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Co-operation agreements

22 April 2013

The deadline for submission of responses to this consultation was 23 January 2013.
The information that appears below is for reference purposes only.
You can download an analysis of responses to this consultation paper.

Introduction

1.
The Solicitors Regulation Authority (SRA) is the independent regulatory body of the Law Society of England and Wales. We protect the public by regulating law firms and individuals who provide legal services.
2.
We are considering a policy of entering into co-operation agreements, in appropriate cases, with witnesses to misconduct who may themselves have had some involvement in the wrongdoing. Typically, this would involve a witness to the misconduct in question co-operating with a wider investigation or prosecution in respect of other regulated persons. The intention is to facilitate reports of misconduct to the SRA by clearly setting out how prompt and frank reporting and co-operation by regulated persons in a wider investigation could mitigate that person’s own regulatory position. We are seeking your views on the benefits and risks and, ultimately, upon whether such a policy is desirable.

About the proposed policy and the potential benefits

3.
Our draft policy on co-operation agreements is set out at annex 1 to this paper.
4.
Some cases investigated by the SRA involve very serious wrongdoing in circumstances where detecting and proving the wrongdoing can be extremely difficult. The primary benefit of a co-operation policy is to maximise public protection by obtaining information about potentially serious misconduct which can then be dealt with at an earlier stage than might otherwise have been the case.
5.
The desired objectives of our draft policy expand further upon the potential benefits of the approach:
- to maximise protection of the public by enabling the SRA to investigate and prosecute serious misconduct;
- to encourage those who are aware of wrongdoing to take steps to stop it;
- to encourage potential witnesses to make disclosures that assist investigations into serious misconduct, even if that person is involved in the wrongdoing;
- to encourage potential witnesses to provide formal evidence;
- to reduce the cost of the most serious cases by facilitating the obtaining of information or evidence that would otherwise be very difficult to obtain;
- to provide a route out of serious regulatory difficulty for those who want to stop wrongdoing but feel unable to act because of uncertainty about their own position;
- to ensure that those who provide assistance are properly dealt with as necessary taking into account any mitigation provided by that assistance;
- to provide transparent criteria and processes.
6.
There is also a persuasive argument to be made that an effective co-operation policy (used as part of a wider enforcement strategy) can deter wrongdoing in the first instance by increasing the risk of detection ¹.

¹ An in-depth study by London Economics for the OFT on the available literature on achieving optimal deterrence noted the significance of a leniency scheme to the overall impact of an enforcement strategy (paragraphs1.4 and 3.34 to 3.40 of ‘An assessment of discretionary penalties regimes’, October 2009)

7.
In summary, the policy:
- provides a transparent process for how a regulated person’s conduct will be dealt with by us if he or she mitigates his or her own regulatory position by reporting the issues to us and co-operating with us in our investigation and any subsequent enforcement and disciplinary action;
- provides that such mitigation could result in no action being taken or a reduced regulatory sanction being imposed in respect of the co-operating witness;
- sets out the factors which we will take into account in determining the appropriate regulatory outcome for a co-operating witness;
- requires full disclosure on the part of the witness of all relevant facts, including their own involvement in any wrongdoing, and, if necessary, live evidence in a court or tribunal;
- provides that the agreement will normally be formalised in writing; and
- provides transparency in that the policy's existence and terms will be open to public gaze but also because those in difficulty will be able to find it on the SRA website and consider their options from an informed position.
8.
It is anticipated that a handful of serious cases per year might benefit from a process by which potential witnesses who may have been involved in some wrongdoing could come forward and be offered leniency as part of a co-operation agreement. However, the potential impact of early discovery of serious regulatory issues in terms of protecting the public interest and increasing SRA efficiency in any one case could be significant.

