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I
Regulation
& Compliance
April 2015
• A real choice of regulator? • COLPs and COFAs: too many rules or too few?
• Reform of the single business rule – a level playing field? • Training: the winds of change
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Compliance&regulation
Regulationgame
The
Welcome to the first in our series of regular Insight e-magazines, starting, as you might expect from Legal Futures, with regulation. No-one
could describe this as a dull backwater, where nothing ever changes. During the Global Law Summit, our legal services market was
described as a “Petri dish” by David Morley, senior partner of Allen & Overy – a place for experimentation. Nobody really knows where
this is going, Mr Morley said, but it will be good for us in the end.
One of the features of the new landscape is more competition – for regulators as much for anyone else. For the first time this year,
we are beginning to see lawyers being offered a real choice of regulator, with CILEx Regulation (formerly known as ILEX Professional
Standards) and the Bar Standards Board joining the Solicitors Regulation Authority (SRA) and Council for Licensed Conveyancers as
regulators of firms. In this magazine, the heads of the four organisations set out their stalls, giving us some idea where the battle lines will
be drawn.
The general approach of the SRA has been characterised by deregulation, whether on its plans to slim down the Handbook and
Accounts Rules, on reform of the separate business rule or to give solicitors more responsibility for continuing compentence. What strikes
me most about the reactions from lawyers is the lack of consensus.
On the rewrite of the Handbook and Accounts Rules planned for next year, Jayne Willetts argues that the rules are already brief
enough, and any further reduction will only spawn yet more guidance, while Ian Pryer says the burden should be lifted from the backs
of small firms.
The SRA’s proposed reforms of the separate business rule
have been condemned by some and supported by others. In
this magazine, solicitor entrepreneur Michael Horne calls on the
SRA to stop “tinkering” and go for wholesale reform, while Mike
Gahan, chief executive of multi-disciplinary firm HCB, says there
should be a “levelling up” of regulation in the interest of clients.
On continuing competence, where you might perhaps expect
a little more togetherness, abolition of the hours-based approach
has not gone down well in some quarters. The Association of
Personal Injury Lawyers and at least one magic circle City firm
have decided to keep it for internal purposes, regardless of the
obligations on solicitors as a whole.
Whatever happens to the Petri dish, and whatever strange
growths take root, regulation has never been more interesting.
Nick Hilborne
Deputy Editor, Legal Futures
www.legalfutures.co.uk
1
April 2015
New continuing competence and training regimes for solicitors take
shape as first paralegal qualifies through ‘equivalent means’ route
Changes in the training and professional
development of solicitors have taken shape
in the last few weeks, with the first firms opting
into the new ‘continuing competence’
regime and a paralegal becoming the first
solicitor admitted through the ‘equivalent
means’ route.
From 1 April firms have been able to leave
behind the old hours-based CPD system,
which will be phased out completely by 1
November 2016. In early April, the Solicitors
Regulation Authority (SRA) said it believed
well over 200 firms have opted into the
new continuing competence regime –
formerly known as continuing professional
development or CPD.
Those wanting to move to the new system
straight away are not required to inform the
SRA, so no precise figures on the number of
firms involved are available.
Under the new system solicitors take
responsibility for charting their progress
against the SRA’s competence statement
and sign an annual training declaration.
Richards Williams, policy associate at the
SRA, said: “A broad spectrum of firms have
2
Robert Houchill
told us they are doing it, from top 100 firms all
the way down to sole practices. There may
well be cost savings, but I don’t think that is
the main driver.
“The benefits are freedom and flexibility for
firms to tailor their learning and development,
and for individuals to do what they need to
ensure they provide a good service.”
Meanwhile, Robert Houchill, a senior
paralegal at London law firm Bates Wells
Braithwaite, has become the first solicitor
to qualify through the ‘equivalent means’
route.
Mr Houchill said the new route would give
law graduates more flexibility in funding the
legal practice course (LPC).
“I borrowed money to do it because I
hoped to get a training contract,” Mr Houchill
said. “It was quite a bold and reckless thing
to do, because getting a training contract is
very competitive.
“This makes becoming a solicitor a more
viable option for those who can’t get one.”
Mr Houchill did he did not think there would
a “dramatic” rise in the number of solicitors
admitted through ‘equivalent means’. “The
requirement that you need to do three areas
of law will preclude many people straight
away. I know many paralegals who are very
good, but have only done one area of law.”
SRA highlights enforcement role
of competence statement
Licensed probate practitioners
on the way
The SRA’s new competence statement means that, for the first time,
it will not have to rely entirely on expert opinion or case law in its
enforcement work, the regulator has declared.
Chief executive Paul Philip said the statement could be used in
proceedings against solicitors where competence is an issue.
“Conceptually, the statement is actionable from a regulatory
perspective,” Mr Philip said. “We are not talking about a one-off
piece of bad advice, but consistently delivering poor-quality advice,
which could be actionable – for example if it’s an asylum advice
case and someone is deported.”
SRA chair Enid Rowlands added that competence-based training
had been around for ages and was seen as “standard practice”
across a whole range of sectors. “The concept is ideal for the
Parliament has given the Council for Licensed Conveyancers
(CLC) the power to issue standalone licences for those wanting
to conduct reserved probate work, without them having to
become licensed conveyancers first.
During the third reading of the Deregulation Bill in March,
peers accepted government amendments enabling the CLC
to issue the licenses.
