The Solicitors Regulation Authority is set to introduce a new compliance regime, and the changes are the most significant since 2011. Paul Bennett outlines the proposals and their potential impact, to help you plan ahead
In September 2016, the Solicitors Regulation Authority (SRA) proposed a radical overall of the Code of Conduct regime. The consultation closed last month and we await the SRA’s response, but if the changes come in as proposed, the timeframe is short – the changes will come into force in the autumn of 2018 or spring 2019. We, as law firm managers, must begin now to review, revise and update our systems and support colleagues to get up to speed.
The onus is on each solicitor to assume responsibility for their own compliance in all they do
The aim of this article is to highlight the underlying challenges so you can start to manage that process – probably through your compliance officer for legal practice and/or senior management team.
Why has the SRA proposed the changes?
The SRA recently took part in a series of conferences at which I also spoke in the Midlands. At these events, the SRA helpfully shared the thinking behind the changes. In summary, the aim is to help firms by removing complex layers of bureaucracy, and encourage innovation.
In the long-term, even a cynic like me will concede that reducing bureaucracy is a positive move. But in the short-term, all law firms face a logistical challenge to be ready for the changes, against a backdrop of other compliance challenges, such as the coming into force of the General Data Protection Regulation, and while the new anti-money laundering regime is still bedding in.
When the changes come in, the Code of Conduct  will be simpler and less prescriptive. The regime is designed to give guidance, while still allowing firms the freedom to develop their own solutions, as appropriate to their clients and skills. The artificial and confusing language of ‘outcomes’ and ‘indicative behaviours’, introduced seven years ago, will be swept away.
Another key aim is to try to encourage and drive innovation to ensure wider access to justice. I don’t think the SRA’s objective is realistic in this regard, but nonetheless, we will need to ensure that, as established practices, we refine our approach to remain competitive if innovation is to be possible.
The major changes
Perhaps the most obvious change is that there will be two Codes of Conduct : the Code of Conduct for Solicitors (which I will call the individual code), and the Code of Conduct for Firms (the firm code). Solicitors who are owners / managers of the business will be bound by both codes, but most employees will operate under the individual code only.
When an ethical point arises in practice at the moment, the obligations of the individual solicitor and regulated entity (firm) are not always clear. This means the firm and the individual professional can come into conflict. The new regime will make clearer whether a point / issue is an individual responsibility (under the individual code) or a firm responsibility (under the firm code). From a processional disciplinary perspective, the argument we often help advance that ‘I did not know that was expected of me, as the firm handled that’ will to some degree disappear. The onus is on each solicitor to assume responsibility for their own compliance in all they do.
Fewer principles – but still paramount
The Principles are to be reduced from 10 to six. In its 2016 consultation (Looking to the Future – flexibility and public protection), the SRA stated: ‘These set out high level ethical principles that comprise the fundamental tenets we expect all those that we regulate to uphold. This includes solicitors and other individuals we authorise, and firms and their managers, owners and employees.’
The following principles are removed:
- Principle 5: that you ‘provide a proper standard of service to your clients’
- Principle 7: that you ‘comply with your legal and regulatory obligations and deal with your regulators and ombudsman in an open, timely and co-operative manner’
- Principle 8: that you ‘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’
- Principle 10: that you ‘protect client money and assets’.
These disappearing principles appear elsewhere in the Code of Conduct documents.
The Principles remain the fundamental core of compliance that every solicitor should work to every day and have at the forefront of their mind. If you face an ethical dilemma in practice, your starting point should be the Principles, and then you will need to move to either or both Codes of Conduct , depending on whether the dilemma raises a matter for individual solicitors or the firm (or both). This raises two managerial challenges:
- how to ensure every member of staff thinks about ethical implications in their own practice
- how to evidence the firm’s supervision of these ethical issues.
- You will need to train all staff in compliance, and introduce a system to monitor how staff then apply this training. At this stage, you need to ask the following.
- Culturally, is your firm ready for this personal responsibility approach, and, if not, what do you need to do to get it ready?
- What training and supervision changes do you need to plan to introduce?
