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Closed consultations

Outcomes-focused regulation - transforming the SRA's regulation of legal services

28 July 2010


Executive summary

The SRA is transforming its approach to regulation for the benefit of consumers. We recognise that significant reform of our traditional approach is necessary if we are to be a "fit for purpose" regulator fit for the new legal landscape brought in by the Legal Services Act 2007.

In particular, we recognise that

  • our current rule book is detailed and prescriptive. It tends to lead to the use of resources which could better be deployed on higher-risk areas and doesn't help us to get the best out of our relationship with the profession. Even in the current marketplace it becomes increasingly difficult for detailed rules to keep pace with change. This will be even more so with the liberalised legal landscape starting in October 2011. A rule book needs to be fit for purpose;
  • our regulatory approach needs to be more effective, proportionate and targeted so we can consistently regulate a greater range of legal service providers with a targeted, risk-based approach.

Consequently, the SRA will move to a system of outcomes-focused regulation (OFR) which will offer

  • a better focus on making sure firms offer good standards of service to consumers; and
  • good firms more flexibility in how they operate their businesses.

This transformation will involve

  • changing the way the SRA delivers its regulatory objectives,
  • changing the relationship legal service providers have with the SRA, and
  • further development of SRA staff skills and competencies.

How will we deliver OFR in practice? Our approach will include

  • working with firms to focus on acting in a principled manner to deliver good standards of service to clients, rather than compliance with detailed rules;
  • a sophisticated desk-based research and analysis capacity to assess potential risks to the regulatory outcomes and support the delivery of targeted proactive regulatory action;
  • an approach to authorisation that is risk and evidence based, making sure that legal services are delivered by principled and competent firms and individuals;
  • an approach to supervision which encourages firms and individuals to tackle the risks themselves, allowing us to concentrate on those who can't, or won't put things right;
  • an approach to enforcement which creates a credible deterrent and is effective, fair and proportionate; and
  • concentrating our resources on dealing with those firms who pose a serious risk to our regulatory objectives, such as protecting and promoting the interests of consumers.

We want to foster a flexible and innovative market for legal services, combining improved access to justice with assured standards. For that reason, our plans for OFR will be introduced at the same time as the framework permitting alternative business structures (ABSs) in October 2011.

Flexibility, not lower standards, is the keynote of the new regime. Firms will be able to show compliance in ways best suited to consumers and their businesses. The SRA will act flexibly in its regulatory dealings, improving effectiveness and efficiency.

The risk-based approach will focus on the things which really matter to consumers and legal service providers. OFR is not light-touch regulation, it is effective regulation. It turns the page to a new chapter in the relationship between consumers and the law.

The purpose of this document is to set out our approach to this transformation and seek your views to influence and shape our thinking.

I. Introduction

  • 1. The SRA is transforming its approach to regulation and how we relate to and work with providers of legal services. Against a background of significant and welcome modernisation of the legal framework for the delivery of legal services, we will deliver a risk-based approach to regulation, focused on supporting delivery by providers of legal services of good outcomes for consumers and the public interest.
  • 2. In particular, we recognise that significant reform of our traditional approach is necessary if we are to be a "fit for purpose" regulator in the new legal landscape brought in by the Legal Services Act 2007.
    • Our current rule book is too detailed and prescriptive and doesn't help either the profession or ourselves to get the best regulatory outcomes or develop a relationship based on trust and confidence. It needs to support and not hinder innovation for the benefit of consumers and encourage a much stronger focus by firms and by us on the overall quality of legal services.
    • Our regulatory approach needs to be more effective, proportionate and targeted. Historically, we have spent too much time dealing with low-level issues, making it harder to focus on what is really important. We need to significantly improve our capacity to identify and deal with high-risk issues.
  • 3. Our new approach will have far-reaching implications for all the firms and individuals we currently regulate, the ABSs we plan to regulate from 6 October 2011, and for consumers of legal services. The purpose of this document is to set out our approach to this transformation and seek your views to influence and shape our thinking.

II. Background

Legal Services Act (2007)

  • 4. The Legal Services Act 2007 (the "Act") sets out a new regulatory framework for regulators and the ownership of legal service providers. It created the Legal Services Board (the "LSB") which is responsible for overseeing legal regulators, including the SRA.
  • 5. The Act enables new forms of legal practice to develop
    • legal disciplinary practices ("LDPs") which are firms involving different kinds of lawyers, and up to 25 per cent non-lawyers, but still providing traditional legal services, and
    • ABSs which will allow external ownership of legal businesses, multidisciplinary practices (providing legal and other services) and many variants.
  • 6. On 31 March 2009, the SRA implemented a package of amendments to its rules and regulations to support LDPs and firm-based regulation.
  • 7. The SRA will apply to the LSB to become a designated competent licensing authority ("LA") in order to be able to license and regulate ABSs. We intend to make our application early in 2011, with a view to licensing our first ABS on 6 October 2011.

SRA's January 2010 Strategy Paper: "Achieving the Right Outcomes"

  • 8. "Achieving the Right Outcomes" set out our intention to move to OFR and sought initial views of consumer groups, the profession and all those with an interest in legal services. We received 23 responses to the strategy paper. These were from law firms, consumer groups, trade associations and third parties. The overwhelming majority of those who responded were in favour of our move to OFR. The benefits of the approach were seen to include:
    • "This is the best way of putting the client's interest foremost in the minds of those who practise law."
    • "It represents a move away from the current box ticking micro regulatory approach."
    • "It avoids unnecessary rules, improves the effectiveness of the regulator for more proportionate supervision".
  • 9. However, there were cautionary comments:
    • " The SRA must send a clear signal that OFR does not mean lax regulation"
    • "A proper balance must be struck between consumer protection and unnecessary intervention into the way firms manage their affairs."
    • "The new approach may result in increased costs, excessive administration burdens and lack of clarity".
  • 10. There were specific comments about the SRA's capacity to move to the new approach:
    • " SRA needs to maintain sufficient resources to investigate and bring enforcement proceedings against those firms and individuals who commit serious breaches".
    • "This new approach may require more and more sophisticated resources within the SRA".
  • 11. Comments also covered the following issues:
    • the need for enforcement sanctions to bite on senior managers in firms as well as the individuals involved,
    • the importance of the independence of the legal profession,
    • mechanisms the SRA might use to assess risk,
    • the need for the SRA to build a capacity for early intervention in those firms not taking prompt and necessary remedial action.
  • 12. The responses to "Achieving the Right Outcomes" have reinforced our decision to pursue an OFR strategy, and have helped to inform the development of our new approach to regulation. Many of the issues raised are covered in this consultation paper. A summary of our responses to the feedback we received is set out in Annex C.