In the future – if the CLC pushes forward successfully with the
idea of being authorised to regulate litigation – it could also
mean standalone litigators.
A spokesman for the CLC said the success on probate would
“remove an unnecessary hurdle to new practitioners” and
support its strategy of promoting competition and innovation.
solicitor’s profession – it’s so diverse.”
At its meeting in March, SRA board member David Willis, ex-joint
Baroness Hayter, the Labour peer and former chair of the
Legal Services Consumer Panel who has championed the
chief executive of Herbert Smith Freehills, warned that “there are
clearly still people in the regulated community who would like to
portray what we do as lowering standards” and said the regulator
would have to win the communications battle.
changes in Parliament which the government then took on,
said the move was important because it took forward “the
intention in the Legal Services Act to increase the availability
of legal services”.
Legal Futures | tel: 020 3567 1207 | email: [email protected]
Compliance&regulation
BSB and CILEx flex new
regulatory muscles
The Bar Standards Board (BSB) and CILEx Regulation
have begun exercising their new powers to approve
businesses and, in the case of the latter, grant
independent practice rights.
In early April, the BSB said it had approved 15 new
businesses, though initially they remained unnamed
as they had first to confirm that they had professional
indemnity insurance.
Since it started accepting applications at the
beginning of 2015, the barristers’ regulator said it had
received 90 expressions of interest.
The BSB’s move expands its remit beyond regulating
individual barristers to encompass companies or
partnerships that provide advocacy, litigation, and
other legal advice services.
The BSB said it believed that becoming a regulator
of entities would “help encourage new advocacyfocused business models to emerge and thrive,
which in turn will broaden client choice.”
Chartered legal executives who want to set up
their own firms need to obtain independent practice
rights first. The first three to obtain these rights were
revealed at the launch of CILEx Regulation (formerly
ILEX Professional Standards) last month.
Scott Morris, a CILEx member specialising in
conveyancing and based at Gloucester firm Langley
Wellington, was the first to receive independent
rights. He was presented with his certificate alongside
Dr Ruth Hendry and Dr Frantz Iwu, who were the first to
be granted independent rights to conduct probate
and immigration work respectively.
Dr Hendry has also gained conveyancing rights,
meaning she is the first CILEx member to obtain dual
practice rights. She works at mid-Wales firm Hugh
Anton-Stephens Notary Public. Dr Iwu runs his own
immigration practice, the Immigration Advisory Unit.
Earlier in the year IPS said it had received expressions
of interest from nearly 50 prospective businesses
wanting to be regulated by it.
Regulators making progress, LSB says,
but not on understanding consumers
The profession’s regulators are not doing enough to understand the
consumers of lawyers’ services, the Legal Services Board (LSB) has warned.
But in an update report on the eight regulators’ performance, published
at the end of February, the LSB said there had been progress since its first
assessment in 2012/13.
The LSB has set regulatory standards relating to outcomes-focused
regulation, risk assessment, supervision, and enforcement, and is also
concerned to ensure that the regulators have the “capability and capacity”
to carry out their work.
The regulators were each required to undertake a self-assessment in
2012/13 and produce an action plan. It is a precursor to the LSB conducting
a full review of their performance in 2015/16.
“They have, on the whole, improved their risk assessment processes and
most have moved to a risk-based approach to supervision.”
However, the LSB said that most regulators’ evidence gathering has
focused on the practitioners they regulate and “very little appears to
have been achieved in engaging and understanding consumers of legal
services”.
The LSB highlighted initiatives from CILEx Regulation to improve its
understanding of consumers. The regulator has developed a feedback
questionnaire that CILEx fellows are encouraged to provide to clients.
Legal Services Board lays out priorities
Breaking down regulatory barriers to competition, growth and innovation,
enabling need for legal services to be met more effectively, and ensuring
that the frontline regulators and the Legal Ombudsman are operating
effectively are the key priorities of the Legal Services Board, its newly
published 2015/16 business plan and three-year strategy plan have
confirmed.
The LSB added: “We will continue to press regulators to ensure that
they understand their respective regulated communities’ ability to meet
demand and any restrictions that either regulatory barriers or costs are
imposing unnecessarily on providers’ ability to adapt and change.”
In the next year the LSB will be reviewing restrictions on the choice of
professional indemnity insurance in some branches of the profession, how
the frontline regulators deal with the under-spend of practising certificate
fees, and the effectiveness of the complaints-handling requirements
placed on lawyers.
However, it rejected calls in responses to the consultation over the plans
for the super-regulator to speak out against legal aid cuts, saying that as a
non-departmental public body, it is obliged to be politically impartial.
It said: “What is important is that LSB continues to address the challenges
of a market which, since 2009, has seen an 11% growth in the number of
professionals, and a 12% rise in real turnover, and yet which remains unable
to meet fully the needs of individual citizens and small businesses, in terms
of affordability and diversity of services provided.”
www.legalfutures.co.uk
3
April 2015
Coursecorrection
Solicitors can now choose to ditch the hours-based approach to CPD –
and from November 2016 it will be scrapped altogether. Nick Hilborne
looks at what this means for law firms and training providers alike
An end to the tyranny of hoursbased CPD
The traditional approach to continuing professional development (CPD) for solicitors is going
through something of a revolution. The first big change happened at the end of last year, when
the Solicitors Regulation Authority (SRA) stopped accrediting courses.
