On 16 October 2013 the SRA held its first conference for law firm Compliance Officers, entitled “The key to compliance”, at the NEC in Birmingham. Around 500 delegates – mainly COLPs and COFAs in practice – attended to hear what the regulator had to say. We suspect that most were hoping for some needed guidance to give them some comfort in their new roles. It was interesting to meet with delegates from the entire cross section of the profession, from one man bands to the magic circle. Ironically of course, the ones that the regulator is most interested in (the incompetent and dishonest) are unlikely to have been in attendance.
The day was split into plenary speeches and workshops, with plenty of opportunity for networking in-between and over lunch. One of the most useful elements of the day was the abundance of SRA staff on hand to answer specific questions informally. There were what seemed to be a small army of them (in a good way!). Rarely do practitioners get such access to regulatory staff.
The main recurring themes were:
- Engagement – the SRA wants to have an open two way dialogue with the profession, without the fear that COLPs and COFAs are being second guessed or judged after the event.
- Self reporting – a key duty of the Compliance Officer role is to report material breaches, and it seems the SRA has concerns about this, particularly in relation to financial stability. Not reporting will be viewed very seriously. It was noticeable throughout the workshops that the main concerns on practitioners’ minds centre around reporting breaches of the rules. Will there be any further guidance from the regulator about what constitutes a “material” breach? (In a word, no).
- Delegation of risk management – they want firms to get to a place where they are actively managing their own risks, with the regulator being left to sort out the rogues and the incompetent.
Key messages from the plenary sessions
Antony Townsend, (outgoing) Chief Executive:
- Change in the profession has been “unprecedented, relentless and at times exhausting…but absolutely vital”.
- On OFR: “…with greater freedom comes greater responsibility”. Introduction of OFR was met with mixed views and skepticism (both within the SRA and the profession), but the implementation has been relatively uneventful.
- Over 200 ABSs have now been authorised (and we understand that to date none have been formally rejected).
- To those who say they are over-regulated: there will be a further push towards Principles and Outcomes, with delegation of risk management to law firms. Future editions of the SRA Handbook are likely to be slimmer and more elegant.
- Vulnerable clients will continue to be a key concern – we can expect to hear more about this in the near future.
- Many of the profession’s dealings with the regulator are still too slow and fragmented, something which needs further work.
- There are too many regulators in the legal services market.
Samantha Barrass, (outgoing) Executive Director
- There are no plans to include any additional annual reporting requirements beyond those in the renewals exercise.
- They want to hear about problems from firms, not third parties – despite any internal pressures to hold back. A timely self report, whilst not a “get out of jail free” card, will be looked upon favourably. As a rule of thumb, material breaches should be reported within 24 hours. As we have been advising for some time now, if the Compliance Officer is unsure whether a breach is reportable or not, they should err on the side of caution and report it.
- They want COLPs and COFAs to develop confidence in their own judgment, and are looking for reasonable approach to decision-making.
- They also want to see law firm cultures where everyone is a risk manager, and it is not left entirely to the Compliance Officers. They are aware that too many COLPs and COFAs feel isolated in their role, and perhaps don’t have the unequivocal backing from senior management that is required.
- Staff need training on risk areas, but also on the OFR regime itself – and in particular what, when and to whom reports should be made, and why it is so important.
Richard Collins, Executive Director
- Lack of influence or access to all of the firm’s information is a real risk to COLPs and COFAs, especially if there is a small inner circle of partners who, for example, keep financial information to themselves.
- The SRA Risk Outlook (published in July 2013) is soon to be updated. That document is likely to include more emphasis on the emerging risks to the profession, including:
- Lack of succession and business planning – with a significant number of new providers entering the market as a result of liberalisation, there will also be a growing number of firms exiting which calls for strategic planning
- Poor standards of service, particularly to vulnerable clients
- Inadequate systems and controls for the transfer of money, identified as a very serious issue with law firms being actively targeted by fraudsters and individuals with terrorism links
- Cloud computing, particularly in relation to due diligence, confidentiality and contractual arrangements with suppliers
- Group contagion, which is likely to become more of an issue as more corporates enter the market.