III. A new approach to regulation

  • 13. The SRA is moving from being a rules-based regulator, primarily responding reactively to individual rule breaches, to an outcomes-focused, risk-based regulator. By 6 October 2011 we expect to have achieved important first milestones, including
    • introduction of a new outcomes-focused Code of Conduct as part of a new Handbook of all of our regulatory requirements,
    • using an explicit risk-based and outcomes-focused approach to our authorisation, supervision and enforcement activities; and
    • licensing our first ABSs.
  • 14. This transformation will involve
    • changing the way the SRA delivers it regulatory objectives,
    • changing the relationship the profession and the providers of legal services have with the SRA,
    • further development of SRA staff to ensure we have the necessary skills and competencies to deliver the new approach.
  • 15. Our goal is to use our resources cost-effectively to maximise our delivery of the regulatory objectives set out in the Legal Services Act 2007, namely
    • (a) protecting and promoting the public interest,
    • (b) supporting the constitutional principle of the rule of law,
    • (c) improving access to justice,
    • (d) protecting and promoting the interests of consumers,
    • (e) promoting competition in the provision of services,
    • (f) encouraging an independent, strong, diverse and effective legal profession,
    • (g) increasing public understanding of the citizen's legal rights and duties,
    • (h) promoting and maintaining adherence to the professional principles.
  • 16. We believe we can best achieve this goal through using our resources to
    • support and encourage good, professional and ethical legal services delivered with integrity;
    • focus on the important regulatory outcomes that must be achieved, rather than the means of achieving them, allowing the providers of legal services the flexibility they need to compete and innovate, particularly in the new legal services environment; and
    • proactively identify and mitigate important emerging risks rather than simply reacting to risks which have already crystallised.
  • 17. Our approach includes
    • (a) ensuring that the requirements on firms are more focused on acting in a principled manner to deliver desired outcomes, rather than compliance with over detailed rules. We will do this by lifting the binding regulatory requirements ("rules") to the level of principles, stating the clear outcomes to be achieved where possible;
    • (b) a sophisticated desk-based research and analysis capacity to assess potential risks to the regulatory outcomes and support the delivery of targeted proactive regulatory action;
    • (c) an approach to authorisation that is risk and evidence based, making sure that legal services are delivered by principled and competent firms and individuals;
    • (d) an approach to supervision which encourages firms and individuals to be open and honest in their dealings with us, that helps and encourages them to tackle the risks themselves wherever possible, allowing us to concentrate on those who can't, or won't put things right;
    • (e) an approach to enforcement that is effective, fair, proportionate and creates a credible deterrent;
    • (f) the delivery of consistent regulatory protection across the profession to ensure that no entity or individual delivering legal services is at an unnecessary comparative disadvantage as a result of our regulation;
    • (g) concentrating our resources on dealing with those firms who pose a serious risk to our regulatory objectives, such as protecting and promoting the interests of consumers. This means we will make decisions not to address matters we judge to be of low risk and impact, and will accept the risk that entails; and
    • (h) delivering better value for money. Concentrating our resources on the greatest areas of risk, will make us more cost effective.

Questions

1. Do you have any comments on our goals and vision for OFR?

IV. The new regulatory experience for consumers

  • 18. Consumers of legal services will be key beneficiaries of the new approach with its central focus on consumer protection, the quality of consumers' experience of legal services and enabling consumers to understand what they should expect from their legal service providers.
  • 19. The most recent stakeholder report (2009) shows that we assessed 11,100 reports or other items of intelligence from consumers and third parties in 2009. These ranged from issues unlikely to be misconduct, but nevertheless prompted a complaint, through to serious reports of fraud.  These volumes indicate that regardless of the veracity of these reports, there are many people who do not believe they are getting the outcomes they expect from their experience of the legal services sector.
  • 20. The Legal Services Act 2007 provides consumers with two strong pillars of protection. Individual complaints handling and redress will sit with the Legal Ombudsman (LeO) and broader regulation to create an environment to minimise the need for redress is the job of regulators, including the SRA. This means that we will refer redress or restitution for consumers and other third parties for wrong doing by a firm or individual to the LeO. We will maintain a strong relationship with the LeO and use our resources to extract relevant regulatory information from complaints to help inform our understanding and judgement about emerging risks. We will use individual complaints and information as evidence in our analysis of risks on a broader level.
  • 21. This means that, while all individual complaints may be pursued through the LeO, there will be many such complaints which will not be pursued by the SRA because, of themselves, they do not justify regulatory action (though some may, in conjunction with other complaints, give rise to such action). While this approach is clearly justified in the public interest, it can give rise to a perception amongst complainants that the SRA "isn't interested" in their concerns. It will be important for us to work with the LeO, with the LSB's Consumer Panel, and with other consumer organisations to ensure that we explain our approach to consumers of legal services.

Questions

2. Are there particular things we should consider to ensure that consumer protection and the public interest remains central to our regulatory approach?

3. How do you think we should work with consumers to help them to understand our role as a regulator for the wider benefit of consumers as distinct from the LeO's role in facilitating individual redress where appropriate?