Solicitors can now, from 1 April 2015, opt in to a new regime, where they no longer need
to clock up 16 hours CPD a year. Instead they must comply with an outcome on appropriate
training, measure their progress against a competence statement and make a declaration on
their practising certificates. The hours-based approach will end for everyone on 1 November
2016.
“In the olden days, in late September you would go on any course you could, just to get CPD
points,” recalls Charles Peter, managing director of Datalaw and a solicitor. “The new scheme will
take away the ability to do inappropriate courses at the last minute.”
Mr Peter says it was always obvious when the deadline had arrived for completion of the 16
CPD hours because solicitors vanished from their offices. “As a solicitor, I always thought going
to three courses once a year was a very artificial way of learning. In March or April the providers
would run an update course and then there would be no news for another six months. That is
artificial, because the law does not develop in handy six-month intervals.
“We will provide lawyers with short webinars updating them regularly as the year goes by. The
change will allow people to learn in a natural way and use technology that previously did not
exist.”
Mr Peter says the length of the webinars will range between 10 minutes and an hour, but
probably not any longer. A short webinar is all people need when it comes to a small change.
“The problem with updates every six months is that as soon as you get there, they’re out of
date. Learning as you go along is much more suitable for solicitors, and I certainly prefer it…
This has been a long time coming. Allowing solicitors the freedom to choose how they learn is
wonderful. My experience of lectures is that solicitors would take notes and go home. Training will
now be available which is compatible with the internet and modern life.”
Culture change
But clearly a culture change is needed. Noting that providers can carry on “as if nothing has
happened” for the next 18 months, if they like, Nick Holmes, managing director of Infolaw, says:
“The new regime means self-regulation for solicitors. They can reflect on what they’ve done and
say they’ve done it. For providers, the hours-based system was nice. Now they will have to say to
solicitors ‘you need to maintain your competence’ but there is not the same incentive on them
to buy courses.
“Other than changing the language, I don’t think many providers have changed their courses
very much. They will have to start selling packages on their merits rather than because they
provide three hours CPD. They will have to think much more carefully about what business they’re
in and adapt accordingly. The hours-based system focussed minds and sold courses.”
Jane Rae, head of events at Practical Law Company, says the changes to CPD will affect all
parts of the profession “in different ways”, allowing solicitors in smaller firms to do more of their
training online rather than at conferences. “We’re confident that what we’re offering is valuable,
continued on page 6
4
Legal Futures | tel: 020 3567 1207 | email: [email protected]
April 2015
Confusion around money
laundering training
whether it is hours-based or not. The general counsels tell us what they think is critical, and we
respond to that.”
Describing the system of minimum hours as a “helpful tool to encourage people to keep up-todate”, Ms Rae says she believes law firms, rather than individuals, should have some responsibility
for keeping training records up-to-date, “but this will only be checked by the SRA if there has
been malpractice”.
Ms Rae says she is encouraged by the SRA’s recognition of the role of research and discussion
groups in training, rather than simply black-letter law. “The role of the lawyer, with all the
developments in technology, is changing and this needs to be recognised. The old, hours-based
system didn’t really enable lawyers to stay competent and we hope the new statement will be
more helpful.”
Ms Rae says the changes to the way CPD is accredited has allowed Practical Law to introduce
new courses. These include commercial skills training, which would not normally have been
accredited, and a course on working across different jurisdictions.
Practical Law has recently launched roundtables, aimed particularly at deputy general counsel
and in-house teams. “A small group discuss an issue in a Practical Law way. Our moderator will
provide a summary of the change and lead the discussion. Since all the people in the room are
in the same industry, you can get a really good discussion going. There are lawyers from five to 10
different companies involved, so they come back with something of real value, rather than just
an update on the law.”
Reduced focus
Josh Goodhardt and Yehuda Solomont, the COO and marketing manager respectively of
online compliance training specialist VinciWorks, work mainly with the top 300 law firms. “The
overwhelming majority of our clients are going to continue with the existing hours-based system
in 2015,” Mr Goodhardt says. “The big law firms are waiting to see what the others do. There is a
sense of safety in numbers. If everyone does the same thing, it can’t be a bad decision. They tend
to move forward in a pack.”
Mr Solomont says there is “a bit of confusion” around the changes. “This does not change any
of the requirements on compliance training – in particular money laundering and bribery,” he
says.
“Money laundering is seen as a ‘key risk’ by the SRA, along with equality and diversity.
Irrespective of any changes to CPD, compliance training remains a key part of the Handbook.”
He reckons that firms want to take more control of training. “We are building a competencybased system to replace the old CPD. Firms will be able to provide guidance to their lawyers on
what their training needs are, whether it is drafting or anti-money laundering. “We have rolled out
the system to a small number of our clients – it’s a more flexible and elaborate system that can be
tailored to the needs of each solicitor.
“What we’re hearing from law firms is that the SRA is asking them to focus on competency,
what makes people better at lawyering, rather than whether they have done a certain numbers
of hours of CPD. Firms are looking to create training that focuses on real life skills and scenarios –
they are not looking at the clock. It’s no longer a question of gathering hours, but more effective,
more regular training in smaller amounts.”
John Spencer, president of the Association of Personal Injury Lawyers (APIL), says his organisation
will not be changing its approach to training, regardless of any “watering down” of requirements
by the SRA. “There is a danger that some practitioners will see this as an opportunity to reduce the
focus on competence and quality,” he says.
