Compliance for Law Firms (Incorporating COLP & COFA 5)

Location: De Vere Venues, Holborn Bars

Regulatory authorities and leading practitioners share their experiences of tackling the issues and risks facing firms. The conference is for individuals working in law firm compliance. Crispin Passmore, SRA Executive Director, delivers a keynote speech on the SRA’s priorities. Helen Walsh and Michael Ewart, Regulatory Managers, facilitate a workshop on getting the most out of regulatory management and sharing best practice.

The view from the regulator: reducing regulatory burdens - Passmore, C


Good morning. I'm delighted to be here this morning to deliver what is my first speech at the Solicitor's Regulation Authority. I joined the SRA in January having spent more than 20 years working in legal services. My experience has led to my fundamental starting point that a competitive and liberalised market is most likely to work for clients of legal services. Good regulation is our best guarantee of the market supporting consumers and the public interest.

It's on this basis that I want to support the next phase of modernising our regulatory approach, with a strong focus on reducing regulatory burdens, removing barriers to entry and supporting lawyers, law firms and other legal businesses as they widen consumer choice and access to justice.

Our priorities

The first 100 days in a job has taken on a symbolic significance and the habit of marking this milestone has become somewhat banal.

I have not been specifically counting the days, but I realise that I will soon reach this point at the SRA. However, modernising regulation, just like the evolving legal market, is a task for the long run rather than a revolution. It isn't a time for hurried policy development. It is a time to work out what really needs to be done and take stock, to look at where we're getting things right and where things might need to change.

In this time we have of course been joined by a new Chief Executive, Paul Philip.

In his first weeks in the job, Paul has outlined his priorities for the SRA—I am sure some of these came as no great surprise; improve our operational delivery, build better relations with the profession; a greater focus on customer care and timeliness and, most fundamentally, a commitment to reducing the burdens on regulation by becoming a more proportionate regulator.

I am entirely in agreement with these early priorities. But there is an overarching priority that encompasses all of these different issues.

It is, quite simply, to be a better regulator.

What's been achieved

This doesn't mean that we aren't doing things well now—we have made significant progress in modernising our approach to regulation.

  • Our recent survey of regulatory management found 90% of respondents had a constructive relationship with their regulatory manager; 85% have made changes to the way they comply and 60% reported having a RM allowed them to comply with regulation more effectively. We've come a long way in building constructive partnerships with large firms, and I'm sure many of you here today have seen the benefits of this.
  • By focusing our resources where they're needed most we've managed to avert a number of big disorderly collapses of well-known and perhaps less well-known law firms that would otherwise have put large numbers of clients at risk and cost the profession—and ultimately consumers—a significant amount to clean up.
  • Our red tape initiative has stripped away unnecessary bureaucracy. By listening to those we regulate, we no longer require firms to report non-material breaches, we've allowed registered European lawyers and registered foreign lawyers to be appointed as new managers and owners of regulated entities, and we've removed some restrictions on charging by in-house lawyers.
  • Last week marked the two-year anniversary of the SRA having licensed its first ABS. On that day Co-operative Legal Services became licensed to offer reserved legal activities and John Welch and Stammers in Oxfordshire and Lawbridge in Kent converted to ABSs primarily to allow non-lawyers who had been integral parts of the firm to be recognised more properly.
  • ABSs licensing has come a long way since then. In the first year, 74 licences were granted. In the light of the early experience, the SRA improved the application process to reduce the administrative burden and waiting times, without undermining its robustness. This led to a near doubling of licences being awarded in 2013.
  • More than 250 ABS licences have now been approved. Early research shows that these ABSs have achieved a significant share of the overall market in certain areas of legal work.

We're getting quicker, we've cut back on red tape and we've enabled market entry to an enormous range of organisations—from very small firms to others containing hundreds of lawyers and other staff, with turnover in excess of £100 million.

We have in many ways become a better regulator.

But we have always been clear that this is a long term programme and we are only part way to where we need to be.

For example, our Handbook needs to continue to evolve to deliver more proportionate regulation; in some instances, it is not delivering the increase in competition that it was intended to promote. How can we make it simpler to comply with; and how can we help law firms, especially those smaller firms without dedicated compliance teams, to understand what is expected of them?

Similarly I have been focusing on how we can best remove unnecessary barriers to enter the legal market. I want to pick up the pace and ensure that better regulation principles underpin every aspect of our approach. 

Background – MDPs

The Legal Services Act was described as the Big Bang moment for legal services, though I always took the view that its short term impact was overestimated and its long term impact significantly underestimated. By encouraging new entrants to the market, the Act sought to increase competition and, it was hoped, improve the consumer experience, particularly in terms of quality, access and value.

The Act ended six years of debating the principle of liberalised legal services. But even seven years after the passing of the Act the practicalities still haven't caught up with the vision. Throughout that period firms and individuals have been rapidly innovating and identifying new services and ways of delivering them. Regulation is too often playing catch up with the market. So, our challenge is not to deliver a regulatory system that meets the expectations of 2007, or even those of 2014; I aspire to quickly develop a system of regulation that is capable of working through to 2025 and beyond.

