OFR and beyond: The SRA's vision for regulating legal services in the 21st century incorporating the Annual Report for 2011

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Chair's Foreword

Charles Plant

It gives me great pleasure as Chair of the Board of the Solicitors Regulation Authority to introduce this Report.

The primary task of the SRA is to promote and safeguard the interests of consumers of legal services and the public in general. We recognise that in turn those interests are secured by the public being served by innovative, ethical and efficient providers of legal services. The vast majority of solicitors and law firms achieve that objective; a small number do not.

The Board of the SRA was reconstituted in January 2010, with new members serving a three-year term which will shortly expire. It is therefore timely to take stock of the progress made to date and the areas which continue to require improvement.

The SRA has faced many challenges in its relatively short existence, and some of these are addressed in detail elsewhere in this Report. The SRA inherited a variety of legacy issues from The Law Society - an approach to regulation which was reactive and remote rather than proactive and constructive; a culture within the organisation which did not always meet the expectations of stakeholders; and operational inadequacies such as inefficient split-site working and information technology systems which were manifestly not fit for purpose. Furthermore, the regulatory settlement achieved by the Legal Services Act 2007 has thrown up many challenges in our ongoing relationship with The Law Society in its capacity as Approved Regulator.

The 2007 Act also required us to introduce a substantially new regulatory regime, namely one which is outcomes-focused and risk and entity-based, to be applied both to traditional firms and to Alternative Business Structures - being the new entrants to a liberalised market to be licensed by us.

The transformation of the SRA over the past three years has thus followed a twin-track strategy - to secure the successful introduction of the new outcomes-focused regulation/ABS regulatory regime and to overhaul the organisation to produce a team possessing the competencies to regulate in the proactive manner which OFR requires.

The Board readily appreciated that the SRA was embarking on an ambitious programme of transformation. It was confident that Antony Townsend, our Chief Executive, and the talented Senior Management Team he has built up, would rise to the challenge.

It is the Board's assessment that considerable progress has been made in this transformation programme. We continue to improve the qualities required of our staff, who in turn are more responsive to the demands placed on a proactive regulator in a changing legal services market. We have closed our inadequate offices in Redditch and Leamington Spa and have moved to central Birmingham; this will significantly improve our efficiency. We have established an office in London where we can enhance our regulation of the largest commercial firms.

We recognise that further work is required to embed OFR, but we are on course. It is important that all our stakeholders understand the benefits which the new regulatory regime will bring to consumers and the profession alike, and our research of all stakeholders confirms that to be the case.

We appreciate that the introduction of mySRA and online practising certificate renewal did not go as well as expected. The introduction of new state-of-the-art systems was always going to be a challenge. We are confident that the problems have now been resolved.

We regulate in a time of unparalleled change. The public interest will benefit from the emergence of new ways of delivering legal services, as we are beginning to see both from those to whom we have awarded ABS licences and the response of established firms. It is incumbent on the SRA to support these initiatives.

With the assistance of the Legal Services Board, progress has been made in resolving many of our differences with The Law Society. We recognise that this is not the time for Parliament to reconsider the deficiencies in the current regulatory structure. We will therefore continue to work with The Law Society to resolve outstanding issues.

The past three years have been very challenging for all SRA staff. The Board places on record its thanks to those who have contributed to the success of the transformation programme. Our confidence in the Chief Executive and his Senior Management Team to push through our demanding programme was well placed and that in particular we wish to recognise.

Charles Plant

A message from the Chief Executive

Antony townsend

Achieving the right outcomes for consumers; working with those we regulate.

The accelerating pace of change throughout the legal landscape demands that we continue to look forward. This Report, as its title OFR and beyond implies, reviews our progress throughout 2011, and examines what lies ahead.

The path to outcomes-focused regulation (OFR) began in 2009. The liberalising reforms contained in the 2007 Legal Services Act, coupled with the Act's statutory regulatory objectives, required radical solutions. We had to put in place a risk-based approach to regulation geared to achieving the right outcomes for consumers. At the same time, we were determined that those we regulate should be given more flexibility to innovate and diversify, to serve their clients' needs and to develop their businesses.

Throughout 2011 we tested and refined our ideas through a series of consultation exercises. I thank all of the thousands of members of the profession who attended the many workshops, roadshows and special interest group meetings held in major towns and cities across England and Wales, and to the consumer groups and many others who helped us tailor our new approach to modern consumers' needs.

Their contributions have helped to inform and shape the content of the new Handbook and regulatory principles.

Unsurprisingly, much of the focus of attention of the media, the legal sector, and other observers, has been the introduction of alternative business structures (ABSs), designed to open up the legal services market to greater competition and more consumer choice. At the time of writing, we have more than 30 ABSs licensed, including multi-national firms, the Co-op, and high street practices. We are delighted to have played our part in opening up the legal marketplace, but we are determined to ensure that the core professional values of integrity and serving the client's interests remain to the fore. We will regulate fairly, proportionately, and firmly.

