Major regulatory change is on the horizon this year. Michael Garson looks at what the Solicitors Regulation Authority’s new regime will mean for conveyancing practice, clients and the competitive environment
New regulatory arrangements to implement the Solicitors Regulation Authority (SRA) ‘Looking to the Future’ reform programme have been approved by the Legal Services Board (LSB). The 2011 SRA Handbook will be replaced with a new approach to the SRA Principles, and, in replacement of the SRA Code of Conduct 2011, two sets of new SRA Standards and Regulations – one for all / individual solicitors, registered European lawyers and registered foreign lawyers (the RS), and one for firms (RF) – will be introduced, as well as new SRA Accounts Rules. All references to sections are to the RS, unless otherwise stated. All rules are available in their current draft from the SRA website .
These new codes represent a further experiment with untested theories concerning consumer behaviour
New Authorisation of Firms Rules and Authorisation of Individuals Regulations enable solicitors to practise as self-employed individuals (freelancers), without being authorised as an entity, or to be employed by organisations operating outside the regulation of the SRA under the Legal Services Act 2007. The SRA has also proposed changes to the SRA Compensation Fund and professional indemnity insurance (PII) arrangements, and some adjustments are being made, but the wider reforms proposed by the SRA have not yet been taken forward for approval by the SRA Board. This means they would not be introduced until after the changes already approved for this year.
There are two key questions for property practitioners.
First, whereas freelancers will be able to offer all legal services including reserved activities (as detailed in schedule 2 to the Legal Services Act 2008), solicitors employed in an unregulated body will be restricted to offering non-reserved activities. How might the development of such bodies impact property practitioners’ clients and work?
Second, the 2011 Handbook has been rewritten and much reduced in length. The SRA Code of Conduct 2011 contained 12 chapters with 93 outcomes plus indicative behaviours; this has been reduced to eight sections in the RS and nine sections in the RF. The new codes are less prescriptive, with fewer explicit directions as to what solicitors must do to comply with the Principles and new standards. Many of the familiar required outcomes are not reproduced (though a few new standards have been added), while the detail of the indicative behaviours is removed. Does this mean the burden of compliance will be reduced for property practitioners? New reporting obligations are still in process of being formulated.
The effect on clients and the competitive environment
Under the new rules, businesses in the unregulated sector will not need to obtain SRA authorisation to deliver non-reserved legal activities, and will be able to employ practising solicitors. This will not require approval of ownership or business structure, or appointment of compliance officers or reporting accountant, as would be necessary for authorisation as an alternative business structure. Solicitors working in such organisations are expected to offer will-writing services, employment advice, and administration of estates, thus increasing competition for high street firms offering those services alongside conveyancing. Although conveyancing remains a reserved activity, the flow of clients to high street firms may, over time, be disrupted for this area too.
The SRA’s objective, supported by the LSB, is to encourage more competition in service delivery, and satisfy an ‘unmet need’ for legal services, through greater flexibility and increased innovation with more digital services. The SRA asserts that solicitors will improve the standards of non-regulated businesses.
The SRA Transparency Rules, introduced on 6 December 2018, require regulated firms and freelancers to publish price and regulatory information, but do not apply to unregulated firms with which they compete. They are able to advertise services free from constraints and can employ solicitors for non-reserved activities including two categories of work where prices must be published by law firms (administration of estates and employment tribunal representation).
The Transparency Rules also introduced a digital badge for display on law firms’ websites, which will show online visitors that the firm is regulated, and, though not visually apparent, will provide them with a link through to information on the protections this provides. This development recognises but does not deal credibly with the obvious confusion to the public, who will find it hard to distinguish the differing levels of protection from solicitors acting from within firms or as freelancers, as contrasted with those employed by non-regulated businesses, whose clients will have no protection from the SRA Compensation Fund, minimum terms and conditions or SRA Accounts Rules.