“Training changes all the time and some subject areas are more popular than others – clinical
negligence and disease claims, for example. This is reflected in the increased number of this type
of claim being brought. The advent of the personal injury portals has had a similar impact on the
demand for core courses, as there is tendency for less qualified staff to be used. The demand
for webinars, responding to the latest developments in rules, judgments and legislation, has also
increased.
“Our response is not to change our own CPD requirement of 16 hours for accredited members.
This is our statement as to whether we think it is a good idea to remove the requirement for all
solicitors.”
continued on page 8
6
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Mr Spencer emphasises that APIL does not take the view that competence is about hours only,
but it is an important prerequisite. “There is more to it than attending a training course, but a
course is a very important platform without which competence is at severe risk.”
An end to tick-box compliance
Ending the autumn rush
Peter Crisp, dean of BPP Law School, welcomes the move from a “tick-box requirement” to a
“position where you want the profession to be reflective practitioners”. He explains: “The concept
of CPD has evolved rapidly in the last couple of years. It’s not seen as just about technical skills,
but about personal development. Commercial lawyers are seen as business partners by their
clients.
“The softer skills are seen as increasing valuable – how to influence people in court or to
influence commercial clients. There is also a move towards training providers working with law
firms to meet their particular needs. In the past CPD-type training has focused on very specific,
narrow areas. Now people are looking more holistically at what they are doing and will be using
the competence statement to address their training needs.”
Mr Crisp expects people to “take their time to adjust” to the new regime, and move only when
required to. The question of policing the new system is “more pertinent” for small firms than larger
ones, but, whatever the size of firm, solicitors are professionals and must comply with the SRA’s
code of conduct.
“We predict that the model for delivering technical training will be very different. People are
looking for bite-sized updates in 20-30 minute chunks, which they can access at lunchtime or at
home. You can only provide a high standard of service if you are a reflective practitioner. This
frees up solicitors to be much more creative and reflective.”
Mr Crisp adds that he hopes solicitors will take a more “planned and measured” approach to
their training than a “hell for leather” rush in the autumn.
Richard Album, co-vice-chair of the Legal Education and Training Group, says most of the
organisation’s 105 member firms recognise the need for change. The head of learning and
development at City firm Ince & Co, he says that although the changes are “not too troubling”
for firms with “relatively organised training departments”, concerns have been raised about their
practical impact.
“Firms which found compulsory hours to be a huge administrative headache are delighted
to be free of that burden. Other people are still recording hours and their behaviour will not
change.”
Mr Album says one magic circle law firm has taken a “formal decision” to keep hours-based
CPD internally. Other firms have already developed their own competence frameworks, or are
working on them. “This is a tremendous opportunity to introduce much more effective learning,
allowing people to reflect on their practice,” he says. “They will be able to concentrate on what
they really need, as opposed to logging 16 hours of CPD every year.”
Freedom to choose
The SRA is not alone in abandoning an hours-based system. The Bar Standards Board launched
a pilot scheme at the start of the year to test plans to replace its hours-based system with a new
scheme putting the emphasis on “individual responsibility” for learning rather than “measuring
the effort involved”.
At the same time the board introduced a new approach to accreditation, with training
providers self-accrediting courses, and it is also working on a ‘professional statement’ for barristers,
its version of the SRA’s competence statement.
Meanwhile, at the Chartered Institute of Legal Executives, a new CPD regime was approved
at the end of 2013 and is being introduced in stages. An additional ‘professionalism’ element
has been added to the requirements for all members, which will not be measured in hours but in
outcomes.
It will be interesting to see how training providers, law schools and law firms adapt to the SRA’s
new competence-based approach. Whatever happens, the change is meant to give them
freedom – even if it is the freedom to continue with hours-based learning, on their terms and in
their own way.
8
Legal Futures | tel: 020 3567 1207 | email: [email protected]
Compliance
Fourth Money Laundering Directive
– &regulation
are we nearly there yet?
It’s like going on a long car journey with the kids. The road seems neverending and there’s plenty of noise. But, really, are we nearly there yet?
Laura Spooner, Practice Management and Compliance Associate at LexisNexis,
discusses the long-awaited Fourth Money Laundering Directive (4MLD) and
gives some tips on surviving the journey.
Where are we going and why?
The Financial Action Taskforce (FATF) gave Europe a nudge and
everyone decided it was time to embark on a trip.
The final destination is pretty much mapped out – we know it’ll
look a lot like the FATF recommendations, but what should you be
particularly aware of?
which will be open to the authorities and anyone with a ‘legitimate
interest’.
To access a register, a person will have to demonstrate a
‘legitimate interest’ in suspected money laundering, terrorist
financing, etc.
Leigh Delamere services
Risk based approach (RBA)
Greater emphasis on RBA presents both challenge and an
opportunity.
You’ll need to identify, understand and manage risks, document
your decisions and be able to explain them to the authorities.
Simplified due diligence will go, with no more automatic
exemptions to the client due diligence (CDD) process.
No long family car journey is complete without a pit-stop, and this is
where we’re at now – sipping a much needed Costa while the kids
run off a bit of steam.
Those last loose ends just need tying up and endorsed by the full
Parliament (expected April at the time of going to print) and by the
EU Council of Ministers. MSs then have two years to transpose 4MLD
into national law.
Politically exposed persons (PEPs)
As most of us already suspected, foreign and domestic PEPs aren’t
that different after all, and 4MLD sets that in stone. You won’t be
able to treat them any differently anymore.
