Measuring the impact of Outcomes-focused Regulation (OFR) on firms

Executive summary

This report examines the impacts of Outcomes-focused Regulation (OFR) on the firms that are regulated by the Solicitors Regulation Authority (SRA). The aim is to identify the impacts, to date, of OFR on the regulated community and to set a baseline from which future impacts can be measured. The reasons for these changes are explored, as well as identifying evidence of any different impacts on specific groups of firms. The research is based on a telephone survey of 1,000 solicitors from separate firms. Respondents were drawn at random but did not include representatives of Alternative Business Structures (ABSs), in-house solicitors and the firms that are classed as 'high impact'

OFR was launched in October 2011 and prior to this the SRA carried out a survey that included questions on firms' views on this new approach to regulation. In 2011 36% of respondents gave a 'favourable' response when asked about their views on OFR2. The survey for this research, carried out one year after OFR's launch, repeated this question and found that 50% of respondents felt 'favourable' about OFR. This indicates that firms' attitudes towards OFR might be shifting towards greater levels of favourability as they increase their experience of working with the new regime of regulation.

Changes to activities undertaken to

Overall, respondents indicated a relatively good understanding of the role of Compliance Officers for Legal Practice (COLPs) and Compliance Officers for Finance and Administration (COFAs). However, a notable proportion still highlighted some uncertainty about their exact responsibilities (including 15% of respondents who are themselves the nominated compliance officer for their firm). An incomplete understanding of the responsibilities of COLPs and COFAs is consistent with the SRA's experience of administering the nomination and approval process for these compliance officer roles

Respondents estimated that just under a fifth of a COLP or COFA's time will be spent on matters relating to 'compliance with the SRA's regulation' as opposed to other fee earning or business activities. Respondents from larger firms tended to estimate a higher proportion of the COLP or COFA's time being required for 'compliance'. However, the implication of this finding is arguably most significant for smaller businesses and sole practitioners, where there is a perception that compliance activities will take up a relatively large proportion of the firms overall fee generating capacity.

58% of firms stated that, other than nominating a COLP or COFA, they have made changes to the way they comply as a result of OFR. 40% of firms stated that nominating a COLP or COFA was the only change they had made.

The main changes reported by firms were the review of existing policies and procedures, creation of new policies and undertaking training. Firms also mentioned setting up or improving risk management and quality assurance systems. Many of the changes appear to be one-off actions – for example, once a document or manual has been updated there are likely to be limited future costs involved. Firms also stated one-off costs like familiarising themselves with the new regulatory regime. This finding could support the view that a significant proportion of increased costs in compliance reported by firms are related to the costs of adapting to the change and that recurring costs in subsequent years will be lower. This will need to be tested in future research when this baseline is updated. It is important that the SRA acknowledges that one-off costs associated with reviewing compliance and making adaptations are significant for some firms.

Compliance costs

A large proportion of respondents reported significant increases in the amount of time and money required to comply with OFR:

  • 67% of firms reported more time being required to comply with OFR. For most the additional requirement was relatively small (under 20% more time estimated as being required) – although some firms did report much bigger changes. Explanations for these changes again pointed to a significant proportion of this additional time being associated with 'one-off' factors such as reading, researching and understanding the new regulations, creating new policies and setting up new quality assurance systems.
  • As a result of OFR, 76% of firms stated that they have spent money on training, 48% of additional administration, 27% on software/ICT and 20% on consultancy fees. Larger firms were more likely to have spent money to comply with OFR, but many small firms had also done so. For example, around 50% of firms with one employee had spent money on training.

Overall, a significant proportion of firms stated that compliance with OFR costs too much time and money. 44% of respondents believed that compliance with OFR 'takes up too much time' and 34% felt it 'costs too much money'.

85% of respondents 'strongly agreed' or 'agreed' with the following statement – “Even if you were not required to do so by the SRA, your firm would continue what it currently does to comply simply in order to run your firm well and look after your clients interests”. Only 5% 'disagreed' or 'strongly disagreed' with the statement. This indicates that although many firms view compliance costs as high, the vast majority also accept that what they do to comply is directly related to the good management of their business and the need to look after their clients' interests.

OFR was launched in October 2011 and prior to this the SRA carried out a survey that included questions on firms' views on this new approach to regulation. In 2011 36% of respondents gave a 'favourable' response when asked about their views on OFR2.	The survey for this research, carried out one year after OFR's launch, repeated this question and found that 50% of respondents felt 'favourable' about OFR. This indicates that firms’ attitudes towards OFR might be shifting towards greater levels of favourability as they increase their experience of working with the new regime of regulation.

Risk management

80% of firms described risk management as part of their day-to-day business activities. This self assessment of risk management capacity is likely to include a wide range of different approaches – from more sophisticated formal processes to informal consideration of the risks facing a firm's legal and financial activities. The SRA does not specify a particular approach that firms should take, provided that good risk management is carried out in a way that is appropriate to the circumstances of each firm. However, it is important to ensure that firms who state that they manage risk as part of their day-to- day business activities are doing so effectively and are not being complacent in their approach.

Just under a fifth of respondents stated that they were aware of the need to introduce risk management and were looking into this, or, that they were setting up or developing their approach to risk management. This finding is encouraging as these firms appear to be taking a proactive approach to improving risk management.