Regulating in a new way, focusing upon risks and outcomes rather than compliance with detailed rules, has been a massive change for our organisation. A huge overhaul of staffing policies, practices, culture and behaviours, along with the design and delivery of a new organisational structure, were undertaken in 2011. Tough decisions - including redundancies - have been required to move the organisation forward.

Through recruitment and re-training we have been putting the right people in the right jobs. We have also introduced a performance management approach to drive forward our vision of being recognised as a modern, risk-based regulator. The introduction of supervisors and relationship managers to improve the quality of regulation, and promote constructive engagement with those we regulate, has been widely welcomed. So too has our developing programme of consumer research and engagement.

We have been deliberately ambitious in the scope of our transformation programme. We are some way yet from completing our reforms. I am keenly aware there remains much to do, particularly in the area of building fit-for-purpose IT systems and ensuring that the standards of service we offer to all those with whom we deal are appropriate.

The roll-out of our online practising certificate renewal services did not go well, and proved a frustrating experience for the firms and individuals who encountered difficulties. We are determined to put this right for the future, and have worked hard with our colleagues in Law Society IT to make the necessary improvements. We are working on other areas to reduce unnecessary bureaucracy, and improve our responsiveness.

This autumn we moved to new headquarters in the heart of Birmingham. It is an opportunity to embed and consolidate the transformational change that took place in 2011. Bringing our teams together in one city-centre location will make us more accessible to the public and more effective in our delivery of a consumer-driven approach to regulation, and improve the efficiency with which we interact with those we regulate.

Our programme has required significant investment. While our day-to-day direct expenditure on running costs was slightly lower than in 2010, one-off costs in IT investment, redundancies and costs associated with the closure of the Legal Complaints Service, meant that our expenditure on Shared Services was considerably higher than in previous years. Further details are given on pages 36 and 37.

My thanks go to the many thousands of individuals and firms who have helped us in the continuing development of OFR. I am also very aware that it is team work that has taken us forward over the past year. That team approach starts with the support and guidance from the SRA Board; the commitment, stamina, and unfailing good humour of my Senior Management Team, and most importantly the determination of our staff to put consumers at the heart of everything we do. A lot has been achieved; a lot remains to do.

Antony Townsend

Where we are now

12 months from the launch of OFR

In 2007 the Legal Services Act heralded the most radical change in the legal services market for a generation. Among its key measures was the creation of alternative business structures (ABSs), which allowed non-lawyers to invest in or manage firms providing reserved legal activities, for the first time.

Such innovations meant that, as the independent regulator of solicitors and their firms across England and Wales, the SRA was naturally at the forefront of delivering the regulatory changes that were required to underpin this new, liberalised legal environment.

In 2009 we committed to delivering an over-arching programme of change which would fundamentally re-shape our approach to regulation. Traditional and prescriptive tick-box regulation would be replaced by principles-based outcomes-focused regulation (OFR). This would enable us to license ABSs and, more broadly, radically reform the SRA as an organisation structured to deliver responsive and effective regulation within a rapidly changing and evolving legal landscape. The principal benefits of this approach would be to enable new forms of legal services provision to respond to consumers' needs, and to help us to focus our resources upon the areas of greatest risk to those users.

The programme culminated in 2011 with a year of transformational change for the SRA. The Annual Report for 2011, published on pages 15 to 38, provides a detailed summary of our achievements throughout this milestone year.

Progress in 2012

Throughout 2012 we have pressed ahead with implementing core aspects of the transformation programme to ensure we continue to develop as the principal regulator of legal services in England and Wales.

Highlights include:

  • Consideration of the first applications for licences to operate as ABSs and the licensing of the first ABSs.
  • Introduction of new arrangements, which require regulated entities to nominate compliance officers for legal practice and finance, subject to approval by the SRA. This process is underway.
  • Continued development of the Risk Centre and the implementation of a new, organisation and activity-wide Risk Framework to inform and target the organisation's development and regulatory activity. This is a critical element of the SRA's new regulatory approach.
  • Further training and development of staff in the new core regulatory functions and recruitment of new staff, particularly in the Supervision function.
  • Launch of further phases of new IT systems and online processes and the implementation of significant improvements to the online annual practising certificate renewals process.
  • Consolidation of the SRA's Midlands operations from Redditch and Leamington into a single, modern office in central Birmingham.
  • Development of a consumer affairs function to provide support and information for all those who use legal services.
  • Introduction of an Equality Framework to progress and promote the SRA's vision of equality and diversity in the new legal services environment.

We are now moving from the development phase of our reforms into a period of intensive implementation. In September we announced a series of changes designed to strengthen and broaden senior management and the leadership of the organisation and create a renewed focus and accountability in the delivery of outcomes.

So, the SRA story is still unfolding. It is too early to predict exactly how businesses and individuals will exploit the opportunities presented by the statutory changes. It is our role as a responsible regulator to ensure we continue to equip ourselves to respond in a timely manner to emerging challenges, as they present themselves.

SRA vision and values

The SRA's vision is to be the leading regulator of legal services; recognised for the outcomes it achieves in the public interest and the way in which it achieves them.