Although all solicitors must ‘ensure that clients understand the regulatory protections available to them’ (RS 8.11), this will be hard to monitor in the absence of any form of prescribed notification. This seems to run the risk of an increase in complaints to the Legal Ombudsman and also other types of claim, some of which may turn out to be uninsured and result in damage to the collective reputation of the solicitors’ profession. The automatic protection previously offered by the solicitor title is diluted and regulators are aware that risks are being taken in this. All provisions in the new Standards and Regulations are subject to SRA monitoring and enforcement, but whether resources will be sufficient to be effective is open to question.
The burden of compliance
To answer the question about the burden of compliance, we need to look in detail at the new regulations. The standards in the new handbook rest upon seven rather than 10 Principles, with operational responsibilities transferred to the two new sets of Standards and Regulations. Inevitably, with brevity and subtle changes comes a degree of uncertainty, thereby making SRA guidance necessary, to assist both experienced solicitors and new entrants. Below are some key points of note. Much of the necessary guidance has yet to be produced.
Regulations relating to conveyancing
In many respects, the regulations relevant to conveyancing cover familiar ground. Requirements in relation to complaints handling (which must be cost free) are preserved (section 8 of the RS), and are not a substitute for the separate requirements within the Transparency Rules. RS 8.6 sets out requirements that: ‘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.’ RS 8.7 requires that: ‘You ensure that clients receive the best possible information about how their matter will be priced and, both at the time of engagement and when appropriate as their matter progresses, about the likely overall cost of the matter and any costs incurred.’
In view of the separate pre-engagement requirements of the Transparency Rules, it will be necessary to make clear the scope of a retainer, and the costs and disbursements and VAT which clients are expected to pay. There is room for misunderstanding to arise where costs advertised diverge from costs given at engagement, and then from costs finally invoiced at completion (RS 8.7).
RS 8.1 requires that ‘you identify who you are acting for in relation to any matter’. This appears to subsume a number of client care and risk management processes that conveyancers routinely carry out, and guidance would be welcome.
Property selling rules are removed, and will be replaced by some limited guidance. The SRA Financial Services (Scope) Rules and SRA Financial Services (Conduct of Business) Rules remain, and were altered in October 2018 to reflect the Insurance Distribution Directive (see the SRA website for details of the changes).
The changes seem likely to increase costs when dealing with freelancers and unlikely to encourage a take-up of conveyancing by freelancers
The SRA Indemnity Insurance Rules (SIIR), amended on 4 December 2018 (and not yet published at the time of this edition going to press), require that: ‘An authorised body must take out and maintain qualifying insurance with a participating insurer and must take out and maintain professional indemnity insurance that provides adequate and appropriate cover in respect of current or past practice. Further it must ensure that its clients have the benefit of the indemnity insurance required under the rules and must not exclude or attempt to exclude liability below the minimum level of cover required under the rules.’
The RS, which also applies to freelancers, requires ‘indemnity insurance that provides adequate and appropriate cover in respect of the services that you provide’ (RS 5.6). However, outcome 1.8 – that clients should ‘have the benefit of your compulsory professional indemnity insurance and you do not exclude or attempt to exclude liability below the minimum level of cover required by the SRA Indemnity Insurance Rules’ – has been removed and placed in the SIIR, affecting only regulated firms.
The obligation to perform all undertakings (RS 1.3) is helpfully repeated in both the RS and RF.
Freelancers may carry out reserved activities such as transfers of land, but the requirement in RS 5.6 is to maintain ‘adequate and appropriate’ cover. This creates a number of issues in dealings with mainstream conveyancing transactions, where third parties, such as lenders and solicitors acting for another party, will wish to be satisfied that adequate cover exists and is likely to continue at least to the level of the SRA minimum terms and conditions (MTCs). Firms will need to be able to check the identity of freelancers and distinguish them from authorised firms holding MTC insurance and authorisation to maintain a client account, rather than having to conduct dealings through a third party managed account (TPMA). Confidence in undertakings and continuity are key to most conveyancing transactions, and the changes seem likely to increase costs when dealing with freelancers and unlikely to encourage a take-up of conveyancing by freelancers.