The last leg – A48
Grouping policies and procedures
A new requirement that multinational firms have group-wide policies
and procedures, implemented at branch level, is an additional
headache under 4MLD. Any local differences in requirements
following national implementation will just have to be ironed out by
firms.
Once the final deal is done in Europe, the Treasury will issue a
consultation on how the government will implement 4MLD in the
UK. The consultation will include draft regulations and any proposed
amendments to existing legislation.
The Law Society predicts this will all come into effect during the
first half of 2016.
The final destination – Carmarthen
There’s more…
There’s a lot more to 4MLD – harmonised sanctions regime for
breaching the CDD, reporting and record keeping requirements,
and black/white lists and data protection all feature too.
A relief from the ‘are we nearly there yets’ and constant bickering
and in 4MLD terms, you’ll know what you have to do.
So take a moment to reflect on the journey and question once
again why you didn’t just go to the nearest Center Parcs.
Quite how it’ll all unravel is anyone’s guess. Maybe next year
we should all go to Canada… (Canada (Attorney General) v.
Federation of Law Societies of Canada, 2015 SCC 7).
Set off
Here to help
So you know where you should be going, you’ve packed six weeks’
worth of clothes in the car, and stocked up on humbugs and wet
wipes. Time to round the kids up.
Consider us here at Lexis®PSL Practice Compliance as your 4MLD
reps. We’ll continue to monitor the situation closely and provide
you with all the guidance and tools you need to make this trip as
painless as possible.
LexisPSL Practice Compliance is an online toolkit that makes risk
and compliance easier to manage. It comes with everything you
need to get your compliance house in order and keep it that way:
practical guidance, templates, flowcharts, checklists and other
time-saving tools.
Somewhere on the M4
The SatNav is shrieking – there’s something new – central registers.
These weren’t included in the initial proposal but were added by
MEPs during negotiations.
Ultimate, beneficial owners (BOs) of companies and other legal
entities (the human beings directly or indirectly owning or controlling
a company and its activities) must be listed in central registers
www.legalfutures.co.uk
n To find out more, visit www.lexisnexis.co.uk/compliance
9
April 2015
Trialseparation
The separate business rule has been under fire for a long time and now
the Solicitors Regulation Authority is looking to reform it.
Dan Bindman reports
Plans by the Solicitors Regulation Authority (SRA) to reform the separate business rule (SBR) have
proved controversial, despite being presented as a deregulatory step aimed at ironing out
competitive advantage between professionals.
Reform of the rule is intended to help level the playing field between traditional law firms and
multi-disciplinary partnerships, which have already been granted greater freedoms.
Under pressure from the Legal Service Board (LSB) – which has described the rule as anticompetitive – an SRA consultation was launched in November and ended in the middle of
February. The results will be discussed by the SRA’s standards committee and are due to go to
the board in June, with handbook changes potentially implemented in October.
Law firms should be able to offer
accountancy services
Powerful opposition
A market analysis accompanying the consultation said the LSB estimated that 20-30% of the legal
services market’s £30bn turnover was already generated by unregulated providers, and about
60% by solicitors. The number of people providing non-regulated, unreserved legal services was
thought to be roughly equivalent to the number of solicitors – around 130,000.
Rather than simply abolish the SBR, the SRA proposed a raft of changes. As well as removing
“the prohibitions on links with separate businesses that carry on non-reserved legal activities”,
it wants to expand the range of permitted solicitor activities and protect consumers through
new ‘outcome’ measures and safeguards. Extra activities that should be allowed by law firms,
the SRA says, should include support services to business such as human resources, recruitment,
outsourcing and accounting services.
Meanwhile, solicitors who are on the roll and work within a separate business will no longer be
able to describe themselves to clients as ‘non-practising solicitors’, lest the term might carry an
implication that they are operating under regulated standards.
These proposals have generated powerful opposition, although the principle of helping
solicitors to compete is widely thought necessary. The Law Society worries, among other things,
that it will weaken the ‘solicitor brand’ and that by encouraging competition between regulated
providers and unregulated ones, it will reduce choice and lead to the exploitation of vulnerable
consumers, ultimately destabilising the legal services market.
As well as sharing fears about the solicitor brand, City lawyers complain that under the reforms,
without a corresponding change to the practice framework rules, solicitors will be able to own a
separate business but not practise within it. Responding to the consultation, the City of London
Law Society added: “Permitting solicitors to flow across the previously impermeable ‘wall’ into the
unregulated sector should act to drive up standards there.”
Lifting barriers
Adjusting or removing the 1994 separate business code to reflect a changing legal services
marketplace is not a new idea. In February 2013, the SRA rejected LSB calls to review the rule,
saying there was no “public interest justification”, but the thinking has changed radically since.
When reform was proposed in 2011, the Legal Services Consumer Panel objected, insisting that
consumers would lose out, especially since many of them assumed that all legal services were
continued on page 12
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Legal Futures | tel: 020 3567 1207 | email: [email protected]
April 2015
KPMG received waiver
regulated. This time around, the panel has offered qualified backing for reform, holding that
despite the risks of detriment to consumers, on balance sacrificing some consumer protection is
worth it if access to justice is extended.
But it wants stronger safeguards to be put in place than are proposed. For instance, instead of
banning referrals to unregulated services in the areas specified above, the panel said the SRA
should ensure that “prohibited referrals cover all high-risk areas of law”.