We act in the public interest and promote and protect the interests of consumers of legal services:

  • we make fair, impartial and transparent decisions and we focus on achieving the right outcomes;
  • we enable the provision of good quality, ethical and safe legal services and access to those services, and help consumers make informed choices;
  • we are committed to the principles of better regulation and are proportionate and transparent in how we regulate;
  • the identification, analysis and management of risk is integral to our regulatory approach and decision-making.

We work collaboratively and engage constructively with all of our stakeholders:

  • we work hard to help those we regulate to achieve a high level of compliance;
  • our regulatory approach, our policies and procedures are informed through a close engagement with our stakeholders and our decisions are evidence-based;
  • we value diversity, and ensure our engagement, with those we regulate and with consumers, is wide-ranging and inclusive;
  • we are clear, timely and targeted in how we communicate with all our stakeholders, and our communication approach is designed to meet the needs of those with whom we are communicating.

Our Vision and Values statement, created by a cross-SRA team of staff, was launched in late 2011. It is an expression of who we are and what we want to achieve.

We value our people - we work together to achieve our objectives:

  • our people seek responsibility and accountability, and their performance is assessed and rewarded fairly;
  • we work as a team, are inclusive, treat everyone with respect and understanding and value difference;
  • we invest in the development of people's skills and knowledge, empower them to make decisions and equip them to embrace change;
  • our people are proud to work for the organisation, committed and actively seek to make a positive difference.

We constantly seek to improve the effectiveness of our regulation and the efficiency with which we achieve our objectives:

  • we keep our activities and use of resources under review to ensure the optimum utilisation of resource to deliver our objectives;
  • we deliver against our plans and budgets;
  • we are open, honest and transparent about our performance;
  • our people are pro-active in seeking opportunities to improve both the effectiveness and efficiency of the organisation and the delivery of our objectives.

Moving forwards - 2013 and beyond

We are committed to building on the solid foundations of our core transformation programme to deliver an ambitious programme of work in the coming three years. Our high level objectives are:

  • To ensure our organisation has the capability and capacity to deliver risk-based outcomes focused regulation effectively and efficiently in a rapidly changing legal services market.
  • To deliver risk-based outcomes-focused regulation and achieve positive outcomes for consumers in the public interest and do so in a way that is justifiable to all our stakeholders.
  • To develop our regulatory arrangements and tools to meet the objectives and the principles of better regulation and to anticipate changes in the legal environment.

Each of these objectives underpins our over-arching strategic goal, namely, to deliver more effective, proportionate and transparent regulation in the public interest.

We recognise that the ability of any organisation to drive significant change and improvement within its sector is founded on excellent delivery in its core operational functions. We are committed to demonstrating high levels of professionalism and excellence. The major structural changes introduced in 2011 and 2012 established a strong foundation upon which to build this capability.

Strengthening our capability

One of the key priorities for 2013 will be to strengthen our capability as a risk-based regulator. We will complete the development and implementation of the SRA Risk Framework across the organisation, to ensure that our decisions are based soundly on assessment of the risks posed to our regulatory objectives. This will enable us to target our resources effectively.

We need to ensure that we have the necessary systems in place to perform our regulatory role effectively. In the past three years, we have introduced major and much-needed improvements to our IT systems, which were outdated and lacking in capacity. We have worked with the profession to make our suite of online application services more stable and 'user friendly'. The feedback has helped us to plan enhancements. The benefits will soon be visible. Ultimately, all our application services will be transferred online, resulting in significant time and cost savings for both the SRA and those using them.

Online application services are just one aspect of the IT improvements scheduled to support our activities. New regulatory IT features will be needed to provide a consistent approach to the capture and recording of information, resulting in a consolidated, comprehensive view of each firm and individual we regulate. This will provide a vital tool in supporting the operation of the Risk Framework and streamlining existing processes.

Regulating effectively, while not stifling the ability of those we regulate to provide legal services in new and innovative ways, will present a stimulating challenge as the new legal environment evolves. We need to ensure our staff possess appropriate regulatory and behavioural skills to enable them to perform their roles. A comprehensive programme is underway to provide a range of training, covering all levels of staff across the organisation.

We are committed to employing a diverse workforce and creating a work environment which is inclusive, values difference and promotes equality of opportunity.

Embedding OFR

Ultimately, our success in delivering effective regulation is dependent upon the success of those we regulate. We will not achieve our ambition unless individuals and entities adopt an outcomes-focused approach to their work and actively identify and manage their own regulatory risks. We will continue to work with regulated firms to support them in embedding the new approach.

The new requirement to appoint compliance officers for legal practice and finance within each firm, which is underway, should support this transition. Other initiatives include the relationship management programme, which provides individual supervision and advice to firms whose work, scale or risk make this appropriate. Feedback for the programme to date, from global and City firms in particular, has been positive and encouraging.

Acting in the interest of consumers

As a public interest regulator, our first priority must always be to act in a way that best serves the interests of consumers and the public in general. We have expanded and improved the advice and information we provide to legal services consumers, through the introduction of an engagement strategy and launch of a dedicated Consumers section of our web site. Throughout the next three years, we will ensure consumers have a voice in the development of regulatory arrangements that support the growth of an accessible legal services market, providing high-quality services.

