Line of sight: Future risk developments – the SRA's view of the main risks to its regulatory objectives and the public interest

The SRA has undertaken a review of the current legal services market to understand better the drivers of risks to the regulatory objectives. The Risk Outlook sets out the SRA's assessment of the key risks. It should help law firms to manage risk, demonstrating the priorities to which the SRA will allocate resources and explaining the controls we use to manage these risks. This webinar, originally held on 9 July 2013, should interest anyone with compliance responsibilities and individuals seeking a better understanding of risks in the legal services market and how they impact the way the SRA meets its regulatory objectives.

Webinar recording

View this video on YouTube


Questions and answers

During the webinar, participants submitted more questions than we were able to answer. For that reason, we have reproduced below many of the questions that were asked—along with our answers. We hope you find this useful.

Please note that in these questions and answers, as in the webinar, we use the term "firms" to describe all entities regulated by the SRA, whether sole practitioners, larger firms, alternative business structures or any other structure.

Q1: Why has the SRA's regulatory regime not been highlighted as a regulatory risk in the Risk Outlook?

A: We recognise that the change in regulatory approach from rules-based regulation to outcomes-focused regulation has meant that firms have had to think about compliance in a different way.

We have addressed risk associated with management of these changes by including regulatory and political change as a driver of risk, rather than a risk in itself, as we believe outcomes-focused, risk-based regulation is the best way to achieve our regulatory objectives.

We are conscious that regulatory burden and the cost of regulation remains a high priority for those we regulate, and it's something we're very aware of. Our red tape initiative is looking to remove those parts of regulation where the cost of carrying them out cannot be justified in terms of protection. It's an ongoing commitment.

Q2: Does the SRA have plans to give any advice to firms on how to manage the risks in the Risk Outlook?

A: We are currently thinking about how best to engage with firms around the risks in the Risk Outlook. For the current risk of Financial Difficulty, we have already provided guidance on good and poor behaviours to help firms manage this risk. It is possible that we will take a similar approach with other risks in the Outlook, so watch this space.

In the risk section of the SRA website, we have information about our risk index which covers all 43 risks to our regulatory objectives, and can provide context to the risks in the Outlook and how they fit into our framework overall.

Q3: What are some specific examples of the problems with improper or abusive litigation?

A: When improper or abusive litigation emerges, it usually has a big impact on consumers and attract press coverage, but it tends to occur as isolated, high profile incidents rather than be a continuous issue.

An example of this type of litigation is the recent case of the correspondence sent out to people claiming they had illegally downloaded pornography, and would have to pay to keep the matter out of court. This was a clear example where threat of litigation was being used to intimidate consumers with a lack of knowledge of the legal system into making payments.

These are the types of cases which really undermine the public's trust in the legal system, and threaten the public interest.

We're not focusing on a specific case of improper or abusive litigation at the moment, but it's in our potential risks as we feel it's important to be able to react promptly when these things emerge, due to the impact on the public and on consumers associated with this issue.

Q4: Could you explain in a bit more detail what you mean by the term "group contagion"?

A: The risk arising from what we call "group contagion" is the risk that one firm or part of a group affect a regulated entity within that group.

Many businesses are made up of a group of firms, whether it's offices in different parts of the country, or different countries, or alternative business structures where there are legal and non-legal entities which are part of the same business. Group contagion is essentially about whether if something goes wrong in one part of the business—so one office or one firm—this problem could spread to other parts of the business.

In the Risk Outlook, we are highlighting that the risk of group contagion is higher where members of a group are less integrated in terms of systems, controls, finances and decision-making, but are still taking on liabilities and risk of the other members, with no control over the other parts of the group.

More information about group contagion is available in the Risk Outlook.

Q5: Have you given any thought to the additional regulatory burden that may be placed on firms as a result of you issuing this report?

A: This is an interesting question, and our response is that we think firms should already be doing risk management, and we hope the Risk Outlook will be an aid to your risk management, alerting you to what we as a regulator are focused on at the moment. It's important that you focus on the risks most relevant to your firm, but the Risk Outlook should give you an advantage in terms of understanding the key risks that the SRA in concerned with at the moment.

We also hope that the Risk Outlook can give you some clarity around why the SRA is focused on certain areas—why we are currently focused on financial difficulty, for example. We don't want to be inconsistent in our approach, and so have provided an evidence base to show why we are focused on financial difficulty, which should go a long way to explaining why we are currently collecting extra financial information at some firms, on a risk basis.

