The SRA's new Handbook — which we are issuing in final draft form for consultation - will underpin the regulation of solicitors, law firms and alternative business structures (ABSs) from 6 October 2011. It will bring all of the SRA's regulatory requirements into a single coherent structure.
It will mark a new approach to how we regulate "outcomes-focused regulation" (OFR). A significant number of detailed rules in the current Code will be replaced by the high-level professional standards expected of a solicitor and an explanation of how they should be experienced in reality by clients (the outcome). These will be supported by non-mandatory "indicative behaviours" (IBs) that will tend to show that an outcome is or is not being achieved. In all, firms will have greater freedom than now in deciding how to achieve the outcomes, taking account of the particular needs of their clients.
This goes hand in hand with the SRA taking both a more constructive and more risk-based approach to monitoring and enforcement. We will move away from investigating rule breaches as an end in itself, to a discussion of whether a firm can demonstrate that it is acting in a principled manner and achieving the desired outcomes for clients — i.e., less box-ticking all round.
Through greater information requirements — examples of which are included in this consultation — we will gain a better understanding of firms, which in turn will help us assess the degree of risk they pose. This will influence the degree of supervision they require. Larger and higher-risk firms will have their relationship with the SRA managed by staff with specialist knowledge of their work.
Enforcement will focus more on breach of principles and failure to achieve defined outcomes and less on failure to comply with detailed rules. Our primary concern will be to work with firms to improve standards and only when failures are serious or a firm does not show the will to improve will we look to take formal action.
OFR has proportionality, transparency and consistency at its heart. As part of this process, the SRA recognises that staff in the SRA need to be trained and assessed to ensure they are equipped and competent to deliver the new regulatory approach.
The consultation process
This is the fourth consultation in the process of moving to OFR and the last opportunity for comments on the draft Handbook.
The first consultation outlined our strategy for OFR, the second the timetable for OFR, and the third, in May, was the first sight of the draft Handbook. We had an excellent response to the May consultation, both in writing and at the roadshows we held around the country.
This consultation reports on the comments received, explains how it has influenced our thinking in revising aspects of our proposals and provides more detail on the new regulatory framework. This document is a snapshot of some of the key issues and should be read in conjunction with the full paper.
A new approach to regulation
There was a broad welcome for the Handbook proposals and in particular the outcomes-focused code. The responses emphasised the need for us to be clear in our expectations of those we regulate and ensure our enforcement is genuinely outcomes-focused and proportionate.
Respondents supported the key principle that clients of traditional law firms and ABSs should enjoy the same level of protection. The SRA has identified disparities between the legislation (the Legal Services Act, the Solicitors Act and Administration of Justice Act) which could lead to differing levels of consumer protection between traditional law firms and ABSs. We have raised this with the Legal Services Board, who are currently consulting on a mechanism by which the legislation could be changed (section 69 order). This would address issues such as the ability for the SRA to recover the cost of investigations from ABSs (as it is able to do from traditional law firms) and to enable a single compensation fund for traditional law firms and ABSs until December 2012 (allowing for the outcome of the review of client protection).
We have also asked the Legal Services Board to extend the definition of reserved activities to cover all "solicitor activities" to avoid consumer confusion over which legal services in this new market are regulated and which are not.
We have been working hard and liaising with other regulators and professional bodies on our approach to ABSs that are multi-disciplinary practices (MDPs). They raise issues such as the limits of the SRA's jurisdiction, the particular risks involved (such as the use of confidential client information) and regulatory overlap. This work will continue up to and beyond October 2011. In December we plan to publish a memorandum of understanding which will provide a framework for co-operation, co-ordination and exchange of information.
We judge from our work to date that the Handbook requirements comply with human rights legislation and satisfy competition law. Where our continuing equality impact assessment is identifying issues, we are assessing them to ensure they are justified in the interests of public protection. We are also looking at the costs and benefits of the changes to legal services providers of the changes. This work continues, but to date no requirements have been assessed as disproportionately costly.
Architecture of the new Handbook — bringing principles and outcomes to the heart of our regime
The six core duties in the current Solicitors' Code of Conduct will be replaced with 10 Principles, against which all actions will be judged. They will apply both to firms and to all those who work within them.
We have redrafted Principle 9 (which requires solicitors to promote equality and diversity and not discriminate unlawfully) to allay concerns that it increases the obligations solicitors currently face and to preserve the professional requirement to encourage equality and diversity.