No one can be certain what impact liberalisation will ultimately have on the legal services market. Maintaining the necessary flexibility to enable us to focus on the highest priority areas as they emerge, therefore, remains a crucial element of our strategic approach.

Annual Report for 2011

A new era of consumer-driven regulation

From our first steps along the path to outcomes focused regulation (OFR), taken in 2009, we have sought to plot a course that puts protecting the interests of consumers of legal services at the heart of everything we do.

The milestones achieved in 2011 demonstrate the progress we have made.

A year of far-reaching change culminated in the launch of the new SRA Handbook on 6 October, marking a new era of public-interest-driven regulation of legal services.

Our Handbook brings together all the regulatory requirements that apply to everyone we regulate. This ensures the same level of protection to consumers of legal services, be they clients of sole practice solicitors, large City firms, in-house practices and now alternative business structures (ABSs).

Ten mandatory principles

OFR represents a radical change of direction, both for those we regulate and for the SRA. Our traditional approach, requiring lawyers to comply with an extensive Code of Conduct, has been replaced by a more mature relationship based on ten mandatory principles we expect solicitors and firms to achieve, and a set of indicative behaviours. These are contained within the new Handbook.

Our objective is to reduce 'box ticking and form filling' and give more freedom to lawyers and firms to concentrate on providing a first-class service to their clients.

At the same time the OFR framework enables the SRA to regulate firmly and fairly. Our prime concern is to work with firms to improve standards. In cases where failures are serious or a firm does not show a willingness to improve, we will then consider taking formal action.

Fair and effective decision-making is a crucial part of our work in protecting the public. Therefore it is essential that fair, proportionate and timely action is taken where appropriate and necessary.

Throughout the year we published more details on how we investigate firms and the principles underpinning our regulatory decision-making, to further improve the transparency of our procedures.

New framework to guide decision-making

We introduced a comprehensive decision-making framework to be used by SRA staff required to make formal regulatory decisions.

The Framework, Schedule of Delegations, decision-making criteria and equality impact assessments are all published on the SRA website.

These are mandatory principles which apply to all.

You must:

  1. Uphold the rule of law and the proper administration of justice.
  2. Act with integrity.
  3. Not allow your independence to be compromised.
  4. Act in the best interests of each client.
  5. Provide a proper standard of service to your clients.
  6. Behave in a way that maintains the trust the public places in you and in the provision of legal services.
  7. Comply with your legal and regulatory obligations and deal with your regulators and ombudsmen in an open, timely and co-operative manner.
  8. Run your business or carry out your role in the business effectively and in accordance with proper governance and sound financial and risk management principles.
  9. Run your business or carry out your role in the business in a way that encourages equality of opportunity and respect for diversity.
  10. Protect client money and assets.

New structure to deliver OFR

A new organisational structure for the SRA was introduced in 2011 to meet the requirements of the changing relationship between ourselves and those we regulate.

The transformation programme put in place to drive these changes forward reflected our determination to adopt a modern, risk-based approach to regulation.

The new SRA structure is designed around three key regulatory activities: authorisation, supervision, and enforcement. The responsibilities of the Senior Management Team were allocated at the start of the year and the remainder of the structure was filled in phases.

At the heart of the new structure is our vision for improved regulation, underpinned by:

  • Intelligent authorisation processes, to ensure we only authorise firms and individuals who are fit to provide legal services.
  • Enhanced supervision to enable us to identify and prevent risks sooner, working with those we regulate to manage risks down.
  • Firm, proportionate, transparent enforcement to deal with those who will not or cannot comply with the regulatory principles, and to act as a deterrent.
  • Robust risk criteria enabling us to focus resources on serious risk.

Supervision: building trusted, two-way relationships

In keeping with the move to risk-based and principles-focused regulation, a new supervisory approach, based on the level of risk posed by a firm, was developed over the course of the year. This was subsequently refined during a pilot which ran from January 2011 to September 2011.

As a result of the positive feedback from the pilot, the decision was taken to introduce, from 2012, two strands to the way we supervise firms. Desk-based supervision involves immediate engagement with firms to discuss issues and request information. Visit-based supervision involves visits to firms to address both one-off events and thematic risks.

In tandem with testing our supervisory approaches, 18 firms, of all types and sizes, agreed to be part of our relationship management pilot. The trial, which ended in late summer 2011, helped to define, among other things, the circumstances in which it is appropriate for us to supervise particular firms using dedicated resources from our expanding pool of relationship managers.

Many of the firms involved in the relationship management pilot had positive things to say about the SRA and the way a trusted relationship had evolved between firm and regulator. The pilot has paved the way for new and improved risk-based authorisation and supervisory arrangements for firms to be introduced.

Authorisation: rigorous standards applied to licensing ABSs

The role of Authorisation is to protect the public interest by ensuring that only firms and entities able to deliver legal services to the required standard and in a principled manner, are able to continue to provide these services; or are newly authorised to provide them. Firms and individuals are expected to provide the SRA with sufficient information to enable us to make appropriate judgements.