Other points of note
The role of compliance officers is retained for regulated firms, with an obligation to promptly report any serious breach of regulatory requirements to the regulator and to investigate any matter required by the SRA (RF 9.1). Formerly, ‘material’ and ‘non-material’ breaches were to be recorded, and reported by firms where considered to be ‘material’. In August 2018, the SRA consulted on the scope of its requirements for reporting concerns – it has yet to respond. Guidance is needed on what would constitute a ‘serious’ breach. Individuals have a similar requirement, which can be discharged within a firm by reporting to one of the firm’s compliance officers. A balance has to be found between over-reporting of minor matters and prompt reporting of a breach so that the SRA can be in a position to direct investigation of serious matters. The reform of investigation and disciplinary rules is outside the scope of this article.
Guidance is needed on what would constitute a ‘serious’ breach
The new shorter SRA Accounts Rules should make record-keeping less prone to technical breaches, particularly of time limits; and where the only client money held is in respect of fees and any unpaid disbursements received prior to delivery of a bill, then setting up a client account is not necessary for that purpose alone. This is part of a revised definition of client money and may assist freelancers who are not permitted to maintain a client account but must use a TPMA.
The new SRA Accounts Rules set out clearly at paragraph 3.3 that: ‘You must not use a client account to provide banking facilities to clients or third parties. Payments into, and transfers or withdrawals from a client account must be in respect of the delivery by you of regulated services.’ This is highlighted by the warning in the SRA Risk Outlook Autumn update concerning dubious and fraudulent investment schemes.
The current position in relation to conflicts of interest and confidentiality is substantively maintained in section 6 of the RS, incorporating shortened versions of chapters 3 and 4 of the 2011 Code, though more specific ‘guidelines’ within the indicative behaviours are not reproduced.
Outcome 11.3 relating to contract races is not reproduced, which suggests that in order to avoid complaints, firms should review their policy and ensure that retainer terms are clear on this eventuality. New Principle 7 requires that ‘you act in the best interest of each client’ and RS 1.2 requires that ‘you do not abuse your position by taking advantage of clients or others’. The lack of a single standard could be disruptive to the market.
During the consultation, there was discussion about the requirements for firms to have at least one member who was ‘fit to supervise’. The requirement for a solicitor who has practised for three years applies to freelancers as well as to firms, and is supported by obligations on all solicitors to maintain competence (RS 3.3) and to supervise and manage others effectively (RS 3.5).
Rules on introductions and referrals appear in section 5 of the RS and remain relevant, particularly as referrals from employed solicitors and freelancers to fully regulated firms may increase. A question for firms to consider is whether there is a case for subcontracting or referring any legal activities into an unregulated body owned by themselves or others. Freelancers and authorised bodies entering into arrangements with unregulated bodies will need to comply with the standards required for introduction and referrals.
Overall, there is not much to suggest that firms immediately need to rewrite their manuals and procedures to cope with the new codes – but neither is there much to suggest that the burden of SRA regulation will reduce, enabling firms to lower their prices. As was the case in 2011, practitioners may feel there is risk in relaxing their existing procedures.
The problems for conveyancers still remain largely outside the remit of regulation: challenges such as identity fraud, money laundering, and technical lender and land registration requirements. I would argue that, for regulated conveyancing firms, the prospect of coming changes from government homebuying and leasehold reforms present a greater challenge than the SRA changes. Having said that, it is clear that, in some areas of practice, new forces of competition could surface, and a new competitive dynamic may develop over time.
The SRA introduced outcomes-focused regulation in 2011. The approach has shown itself to be unwieldy and incapable of adequate enforcement. These new codes represent a further experiment with untested theories concerning consumer behaviour. It has been argued to no avail that the public will be confused and ultimately disappointed with the likely results arising from these changes. Unless the public is better equipped to understand the quality or standard of work carried out, it is unrealistic to expect better appreciation of value beyond superficial aspects of service that are easily recognisable. While over-prescriptive rulebooks are equally unlikely to reach their target, a better solution remains a profession recognised for clear and embedded professional standards, and regulated consistently to that end.
If you want to know more…
…about the upcoming changes to SRA regulation, Michael Garson will be speaking at the Property Section Convention on 14 May in Birmingham and 6 June in London. Other sessions will cover Land Registry developments and fraud.