V. The new regulatory experience for firms

  • 22. Firms will experience a different relationship with the SRA. With more efficient risk management based on information collected from a number of sources, including firms, the emphasis will be on proactive engagement throughout the lifetime of a firm. Table 1 sets out the overall approach.

Table 1

Diagram depicting the relationship between the SRA's risk assessment and firm supervision - see paragraph 23-26 for details

  • 23. The SRA's successful move to OFR will require the majority of firms and individuals to take responsibility for identifying and managing the risk of not delivering the required principles and outcomes, acting ethically and professionally, exercising judgement on how to deliver good outcomes and engaging positively with us when difficult issues emerge. Firms that can do this will then be allowed to get on with running their businesses, leaving us free to focus our resources on the small minority of firms and individuals that cannot or will not comply.
  • 24. We realise this entails a high degree of confidence between us and the firms and individuals we regulate and we recognise that we have much to do to build this confidence. Good firms and individuals will need to be confident that we will not seek "to catch them out", taking 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. Good firms will also want to be confident that we take decisive action against those who make bad decisions or represent risk to the public.
  • 25. As a first step to building this confidence we have set out our proposed approach to constructive engagement and enforcement in Annex A and welcome comments on this strategy as a part of this consultation.
  • 26. Other new developments for firms include
    • "rules" that specify principles and outcomes rather than prescribing the approach that should be taken to how those outcomes should be delivered—although rules may still be necessary in high-risk areas;
    • significant shift of supervisory emphasis towards assessing whether firms' risk management and controls are likely to exacerbate or mitigate risk. Firms with good systems are likely to experience a less intrusive relationship with the SRA;
    • more supervisory analysis of whether firms are achieving the specified outcomes and much less emphasis on the detailed approach firms take;
    • SRA supervisors and investigators who understand particular firms' business models and know what good risk management and good outcomes for clients look like;
    • new regular reporting and notification requirements on firms as part of the authorisation process and continuing monitoring in order to assess risk;
    • The annual renewal process for current firms (recognised bodies and recognised sole practitioners) will be replaced by a requirement for all authorised bodies to pay an annual fee and to provide an annual information report. This will sit alongside the annual renewal of practising certificates and registered European lawyers/registered foreign lawyers registrations which remain unchanged;
    • less supervisory attention to areas of a firm's business we consider to be low risk and more intensive attention to high-risk areas. Going forward, SRA visits are likely to be focused on key matters rather than broad-ranging reviews;
    • new requirements to ensure that those managing a firm have clear lines of responsibility for compliance with the SRA's principles and outcomes, and for competent running of the firm's business. These requirements will be outlined in the consultation on the new Handbook of regulatory requirements that will be published in May.

Information from firms

  • 27. A risk-based regulator needs information from many sources in order to assess risk. This includes the broader economic environment, market-specific information and information from those it regulates.
  • 28. At present, the SRA collects little data from firms. We have already begun to consider our information needs in relation to our interest in the financial stability of firms. Our findings on this matter are reported in more detail in Annex B. Over the next few months, we will enhance this analysis with an assessment of the overall information needs for risk-based regulation with a view to consulting on reporting and notification requirements in October (some high-level reporting and notification requirements will be consulted on in May). We will be engaging with stakeholders in our approach to this issue, which will also be informed by an impact assessment, an understanding of the risk of collecting too much information, our own readiness to capture and analyse information, and the need to minimise the burden on firms.

Questions

4. Do you have any comments on the key implications for firms set out above?

5. Are there other implications we need to consider?

6. Do you have any comments on how the SRA and firms can work together to build the necessary degree of trust and confidence for the move to OFR?

VI. A new Handbook of regulatory requirements

  • 29. Our intention is to bring all of our regulatory requirements (the Code, Accounts Rules, Licensing Rules, special bodies etc.) into one online Handbook which will be a single source for all those we regulate. The new Handbook will be finalised and published in April 2011 and implemented on 6 October 2011.
  • 30. The first consultation on the new Handbook will take place in May followed by a second consultation in October this year. The May consultation will include, amongst other things, the new Code of Conduct, the new licensing rules and changes to the accounts rules. There will still be "rules" in the Handbook (such as the Accounts Rules and the Licensing ules). However our aim is to remove as much unnecessary detail and prescription as possible.
  • 31. In particular, a redrafted Code of Conduct is central to our implementation of OFR. It concentrates on providing positive "outcomes" which are standards of service that all involved in the provision of legal services will wish to deliver in order benefit consumers of legal services and the public.
  • 32. The new Code of Conduct will set out the key principles and outcomes which must be achieved and the objective is to remove or rationalise much of the detail contained in the current Code. The core of the Accounts Rules is likely to remain much the same, reflecting our judgement of what is necessary to manage risks to client money. However, these are being re-drafted in a more outcomes-focused way and the guidance in these rules will not be mandatory—see Table 2 below by way of example.

Table 2

Diagram illustration a high-level overview of the new Code of Conduct - see paragraphs 33 to 36

  • 33.Principles, which will be mandatory, will govern all of the activities of firms and individuals and will apply across the entire Handbook. We will be consulting on the ten principles in May.
  • 34. In the new Code we will define the outcomes we expect firms to achieve. These will also take the form of binding regulatory commitments.
  • 35. Principles and outcomes will be supported by two types of non-mandatory material: indicative behaviour and guidance.
  • 36. We will use indicative behaviour provisions where we have a strong view of some of the behaviours we would and would not expect to observe in firms complying with the outcomes. Firms will not be obliged to follow these provisions and while in the absence of the indicative behaviours SRA supervisors will start from the presumption that there is a risk to the firm's delivery of the outcomes, a firm will still be free to demonstrate that it is using effective alternative methods of compliance.
  • 37. By contrast, guidance provisions are intended to be purely helpful material, setting out one way but not the only way firms might deliver the outcomes. The SRA will make no assumptions about a firm that does or does not take account of the guidance we issue, although this might be relevant as part of the overall context of a firm's behaviour.
  • 38. We will consult on the principles, outcomes and indicative behaviours in May and the guidance in October and will be using the consultation period following the publication of the May paper to work with firms on the type of guidance we should include in the final Handbook.
  • 39. We are interested in hearing views on whether representative bodies or others see a role for themselves as providers of guidance under the new approach. We would like to explore this point with our stakeholders including a consideration of such questions as whether and in what circumstances the SRA might provide some sort of recognition of such guidance, and whether we might include the guidance in our Handbook or links to this guidance.