The Legal Services Act opened up the market to alternative business structures (ABSs) - a radically different type of legal services provider - in October 2011.

The SRA did not receive approval from the Ministry of Justice to license ABSs until the end of December 2011. The Parliamentary process took longer than expected and was not within our control. However, the delay did not dampen our enthusiasm to enter this new and important area of regulation.

We believe it is in the public interest for the SRA to regulate ABSs as this ensures these new types of legal practice are subject to the same demanding standards as those applied to traditional law firms.

The extensive preparatory work on our licensing application paid particular attention to the measures in place to protect the public interest and the need for those who owned and invested in ABSs to meet rigorous standards.

ABS applications are made online through the SRA website. The application process comprises three stages, including a thorough vetting process. The most complex of applications can take up to six months.

We accepted our first ABS applications in January 2012. At the time of writing the SRA has licensed more than 30 ABSs.

Risk Centre: new analytical model

The Risk Centre, formally set up in July 2010, is at the core of the new approach, identifying and overseeing the level of risk associated with our regulatory activity.

From the outset, the Risk Centre's prime purpose has been to ensure our monitoring and investigative activity is better targeted, through more effective use of intelligence and assessed against robust risk criteria.

A priority for the team in 2011 has been to build a risk framework. The Risk Centre has adopted a sophisticated analytical model focused on measures of potential impact a firm may have on our objectives. Key factors we take into consideration include the size of a firm, the potential vulnerability of its clients, and the amount of client money held. Distinctions are made between thematic risk - an issue that potentially could affect groups of firms or sectors of the legal services market, and risk inherent in an individual firm.

This assessment process, which will be refined in the light of experience, allows us to determine how best to deploy our resources.

Enforcement: enhanced strategy in place

Following a formal consultation, we launched our enforcement strategy in January 2011. Enforcement is, of course, just one of a range of regulatory tools available to us - and it is a last resort. For example, a firm (or individual) may avoid formal proceedings where it has demonstrated it is open to our guidance, supervision and monitoring and works with us constructively to take prompt remedial action.

In deciding what action to take, a variety of factors will be considered, including the number of clients or others affected and the impact upon them; the impact or risk to the general public; whether the firm accepts promptly and genuinely that is has acted incorrectly, and the action taken to correct the situation.

Transforming the SRA

Moving our headquarters

Finding a suitable, new, headquarters building in which all Midlands based SRA staff are located together, has been a key part of our strategy to deliver new ways of working and become a truly effective regulator of legal services.

In December, following an extensive property search, we announced that The Cube building in Birmingham would become the new headquarters of the SRA and the base for Midlands Law Society Group staff who provide support services.

The move to The Cube was completed in autumn 2012. Our office in the City of London will continue to provide an effective and responsive presence for London-based larger firms and stakeholders.

Embracing change throughout the organisation

Throughout 2011 we put in place a carefully planned series of changes to equip our staff to meet the challenges of becoming a modern, consumer-driven, outcomes-focused regulator.

To help ensure the right people were placed in the right roles in our new organisational structure, role profiles were developed, based on groupings of similar characteristics, skills and job knowledge. A new set of behavioural and technical competencies was also mapped to support the recruitment of candidates to new roles, from both inside the organisation and the external job market.

All line managers underwent leadership training to help them create a supportive team environment, delivering efficient and effective performance and even greater levels of employee satisfaction.

This has been a period of extensive change for the whole organisation. While our restructure was not designed as a job-cutting exercise, the matching of existing staff to the new roles and skills sets required to deliver our new regulatory approach, resulted in a number of redundancies. Staff were supported throughout this unsettling period.

Transforming outdated IT systems

A great deal of effort and attention has been invested in updating the SRA's IT infrastructure. The first phase was successfully completed in February 2011, introducing key improvements such as network systems upgrades, and a new document and customer management system. This was followed by the launch of the first of a series of online applications, allowing students to register electronically for Legal Practice courses.

The second phase of improvements planned for later in the year - the launch of mySRA and roll-out of further online services to those we regulate - encountered difficulties. Regrettably, this then led to further delays with the launch of other online applications including PC renewals and recognitions, and Keeping of the Roll.

We are grateful to those we regulate for their forbearance, and to our staff, who worked tirelessly and professionally to solve the problems experienced by our users.

Key policy initiatives

Reserved activities: The case for radical reform

The SRA welcomed the Legal Services Board's decision to review the scope of legal services regulation in England and Wales. In our formal response, we put forward the case for radical reform.

In our view, the current system is confusing for consumers, creating significant problems. Our submission to the LSB proposed all legal services should be regulated thus providing better protection for consumers. Research shows consumers are unclear about which legal services are regulated.

Financial protection changes

In 2010 the SRA introduced a stricter enforcement strategy toward firms that failed to pay their premiums under the Assigned Risks Pool (ARP) insurance scheme. The ARP provides Professional Indemnity Insurance to firms that fail to secure indemnity on the open market. The SRA put plans in place to wind down the ARP. The scheme will close in September 2013.