9.
A hypothetical illustration of the type of scenario in which a co-operation policy could offer benefit is set out below:

Example 1

Mrs Partner Ay wishes to speak to the SRA about some serious concerns which she has about the one other partner in her partnership, Mr Partner Bea. The allegations which Mrs Ay feels could be made against Mr Bea include overcharging clients, breaches of the solicitors’ accounts rules and the backdating of documents and correspondence. Mrs Bea is aware of her conduct obligations to report serious misconduct to the SRA but is very concerned about doing so for a number of reasons:
- she anticipates immediate dissolution of the partnership and loss of her livelihood if Mr Bea were to find out that she had provided information to the SRA;
- she does not want to ‘incriminate’ herself – as a partner she realises that she is also responsible for compliance with the accounts rules and she has also failed to take action about the backdating of documents by Mr Bea for some time.
Mrs Ay is clearly in some regulatory difficulty but it is also in the public interest, and in her interests, for her to be able to ‘come clean’ in a structured way.

10.
In a scenario such as that described above, a clear and transparent policy for how we will deal with the regulatory position of a co-operating witness could increase the likelihood of a report being made to us and allow us to take steps to remove the risks posed to consumers and the wider public interest.

The use of similar schemes in other sectors

11.
We deal with a very wide range of cases, some of which involve very serious wrongdoing, usually of a financial nature. The development of the legal services market, particularly the introduction of Alternative Business Structures (ABSs), is likely to mean that we regulate more businesses which are more akin to large companies. We feel that some of the lessons learned from regulation of large businesses in other regimes can assist us in assessing whether such an approach might help in properly protecting the public in the legal market.
12.
The potential benefits of schemes similar to a co-operation agreements policy appear to have materialised in other areas such as financial services regulation and competition law.
13.
The FSA has been operating its leniency scheme since 2009, whereby co-operation of a witness in a wider investigation is formally recognised as a significant mitigating factor, with apparent success. Between 2007 and 2009 calls to the FSA's dedicated whistleblowing line are reported to have more than doubled from 835 to 1,890 ². Also, its former Director of Enforcement noted in a speech in 2010 that their leniency scheme has been "used to good effect in several of our cases.”³

²Figures taken from 'FSA sees whistleblowing activity surge' by Jane Croft, FT.com, 2 April 2010

³Introduction to the FSA Enforcement Conference 2010 Speech by Margaret Cole, Director of enforcement and financial crime at the FSA, 22 June 2010, see Introduction to the FSA Enforcement Conference 2010
14.
It is also very clear that both the UK and EU Competition Authorities consider that leniency programmes are extremely important and very effective in ensuring that information is disclosed to enable action to be taken against unlawful cartels. Indeed, the OFT now even offers rewards for information about cartels.⁴

⁴Further information about the OFT's Leniency Programme can be seen on its website. Confess your cartel to the OFT - The Office of Fair Trading

Co-operation Agreements – the potential risks and challenges

15.
As well as providing assurance as to potential benefits and effectiveness of a cooperation agreements policy, the research and experiences in other regimes also provide a clear insight into the relevant risks and challenges posed by such an approach:
- a)
  the importance of sufficient incentives being offered to potential witnesses;
- b)
  the importance of clarity as to when leniency will be offered to a witness;
- c)
  the question of the reliability of evidence obtained from such witnesses ⁵ and the extent to which reliance should be placed upon an individual or entity with a personal interest in a matter;
- d)
  the level at which decisions under any such policy should be taken within an organisation such as the SRA e.g. the seniority of the decision maker;
- e)
  whether there should always be a removal of any profit on the part of the co-operating party arising from the misconduct before any agreement is reached as to his or her own regulatory position; ⁶
- f)
  ethical considerations in determining the extent to which leniency or even reward should be offered to those who have been involved in wrongdoing;
- g)
  ensuring that leniency is not administered so generously as to risk reducing the incentives to consistently maintain compliance.⁷
⁵ It is perhaps notable that the courts have recently expressed concern about plea bargaining in criminal cases brought by the Serious Fraud Office, see for example In R v Dougall [2010] EWCA Crim 1048

⁶ Factors (a)-(e) were, for example, highlighted as stakeholder concerns during the FSA’s consultation on its leniency scheme: Decision Procedure and Penalties manual and Enforcement Guide Review 2008 Feedback on CP08/10 Financial Services Authority, December 2008, p9, paragraph 2.8 and 2.9.