Small businesses are still poorly served by legal services; there are issues around accessibility, and for many, the cost of legal services puts it out of reach. I often ask how many lawyers can afford their own services?

Isn't this what ABSs were meant to address?

No doubt we've come a long way in licensing ABSs and in many ways they are changing the face of legal services, not least because of the way that traditional law firms have responded. Perhaps the most significant changes that ABSs have made is how the business is financed and the large numbers that have successfully attracted new investment. But as I say, traditional law firms have responded too and we now have a more dynamic legal market.

The problem

However, some businesses are notable by their absence, none more so than Multi Disciplinary Practices. By an MDP we mean a business that delivers reserved legal services with other professional services, such as accountancy, land and housing management, or financial services.

It is exactly the type of business that the Act was expected to facilitate: a 'one-stop-shop' for consumers; opening up access to legal services, increasing competition in the market, driving down costs and improving value for money.

They were expected to be a key part of the post Legal Services Act market and the SRA made explicitly clear its desire to regulate such firms when it applied to become a licensing authority in 2011.

Accountants, surveyors, financial advisers, estate agents and a whole host of other professions working with solicitors to offer a combination of professional services. So, for example, a non – lawyer owned consultancy that currently provides wealth and asset management and tax advice services to clients might use solicitors or other authorised lawyers to manage legal transactions and disputes, conveyance property or apply for probate on their behalf if they became an ABS, without the extra cost of instructing external lawyers.

The reality is very different. In the two years that we've been licensing ABSs, we've only seen a relatively small number of applications and limited entry of MDPs.

So what's happened?

The scope of our regulation and how it applies to MDPs seems to be at the root of the problem. In particular, the extent that the activities of non-lawyers within MDPs need to be regulated by the SRA.

The rules in our handbook might be described as complex—they are certainly long at over 700 pages. The effect of the rules seems to be that any 'legal activity' even if it is not a reserved legal activity, has to be regulated by the SRA within an SRA regulated firm or a connected business.

There is a serious risk that this can become just too complicated and a barrier to entry and innovation.

The situation we are particularly concerned about is where an MDP will be providing some or all of its non-reserved legal services by non-lawyers that are already regulated by another professional regulator.

I'm going to use an example of an accountancy practice that wants to become an ABS. I'm using accountancy as an example, but it would apply in exactly the same way to any mix of legal and non-legal activities, such as insolvency services or financial services.

Such a firm is likely to already be providing some sort of legal services in relation to their bread and butter work such as tax advice, auditing and business advice.

The LSA of course does not require that all 'legal activity' be regulated by an LSA approved regulator – only the reserved legal activities. Any regulation of that legal advice is via their own regulatory rules.

But, under our current rules, if the accountancy firm wishes to add reserved legal activities to the services that it offers and applies to become an ABS, then all of that firm's legal services, including the non-reserved activities carried out by accountants, will also fall under our regulation.

And if the firm wishes to separate its reserved legal activities out, this is likely to be prevented by our separate business rule.

As a result, firms that have applied have had to be granted complicated waivers and gone through complex engagement with us to achieve the sort of market entry that we sought to deliver in the first place.

This could be costly for those applying, could delay applications and, create unnecessary burdens on applicants. It may even have put some off altogether.

Is there a risk that we are perceived as only being happy with firms that look like law firms? Could this deter interest in the market for people who want to innovate and work in different ways?

The numbers of applications have been in the tens rather than hundreds which should cause any forward-thinking regulator to at least check if it has inadvertently deterred applicants.

There must be a risk that this has hindered the development of MDPs and prevented the development of choice for clients. This could impact significantly on small business consumers who have been recognised as being poorly served by the existing legal market. But similarly it might well impact on any consumers that could benefit from more joined up legal services.

The solution

So we need to pick up the pace when it comes to licensing MDPs. I am today setting out our thinking in seeking to move to an effective regulatory framework for the authorisation and supervision of multi-disciplinary alternative business structures providing legal and non-legal services.

We are considering radical changes to the rules governing the authorisation and supervision of ABSs. Where an ABS carries out non-reserved legal activities through non-legal professionals, the SRA is considering how we could get to a position that the activities will not be SRA regulated subject to appropriate safeguards or conditions. These conditions, could be, for example:

  1. The activity not being led or supervised by people authorised by the SRA;
  2. The activity being subject to suitable alternative regulation; and
  3. The client being aware that the activity is not SRA regulated and instructing the ABS on that basis.

This is entirely consistent with the duty to promote growth that the SRA is likely to acquire from the current Deregulation Bill, as well as being consistent with the gamut of regulatory objectives under the LSA and the better regulation principles. It is intended to increase consumer choice, drive value for money and promote access to justice. Lawyers that compete and thrive in this market will be contributing to a strong and independent legal profession.

Next steps

We're publishing a statement on the regulation of MDPs today and this sets out our direction of travel. There is much to consider before we can make proposals for formal consultation. We want to engage widely to ensure that we consider all the issues.