In 2010, there were more than £6m in unpaid premiums outstanding, a significant cost that was passed on to those we regulate, and through them to their clients.

One year on from the introduction of our stricter approach to enforcement, we saw encouraging results, with 89 of the firms covered by the ARP during 2009-10 closing down and a further 48 covered by open market insurance for 2010-11. Of the firms covered by the ARP, 64 had already closed, including ten whose closure was brought about by the SRA.

We issued formal disciplinary proceedings against a number of firms that failed to pay their ARP Premium, including referrals to the Solicitors Disciplinary Tribunal. We worked alongside firms to help them manage their way out of the ARP or towards orderly closure, if that was the only option open to them. Ultimately, our responsibility is to the public and those we regulate to ensure that appropriate action continues to be taken against those firms owing significant premiums to the ARP.

Global responsibility

In November 2011 we launched a consultation on how we should fulfil our principal duty of consumer protection without constraining a competitive and highly sophisticated international sector.

Our consultation document, 'Regulation of International Practice', set out proposals on how we should regulate the international practices of firms headquartered in England or Wales. Our intention, in launching the consultation, was to seek views on proposals to cut through at least some of the regulatory maze facing international firms. We realise that we need to regulate in ways that maintain high standards and support the health and competitiveness of this sector of the legal market. The policy will be further developed, in the light of the consultation.

Consumer affairs

Progress was made in 2011 in developing the SRA's consumer affairs function. Research and focus group sessions revealed that, while most consumers have a high level of trust in the legal profession and those working in law firms, many were unaware about how to complain if something went wrong. Value for money, combined with a quick and efficient service, came top of the 'must have' list of people seeking legal advice. Clients wanted to see clear charging policies as standard, and expected a solicitor to remember their names when they visited a law firm. However, consumer knowledge of the legal market is low, while shopping around or making price comparisons is rare.

These research findings have helped to improve the way we present consumer information on the SRA website. We now have a range of advice accessible online to those using legal services, covering topics such as what to expect when using a solicitor, alerts on the legitimacy of a particular solicitor's practice and information on how to report a solicitor.

First-tier complaints

The Legal Services Act places a requirement on approved regulators to ensure that those they regulate have effective procedures in place for the resolution of complaints. In August 2011, we announced that collection of these statistics would be a compulsory element of the annual renewals and recognition process.

Any firm's failure to handle complaints properly is seen as a key indicator of risk to both the outcomes a consumer might expect and to our regulatory objectives.

The data we are now capturing will be used to identify thematic risks emerging about complaints handling in the legal services market. It will also highlight those firms with inadequate or insufficient systems for dealing with complaints.

Service charter

We launched the SRA service charter in 2011, setting out our vision to be 'a leading regulator, protecting the public, supporting our staff, providing value for money, fair and transparent outcomes and service excellence'. Our charter makes plain our commitment to providing a high standard of service that is fair, effective and inclusive. It also sets out the responsibilities of our stakeholders in their dealings with us, the process for making complaints against us, and how to access further information about the SRA.

Equality Framework

We reviewed progress on our Equality and Diversity Strategic Action Plan, which covered the period 2009-2011 and published our first annual Equality and Diversity report for 2010.

Over this two-year period we have introduced a disclosure and transparency policy, assessed the impact our policies, procedures and proposals might have on equality, and published annual diversity monitoring statistics for key regulatory outcomes. We also implemented recommendations which came out of the research from Pearn Kandola into the reasons why Black and Minority Ethnic (BME) solicitors are over-represented in some areas of our regulatory work.

In July 2011, we launched the Equality Framework, enabling us to continue to progress and promote our vision of equality and diversity.

Our three main equality objectives for 2011 were:

  • Embedding equality and diversity in our new organisational structure and ways of working introduced to deliver OFR.
  • Monitoring the impact of these changes.
  • Continuing to address disproportionality for BME solicitors.

In December, we reported our progress in meeting the Pearn Kandola recommendations, which included a number of decision-making audits looking at key areas of disproportionality.

Other areas of work on Equality and Diversity issues include strengthening our decision making through the new Decision-Making Framework and training for staff on managing unconscious bias.

The External Implementation Group (EIG) continues to provide feedback to the SRA on key policy developments and regulatory issues. The EIG, chaired by Lord Herman Ouseley, is made up of representatives from BME solicitor practitioner groups.

Biggest review of education and training in 40 years

At the beginning of 2011, the SRA, together with the Bar Standards Board (BSB) and ILEX Professional Standards (IPS), the chief executives of which are in the photo below, set in motion the most comprehensive review of legal education for 40 years. The Legal Education and Training Review (LETR) is designed to ensure ethical standards and levels of competence of those delivering legal services in regulated law firms are sufficient to secure the highest standards of service for clients.

In spring 2011 we appointed the UK Centre for Legal Education (UKCLE) to undertake the review.