⁷Factors (f)-(g) are highlighted as the key risks posed in the OFT publication of the London Economics study referred to above: (paragraphs 3.34 and 3.38 of ‘An assessment of discretionary penalties regimes’, October 2009)
16.
There is an additional consideration from the SRA’s perspective in light of the very specific regulatory obligations upon individuals and compliance officers within firms to report serious misconduct. While there are existing conduct obligations to report serious misconduct to us, a policy for how such reports and co-operation with an SRA investigation may constitute mitigation for an individual’s own position may result in matters being reported to us which we may not otherwise have become aware of. In addition, the facilitation of co-operation by a witness beyond the conduct requirements may assist the SRA in concluding a wider investigation. In either scenario, the SRA could more effectively and efficiently protect consumers.
17.
However, we would particularly welcome views on whether formally treating such reports and co-operation as a mitigating factor in terms of the witness’s own regulatory position is appropriate taking account of the conduct obligations discussed above.

Safeguards in the draft policy

18.
In order to mitigate against the risks posed and address these challenges, the draft policy:
- makes no offer of rewards to witnesses for information;
- limits the involvement of the potential witness in the wider investigation or prosecution;
- states that in some circumstances the policy may operate so that no action is taken by the SRA in respect of conduct on the part of the co-operating party in light of this mitigation (a significant incentive);
- sets a clear framework for when co-operation agreements should be used and what factors may impact upon the level of leniency available (while retaining flexibility dependant upon the facts);
- emphasises that there are conduct requirements to report wrongdoing;
- makes clear that any agreement will be contingent upon full and frank disclosure and co-operation in good faith;
- stresses that generally the SRA will not commit to a regulatory outcome with a co-operating party until it is satisfied that it is in full possession of all relevant facts;
- provides that agreements will generally be formalised in a regulatory settlement agreement, which will ensure:
- makes clear that failure to act in good faith and provide full and frank disclosure could result in reinvestigation including in respect of further resulting conduct issues such as misleading the SRA; and
- any benefit which the co-operating party has received as a result of the misconduct could be a barrier to a co-operation agreement or the extent to which leniency can be considered.

19.
In addition to these safeguards, we are interested in stakeholder views as to whether certain conduct, such as alleged criminal behaviour, should be excluded from the scope of the policy.
20.
While the draft policy provides a sensible safeguard against the risks posed as far as possible, we recognise that there remain overarching policy considerations:
- is the principle of offering leniency to parties involved in wrongdoing in this manner acceptable ethically; and
- are there risks which remain despite the safeguards in the policy and if so are these risks acceptable.

Co-operation agreements – preliminary conclusions

21.
In the context of the SRA’s regulatory role, the core concepts which underpin the proposed policy may not be as radical a departure from current practice as they could at first appear:
- the SRA’s Enforcement Strategy and code for referral to the Solicitors Disciplinary Tribunal (SDT) highlight the relevance of prompt admission of misconduct and full co-operation with the SRA in determining the action to be taken by the SRA;
- the SRA has operated Regulatory Settlement Agreements very successfully since 2007, including "without prejudice" discussions and agreed disciplinary outcomes and often with provision for clients to be provided with redress;
- the SRA / its predecessor has experience of prosecuting cases successfully before the SDT on the basis of agreed facts⁸ (essentially following the established position in director disqualification cases⁹ ); and
- more generally, respondents to investigations are aware that the early correction of problems and co-operating generally with the SRA can significantly mitigate any failures on their part.
⁸ Wilson-Smith SDT 8772-2006, where it was accepted that “There was no impropriety in directors’ disqualification cases - or in any other civil proceedings - in placing before the Court an agreed statement of facts and inviting the Court to deal with the case on that basis.”

⁹ Namely Re Carecraft Construction Company Limited and Secretary of State for Trade and Industry -v- Rogers
22.
A co-operation agreement policy which clearly and transparently sets out the position would, in our view, be a significant step forward in encouraging disclosure and co-operation.
23.
More fundamentally, the policy could place the SRA in a better position to effectively and efficiently protect consumers than might otherwise be the case.
24.
Overall, our preliminary view is that:
- the risks posed by a co-operation agreements policy would be adequately mitigated by the safeguards contained in the draft policy and that the benefits of having an express approach to this issue could be of significant benefit to the public interest;
- the proposed approach is a reasonable extension of existing principles; and
- while there are conduct obligations to report serious misconduct to us, the policy may increase the likelihood of such reports being made in practice and further the protection which the SRA can deliver to consumers