The SBR consultation elicited just 19 responses. The SRA’s chief executive, Paul Philip, admits it
was “not hugely popular”, but says the “key players” had all responded. The detail of SBR reform
was “still up for grabs at the moment”.
Some practitioners broadly welcome the reforms. Rob Hailstone, whose conveyancer support
body, the Bold Legal Group, has many high street firms among its membership, agrees SBR reform
is necessary. Although lifting restrictions imposed by the current SBR is just not on the radar of
many solicitors, he predicts that once barriers to involvement with non-regulated entities are
lifted, a number will take advantage.
“I think once something happens, they will see the opportunities and I think some of them will
jump on it. Once a few jump, others will follow.”
Mike Gahan, chief executive of multi-office law firm HCB, which has joined forces with a firm
of accountants, says his clients appreciate the multi-disciplinary approach and it is only fair that
professionals offering the same service should operate under the same rules. But he prefers a
‘levelling up’ to greater regulation “in the client’s best interests”.
One criticism of the SRA’s proposals is that they are ‘tinkering’ with regulation that needs
to be reformed wholesale. This view is encapsulated by solicitor entrepreneur Michael Horne,
whose Herefordshire ABS, Kidwells, sits alongside several related businesses, including a barristers’
chambers and a mediation practice.
He insists that the current model of regulation is “applying rules and ethos of the old-type
lawyers, where one would be conversant in Latin, to modern-day business practices – and it’s a
mismatch”. He continues: “In altering the SBR, the SRA are groping around in a desperate attempt
to try and show that they are dealing with, or being sensitive to, the modern business needs of
the client/customer. They have totally and absolutely misunderstood modern requirements for
legal services.”
Levelling the playing field
Tony Guise, of London-based regulatory specialists Guise Solicitors, says the SRA needs to find a
“workaround” fix to the SBR, since “big firms like KPMG are getting waivers, whereas high street
firms with maybe 10 partners are not”.
But he says the SBR consultation should be a prelude to the authority asking itself “why are
we regulating – what is the risk?”. However, he recognises that a major rethink on regulation
is not possible as long as the Ministry of Justice has no appetite for “doing anything about the
fundamental issues”.
Mr Philip acknowledges that the SBR is not where someone devising the regulation of legal
services would start, ideally. But the SRA has to act as best it can. “Given that the model is
creaking and is not fit for purpose in terms of how the market is developing… we need to level up
the playing field with solicitors, and that’s what we’re hoping to do,” he said.
Mr Philip stresses that he is sensitive to the consumer panel’s concerns, but argues there is
necessarily a balance to be struck between consumer protection, and encouraging growth and
competition in the market. “What we’re saying is that the pendulum is too far in one direction and
there is no such thing as absolute consumer protection. The question that arises here is whether or
not the present arrangements provide a proportionate level of consumer protection or whether
or not they inhibit competition in the marketplace.”
Enabling MDPs was an important initiative and the SBR reform is aimed at levelling the field
for big and small firms alike: “The whole idea was that ABSs would open up the market and
allow genuine multi-professional practices to get together to provide one-stop shops, not just for
ordinary people but for small businesses. That hasn’t happened. Of ABSs, only a handful of them
are multi-disciplinary in nature and that’s because we’ve waived lots of rules – and actually rules
are hardly rules if you waive them all the time.”
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Legal Futures | tel: 020 3567 1207 | email: [email protected]
Compliance&regulation
too few?
Too many or
With the SRA promising to rewrite both the Handbook and the
accounts rules, COLPs and COFAs give their views on the future
Jayne Willetts, founder, COLP and COFA at regulation specialist Jayne Willetts & Co in Birmingham
Those new to the legal services market and those without compliance departments do not have
the capability to second guess the SRA’s interpretation of the Handbook.
The latest plans to ‘simplify’ the rules have been met with incredulity by many COLPs, COFAs
and professional regulation lawyers alike. It is difficult to see how the code of conduct could
be shrunk any further or else the ethical framework it puts in place would vanish. It is minimalist
enough as it is. There has to be enough detail in the code for firms to get an indication of what all
these systems and procedures that they have in place are meant to deal with.
The accounts rules could be tinkered with, but holding client money is a high-risk area and rules
on the definition of client money, withdrawals from client account and maintaining accounting
records have to be precise so that a breach can be clearly identified.
Many firms regularly complain about the lack of guidance in the 2011 code and still rely upon
the 2007 code of conduct for guidance in dealing with compliance within their firms.
The SRA has recently issued a guidance note on protecting client confidentiality and a warning
notice on using client account as a banking facility. Both documents demonstrate the need to
augment the existing Handbook with the SRA’s own interpretation of the current rules.
If the Handbook were to be ‘simplified’, would this mean further guidance notes from the SRA
which are not mandatory, not part of the Handbook, “but the SRA may have regard to them
when exercising regulatory functions”?
We need certainty and transparency from the SRA. The Handbook needs to be prescriptive so
that the regulated community can see at a glance the rules they need to follow and not waste
time trying to second guess the SRA’s interpretation. It also needs to be prescriptive in the public
interest so that clients can expect a consistency of conduct from legal service providers.
Jayne Willetts
Ian Pryer, founding principal and COLP of Pryers Solicitors in York
The SRA tells us that one of its key objectives is to “ensure that sole practitioners and small firms
are able to comply with our rules”. A quick scan of legal blogs and judgments on the Solicitors
Disciplinary Tribunal website reveal that it is also a vexed community, very much under fire and
under increased scrutiny.