VII. OFR in operation

  • 40. We are undertaking a review of all of our regulatory operations with a view to assessing the changes we need to make to become an OFR risk-based regulator. In particular, we need a framework which underpins a strategy of using our resources to identify and address the major emerging risks. The core components of our OFR framework are set out in Table 3. Our high-level thinking on each component part of the framework is set out in the remainder of this section.
  • 41. This will build on the work that we have been doing over the last two years, namely:
    • in February 2008, decision-making guidelines were agreed and published, followed by 11 principles of regulatory decision making in 2009;
    • a new risk assessment process was fully implemented in early 2008 through the creation of a Risk Assessment and Designation Centre (RADC) for all non-confidential reports of possible misconduct; and the upgrading of assessment processes applied to all confidential reports by Fraud Confidential Intelligence Bureau;
    • engaging with various practitioners groups—such as the Solicitors Sole Practitioners Group and black and minority ethnic groups such as the Black Solicitor Network, through roadshows, focus groups and consultations, to develop our understanding of the impact of regulation.

Table 3

Diagram illustrating OFR in operation - see paragraphs 43 to 53

The Risk Centre

  • 42. Our priority is to address the following types of risk:
    • risks to the regulatory objectives, including risks that might arise from the wider economic environment, such as an economic down turn;
    • the risk that firms' actions and that of individuals will be inconsistent with the 10 overarching regulatory principles in the Handbook; and
    • the risk that firms will not comply with the outcomes and other binding regulatory commitments in the Handbook.
  • 43. We are particularly concerned to address risks that may
    • impact on a significant number of consumers and/or third parties in a way that they cannot reasonably foresee or protect themselves from, where this impact may lead to a loss of their money, justice, or social or economic wellbeing; and
    • significantly impact on the public good that arises from the provision of competent and ethical legal services that also serve the higher public interest in the rule of law.
  • 44. We need to devote our resources to the most important of these risks, and to explicitly take the necessary decisions to not address less important issues.
  • 45. The Risk Centre will be at the heart of delivering and coordinating the proactive assessment of risk necessary to support these decisions. The objective will be to obtain, analyse and deploy information from a range of sources in order to understand the changing legal marketplace and to understand the risk to our objectives which may come from
    • the behaviour of firms we regulate,
    • our own internal operations,
    • broader economic and sector developments.
  • 46. We will continue to make our broad risk assessments available to our stakeholders. In addition we will publish an annual outlook of emerging risks and key areas of focus for firms.
  • 47. As part of assessing firm and individual risk, we will use information from a wide range of sources including
    • the firm or individual (as requested/collected by the SRA),
    • from consumers (by means of complaint/information),
    • from third parties,
    • from sources of intelligence including intelligence on unauthorised activity and criminal behaviour,
    • market research.
  • 48. As discussed in Section V, we will need additional information from firms in order to risk assess more effectively. We will ensure we will make efficient use of the information we collect, that the information is necessary for our risk assessment function, and that we do not place an undue burden on firms by gathering information which we do not use.
  • 49. We may collect information from firms in the following ways:
    • as part of the authorisation process (e.g. compliance and business plans),
    • on an annual/periodic basis,
    • ad-hoc requests for information arising from thematic risk work,
    • event-driven reporting.
  • 50. Some information requirements will be consulted on as a part of the May consultation, but the main consultation on reporting and notification requirements is scheduled for October this year.
  • 51. Assessment of market and macro-economic risk will set firm and individual risk in context and will help us to assess emerging systematic risks. We will analyse political, economic, social and technological risks as part of this approach, and use these assessments to build a capacity for scenario mapping and stress testing.
  • 52. We will develop further risk assessment tools to support our delivery of targeted, proportionate, consistent supervision that varies according to different factors such as size of firm, risk profile and sophistication of the firm's own internal management systems.
  • 53. An example of one way the Risk Centre will work relates to the very useful intelligence we receive and wish to continue to receive on how the legal services market is working and where potential problems might arise—see tables below.
SRA current activities
We receive a report of a single firm operating a misleading website regarding fees charged for conveyancing.
A caseworker allocated to look at the issues will check the firm's website to assess the allegation which has been made about potentially misleading information.
The caseworker concludes that the information is indeed misleading and contacts the firm.
The firm complies with requests to make changes to its website and a follow-up check confirms the appropriate changes remain in place.
The firm has responded positively and no enforcement action is necessary.
SRA OFR activities
The risk unit within the SRA runs an issues profile.
Web searches are carried out looking for other firms who may have similarly misleading publicity. This profile determines that other action is required.
The SRA published guidance on its website and contacts the other firms involved to discuss compliance issues with them.
Other firm-based action may be required depending upon the attitude and approach of other firms to compliance.