Dame Janet Gaymer and Sir Mark Potter, both experienced legal practitioners with expertise in legal education and training, were appointed to head up the consultative panel for the review, on which a wide range of stakeholders is represented. The report of the research team will be delivered at the end of 2012. The regulators will then draw up and consult on proposals for reform.

Continuing Professional Development

In April 2011, we appointed Westminster University to undertake research into Continuing Professional Development (CPD) in the legal profession, the first such review for over 25 years.

A second research phase began in October 2011, with solicitors participating in focus groups and informal consultations. Our aim is to find out how well CPD is operating within the profession and build on good practice. The results of the research phase will feed into the LETR.

Work-based learning

In June 2011 we published a report on the results of a two-year assessment of the introduction of Work-Based Learning (WBL) within the profession.

The WBL pilot examined different ways of assessing competence in qualifying as a solicitor. Some of the candidates participating in the pilot were not required to face the hurdle of securing a training contract in order to take part in the scheme. Candidates were either nominees from legal firms who had already agreed to take them on for training as solicitors, or who were already employed in legal firms or in-house legal departments in roles which would not otherwise have led to qualification. The results will inform our future approach to WBL.

Quality Assurance Scheme for Advocates (Crime)

The SRA, Bar Standards Board (BSB) and ILEX Professional Standards (IPS) have been working together for the past two years via a Joint Advocacy Group (JAG) to develop a scheme to assure the quality of criminal advocacy. The origins of the scheme date back to Lord Carter's Report of 2006, which identified a need for a scheme that would protect clients. The JAG has undertaken significant work to develop a scheme that has the public interest at its core. The underpinning approach is that everyone, regardless of their prior education and training and professional qualification, will be subject to a single scheme to accredit criminal advocates.

Work on the detail of the scheme has been informed by an advisory group comprising solicitors, barristers, legal executives, the regulators and lay members, which is chaired by Sir John Thomas, President of the Queen's Bench Division. The JAG has also conducted three formal consultations and has engaged with key stakeholders and members of the regulated communities throughout the process.

Enforcement

Our aim is work with those we regulate to put things right. Where possible, we try to avoid formal enforcement action, but tough enforcement is sometimes the only means of ensuring that clients and the wider public interest are protected. This is particularly the case where vulnerable clients are involved, and in the small minority of cases where those we regulate will not, or cannot, comply with the regulatory principles. A good example of this was two cases in which individuals were subjected to intimidatory correspondence from lawyers.

Pursuit of thousands of copyright file sharing claims was 'unacceptably aggressive'

In a high profile case attracting widespread national media interest, the Solicitors Disciplinary Tribunal (SDT) found correspondence relating to approximately 6,000 claims against individuals, sent by two partners in the law firm Davenport Lyons, to be 'unacceptably aggressive, overbearing, misleading and disproportionate'.

The letters were sent on behalf of a range of clients to individuals allegedly involved in unlawful file sharing in breach of the Copyright Designs and Patent Act.

It was found that the respondents, Brian Miller and David Gore, had a clear financial interest in each claim they pursued but this in itself did not constitute a breach of the conduct code.

The Tribunal considered that the respondents did not take enough care in dealing with responses which disputed liability, but persisted with claims. The SDT imposed a financial penalty and suspended both partners for three months.

In a separate case, the SDT suspended Andrew Crossley, who was practising under his own account under the name ACS Law, for two years. Between 2009 and 2011 the respondent pursued claims and made demands for payment against more than 20,000 individuals whom he alleged had been involved in peer-to-peer sharing of files belonging to six of his clients in breach of the Copyright Designs and Patent Act 1988.

Solicitors Disciplinary Tribunal orders

The SDT has the power to strike a solicitor from the roll, suspend a solicitor from practice and to apply fines and reprimands. The table below compares SDT orders made in 2011 with those made in 2010.

  12 months to December 2010 12 months to December 2011 Variance Monthly average last 12 months
Fined 115 108 -6% 9.0
Struck off 86 60 -30% 5.0
Suspended 50 54 8% 4.5
No order 19 10 -47% 0.8
Reprimand 40 16 -60% 1.3
Other 45 37 -18% 3.1
TOTAL 355 285 -20% 23.8

Forensic investigations

The table below compares the number of accounts inspections conducted by the Intelligence and Investigations Unit over the past two years. Visits are rescinded where no investigation took place (where a firm has closed down, no longer poses a threat or where it is appropriate to await the outcome of some other activity).

  12 months to December 2010 12 months to December 2011 Variance Monthly average last 12 months
New investigations authorised 567 490 -14% 41
Investigations concluded 466 442 -5% 37
Rescinded/other 19 48 153% 4

Interventions

We will only intervene to close down a firm as a last resort, if it is in the public interest to do so. The majority of interventions are into practices run by a sole practitioner. In cases where the intervention is not into a sole practice then typically all partners within the firm will be subject to the intervention.