The fire is something to which these firms have become accustomed over the years, with
diminishing markets, increased competition and the relentless financial pressures of running high
street firms. Increased scrutiny from the regulator is a more recent phenomenon and with each
rewrite of the Handbook there is a widespread feeling that the screws of the regulation framework
are tightening, with the torsion equally applied to all firms, great and small.
The perception of the SRA from the small benches is that it is indifferent to small firms and pays
homage to the big players. It is undoubtedly easier to regulate a company with 4,000 staff and
one COLP, than 400 small firms with the same number of COLPs. Until recently, the SRA has done
little to dispel the myth that the consolidation of the legal industry has been welcomed with open
arms (in fact encouraged) by the regulator.
What we need in these changes is the relaxation of the regulatory burden on the smaller firms.
Ian Pryer
continued on page 14
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13
April 2015
There should be no need for the onerous duties on the COLP/COFA who oversees a pocket full
of people. The core duties will always be paramount, but that is the same as it has always been
and in loosening the grip in regulatory terms, it should allow the people running businesses more
time and breathing space to get back to their day jobs.
Significant changes (again) to the code of conduct will produce the need for yet more training
and the requirement to adjust the compliance sights again. It is sincerely hoped that the SRA
does follow through its thinking with small firms and introduces real changes designed to help
them whilst going easy on the rule changes.
Caroline Calverley
Caroline Calverley, practice manager and COFA at north-west firm Chafes Solicitors
Having already put in place strong financial management processes, at first I found a lot of the
requirements simple to comply with. Where I found it difficult was how to provide evidence of
controls when we had no formal recording procedures.
Joining the Manchester Law Society COLP & COFA Forum saved my sanity as we shared best
practice between ourselves. I now have a daily report from our accounts department and
prepare a quarterly assessment for the partners.
Are there strengths in this regime? I always look for the positives but I have struggled to see
the benefits. Those firms with good financial management in place don’t really need this level of
regulation and those without probably won’t be worrying about the rules anyway.
The weakness is the reliance on solicitors to self-regulate as it still does not address the issue of
the rogue or inefficient firm. There a further complication in the one-size-fits-all regulation which
does not take account of the resources available.
The accounts rules are long and complex. They were written at a time when the Internet was
unknown and the use of computers both by solicitors and banks were in their infancy. The last
revision to the 1998 rules was in 2011 and did nothing to address the electronic environment the
majority of firms now operate in, so this should perhaps be a starting point for next revision.
More alarming for me has been the proposal from the SRA to amend the reporting requirements,
when again those that are struggling or have poor bookkeeping standards will have another
opportunity to hide. If change is to happen, let’s see a simplification of the rules and reporting
standards and reporting remain mandatory.
Lisa Dixon, executive committee member at the Institute of Finance and Legal Management,
former COFA at Harrison Clark Rickerbys, and founder of her own book-keeping, accountancy
and legal finance business
When the compliance roles were introduced, the lack of real practical guidance was a huge
issue for the majority of firms – particularly smaller firms who felt the burden of compliance most
keenly both in terms of increased costs and the hidden costs of lost fee earning time.
Looking ahead, the SRA has indicated its commitment to condensing the accounts rules
significantly by April 2016. The current rules are some 57 pages excluding the various appendices
– looking at other regulators and you see that the Council for Licensed Conveyancers’ (CLC)
accounts rules total 10 pages with a further 10 pages of separate guidance, CILEx Regulation’s
accounts rules are 16 pages and the accounts rules for notaries run to 12 pages.
It is a fair conclusion, then, that the SRA’s accounts rules could be considered somewhat overburdensome.
I expect that the usual suspects are likely to be on the hit-list: the 14-day rule on transferring
costs and the two-day rule on paying or transferring unpaid professional disbursements. Whilst
there are good historic reasons underlying why these rules exist, it’s difficult under outcomesfocused regulation to see how breaches of these rules are meaningful.
Changes to make the interest provision more outcomes focused were introduced in 2011, and
yet they still remain very prescriptive – other regulators simply require that interest is paid.
I’d also suggest that the CLC approach of segregating guidance from rules into two separate
documents is useful. More guidance, particularly on what is not acceptable, would be helpful
Lisa Dixon
14
but that easy accessibility is key.
In truth, there is quite a lot of guidance from the SRA under the resources section of its website
but it feels very piecemeal and relies on some tenacity on the part of the COFA to pull everything
together to form a comprehensive picture.
Legal Futures | tel: 020 3567 1207 | email: [email protected]
Compliance&regulation
A real choice of
regulator?
With CILEx Regulation taking applications from law firms and the Bar Standards
Board licensing its first entities, Legal Futures asks the heads of four legal
regulators about their vision of a future where lawyers have a real choice of
regulator
Paul Philip, chief executive of the SRA
It’s hard to say what, if any, changes will happen as a result of the BSB and CILEx Regulation
authorising and regulating law firms. A lot may depend on exactly what approach they take. If
there are no obvious advantages in their proposals, then it’s hard to see why a firm would make
that leap.
The majority of law firms want to be legal generalists rather than legal specialists. That allows
them to be as flexible and resilient as possible, with the attendant financial benefits.
