SRA risk management process overview
On 2 July the SRA risk outlook 2013 was unveiled at a launch event in Birmingham. The regulator describes the SRA risk outlook as being the final piece in the jigsaw to accompany the Regulatory Risk Framework and Risk Index, which were published in December 2012.
The document represents the first in what the SRA promises will be an annual exercise, and provides a good indication of where regulatory attention will be focused in the short, medium and long term.
The SRA risk outlook focuses on two distinct areas – the actual risks themselves and drivers behind changes in the legal market.
A) Risks
For each category the SRA risk outlook identifies several specific areas of concern which are then considered in terms of their negative effects, trends and SRA controls.
Current risks
- financial stability – this should come as no surprise, with the SRA having made it very clear over the past 12 months that it is concerned about whole sections of the profession
- dishonest misuse of client money or assets
- lack of diverse and representative profession
- failure to co-operate or comply with notification and information requirements – see for example, the number of firms who failed to nominate a COLP and COFA by the deadline, and who are now facing sanctions.
Emerging risks
- lack of adequate succession planning
- poor standards of service (particularly where vulnerable consumers are involved)
- inadequate systems and controls over the transfer of money
Potential risks
- improper or abusive litigation
- lack of due diligence over outsourcing arrangements
- group contagion
- lack of transparency in complex business structures
B) Drivers of risk
The SRA assessment of the market identifies the following components as being the main drivers of change, within which several specific areas are identified:
Economic trends and outlook
- difficult economic conditions
- impact on demand for services
- deficit reduction
- housing market
- interest rates and availability of credit
- globalisation
Regulatory and political background
- LASPO, in particular the referral fee ban in personal injury claims, and litigation costs recovery
- Legal aid reform
- Legal Services Act, particularly the introduction of ABSs
Market and firm level trends
- market structure
- mergers and consolidation
- commoditisation
- technology
- obtaining professional indemnity insurance
Consumer behaviour and expectations
- price awareness and expectations of lower cost services
- consumer empowerment
- branding and consumer confidence
- on-line consumers
- demographic shifts
Take-away points
The SRA risk outlook itself does not give any weighting to the risks identified. However, from the speeches and workshops that accompanied the launch, we were able to identify the following points that came up time and time again. These are the main thrust of the SRA’s concerns:
- Financial difficulty has, unsurprisingly, a direct link to the dishonest use of client money. This was perhaps the main focus of the launch event, with a whole workshop devoted to financial stability and Samantha Barrass commenting that:
When market conditions are tough and financial problems begin to bite, individuals who are usually principled and ethical can succumb to pressures and temptations, getting drawn into dishonest practices that put their clients, their businesses and their future at risk….
- The SRA revealed that reports of the dishonest use of client money have doubled in the last two years, and currently account for around 35% of SRA interventions. Perhaps more worrying was the prediction that more firms will fail in the economic recovery than during the downturn.
- The importance of strategic planning was underlined by several speakers. The need for lawyers to be both commercially-minded and professional in equal measures is not a new message, but a particular concern was (lack of) succession planning in smaller firms, which one speaker identified as a “demographic time bomb”.
- Samantha Barrass stressed that where clients are vulnerable the risks and potential impact of poor service provision is much greater. Vulnerable clients are less likely to complain, or indeed know that they have received a raw deal from their solicitor, and so complaints data alone does not tell the whole story.
- “Group contagion” appears to be a hot topic, with SRA delegates highlighting that any relevant ABS applications must demonstrate how the proposed firm would cope with contagion issues caused by a parent or subsidiary (think Co-operative Bank).
Perhaps the highlight of the launch event was the Q&A session, when the panel and SRA representatives were invited to suggest areas of risk that the SRA had missed. The following points came out in discussion:
- Data security and management concerns e.g. confidentiality and insolvency issues with cloud-based services
- The role that mental health, stress, and substance abuse can play in individuals falling short of regulatory requirements
- Fears that the impact of Legal aid reforms will disproportionately take their toll on BME firms
- One brave soul even put it to the SRA that over-regulation was itself a risk, with firms increasingly fettered by the fear of falling foul of the regulator.
What next?
So what does the SRA risk outlook really mean for firms, and what should COLPs and COFAs do with the document? Bear in mind that these are the issues that the SRA is concerned about, which means Compliance Officers should be too:
- Firstly, read the SRA risk outlook with a critical eye and consider how the identified risks are currently, or could in the future, impact on your firm. Are there a number of partners on the brink of retirement, with nobody up-and-coming? Do you deal with vulnerable people? Is your practice reliant on personal injury or legal aid?
- Use this as an opportunity to evidence that you have considered the issues, even if you come to the conclusion that no action is currently required.
- If your analysis does identify any areas for concern, take steps to mitigate them by, for example, amending procedures, diversifying into other practice areas, initiating a succession plan, improving management accounts reporting etc.
- Don’t forget that every risk usually has an associated opportunity – if you take this approach, risk management is likely to be less daunting and a much more positive exercise.