Questions

7. Do you have any comments on the central role of the Risk Centre in our move to OFR?

8. Do you have any other suggestions for the activities the Risk Centre will undertake?

9. Will firms understand our need to receive information from them in order to undertake high quality risk assessment?

Authorisation

  • 54. Authorisation is the process by which the SRA recognises and licenses an individual or firm to practise law. Authorisation and reauthorisation are important gateways for risk-based regulation. The objective is to allow only those firms and individuals who are capable and willing to act ethically and deliver good outcomes for clients, to deliver legal services.
  • 55. We will take a risk-based approach to authorisation and the process will become more rigorous and evidence based than at present, including a greater use by us of due diligence checks on individuals and firms.
  • 56. Under the provisions of the LSA, we will authorise ABSs on an activity basis. This will help us to manage risk by enabling a more bespoke approach to authorisation. It will also help firms to practise who might be able to provide some good legal services but are not suitable providers across the piece. This approach raises a more fundamental question of whether over time we should move to authorise non-ABS firms and solicitors and their firms on an activity basis. We will be considering this question and seeking comments at a later date.

Operation of authorisation

  • 57. When an application is made by a new firm, we will analyse the information we receive about the proposed structure, governance and systems for compliance within the firm's business model. We may request additional information and undertake further investigations in order to form a view on whether or not authorisation should be granted.
  • 58. We may consider at the application stage whether conditions on an authorisation are necessary to mitigate any perceived risk to consumers and our regulatory objectives. This could arise in any number of ways including
    • concerns about the extent of external influence,
    • risk issues emerging from a business model, and
    • risk issues arising from proposed arrangements to obtain business.
  • 59. We will retain the ability to revise any conditions placed on authorisations, either to remove them or add to them. This would be done ideally in close cooperation with the firm and would cover circumstances such as
    • an ABS wishing to amend its permitted activities;
    • the SRA judging it necessary to amend an ABS's permitted activities.
  • 60. At the level of individual solicitors, we will strengthen and develop the critical link between minimum education and training requirements for entry into the profession and maintaining good standards thereafter, for example use of compulsory reauthorisation. In addition we will undertake risk-based checking of individuals applying for Practising Certificates (PC) and will develop an approach to ongoing risk-based vetting of individuals at the point of PC renewal, including periodic CRB checks.
  • 61. Finally, our intention is to move away from an annual renewal process for firms, to be replaced by a requirement for all authorised bodies to pay an annual fee and to provide an annual information report. This will sit alongside the annual renewal of practising certificates and registered European lawyers/registered foreign lawyers registrations which remain unchanged.

Questions

10. Do you have any comments on our proposed approach to authorisation?

Our supervisory approach

  • 62. Supervision is the risk-based oversight of the entire regulated community. The aim of our supervisory activity will be to continue to help firms improve standards, reduce risk for consumers and enhance the reputation of legal services providers.
  • 63. One focus will be on the quality assurance of the firm's own risk management systems and assessing whether or not firms are delivering the principles and achieving the right outcomes, rather than the detailed processes for delivering outcomes. Where warranted through risk assessment we will undertake more intensive analysis of particular activities including a firm's approach to exercising judgement on how to deliver particular principles and outcomes. Firms will also be assessed on whether their systems produce good outcomes: simply having a system will not be sufficient.
  • 64. Our prime point of contact with a firm will be through a nominated individual and more detail on this point will be provided in the May consultation.
  • 65. Supervision will be tailored, taking into account such factors as
    • the risk posed by the firm,
    • size of the firm,
    • the firm's approach to risk management.
  • 66. We will also take account of
    • positive engagement with the SRA,
    • compliance history, and
    • the firm's ability and willingness to put things right.
  • 67. As a risk-based regulator with finite resources, we will need to make choices on how to supervise, using a range of approaches including
    • permanent relationship management,
    • temporary relationship management,
    • contact management, and
    • other regulatory tools.
Permanent relationship management
  • 68. Large and/or complex commercial firms, including those that are ABSs are likely to have dedicated supervisory staff/teams who have regular contact by means of face-to-face meetings or telephone contact. The ongoing dialogue between supervisors and the firm would concentrate on the firm's internal systems, periodic assessments of whether or not the firm is delivering the required outcomes, and exercise of judgement.
  • 69. In developing our thinking about relationship management we have embarked on a programme of pre-pilot visits to a small number of commercial firms in the City, which will be widened to include a greater range of commercial firms who have established internal systems and governance structures. Two particular questions for the pilot programme to address are whether it is ever proportionate to provide any firms with dedicated staff/teams and whether the proportionality arises as a result of the risk posed, the size and complexity of the firm or a combination of both. The danger of "regulatory capture" must also be addressed, ensuring independence is maintained in regulatory oversight.
Temporary relationship management
  • 70. Permanent relationship management is resource intensive and not practical or proportionate for all the firms we regulate. However, the approach may be suitable on a temporary basis for a wider range of firms, for example new firms and those in the Assigned Risks Pool. Our use of this approach will be evidence and risk based.
  • 71.Example - the SRA becomes aware that a number of firms have become involved in a niche area of practice. The SRA has also received a number of complaints from consumers stating that they are unhappy with the legal service they have received in this area of work. We receive intelligence that some firms involved have employed additional staff specifically to undertake this work who may not be sufficiently experienced. As a result of information we have collected from firms, we are aware that there may be approximately 20 firms dealing with this type of work. Initial risk-based visits have informed us that the compliance issues we find may be more widespread. We decide to relationship manage these 20 firms and allocate dedicated supervisory staff to them. The supervisory staff have continuous regulatory oversight of the firm for an appropriate period of time, and work with firms to mitigate the risk. Regular assessments are made to ensure that the appropriate outcomes are being achieved.
Risk-based visits
  • 72. Building on our current process, firms who are not relationship managed are likely to be visited by us on the basis of a proactive or reactive assessment of risk. This might mean that some firms never receive a visit from us, although we are still considering whether all firms should be visited by us at least once over a period of time, such as five years and would welcome views on this. At the very least, we will have a team of supervisors dedicated to visiting newly created firms and we are already building a team to undertake this work.
  • 73. Even where visits take place, it follows that less supervisory attention will be paid to areas of a firm's business we consider to be low risk and more intensive attention to high risk areas. SRA visits are likely to focus on a few matters, rather than an audit of all areas of a firm's compliance with the principles and outcomes.
  • 74. The only exception to this approach will be any studies we undertake involving random sampling, base lining and monitoring of the delivery of the required outcomes across all of our regulated firms.
  • 75. On this, we expect to undertake an initial baseline assessment of the delivery of the required outcomes later in 2010. We will use a random and representative sample of firms to establish a benchmark picture of the extent to which the required outcomes are being achieved, followed by a subsequent assessment, 12 or 24 months later to measure progress.
"Safe harbours"
  • 76. A key element of our supervisory approach will be on assessing firms' own management and decision-making systems, not making firms' decisions for them or "signing off" particular approaches to delivering outcomes. With over 10,000 firms to regulate we cannot possibly hold ourselves out as able to provide this function, even if we were able to manage the regulatory risk implications. The exercise of judgement and responsibility for achieving the outcomes will remain with the firm. However, where we do observe good practice, we may choose to use this to offer broader guidance to all firms.
The transition between supervision and formal investigation
  • 77. Our regulatory regime will need to manage the transition between intensive supervision, formal investigation and enforcement. Formal investigation will reflect a decision that a serious breach of principles and/or outcomes may have occurred requiring formal action to gather evidence and assess if enforcement is required. At this point, we will take an explicit decision, based on the circumstances, on whether it is appropriate for the relevant supervisors to be involved in the investigation. Our concern will be to deliver an objective assessment, managing the risk either that those supervisors have become too close to the firm or that their views are pre-set.
Low-level, endemic non-compliance
  • 78. It is implicit in the discussion in this paper and some of the examples provided that we anticipate a need to identify and deal with endemic non-compliance that may go undetected and unaddressed by us (apart from possibly as a result of redress through the Legal Ombudsman) if it were to occur in only a few firms and therefore not attract a sufficiently high-risk weighting.
  • 79. We wish to make it clear that we will be using information, such as consumer complaints, to identify where there may be systematic non-compliance and will deal with it appropriately through guidance, supervisory activity or though taking firm enforcement action to deliver a change of behaviour by all relevant firms and individuals.
Example