Main points from the workshops
Workshop 1 – Avoiding financial instability: some tips from the front line
- The legal market is seeing unprecedented change, which prompted the SRA’s financial survey of the market.
- Firms are expected to actively plan their finances, and take practical steps to reduce financial risks e.g. by opening dialogue with lenders, dropping unprofitable areas of work, and keeping all partners in the loop.
- One of the greatest failures is failure to recognise there is a problem, which makes it impossible for contingency plans to be made.
- The key issues to consider in financial management are:
- cash flow and “pinch points” (e.g. VAT and PII)
- work in progress
- credit control
- short term borrowing for PI
- early engagement with creditors
- The market is likely to see lots of consolidation in the coming years, and as part of succession planning firms should be looking at getting their historical books and records in order.
- More law firms will fail as the economy improves because they will run out of cash. Measure new matter starts to ensure the firm is not over-stretching and retain key staff to ensure there is capacity and expertise to do the work
Workshop 2 – What good practice might look like and how to manage risks
- Despite the increased burden on COLPs and COFAs, compliance does not have to be complicated – and it’s not about having the latest software.
- It is more about risk management: identifying, monitoring and mitigating risks in the firm.
- Leaving the accounts to the accountants is not a sensible approach to financial management.
Workshop 3 – Line of sight: future risk developments
- An interactive session in which the delegates were asked to vote on future market developments and risk areas. It made for an engaging and debate-provoking workshop.
Workshop 4 – Just for the COFAs
- There is some confusion about the overlap between the COFA and reporting accountant. The main differences are that the accountant is independent, whose reports are retrospective, whereas the COFA is required to manage risks.
- COFA should not be concerned about qualified reports – if anything, it shows that the accountant has been thorough and is independent.
- Don’t share the COFA’s list of breaches with the reporting accountant – this might fetter his/her independence and ability to spot errors.
- As we have been saying for a long time, COFAs need to evidence that they are discharging their duties. Think audit trail.
- The SRA is considering expanding the role of the COFA beyond simply the Accounts Rules, to include compliance with Principle 8 (“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”). In practice, we suspect that most COFAs are doing this anyway – if not, watch out!
Workshop 5 – A changing legal landscape – the impact on your business
- The SRA are still looking very closely at the referral fee ban, particularly work-around schemes. The regulator is using the “if it quacks like a duck” test. The COLP must be involved in – and probably required to sign off – any such referral arrangement. See also the warning note of 11 October 2013.
- With the removal of legal aid, they will also be looking very closely at the impact on vulnerable clients (e.g. do they know what they will have to pay?), as well as firms diversifying into new areas of law without the proper skills and resources.
- Consumer credit activities (such as debt collection and advice) will be regulated by the FCA from 1 April 2014. There is a lot of confusion about the requirement to register for certain types of mainstream work if they fall outside of the general Part XX exemption. It will be a criminal offence to carry on this work without being regulated by the FCA, and we can expect more on this as the deadline approaches.
Workshop 6 – Being aware of the danger signs
- The risk centre and intelligence unit receive approx. 14,000 reports per year which are ‘coded’ (red/amber/green) and processed in accordance with the risk to clients. In 2012 there were 408 investigations.
- Mortgage fraud is reducing, but there is a trend towards other types of fraud (not necessarily dishonest solicitors), such as:
- attempted hacks into the SRA systems
- bogus firms and advanced fee schemes
- disgruntled ex-employees causing havoc my logging into mySRA and changing the firm’s details (including one solicitor being removed from the roll without knowing it!)
Workshop 7 – Outcomes-focused enforcement: constructive ways to respond
- The key message here was that you must cooperate with the regulator and Legal Ombudsman
- If the worst should happen and the regulator comes after you, they advise you to:
- take early independent legal advice
- tell the SRA early on what is admitted and denied
- continue to narrow the issues
- take any remedial steps possible
- be represented at SDT hearings