Your views

25.
We are keen to hear your views on the issues explored in this paper and in particular would ask for responses to the following questions:
- (1)
  Do you feel that the SRA should develop a policy on reaching agreements with co-operating witnesses?
- (2)
  Do you agree that there could be significant benefits in implementing a co-operation agreements policy? Do you feel that there are any objectives which have not been included in the policy which should be?
- (3)
  Do you agree with our views as to the main risks and challenges posed by such an approach? Are there other issues which you feel should be considered?
- (4)
  Do you feel that the steps proposed to minimise the risks posed by such an approach are sufficient and appropriate? Are there any other safeguards which you feel should be included, such as excluding very serious conduct from the scope of the policy?
- (5)
  Do you agree with the content of the draft policy and the proposed process for dealing with such matters? Do you feel that this could be improved in any particular way?
- (6)
  Do you envisage any particular section of the public or a group of stakeholders being placed at a disadvantage by the policy or the implementation of the policy? If so, do you feel that there are any steps or adjustments which can reasonably be taken to minimise any impact?

Annex 1

Draft SRA Policy on Regulatory Agreements with Potential Witnesses

About this policy

1.
This policy sets out the SRA's approach to dealing with people who may be witnesses in serious cases but who have (or may have) themselves been involved in alleged wrongdoing.¹⁰

¹⁰ This is a statement of policy and not a formal document to be interpreted closely as if it were a rule or delegated legislation.
2.
The objectives of this policy include:
- to maximise protection of the public by enabling the SRA to investigate and prosecute serious misconduct;
- to encourage those who are aware of wrongdoing to take steps to stop it;
- to encourage potential witnesses to make disclosures that assist investigations into serious misconduct, even if that person is involved in the wrongdoing;
- to encourage potential witnesses to provide formal evidence;
- to reduce the cost of the most serious cases by facilitating the obtaining of information or evidence that would otherwise be very difficult to obtain;
- to provide a route out of serious regulatory difficulty for those who want to stop wrongdoing but feel unable to act because of uncertainty about their own position;
- to ensure that those who provide assistance are properly dealt with as necessary taking into account any mitigation provided by that assistance; and
- to provide transparent criteria and processes.
3.
Some cases investigated by the SRA involve very serious wrongdoing in circumstances where proving the wrongdoing is extremely difficult or proving it is likely only to be reasonably possible when supported by evidence from a witness close to and possibly involved in the behaviour of concern. It is important that the public and potential witnesses understand how the SRA will approach such situations to ensure that the public is protected.
4.
The SRA receives information from confidential informants and protects their identity so far as it properly can as a matter of law. This policy is about more formal disclosure including formal evidence being given by a potential witness.

Recognition of mitigating factors

5.
As a matter of general principle, the SRA can decide not to pursue misconduct by a person on grounds of proportionality, including in response to relevant mitigation.
6.
Appropriate co-operation with the SRA by a potential witness in a wider SRA investigation (i.e. an investigation into persons other than the potential witness) mitigates misconduct by that person. Co-operation by a person regulated by the SRA, who may themselves have been involved in wrongdoing, could therefore result in a decision that, for example:
- no action needs to be taken against the potential witness in respect of their own wrongdoing;
- any agreed sanction can be reduced from what would otherwise have been imposed in the absence of co-operation (which may include the level of any fine imposed); or
- where a sanction is to be considered by another body (such as the Solicitors Disciplinary Tribunal), the SRA acknowledges the assistance provided and that it constitutes mitigation.
7.
Each case will turn on its own facts but relevant factors which the SRA will take into account in determining a regulatory outcome in respect of a co-operative witness include:
- a.
  how promptly the potential witness has disclosed the alleged wrongdoing to the SRA - this provides greater mitigation than delayed disclosure;
- b.
  whether the witness has made the disclosure on his or her own initiative (rather than in response to an investigation) - this provides greater mitigation than disclosure prompted by the likely uncovering of the behaviour by other means;
- c.
  whether the witness has provided important evidence for the investigation of serious misconduct;
- d.
  whether the witness has made frank and prompt disclosure of his or her own involvement in the alleged wrongdoing;
- e.
  whether, in a situation where a witness’s involvement has been serious, he or she agrees to removal from the Roll of Solicitors or another form of disqualification and enters into a formal agreement to that effect;
- f.
  whether the witness provides or contributes to redress for the victims of the wrongdoing as appropriate in the overall context – a regulatory agreement with a witness would be extremely unlikely if the witness has retained benefits arising from misconduct;
- g.
  whether the witness has paid any financial penalty or costs due to the SRA or has entered into an arrangement to do so (and abides by that arrangement).
8.
Mitigation may be particularly substantial if the witness is the first person to disclose the behaviour of concern or to provide credible evidence of it. However, it should be remembered that persons regulated by the SRA – firms, managers and employees - already have an obligation to report misconduct. For example, outcomes 10.3 and 10.4 of the SRA Code of Conduct 2011 require that:
- O(10.3) you notify the SRA promptly of any material changes to relevant information about you including serious financial difficulty, action taken against you by another regulator and serious failure to comply with or achieve the Principles, rules, outcomes and other requirements of the Handbook; and
- O(10.4) you report to the SRA promptly, serious misconduct by any person or firm authorised by the SRA, or any employee, manager or owner of any such firm (taking into account, where necessary, your duty of confidentiality to your client).