Q6: Are there any plans to revise Lexcel so that membership is indicative of good risk management?

A: Lexcel is a Law Society initiative, it's an accreditation that they offer, and the SRA does not have input into the content of Lexcel. However, we do consult regularly with the Law Society about our regulatory regime and how this feeds into their work.

It's also worth saying that good risk management is something that is encouraged by the Law Society and they have a lot of guidance about it on their website. However, we do not consider that any type of accreditation means that a firm automatically has good or poor risk management, and so should be supervised differently to a firm that does not have the accreditation.

If you would like more information about Lexcel, visit the Law Society's website, or contact your local Law Society representative.

Q7: One of the risks highlighted in the Risk Outlook is a lack of a diverse and representative profession. The Legal Education and Training Review was also recently published and covered some similar issues. How will the SRA be taking findings from both reports forward?

A: There are some key priorities for the SRA that have come out of the Legal Education and Training Review. They are

  • how to assure continuing competence, including continuing professional development (CPD),
  • how to enable greater flexibility in the delivery of education and training by avoiding unnecessary regulatory restrictions,
  • how to improve access, equality of opportunity and diversity within the profession, and
  • how to achieve the right balance of responsibilities between the regulators, education providers, law firms and legal professionals.

We'll be looking at how to incorporate these priorities into our work, including within risk, over the coming months now that the report has been published.

Touching on the priority of improving access, equality of opportunity and diversity within the profession, this does link through to one of the current risks in the Risk Outlook, Lack of a diverse and representative profession.

We've included this as a current risk because part of our regulatory remit is to encourage a strong, diverse and representative profession, and although a diverse range of people are entering the law, we do still see evidence of barriers to progression within legal services. It's not always clear why this is, but there is a lack of women at partnership level and a pay gap between BME solicitors and white British solicitors. Access to the profession for people from less affluent socio-economic backgrounds is also an issue.

We know that firms cannot tackle this by themselves, as there are many social and economic factors at play, but at the same time we know we can do more to encourage better practices across the profession on these issues. We have recently published a report outlining best practice in encouraging equality and diversity across the profession, which outlines the sort of behaviours we want to see.

Q8: In terms of the regulatory objectives, would you say the SRA is prioritising some objectives over others?

A: The Legal Services Act 2007, which contains the regulatory objectives, does not do any prioritisation of the objectives. So, no, we haven't gone out of our way to prioritise any particular objectives, and we see them all as having an equal weighting.

There is an analysis at the back of the report which sets out which regulatory objectives we think are affected by the current, emerging and potential risks. Through this analysis, we have shown that the risks in the Outlook have the biggest impact on the following regulatory objectives:

  • protecting and promoting the public interest
  • protecting and promoting the interests of consumers, and
  • promoting and maintaining the professional principles.

We are not making a judgement that these objectives are more important, but they are the ones most impacted by the risks we're currently seeing in the market.

Q9: Does the Risk Outlook apply equally to in-house lawyers and local authorities?

A: The Risk Outlook is primarily about risk to the SRA's regulatory objectives, rather than about risks to firms or individuals. You will be managing risk within your own practice, in terms of protecting your clients and the profitability of your firm, and this applies equally to those working in house and at local authorities.

However, the risks in the Outlook are not all going to apply equally to every firm. There are some issues in the Outlook that are obviously more likely to crystallise in what we might think of as a "traditional solicitors firm" than for an in-house lawyer or someone working at a local authority.

Saying that, a number of the risks in the Outlook can be applied to in-house lawyers and local authorities; in terms of collection of evidence for the Outlook, we have spoken to in-house lawyers to explore what is going on in their market and what types of risks they're seeing.

Issues like providing advice to those who may be vulnerable may be framed slightly differently for those in local authorities; although they are not providing this advice directly, they need to think about how their work impacts an employer who is providing advice through a statutory duty of care to vulnerable consumers.

Other issues such as group contagion may have a slightly different meaning for you, as there may be reputational impact for your organisation if in-house lawyers at a similar body are found demonstrating poor practice.

At all types of firm, whether in house or not, risk and compliance staff need to be thinking how the Risk Outlook applies to you and your firm.

It's also worth saying that later this year we'll be publishing a report on in-house lawyers on the SRA website.