The Risk Centre's analysis of the data on consumer complaints picks up an increasing number of complaints about firms' failure to notify clients of their policy on paying interest on client money. The SRA is concerned to tackle this behaviour and prevent it from undermining the outcome that firms must ensure their clients are in a position to understand the basis upon which they are receiving legal services. The SRA visits a sample of firms, discovers a high percentage of poor practice and decides to address this through a combination of softer regulatory tools across the types of firm being most complained about (for example, "Dear Managing Partner" letters, and mystery shopping) and exemplary enforcement activity directed at firms and individuals who do not demonstrate a willingness or ability to improve practice. Follow-up analysis of complaints is then used to determine whether or not the SRA has successfully changed behaviour and improved standards on this matter.

Regulatory tools
  • 80. Overall, our approach will be to work with conscientious firms to put things right using a range of regulatory tools which we will add to as we develop our experience as an OFR regulator.
  • 81. In addition to the approaches set out above, our initial tools may include
    • "Dear Managing Partner" letters to alert senior management in firms to our views on specific matters and our expectations of firms in relation to those matters;
    • roadshows on particular themes;
    • remedial plans for individual firms to support their improvement of standards;
    • mystery shopping to identify firms who may not be delivering good standards;
    • unannounced visits or visits with little notice; and
    • where a firm is in financial difficulties, overseeing the management and resolution of those difficulties, including an orderly wind-down if necessary.
Contact management
  • 82. The majority of firms and individuals regulated by the SRA will approach the SRA through a central contact management function, such as that currently provided by our contact centre and Ethics helpline. Contact management as a function will take on increasing importance in the move to OFR. In particular, good management of the substance of contact will
    • help us to understand the needs of firms and potential sources of emerging risk, and
    • provide firms with appropriate information and support in their delivery of the required outcomes.

Questions

11. Do you have any comments on our proposed approach to supervision?

12. What might be the particular issues for smaller firms and how might we address them?

13. Are there other regulatory tools we could consider?

14. Is there a role for representative bodies in supporting their members' compliance with the principles and outcomes in the Handbook?

Formal Investigations, Legal and Enforcement
  • 83. Our proposed approach to formal investigation and enforcement is set out in Annex A to this paper. In summary, stakeholders should understand that our objective is to ensure that serious breaches of the principles and outcomes are detected and rigorously enforced, including taking appropriate action against individuals, with the purpose of creating a credible deterrent to others. Our policy on sanctions will drive that credibility and we will publish a paper in due course on our approach to applying penalties, sanctions and other enforcement tools.
  • 84. We will continue to have a Legal and Enforcement function to provide legal advice to the SRA, advise on proposed enforcement action, particularly financial penalties, and to authorise and prosecute Solicitors Disciplinary Tribunal (SDT) cases. We intend this function to provide an internal check and balance function for high profile decision making and support industry learning from enforcement actions. In particular it will
    • function separately from the formal investigations (i.e. investigations to establish whether principles and/or outcomes have been breached),
    • provide an objective evaluation of enforcement proposals,
    • take forward action that is proportionate,
    • set overall enforcement policy and strategy,
    • publicise enforcement action on priority issues to improve standards.

Questions

15. Do you agree with our approach to formal investigations?

16. If not, please explain why.

17. Do you have any comments or feedback on our draft enforcement strategy?

Policy and Handbook
  • 85. The SRA will continuously review the content of the Handbook, and provide advice internally and externally on the intention of and policy behind Handbook provisions. Where necessary, the Handbook will be supplemented and edited in order to maintain its currency and relevance. We will consult with our stakeholders on all changes to the Handbook.
  • 86. The objective of any new Handbook provisions will be to
    • keep up to date with the evolving nature of legal services,
    • ensure that firms have clarity on what we expect,
    • address emerging risks where these are best addressed new Handbook provisions,
    • review and remove outdated provisions.

