Good afternoon! When I originally accepted the very welcome invitation to address this conference, I anticipated, as did you, that the nomination process for COLPs and COFAs would have concluded and I could focus on the various issues that have been on your agenda today. Instead, I'm highly aware that the timing of this speech is against a background where we have yet to fire the starting gun for the COLP and COFA nomination process. I am pleased to say that I'm going to be able to provide more detail on this today, both about the timing of the process, the regulatory importance of the process itself and what it will look like for firms and their nominees, and that is what I am going to concentrate on. However, I'm very happy to pick up any particular issues which have emerged during questions, if that might be helpful.
Clearly the nomination process is starting later than all of us would have liked. This is because we have been keen to reflect on the difficulties there have been with the online PC renewal experience before we launch a further online process. We are absolutely clear that we must do all we can to ensure there is not a repeat of these difficulties, not just for this year's PC renewal process but also for any of the other similar engagement we have with firms.
But this consideration has not just been about the operational side of the system. It has also been about us being absolutely clear that our approach to the COLP/COFA process is consistent with
- our promise to be proportionate in asking for information from firms and individuals—only that which we need and only that which we cannot source from elsewhere; and
- our overall risk-based approach to regulation and the critical place for the COLP and COFA roles; and more broadly
- the changes to legal services regulation inherent in the Legal Services Act 2007 and before it the 2004 Clementi "Review of the Regulatory Framework for Legal Services in England and Wales".
So before I run through the approach we intend to take to the specific COLP/COFA nomination process, I'm going to take a step back and reflect on the context for why we are doing all of this.
As we all know, the Clementi review didn't come from left field. Throughout the late 1990s and into 2000/2001, various reviews, particularly by the OFT, saw an increased focus on competition in and regulation of the professions. There was a growing concern that self-regulation and supplier controlled restrictions to competition, including restrictions created by statute were not in the consumer interest and risked self-interest and public interest becoming muddled; and that the handling of consumer complaints was not fit for purpose.
For the legal services sector, these broader concerns about competition in and regulation of the professions translated into the following three specific issues which needed to be addressed by the Clementi Review:
- That the prevailing regulatory framework was "outdated, inflexible, over-complex and insufficiently accountable or transparent" and that the "failings (arose) because the governance structures of the main front line professional bodies (were) inappropriate for the regulatory tasks they face".
- Significant concerns that, in practice, these failures in the regulatory framework were translating into poor outcomes for consumers and the public interest. For example, in respect of handling of client money, client care, general financial and business management, conflicts of interest and prevention of criminal activity. In particular, that when things went wrong, the approach to consumer redress was inadequate and little was being done proactively to mitigate these types of risk.
- Finally, the third element addressed by the Clementi Review was the restrictive nature of legal business structures.
What was emerging therefore was a growing focus on the role, not just of competition, but also independent modern regulation and, pertinent to my focus today, the role of the entity in which professionals practise, as essential elements in making sure that the legal services sector of the 21st century properly address the needs of consumers and the public interest.
Turning to the 2004 Clementi Review. Much of this is familiar! Some quotes:
"To consider what regulatory framework would best promote competition, innovation and the public and consumer interest in an efficient, effective and independent legal sector."
"To recommend a framework which will be independent in representing the public and consumer interest, comprehensive, accountable, consistent, flexible, transparent and no more restrictive or burdensome than is clearly justified."
"Research shows that complaints arise as much from poor business services as from poor legal advice. If certain lawyers continue to reject the notion that they are in business, such complaints will continue until they are indeed out of business."
"The change in regulatory emphasis which is proposed in this Review is a shift in emphasis towards regulation of the economic unit and away from regulation of individual lawyers. This is particularly relevant for the regulation of new business practices...but it also has relevance for some existing legal practices, where regulatory emphasis needs to be on practice management and systems as much as on individuals."
The rest, as we know, is history! The Legal Services Act was passed and is well on the way to being fully implemented and key elements of a new regulatory structure have been implemented, including the Legal Ombudsman, to focus on complaints and redress, and independent regulatory bodies, including, of course, the SRA.
I know the SRA has taken a recent reputational hit in relation to "mySRA". We're not shy of fronting up to that, nor are we shy of being clear that designing and implementing a modern regulatory regime more generally, can be a bumpy ride from time to time. But I do think it is clear that the SRA has grabbed the baton and is leading the charge to champion and implement the spirit of the Clementi Review and the Legal Services Act.