There are, of course, already other regulators authorising alternative business structures (ABSs),
such as the Council for Licensed Conveyancers. But many of the 350-plus ABSs we regulate
provide conveyancing services, so firms are making a choice about what suits their business
model. Over the last two years, we have worked to simplify the process of authorising new
entrants to the profession to ensure it is proportionate.
As regulators, we have similar ideas on the standards we expect of those wanting to practise
in England and Wales. This is why, for example, we worked in partnership on the competence
statement we consulted on over the turn of the year.
Those firms that feel that our model of regulation is the one they prefer will need to show that
those working within its practice are suitable, and adhere to the code of conduct. There are a
small number of ABSs that have breached the rules, and they have found that they will be treated
in the same way as traditional law firms. We won’t tolerate bad behaviour in the profession, and
I’m sure the other regulators feel the same way.
Paul Philip
Ian Watson, chief executive of CILEx Regulation
The legal services market is changing rapidly, and as a regulator we are responding to this
change. We see our role as the home for regulating specialist legal services in the public interest,
and will naturally be regulator of choice for chartered legal executives and CILEx practitioners, as
well as for existing firms looking for a regulatory model that better applies to their set-up.
CILEx Regulation believes the regulatory model it has developed, which is competence-based
and reflects consumer risk, will prove more adaptable to new business models than those based
on status qualifications.
We also expect that many of our regulated entities will be new start-ups which will seek to
match the services they provide to the market as it is developing. We have sought to make the
registration process as fair as possible whilst maintaining rigour.
We can regulate entities managed by any kind of authorised practitioner and qualifications
and competence will be transferable through our outcomes-based approach to authorisation.
There remain some impediments to switching, including for some firms required to have lengthy
run-off insurance cover before doing so. This is something we, with other regulators, have raised
Ian Watson
continued on page 16
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15
April 2015
with the Legal Services Board. It’s important that any restrictions in place are necessary to protect
the public and clients.
The standards we had to demonstrate to be authorised by the Legal Services Board were
highly stringent, and were then scrutinised by Parliament. We have assured our regulator, policy
specialists and parliamentarians of our ability to protect the public and regulate effectively.
No firm can expect to come to CILEx Regulation to escape scrutiny or be subject to a ‘lower’
threshold. As the market and legal businesses change, our primary responsibility is to protect the
consumer, which necessitates the exacting standards we have demonstrated.
Dr Vanessa Davies
Dr Vanessa Davies, director-general of the Bar Standards Board
More often than not the best way to protect the public is to ensure that barristers have the
capabilities, the environment, and the right regulations to enable them to adjust how they do
things so that they can best meet the needs of their clients and of the justice system.
This is what we had in mind this January when we started accepting applications from people
wishing to establish BSB-regulated businesses. We wanted to do our part to allow the market to
develop and provide greater choice about how legal services are provided.
For almost five years barristers have been able to set up entities under other regulators like the
SRA. Some will continue to do so. We have no desire to replicate existing systems. We continue
to do what we know we’re good at – regulating advocacy-focused services delivered to high
professional standards.
That said, there is nothing to stop entities moving from the SRA to the BSB (and vice-versa). The
Legal Services Act, whether intentionally or not, has had the effect of encouraging competition
in all areas of legal services, including regulators.
So, in becoming a regulator of entities, we offer barristers a new choice. We want to preserve
the skills and expertise associated with the Bar, and ensure standards are maintained. We want to
give those entities wishing to specialise in advocacy and litigation the option of being regulated
by us, under a specific, more tailored regime.
It is already clear that the Bar is interested in change and opportunity – we had over 50
expressions of interest in the first month. Here, Sir Bill Jeffrey’s message is of real relevance – not
just for criminal advocates but for all barristers. He said, arguably louder and clearer than most in
recent times, that “simply carrying on as at present” is myopic – the time to adapt is now. Our role
is to open up these opportunities so that clients can continue to benefit from the best of what the
Bar has provided for many years.
Sheila Kumar, chief executive of the Council for Licensed Conveyancers
Regulatory competition sounds to some a rather vulgar idea, or even a race to the bottom to
attract a larger regulated community to increase income. As the regulator created specifically
to break the monopoly in the supply of conveyancing, our experience is quite to the contrary.
Three decades on, the fruit of that disruption is evident. Cost to the consumer has been very
significantly reduced, there has been a huge amount of innovation in the sector and there is a
Sheila Kumar
16
wide diversity of firms providing true consumer choice.
In the post-Legal Services Act world, with the shift in emphasis to entity regulation, it must be
right that, for example, a solicitor running a specialist conveyancing practice – whether standalone or within a larger firm – should be able to move the regulation of that practice to a specialist
environment.
This is possible and it does happen, but there are some obstacles which we are seeking to
remove, such as the attitude of some insurers and some lenders to the question of whether a
change of regulator creates a new practice or rather, as seems the case in reality, continues an
existing one.
As a specialist regulator, the CLC has tailored its approach to the regulation of specialist
providers. We are extending our specialist approach to the regulation of probate and this year
we are beginning a fundamental review of our code of conduct to ensure it continues to deliver
effective, good-value regulation for consumers that continues to support innovation and extend
choice.
The experience and insight that we are gaining from different approaches to regulation in the
sector is driving improvement across the board, diversity of provision of regulation and the power
of the choices made by regulated businesses. This process still has a good while to run.
Legal Futures | tel: 020 3567 1207 | email: [email protected]