  12 months to December 2010 12 months to December 2011 Variance
Total interventions effected 64 62 -3%
..of which.. Suspected dishonesty 12 12 0%
Non-dishonesty 52 50 -4%
..of which.. Individual(s) 0p 0 N/A
Sole practice 48 52 8%
2-5 partner firm 16 10 -38%

Most common grounds for intervention

The circumstances in which we can intervene are set out in statute and include a public interest test. The five most commons grounds for interventions over the past two years are shown in the table below.

  12 months to December 2010 12 months to December 2011
  No. Interventions % of Interventions No. Interventions % of Interventions
Protect interests of clients/beneficiary 48 75% 45 73%
Accounts rule breaches 26 41% 31 50%
Code breaches 15 23% 30 48%
Reason to suspect dishonesty 12 19% 12 19%
Bankrupt/insolvency of LLP 6 9% 11 18%
  12 months to December 2010 12 months to December 2011 Variance Monthly average last 12 months
Fined 115 108 -6% 9.0
Struck off 86 60 -30% 5.0
Suspended 50 54 8% 4.5
No order 19 10 -47% 0.8
Reprimand 40 16 -60% 1.3
Other 45 37 -18% 3.1
TOTAL 355 285 -20% 23.8

Financial Review 2010/2011

Demonstrating value for money in our work is fundamental to the way in which the SRA carries out its regulatory responsibilities.

Expenditure increased in 2011 due largely to costs incurred in restructuring the organisation to support the introduction of outcomes-focused regulation. There was also essential, significant investment in IT to replace historic and outdated systems. A fall in the amount we were able to recover from the Compensation Fund, Solicitors Disciplinary Tribunal (SDT) hearings, interventions and other costs orders meant we were unable to offset these costs as much as we have done in previous years.

Results

In the year ending 31 December 2011, the total net cost of regulation was £68.2 million, compared with £44.4 million the preceding year.

The SRA shares a range of services - IT, finance, HR and facilities - with The Law Society, which results in an Organisation Services charge. In 2011, the SRA's charge rose to £44.9 million, up from £31.9 million in 2010. This rise was mainly due to work on the SRA's Enabling Programme, which is delivering a new IT system to enable us to adopt an OFR approach to regulation effectively.

Adding direct expenditure to our organisation services costs, total expenditure was £89.1 million compared with £76.6 million the preceding year.

Money recovered

The Solicitors Act 1974 allows the SRA to recover from the Compensation Fund payment of all costs, charges and expenses for managing and administering the fund. £10.8 million was, therefore, re-charged to the Compensation Fund in 2011.

The SRA has the authority to recover the costs of its legal fees for Solicitors Disciplinary Tribunal (SDT) hearings, interventions and other costs orders. In 2011 our legal fee recoveries were £3.8 million

Adding this to recoveries from the Compensation Fund, the total recovered was £14.6 million. This is less than last year because of lower spend on legal fees by the SRA, and also a change in Compensation Fund recoveries policy.

Income

Regulatory income for 2011 was £6.4 million, compared to £8.9 million in 2010. This reduction is primarily due to a change in income policy which now requires Recognised Body Renewal and Sole Practitioner Renewal income to be reported centrally within The Law Society. In addition, delays in respect of the Enabling Programme during 2011, resulted in no Keeping Of The Roll income being collected in 2011.

The total cost of regulation explained

The total cost of regulation of £68.2 million is arrived at by deducting total recoveries £14.6 million and total regulatory income £6.4 million from direct expenditure £44.2 million and adding back the cost of Organisation Services, £44.9 million.

Financial Review: comparison of 2010 and 2011

Expenditure £m 2010 2011
Staff Costs 25.4 26.1
Staff travel and subsistence 1.0 1.3
Board, adjudicator and other expenses 1.2 1.1
Professional and legal fees 14.8 13.9
Other admin costs 2.2 1.8
Total Direct Expenditure 44.7 44.2
Expenditure £m 2010 2011
Exam and Legal Practice Course fees 2.4 1.5
Admission and enrolment fees 2.1 1.4
Registration and transfer of articles 0.2 0.4
Other income 4.2 3.0
Total Regulatory Income 8.9 6.4
Net Position Excluding Recoveries 35.8 37.9
Legal Fee Recoveries 5.3 3.8
Compensation Fund Recoveries 18.0 10.8
Total Recoveries 23.3 14.6
Total SRA Net Position 12.5 23.3
Organisation Services Costs 31.9 44.9
Total Cost Of Regulation 44.4 68.2

Expenditure chart

Members of the SRA Board July 2012

Members of the board Back row, l-r: Dr Susan Bews, Lay Member; Cindy Leslie, Solicitor Member; Martin Coleman, Solicitor Member; Lorrette Law, Solicitor Member; Mark Humphries, Solicitor Member; Peter Duffy, Lay Member; Ian Menzies-Conacher, Lay Member; Malcolm Nicholson, Solicitor Member. Front row, l-r: Sir Ron Watson CBE, Lay Member; Lucy Winskell, Solicitor Member; Jane Furniss, Lay Member; Charles Plant, Chair, Solicitor Member; Moni Mannings, Solicitor Member; Professor Shamit Saggar, Lay Member; Sara Nathan OBE, Lay Member.