In particular, using injections of professional, modern regulatory thought and concepts, including the experience gained in the regulation of other sectors of the economy, the SRA's focus is on developing a regulatory regime where
- regulation is a proactive tool, focused on delivering key regulatory objectives rather than a passive reactive tool focused on complaints;
- we deliver the substance as well as the form of independent separation between regulation and representation. We are happy when we are described as "fiercely independent". And it's not counter intuitive to say that by protecting that reputation, we build a strong base for confident, constructive engagement with the firms we regulated, rather than the defensive bureaucratic approach that characterised some of our previous engagement;
- we increasingly focus on the firm and those responsible for running the firm. Of course we will always hold individuals accountable for their actions when things have gone wrong, and the education and training review that is underway will have significant implications for what individuals will need to do to be able to demonstrate competency to practice. But I cannot over emphasise the centrality of our focus on the firm and those responsible for running the firm, in the delivery of risk-based, proactive regulation. This is because the way a firm is run, its culture, the collective approach to risk management, training, taking on new business etc. has a huge impact on whether or not the provision of legal services is competent and ethical. For example, consider the work we are doing to meet concerns that criminal advocacy is less than competent. All the publicity on this work has been on the development of the scheme to assure individual competency. But competency of the service has as much to do with the approach criminal practice firms take to their choice and deployment of their advocates, a point we will be taking forward in future supervision work.
At the centre of all of this is the question of what do we need to do to be proactive and risk based when we regulate a community of 11,000 firms? What is the most effective and efficient way to deploy our resources so that we maximise the extent to which we regulate to support the delivery of competent and ethical legal services?
By and large, we are regulating a community which is highly educated and capable and willing to deliver good legal services. But history tells us this is not always the case, and to an extent that created sufficient concern to bring about the Clementi Review and the Legal Services Act. Moreover, recent research we have published that baselined firms' attitudes to compliance and actual compliance, contains pointers which for me underline the benefits we hope to see from the COLP and COFA regime. In particular:
- whilst the vast majority of firms place a great deal of importance on professional ethics and delivering professional services...
- a lot of firms may not be appropriately delivering the required regulatory outcomes, albeit, in the main, in areas which don't present immediate extreme danger, but nevertheless concern us, for example, client care.
This is despite the fact that entity-based regulation has been in force since 2009.
What this all this tells us is that a proactive efficient regulatory regime
- is one where the primary responsibility for managing compliance risk lies with the firms, with particular responsibilities for the most senior people in firms;
- encourages the development a strong proactive compliance culture in firms by creating a clear formal focus for delivery of the regulatory outcomes in each firm, increasing the chances that the vast majority of firms will identify and deal with regulatory risk;
- leaving us at the SRA to focus:
- on those who cannot and/or will not deliver competent and ethical legal services; and
- on those who are capable and willing, but need our support to manage particular compliance issues.
It is this thinking that underlies our decision to create the COLP and COFA regimes.
Probably the most important element of this regime is the less obvious one. It is how the regime works to make sure that although the COLP and COFA are formal focus points for compliance, they are not the sacrificial lamb so that others within the firm, particularly the senior managers, can absolve themselves of their responsibilities. If it worked that way, the regime would fail its most important test: the creation of a firm-wide culture of compliance.
In many respects this regime, particularly in the larger firms, is about articulating our expectations of two groups rather than one.
The first are the absolute requirements on the most senior people in the firm for
- compliance with statutory and regulatory requirements (rule 8.1 of the SRA Authorisation Rules 2011),
- ensuring that at all times the firm has in place suitable arrangements to ensure compliance (rule 8.2), and
- that the firm has suitable arrangements in place to ensure that its COLP and COFA are able to discharge their duties (rule 8.5).
The second group are of course the COLPs and COFAs and their responsibilities are to take reasonable steps to ensure compliance as relevant to each of their roles, to report material compliance failures to the SRA and to keep records of non-material breaches.
Many in this audience will be very aware of the effort we have put into highlighting the responsibilities of the senior managers of the firm in this regime over the last year. A particular focus has been to secure strong senior engagement up to and during the COLP/COFA nomination process.
And on this, one, perhaps controversial, observation at this point, is that the fear-tinged concern that arose in the wake of our decision to create this regime, much of it unnecessary once it is realised that controlling interests cannot hide behind their COLP and COFA, has also evidently focused minds in a very helpful way. It is clear that some firms at least are taking this regime very seriously and are thinking through, perhaps properly for the first time, what it means to be a regulated entity. I'm certainly not suggesting that all firms need to do the following, but, by example, when I hear that a firm has taken the decision to make changes to its employment contracts so that all of its staff are aware of their responsibilities to support the work of the COLP and COFA, for example in reporting possible compliance issues, this is a firm clearly keen to get on top of its responsibilities. It is likely to have a constructive relationship with us, even in difficult circumstances.