The process of entering into an agreement with a witness

9.
The SRA may approach a potential witness on its own initiative or enter into discussions at the instigation of the witness. The SRA is under no obligation to enter into discussions or reach any agreement.
10.
Discussions will be ‘without prejudice’ as between the SRA and the potential witness, save that the SRA may have to act upon factual information representing a risk to the public or the regulatory objectives of the Legal Services Act 2007.
11.
Subject to any potential claim to public interest immunity¹¹, the agreement reached with the witness will be disclosable to a respondent (i.e. another person being investigated by the SRA in respect of whom the evidence relates) if evidence from the witness forms part of the SRA case before any court, tribunal or in the SRA's internal decision-making processes. The SRA's view is that communications with the witness prior to and leading up to the agreement will usually be irrelevant and should not be disclosable to any other party, subject to orders of the court or a relevant tribunal.

¹¹Public interest immunity essentially refers to the right to withhold disclosure of information, for example, on the basis that to disclose it would be harmful to the public interest
12.
The potential witness must make full and frank disclosure to the SRA of alleged wrongdoing of which he or she is aware and in particular of his or her involvement in wrongdoing. If it is subsequently discovered that full and frank disclosure has not been made, the SRA may re-investigate and/or take action against the potential witness for any original wrongdoing or consequential misconduct (such as misleading the SRA).
13.
The SRA will not generally commit to any outcome or likely outcome until satisfied that it is in full possession of all relevant facts including the involvement of the potential witness in the wrongdoing and how that relates to the involvement of others (such as the identity of the ‘ringleader’ or any person coercing others into the behaviour in question).
14.
The potential witness must provide continued and good faith co-operation including giving evidence where necessary. Failure to co-operate may also result in the SRA reinvestigating or taking action as set out above.
15.
The potential witness will generally be required to enter into a regulatory settlement agreement which will include a full admission of any wrongdoing and a declaration that full disclosure has been made (with consequential acknowledgment of potential action if disclosure has not been full).

Consultation Questions

(1)
Do you feel that the SRA should develop a policy on reaching agreements with co-operating witnesses?
(2)
Do you agree that there could be significant benefits in implementing a co-operation agreements policy? Do you feel that there are any objectives which have not been included in the policy which should be?
(3)
Do you agree with our views as to the main risks and challenges posed by such an approach? Are there other issues which you feel should be considered?
(4)
Do you feel that the steps proposed to minimise the risks posed by such an approach are sufficient and appropriate? Are there any other safeguards which you feel should be included, such as excluding very serious conduct from the scope of the policy?
(5)
Do you agree with the content of the draft policy and the proposed process for dealing with such matters? Do you feel that this could be improved in any particular way?
(6)
Do you envisage any particular section of the public or a group of stakeholders being placed at a disadvantage by the policy or the implementation of the policy? If so, do you feel that there are any steps or adjustments which can reasonably be taken to minimise any impact?

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