, reduce risk for consumers and enhance the reputation of legal service providers. Our supervisory focus will be on the outcomes achieved rather than on the processes used to deliver them, although where warranted, more intensive analysis of activities and judgements may be required. The form of supervision we use for a particular firm will be tailored to take account of the risk it poses, its management of risk, its size and approach to and history of compliance. RM is one of a range of supervisory approaches we are developing and trialling.

How will the RM pilot work? An overview

Our model for RM is based on the multi-stage process outlined below. We have described the process in this way to emphasise how our relationships with RM supervised firms might develop through the stages of information gathering, analysis, contact and review. However, in practice we do not expect each relationship to follow precisely the same course. Indeed, in some cases we would expect some of the listed stages to be combined and the RM process to operate with considerable flexibility.

We will use lessons learned and feedback received in relation to the RM pilot to inform the roll-out of RM after October 2011. We also aim to provide regular updates on the progress of the pilot, guidance on preparing for dedicated supervision and the development of the RM model in general.

What information would the SRA require my firm to provide for the purposes of the pilot?

At Stage1 we may require information about your corporate governance structures and an outline of the arrangements you have in place to manage risk and compliance.

If your firm participates in the pilot, Stage 2 of the process will involve you providing more detailed information to us. The most convenient approach is likely to be for pilot firms to give short presentations to our relationship managers on and answer questions about their governance and risk-management systems.

Stage 3 will involve our relationship managers asking each pilot firm to produce an RR and a form of RCP.

Stage 5 – we deal with Stage 5 meetings and contact calls below.

What are risk registers and regulatory compliance plans?

To assess the regulatory risk a particular firm poses we need to receive information from it about its own perception of the risks it faces, including the extent to which other risks for example operational, strategic, business and financial risks might impact on regulatory risk and to understand the arrangements it is making to mitigate these risks. As a matter of good risk-management practice many firms periodically record this information by means of an RR or risk matrix.

Firms which participate in the pilot will also be asked to produce an RCP. This will be a firm's plan for how it proposes to address the regulatory risks identified in the RR.

What factors will shape the Stage 5 programme of RM meetings?

We envisage that during the pilot, each programme will provide for at least monthly contact between our relationship managers and the pilot firms they are working with.

Relationship managers will propose a programme of Stage 5 meetings and/or telephone calls for the pilot period with each pilot firm based on a risk assessment of their RRs and RCPs. However, relationship managers will reserve the right to revise the Stage 5 programme to take account of issues both emerging from earlier meetings and in the broader environment.

A typical Stage 5 meeting during the pilot might comprise the following steps:

• The lead relationship manager asks their contact whether any significant risk or compliance-related issues have arisen in the firm since the last meeting;
• The relationship manager to inform their contact of emerging risks or other issues which we identify for discussion or review;
• Deal with matters arising from the previous meeting (e.g. answers to outstanding questions raised by the relationship manager about features of particular systems or structures);
• Focus on the system or structure selected for the meeting in the Stage 5 programme with a presentation given by the contact and then questioning and challenges raised by the relationship manager; and
• AOB.

Which Code will apply to the RM pilot?

Before October 2011, the 2007 Code of Conduct will continue to be the relevant code for supervision purposes. However, so far as possible, we intend to use the pilot to trial how RM firms will respond to the requirements of OFR after October 2011.

Will pilot firms be expected to be prepared for OFR before October 2011?

During the pilot we will encourage participating firms to develop their plans for the transition to OFR and to discuss how the transition process is progressing.

Since OFR will allow firms to choose how to deliver the outcomes required by the new Code, firms will also have flexibility about how to demonstrate that particular outcomes are being achieved. We envisage that Stage 5 meetings will include discussions about these issues, particularly once the contents of the new Handbook are confirmed.

What if a rule breach comes to light during the pilot?

We will expect pilot firms to bring significant rule breaches of the 2007 Code of Conduct to the attention of their relationship manager together with proposals for resolving the breach. In that instance, the relationship manager would work with the pilot firm to put things right (see paragraphs 23 and 24 of our April consultation paper). We will not seek to take enforcement action either on reasonable decisions made in good faith or in respect of a firm or individual that has run into problems but shows the willingness and capability to work with us to put things right. However, enforcement action will be necessary where there is serious misconduct or a risk to the public which cannot be mitigated.

What will happen at the end of the pilot?

At the end of the pilot (Stage 6) we will review whether supervision by means of RM is an appropriate approach going forward for each of the pilot firms and, if so, the frequency and depth at which RM should continue for each firm after the introduction of OFR.

Key points

Firms selected for the pilot will need to nominate a partner, director or manager as the primary point of contact for our relationship managers. The nominated person must be familiar with the firm's business model, governance and arrangements for compliance and risk management and have sufficient time available to attend the contact meetings scheduled during the pilot period. We would also expect the nominated contact to be familiar with our plans to move to OFR. We may also wish to engage with other partners or staff within a pilot firm in relation to specific issues.

During the course of the pilot we will expect pilot firms to produce and develop plans setting out how they will deal with the transition from the current regulatory obligations they face to the requirements of the new Handbook.

We will answer any queries you may have arising from this paper and in due course aim to publish an FAQ sheet on the SRA website dealing with commonly raised issues.

Contact

If you have any queries, please email relationshipmanagers@sra.org.uk or write to

Solicitors Regulation Authority
24 Martin Lane
London
EC4R 0DR

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