Please don't all feel the need to give your HR Directors a massive headache but I would hope the point I am making is clear: there is a win-win potential outcome here of better regulatory outcomes, less intrusive regulation for firms and lower regulatory costs.
Turning now to the nomination process. We have four objectives for this:
- the first, particularly after the PC renewals experience, is to make it operationally as straightforward as possible to fill in the forms and submit them,
- the second, is to manage the risk that the individuals appointed are not competent or ethical, possibly unbeknownst to the firm,
- the third is to maximise the extent to which senior managers in firms and their nominees actively engage in the importance of the exercise and think through their obligations under the regime;
- And the fourth, consistent with our risk-based approach, to maximise the extent to which our checking of firms' judgement on this is confined to higher risk firms, and that we minimise the extent to which we spend time second guessing decisions by firms that are capable of exercising good judgement.
We've given a great deal of thought to this over the last few months because we believe that if we get this right, this year's "mass" nomination process by firms we already regulate, has the potential to be a one-off opportunity, in and of itself, to deliver better regulatory outcomes across the piece, without us needing to visit every firm to check they've made good choices.
Consequently, we have worked our way through various drafts and approaches and have arrived at one which we believe delivers on all four of our objectives. It's a short form based on binding declarations by both a manager with authority to sign on behalf of the firm and the COLP and COFA nominees, for which the signatories personally will be held to account to by us.
In summary, the process will set out the obligations of the firm (the ones I outlined earlier) under rules, 8.1, 8.2, 8.5 of the Authorisation Rules.
Someone who has authority to sign on the firm's behalf, will then need to sign the firm's side of the declaration. This will include
- confirmation that the firm has suitable arrangements in place to ensure that the COLP and COFA are able to discharge their duties; and
- confirmation that the COLP/COFA declarations, including that the nominee has sufficient seniority and responsibility in the firm, are correct.
The form will also set out the responsibilities of the COLP and COFA under rules 8.5(c) and (e) and requires the nominee(s) to declare
- that they understand their obligations and have sufficient responsibility in the firm and are in a position of sufficient seniority to perform the role;
- they are satisfied that the firm's managers have put in place suitable arrangements to ensure that they are able to discharge the COLP/COFA duties in accordance with the rules;
- that they will take all reasonable steps to ensure compliance; and
- that they consent to being designated as the COLP/COFA.
There are then relevant declarations for the suitability test.
Signatures in actual blood aren't obligatory, but I think our intention to focus minds is clear and we will take it very seriously if subsequently it becomes clear that declarations were signed unthinkingly.
At our end, we will
- take a risk-based approach to checking the nominations of the individual COLP and COFA nominees;
- go back to a subset of firms, largely on a risk basis, but also those that are highly complex and also some random sampling, to check that sensible judgement has been exercised by the firm in this process. Some firms will be contacted by us during the nomination process;
- make sure that dedicated phone support is available to firm managers and nominees who wish to talk through the approach they are taking.
We will be user testing this approach over the next month and the form and further information will be available on 31 May. Firms will need to make their nominations by 31 July. Clearly, given this timetable, we may need to accommodate some late approvals of COLPs/COFAs, beyond 31 October, and we are currently considering this. We want to have COLPs and COFAs established in all the firms we regulate as soon as practicable, but I can assure you that we will do our utmost to make the process simple, and that we will not impose unreasonable deadlines.
I should also contrast this approach, which is designed to be proportionately focused on the firms we already regulate, to that which we use for new firm applications including ABSs. Here we purposefully are prepared to get in behind each in and every application, including the COLP and COFA nomination, because we are making an initial judgement on whether the entity is fit to provide ethical and competent legal services and to understand the risks posed. These nomination forms will continue, as at present to ask for more information including personal career background, organisational structure etc.
Finally, what I have covered today is the work we are doing to establish formally the COLP/COFA community. It of course doesn't end there. On this a couple of points:
- We very much welcome the various initiatives to bring COLPs and COFAs together to discuss issues of mutual interest and support. We very much welcome initiatives by organisations such as The Law Society to consider the role that can be played by representative bodies in supporting the work of COLPs and COFAs. We will always be ready to engage with you in these initiatives, whether it be people like me participating in events such as this, or our key people involved at the coal face of our regulatory activity having more working sessions with you.
- Separately, I cannot over-emphasise the "COLP/COFA community" point as important from our perspective, and we are doing some thinking about what this might mean in practice and we will share this thinking with you as it emerges as, clearly, we will need your input as well. This isn't just about having a particular point of contact with each firm with whom we can promulgate particular thematic or firm-based activity. We also hope that, at least in part, this is a community, which, because of its heightened regulatory awareness is one which we can have a particularly productive broader regulatory engagement with, supporting our own development as a regulator.