Questions

18. Do you have any comments on our proposed approach to making new Handbook provisions?

Consumer education

  • 87. Consumer understanding of their legal rights and duties is one of the regulatory objectives for regulators set out in the LSA 2007. We plan to develop strategies, working with our fellow regulators and the Legal Services Board Consumers Panel and others, aimed at increasing consumers' understanding of what they should expect from the provision of legal services and how they can play their part in ensuring that they get the right outcomes.

Education and training

  • 88. Formal pre- and post-qualification requirements have long played an important role in trying to make sure only suitable individuals are allowed to practise as solicitors and continue to be well qualified. We will need to look at what the appropriate balance is between firm-based and individual requirements as well as pre- and post-qualification requirements. We have already taken steps to review aspects of our pre-qualification framework to move away from detailed prescription about process towards flexible achievement of outcomes.
  • 89. We will assess whether our current systems places sufficient emphasis on principles, ethics and financial management at the pre-qualification stage, and whether there is sufficient risk-based targeting of post-qualification training and reauthorisation. For example, we may consider the targeted use of compulsory Continuing Professional Development (CPD) courses.
  • 90. In addition, we plan to expand our use of less formal education and training opportunities such as workshops and roadshows to support our supervision activity.

Questions

19. Do you have any comments on our proposed approach to consumer education? Are there particular initiatives we should consider?

20. Do you have any comments on the SRA's current approach to formal education and training for the profession? Are there additional approaches we could take to improving pre- and post-qualification training?

Evidence-based decision making and research

  • 91. We will build a significant capacity to expand our analysis and research radically, using it to support and inform all of our regulatory activities. This investment reflects our view that if we are to focus our resources on the greatest risk, we need analysis and evidence to support forming an accurate view of risk. Our particular objectives will be to
    • undertake a problem-identification analysis before commencing work on new policy to ensure we are informed by an objective assessment of the risks to our regulatory objectives arising from the issue at hand;
    • understand the economic impact, including the impact on competition, of new regulatory policy;
    • understand the impact on firms of new regulatory policy, including direct, indirect, one-off and ongoing costs;
    • ensure our decision making is informed by a good awareness of the direct and indirect costs and benefits of the available policy options;
    • publish our analyses and the reasons for our decisions to our stakeholders;
    • develop and publish measures of our success as a regulator that focus on the extent to which our regulatory activities are improving firms' delivery of the principles and outcomes.
  • 92. In the next few months we will undertake a cost-benefit analysis of the approach we are taking to implementing OFR, including working with a cross-section of our stakeholders to understand the impact on particular types of firms. This will be published in October 2010.
  • 93. We have been conducting a programme of initial equality impact assessments in relation to various aspects of our current regulatory activity. For each area of work that will be affected by the transformation to outcomes-focused regulation, we will be using this work as a starting point and will develop full equality impact assessments for each of the relevant areas. We are gathering the relevant data and our work will be informed by the response to this consultation document and our engagement with stakeholders. We will be using our recently updated equality impact assessment tool which will also help us to assess any implications that there might be for human rights.

Governance, coordination and decision making

  • 94. Delivering good risk-based cost-effective regulation that directs regulatory attention to the areas of greatest need will require us to develop strong, flexible mechanisms for the management and coordination of our resources. Over the next few months, we will be considering this and reporting back in October on how our structure, internal communications and approach to decision making will support
    • a robust governance structure for the coordination of regulatory responses across the SRA;
    • appropriate delegation of and support for quality decision-making at all levels of the SRA;
    • OFR functions, including importantly risk assessment, that operate effectively and efficiently, supported by strong horizontal management;
    • a quality audit system and systems for internal validation that provides positive challenge to the way we function and the decisions we make;
    • our existing formal decision-making criteria will also be reviewed.

SRA – people, culture and systems

  • 95. The SRA culture needs to reflect the expectations of consumers, the regulated community and other stakeholders. We recognise the sizeable challenges involved in preparing our people, culture and systems for the new regulatory approach. Successful cultural transition will require new attitudes and behaviours from our staff alongside the development of technical competencies to regulate in the new way.
  • 96. Our primary focus will be to bring about an outcome-focused approach in everything we do, valuing skills such as an inquisitive mindset, a desire to work across functions with colleagues, sharing information, and keeping consumer and public interest at the heart of everything we do.
  • 97. There are considerable implications for our technical skill set. For example we need to expand our capacity to analyse less standardised information and proactively assess risk. Commercial awareness will become more important as business structures become more varied, and we will need to bring credibility to our work alongside the profession as partners in protecting the public.
  • 98. Our systems also need considerable updating and benefits from planned development include
    • a significant reduction in requirements for paper-based interaction between ourselves and firms and individuals by moving to online submission of material such as applications and annual returns;
    • tools to support the systematic assessment and management of risk, and the management of our relationship with firms;
    • to eliminate artificial hand offs internally to improve the service we provide and ensure that we deal with matters at the earliest opportunity in the most effective way.
  • 99. The SRA has launched a programme of organisational reform for this work and we are being very ambitious in the approach we are taking. Nevertheless, this type of transformation cannot happen instantly and stakeholders will experience an evolution to the new approach rather than a "Big Bang".

VIII. Transition

A phased approach to OFR

  • 100. More generally, we are considering the question of what is the best way to transition to the new regulatory approach. On 6 October 2011, we must be in a position to license and regulate ABSs, supervise and where necessary enforce the new Handbook. However, we have choices that can be made for example on whether there are aspects of the new Handbook (such as reporting requirements and lifetime licences for all firms) that are best phased in over a slightly longer period. Our decisions need to be informed by a practical analysis of what is realistic not just in terms of our own readiness, but firms' readiness also, including an understanding of any direct and time costs for smaller firms in particular.
  • 101. Over the next few months we will be considering what our approach to phasing over the next three years should be, working also with stakeholders and will report on our decisions in October this year.