Overall, 59% of respondents stated that in the previous twelve months, their firm has made changes to the way they identify and manage risk. A tenth of these firms had done so entirely as a result of OFR and a further 73% had done so 'mostly' or 'partly' due to OFR.

The types of changes described by firms covered a diverse range of approaches - including 'improved procedures' (25%), 'increased checking' (20%) and 'reviewing existing policies and procedures' (17%). It is not possible for the SRA to assess the suitability of these approaches based purely on survey responses. Suitability to a particular business will depend on many factors, such as how they are applied and the complexity of the firm's business model. However, the descriptions provided give a useful baseline of firms application and interpretation of risk management which can be assessed against future survey findings. This will provide an opportunity to assess the effectiveness of the SRA's work to increase awareness of risk management best practice.

In delivering a risk based approach to OFR, the SRA aims to focus its resources on the regulated individuals and firms that are most likely to harm the interests of consumers of legal services, and to act promptly and effectively when risks are identified. 38% of respondents 'strongly agreed' or 'agreed' that the SRA focuses its resources on factors that present the greatest risk to the public. 17% 'strongly disagreed' or 'disagreed' with this statement. This finding is more positive than negative, but it indicates that more needs to be done to build understanding amongst the legal profession of how the SRA manages risk and delivers risk-based OFR. A key step towards this was the publication of the SRA's Risk Framework and Risk Index in December 2012. Further information will be provided to the profession when the SRA publishes a Risk Outlook, due summer 2013, which will explain the SRA's view on the greatest risks.

Interactions with the SRA and perceptions of

Only 51% of respondents 'strongly agreed' or 'agreed' that 'OFR makes it clear what outcomes the SRA expects' to be delivered. This is a concern as a lack of understanding of the outcomes could lead to them not being delivered. This could lead to firms attempting to comply in a way that leads them to experience higher costs or firms failing to effectively manage risks to themselves or their clients. It was notable that respondents who felt it took too much time and money to comply were also more likely to feel unclear about the outcomes to be delivered. The ban of referral fees for personal injury work has been a recent example where many firms have expressed a desire for more prescriptive rules. However, when firms are free to adopt a wide variety of business models and company structures, it would not be possible for the SRA to design effective detailed rules beyond those set out in government legislation.

32% of respondents gave a 'positive' rating for their overall experience of dealing with the SRA – compared to 21% who rated it negatively.

Respondents were also asked to rate their experience of a number of different aspects of the SRA. Whereas the majority of respondents were able to give an overall response about the SRA as a whole, when asked about specific areas of the organisation many respondents were not able to give an informed response. As a result there are varying proportions of 'don't know' responses for some areas. The findings below show the proportions of positive and negative ratings for each area where a rating was provided:

Figure B:  Ratings of different areas of the SRA
  As a proportion of those that provided a rating
…% 'positive' …% 'negative'
Ethics Guidance Helpline* 61% 12%
Supervisors** 49% 13%
Call Centre*** 41% 26%
MySRA / Online services**** 26% 43%
* N=699, ** N=500, *** N=588, **** N=965 (N= the proportion of valid answers, excluding 'don't know' responses)

The findings above show that the Ethics Guidance Helpline was generally rated most positively, followed by the respondents experiences of dealing with Supervisors and the Call Centre. The SRA's online facility, MySRA, was rated least positively reflecting its problematic launch which led to users experiencing difficulties during the Practising Certificate (PC) renewals process in 2011. The survey was completed prior to the 2012 PC renewals exercise, which avoided many of these problems7, and an improved rating should be achieved in future years.

OFR is intended to lead towards a more constructive relationship between the SRA and those it regulates. The survey revealed that 34% of respondents 'strongly agreed' or 'agreed' that their firm had a constructive relationship with the SRA (compared to 15% who rated the relationship negatively). Increasing the proportion of firms who feel that a constructive relationship exists will be essential to the long-term success of OFR. Over the twelve months since the launch of OFR there was little evidence that firms have experienced an improvement in this area. However, firms that had been visited by an SRA supervisor over this period were generally more positive than those who had not. This is encouraging as firms with more direct exposure to SRA supervisors working under the new arrangements of OFR were more likely to feel a constructive relationship had developed. As more firms gain this direct experience this should contribute to an overall improvement in perceptions of a 'constructive working relationship' in future years.

Approximately 70% of respondents stated that SRA enforcement acts as a credible deterrent to non-compliance at their firm. Those that did not feel enforcement acted as a deterrent explained that this was because they would 'comply anyway'. In terms of views on the credibility of enforcement as a deterrent to 'other firms', a slightly lower proportion (59%) felt that that it successfully played this role. Only 9% gave a response indicating that they did not believe that enforcement acted as a credible deterrent to other firms. The explanations for this included a perception that the SRA 'doesn't do anything' to enforce its regulation and that the SRA 'focuses its attention on the wrong things'.

Flexibility

55% of respondents did not believe that their firm had made use of the greater flexibility offered by OFR since its launch in October 2011. Only a very small proportion felt that had used this flexibility to a great extent.

Thinking about the future, over half of firms believed that they would use this flexibility to either 'some' or a 'great extent' – but still 28% stated that they 'would not at all' and 14% 'did not know'.

These findings indicate that firms are not widely positive about making use of flexibility offered by OFR. The main reason given for not doing so was a view that the system does not offer any real flexibility or that the outcomes are too vague or unclear from them to do so with confidence. This indicates that attention is needed to removing barriers to use of OFR's flexibility.