So, we're inviting prospective MDP applicants to engage with us on the issues, some of which are complex. This is to ensure that MDPs and the SRA will be able to take forward applications quickly once decisions have been made on the policy.

We are also setting up a reference group to help us during the development of any changes, and to make sure that we develop solutions that work in practice. This will include representatives from a wide range of bodies that can help us identify and consider all of the issues as we take this important step.

We will be consulting on this in the early summer and plan to bring any changes in by the end of the year if that proves feasible.

Implications for how we regulate

While this proposal is focused on MDPs, it has ramifications for how we regulate more widely. The SRA is rightly committed to a level playing field—there should no favours or benefits for particular business models. But where the issues that we are tackling—the problems that arise—are different in different market segments, we must respond in a manner that is consistent with the better regulation principles.

It is often pointed out that big city firms and small firms, for instance, are like chalk and cheese. They face different issues, as do firms that focus on retail consumers as opposed to corporate consumers. The SRA already recognises this with its use of Regulatory Managers. And our thematic work focuses on specific issues that affect certain segments.

So do we need a more nuanced approach to how we regulate? We do think there is a need to continue to develop the current model of regulation, particularly given the pace at which the legal market has already diversified and become more plural. It's too early to say exactly what that looks like.

However, we think that there is scope to consider different provisions for different types of firms, alongside different supervisory approaches, recognising the variety of firms, services and consumers.

These are big issues that we plan to take a look at in more detail. We need, for example, to consider how often we waive certain rules, such as the separate business rule; or how we impose conditions in certain circumstances in order to make sure that our regulatory handbook and approach is keeping pace with the dynamism of solicitors and their firms.

Other ways we're reducing regulatory burdens

We are also picking up the pace on others areas where we can do more to reduce unnecessary burdens on those we regulate.

The education and training review is well underway – we recently consulted on proposals for removing unnecessary prescription about how the stages of qualification as a solicitor should be completed, and other requirements that do not serve a clear regulatory purpose.

And we are currently consulting on a radical overhaul of CPD requirements with proposals to bring in a less prescriptive approach to continuing competence.

We are continuing to explore other areas of education and training where we can secure good outcomes with less regulatory burden.

Elsewhere, and directly relevant to many of this audience, we are asking ourselves if the requirement for accountants' reports to be filed by all firms is too broad and not targeted or proportionate.

A significant review of the compensation fund is underway. We will soon publish an information pack that sets out much more detail about the compensation fund. We need to think about the costs and benefits of the compensation fund as it operates at present so that we protect consumers without pushing up costs unnecessarily. A formal consultation will take place later this year and anyone with an interest is welcome to share their views with us.

And there will be a further push on our red tape initiative. Behind this initiative were mounting concerns from firms about the level of burdens still in place following the introduction of our new regulatory approach in 2011.

We agree. And significant changes have recently been proposed.

Our next phase of the red tape initiative is looking at regulations such as…

  • Removing the need for the annual keeping of the roll exercise, and our consultation on this was published earlier this week.
  • Our authorisation of sole practitioners. Lifelong licences are currently given to businesses we regulate, other than sole practitioners. Instead, they have an endorsement on their practising certificate which has to be renewed every year. We are looking at deregulating this so sole practitioners can be granted an authorisation certificate that doesn't have to be renewed annually. Unnecessary regulation, we think, that can be ditched. (See News release, 28 March 2014: Lifetime licences for sole practitioners.)
  • Residual client balances. Currently, firms can withdraw anything under £50 following an unsuccessful search for former clients and donate it to charity. Anything over £50 involves a disproportionately complicated and costly process. This was raised with us through our initial red tape challenge by the Law Society and some Solicitors. We do listen. We think this can be safely increased to £500. (See Red Tape Initiative consultation: Residual client balances.)

These are just a few examples, but you can have your say on how we can reduce red tape at any time. I'd encourage you to email us at redtapeinitiative@sra.org.uk with any suggestions that you've got, and I will make sure that we consider them carefully.


Better regulation doesn't just help those we regulate. It also helps us to deliver the outcomes we are looking to achieve.

Good regulation doesn't mean regulating everyone in the same way, but in a proportionate way to the risks that businesses need to manage.

So whilst I do not claim to have delivered a radical 100 day plan, I am confident that the SRA is developing far-reaching proposals to become a better regulator, to remove unnecessary barriers to entry and be more proportionate in how we regulate.

In a speech in 2010 Charles Plant, Chair of the SRA Board, outlined our proposals to regulate ABSs. He said in relation to MDPs: "We cannot, nor should not, try to second guess what the market will want. It will be for the market to decide on the ABS model it wants and then, hopefully, for consumers to benefit."

This is as true now as it was back then.

But it is for the SRA to offer vital leadership to maintain standards, ensure we can better support businesses, making it easier and cheaper for them to make the most of the opportunities now on offer. Lawyers and firms can then get on with what they do best – innovating, enterprising and competing in order to grow the legal market and improve access to justice.

Thank you.