Honesty as well as integrity
The meaning of these two closely associated words has been the focus of some case law in 2017 and over recent years. The pendulum in the courts has swung around a bit and the SRA is a little bruised. The current Principle 2, to act with ‘integrity’ – note no mention of honesty – is to be replaced with the new Principle 4: to ‘Act with honesty and with integrity’.
It is the ultimate principle for law firm managers. If there is any hint of lacking honesty or integrity by your team, you should report it.
The new ‘why did you do that?’ obligation
Exercising professional judgement is a fact-sensitive challenge. The professional obligation to evidence your reasoning is to be put firmly at the heart of day-to-day practice in the new individual code. It states at 7.2: ‘You are able to justify your decisions and actions in order to demonstrate compliance with your obligations under the SRA regulatory arrangements.’
The new focus is on you – I stress you – being able to justify your actions in every deal, every piece of litigation, and all work that you do. For many solicitors, this will require a significant change in approach, as they probably think only of their professional obligations when a conflict of interest or specific conduct point arises. Now you must be able to evidence compliance at all times.
One useful example of the challenge ahead is the information given to clients at the outset of their matter on service levels, costs and prospects of success. The individual code states at 8.6: ‘You give clients information in a way they can understand. You ensure they are in a position to make informed decisions about the services they need, how their matter will be handled and the options available to them.’
Your professional obligation will be to ensure clients make an informed decision from the options available. How will you show this? How will you make sure those you supervise achieve this? For litigators, how will you show that all funding options have been explained to the client and the firm’s preferred working method was agreed as an ‘informed decision’?
A similar obligation for firms is set out the firm code at 2.2: ‘You keep and maintain records to demonstrate compliance with your obligations under the SRA regulatory arrangements.’
How are you going to show this in practice? No guidance has yet been given, but I would suggest that the need for file reviews and effective (and documented) supervision has never been greater. Are you sure as a firm that if someone does something unprofessional or covertly, your supervision would pick it up? What if they were a partner? The senior partner? Uncomfortable though it is to discuss this challenge, you need to formulate a plan to demonstrate the compliance with evidence.
You are responsible for the actions of others
The firm code aims to make sure that those who run law firms have less room to excuse their actions (or failure to act) when dealing with the actions of colleagues. The obligations on the profession are rising. This is evidenced at 8.1, which states: ‘If you are a manager, you are responsible for compliance by your firm with this Code. This responsibility is joint and several if you share management responsibility with other managers of the firm.’
The SRA is focusing here on its aim to hold law firm managers to account, and by making the obligation ‘joint and several’, it is highlighting that the excuse ‘it wasn’t me’ or ‘it was a firm decision and not mine’ is not appropriate or valid. No longer can firms delegate compliance to a compliance officer, while the other partners plead ignorance.
In the summer of 2017, I spoke jointly with Crispin Passmore, executive director of the SRA, at a Law Society event on this topic. Crispin publicly agreed with my analysis that the ethos of ‘joint and several’ liability was key to the proposals. In order to maintain standards in the profession, the emphasis is shifting back to the traditional value of ‘you are the professional, you take the responsibility’. This ethos of collective risks is of course familiar to many solicitors who, prior to the Limited Liability Partnerships Act 2000, were trading as a partnership under the Partnership Act 1890, which provided that joint and several liability arose for the actions undertaken by any partner.
The firm code also imposes an obligation to report serious issues promptly (without delay) at 3.9: ‘You promptly report to the SRA or another approved regulator, as appropriate, any serious breach of their regulatory arrangements by any person regulated by them (including you) of which you are aware. If requested to do so by the SRA you investigate whether there have been any serious breaches that should be reported to the SRA.’
This obligation exists under the current Code of Conduct 2011 (under outcome 10.4), but the shorter, simpler firm code removes the ambiguity, so expect more reports and for more professionals to appreciate the importance of the obligation. It will be clearer, so you need to plan how you will handle any concerns.
Compliance officers and law firm management teams should be reviewing the changes, attending training events and, once they understand the proposals, focusing on developing a plan for implementation within their firm.
All firms will need to:
- update their practice manual
- amend the procedures of the firm
- change supervision arrangements
- retrain their entire workforce for the new regime (including on Principles and the two codes, and how the two codes interact).
But these four steps are only the starting point: as law firm managers, we also need to assess the impact in the widest sense, and plan for the changes accordingly.