We have included limited guidance in the Code where appropriate. However, although there was enthusiasm for guidance on a range of issues, we have avoided detailed guidance, due to the risk of this becoming seen as mandatory. Instead, we have amended and expanded some of the indicative behaviours and will provide further help to firms by regularly publishing frequently asked questions on our website.
Conduct of legal services
The new structure of the Code was generally welcomed. We have since stripped away duplication, removed any mandatory language in the IBs and added a fifth section covering application, waivers and interpretation. We have reviewed the IBs for their application to City firms.
The importance of firms considering the needs of consumers is reflected in a new outcome to treat clients fairly. We will take steps to help clients assess the legal services they require and raise the profile of the SRA amongst consumers.
The May consultation raised some specific issues.
Our new chapter follows the rest of the Code in its outcomes-focused approach, but is generally in line with our current policy on conflicts. We have removed the specific provision relating to conveyancing, but we have not changed our position on acting for buyer and seller.
The majority of respondents supported restricting firms and individuals that provide reserved legal services from delivering non-reserved activities through a separate business. This is to prevent providers from trying to avoid regulation, and to reduce confusion. Consumer research we have undertaken shows that consumers lack understanding of the various providers of legal services and the differing levels of protection they offer.
Large parts of the Accounts Rules are being retained because this is a high-risk area. There was good support for removing detailed rules on interest and signing on client account (except that an owner who is neither a manager nor an employee of an ABS cannot be the sole signatory on client account).
The financial services and exemption will be extended to ABSs, after successful talks on the former with the Financial Services Authority.
Engaging with the SRA — Authorisation and Discipline of firms and individuals
Every firm, including recognised sole practitioners, will be required to have a Compliance Officer for Legal Practice (COLP) and a Compliance Officer for Finance and Administration (COFA) to enhance risk management and compliance. Our experience shows a clear need for specified individuals within firms to be responsible for implementing systems and controls. They could be managers or employees, but will need sufficient authority; a failing that arises because this has not happened will be held against the firm, not the individual.
All managers, owners, COLPs and COFAs will be subject to a Suitability Test — previously the character and suitability test — to assess whether they are fit and proper people. This is based on (and will replace) the criteria that solicitors currently have to meet on admission and declare they continue to meet annually. There will be passporting provisions for solicitors, registered foreign lawyers, and other lawyer managers/owners in legal disciplinary practices.
The test has been strengthened. As a result of recent case law, the non-disclosure of issues that call into question an individual's suitability eventually to be admitted as a solicitor will be presumed to be dishonest behaviour unless there are proven to be exceptional circumstances. Mental health issues or addiction to alcohol or drugs will not of themselves be grounds for failing the test, but will be taken into account when considering an individual's overall suitability and the public interest.
All those with a "material interest" in an ABS, including those who propose to acquire a 10% share in an ABS (and associates who cumulatively acquire a 10% share) will be subject to the test. ABSs will have to disclose the ultimate beneficial owners of the firm.
Our work on in-house practice is continuing but we have amended the in-house exemption in relation to reserved legal work, so that the organisation would have to be licensed unless there is a nexus between the organisation and the "client", such as acting for fellow employees or related companies in the employer's group. This could have an unfortunate impact on in-house solicitors' pro bono work and we are talking to the Legal Services Board to try to resolve this.
The exception that allows in-house solicitors working for associations has been re-drawn so that it only applies to organisations whose members have a specialist interest in common. If they do not, then the association will need a licence to carry out reserved legal work for its members. We believe the current exemption is being exploited.
In line with our general approach, we intend to harmonise the powers and rules for disciplining traditional law firms and ABSs. We are also introducing powers to make discounts for early admissions and order suspended penalties. The draft rules now explain the test for disqualifying an individual or entity from working in an ABS.
Education and training
Ahead of a fundamental review of the education and training requirements — suggestions for which are welcome — the relevant regulations have been redrafted to improve clarity and be consistent with the rest of the Handbook.
Protecting the public
The existing indemnity insurance and compensation fund provisions will apply to ABSs in respect of their "regulated activities" — i.e., reserved legal activity, legal activity, and non-legal activity subject to a condition on the ABS's licence. The SRA is currently conducting a major review of client financial protection measures, and will publish a consultation paper in December.
We are confident that the timetable, though challenging, will be met. We will make every effort to help firms be ready, with further roadshows, an implementation timetable on our website by reference to the type of firms, and a transition manual.
|13 January 2011
||Closing date for written responses to this consultation
||Publication of the final Handbook
||Anticipated designation of the SRA as a Licensing Authority for ABSs
|6 October 2011
||First ABS licensed; new Handbook takes effect.