Working with our stakeholders

  • 102. " Freedom in Practice – Better outcomes for Consumers", our most far-reaching consultation programme to date, was launched on 25 March 2010. This programme acknowledges the importance of engaging with all of our stakeholders, firms, individual lawyers and consumers, in a myriad of ways. We do not plan to sit back and wait for written responses to this and the May consultation paper.
  • 103. During May and June 2010 the SRA will hold a series of roadshow events for the profession—see Table 5 below. Specific events will also be held for consumers and diversity groups within the profession.
Table 5 - Freedom in Practice: Better Outcomes for Consumers schedule of roadshows
May 25 London
May 27 Bristol
June 8 Leeds
June 9 Manchester
June 10 Liverpool
June 15 Birmingham
June 16 Cambridge
June 22 Exeter
June 24 Newcastle
June 28 Cardiff
 
  • 104. In addition to the initial series of roadshows, senior SRA staff and Board members are also undertaking a programme of speaking engagements working with The Law Society and other groups to maximise our engagement. We will also run workshops and focus groups to understand what guidance will be helpful in the new Handbook, and the costs, benefits and impact of the new regulatory approach.
  • 105. The SRA roadshow programme will be supported by a microsite that links to the SRA's main website. People wishing to attend roadshow events can use the microsite to register their interest and to learn more about the move to outcomes-focused regulation.

Questions

21. Are there other ways we can engage with our stakeholders on our move to OFR?

Equality impact assessment

  • 106. In the paper at Annex D, we have highlighted some of the equality issues that we will be considering. We will continue with this work and plan to publish the findings of our full equality impact assessment for key areas with our policy statement in October. To help us with this work, we will be seeking meetings with equality groups to understand the issues and find solutions. Our new approach will require us to work much more collaboratively with firms and individuals and this will require a high level of trust and confidence from all sections of the profession. We want to be sure that equality and diversity are embedded in our outcome-focused approach from the very start.

Questions

22. Do you have any comments on any aspect of our approach and how it may affect equality in relation to gender, ethnicity, disability, age, and religion or belief? Are there any additional equality issues that we need to consider at this early stage?

IX. Next steps

Table 6 below sets out the timetable of key milestones up until 6 October 2011.

Table 6
Timetable: April 2010 to 6 October 2011
Date Action
April 2010 onwards Engagement with the profession, consumers and other stakeholders
28 May 2010 Publish first consultation paper on the Handbook.
27 July 2010 Closing date for written responses to "Outcomes-focused regulation: Transforming the SRA's Regulation of Legal Services"
20 August 2010 First Handbook Consultation closes.
October 2010 Publish second consultation on the Handbook.
October 2010 Policy Statement on "Outcomes-focused regulation: Transforming the SRA's Regulation of Legal Services" with the timetable setting out the transition to OFR, the full cost-benefit analysis and equality impact assessment (the equality impact assessment is an ongoing piece of work taking pace alongside the development of outcomes-focused regulation—we will share with you our work at the key stages of development).
January 2011 Second Handbook consultation closes.
March/April 2011 Publication of final Handbook
June/July 2011 Anticipated designation as a Licensing Authority for ABSs
6 October 2011 First ABSs licensed and Implementation of new Handbook.

Complete list of questions

1. Do you have any comments on our goals and vision for OFR?

2. Are there particular things we should consider to ensure that consumer protection remains central to our regulatory approach?

3. How do you think we should work with consumers to help them to understand our role as a regulator for the wider benefit of consumers as distinct from the LeO's role in facilitating individual redress where appropriate?

4. Do you have any comments on the key implications for firms set out above?

5. Are there other implications we need to consider?

6. Do you have any comments on how the SRA and firms can work together to build the necessary degree of trust and confidence for the move to OFR?

7. Do you have any comments on the central role of the risk centre in our move to OFR?

8. Do you have any other suggestions for the activities the risk centre will undertake?

9. Will firms understand our need to receive information from them in order to undertake high quality risk assessment?

10. Do you have any comments on our proposed approach to authorisation?

11. Do you have any comments on our proposed approach to supervision?

12. What might be the particular issues for smaller firms and how might we address them?

13. Are there other regulatory tools we could consider?

14. Is there a role for representative bodies in supporting their members' compliance with the principles and outcomes in the Handbook?

15. Do you agree with our approach to formal investigations?

16. If not, please explain why.

17. Do you have any comments or feedback on our draft enforcement strategy?

18. Do you have any comments on our proposed approach to making new Handbook provisions?

19. Do you have any comments on our proposed approach to consumer education? Are there particular initiatives we should consider?

20. Do you have any comments on the SRA's current approach to formal education and training for the profession? Are there additional approaches we could take to improving pre- and post-qualification training?

21. Are there other ways we can engage with our stakeholders on our move to OFR?

22. Do you have any comments on any aspect of our approach and its implications for equality issues? For example how might our approach impact on black and minority ethnic solicitors, women solicitors, disabled solicitors, and older and younger solicitors?

Questions on Annex B

23. Do you have any comments about the risks arising from the current financial management of firms?

24. Do you have any comments regarding the SRA's responsibilities for addressing the financial stability of firms and its proposed desired outcomes?

25. To what extent do you consider the proposed response outlined in this section meets the objectives of outcomes-focused regulation?

26. Do you have any suggestions regarding what information may be requested of firms and how frequently it may be requested?

Annexes

Annex A: Enforcement strategy

Annex B: An example of our risk-based approach - financial assurance

Annex C: "Achieving the right outcomes" - our responses to the main questions from the profession

Annex D: Discussion paper on the equality implications of outcomes-focused regulation


Downloadable document(s)