The Cost of Compliance?

Last month the Law Society published the outcome of a survey it had conducted amongst small firms, which claimed that 1 in 10 small practices were planning to close down because of the cost of complying with the regulatory regime contained in the new Solicitors’ Handbook, commonly known as “Outcomes Focused Regulation” (OFR) would be prohibitive.

The report claimed that 9% of firms surveyed were planning to close or merge as a result of the increased costs of compliance. The report also suggested that 23% of firms with fewer than 10 partners did not record how much time was spent on compliance whereas those that did claimed to spend a whopping 27 days per annum on it. That, of course, must be on the old Code of Conduct, not the new, but as each firm will now have to get on top of the new rules, and will have to appoint a Compliance Officer Legal Practice (COLP) and a Compliance Officer Finance and Administration (COFA), by next March, the amount of compliance work is only going to increase, in the short term anyway. It does not help that these new roles cannot be outsourced. However, I doubt that OFR will be, on its own, the cause of many firms to pack it all in.

My initial reaction to OFR (aka Freedom in Practice) was that whilst it may be yet another issue with which to get to grips, the emphasis was on saying goodbye to box ticking and taking a more common-sense approach to regulation. Provided you adhered to the Ten Commandments (sorry, Principles) you ought to be fine and if you had complied with the 2007 Code of Conduct you would have little to fear from OFR.   The new Handbook is significantly shorter than then old and there are “Indicative Behaviours” to guide you as well.  This taken with the SRA’s stated desire to be friends with the profession, to supervise and help and only to come down hard on those  firms that refuse to change or accept help, left me feeling that maybe this was not such a bad development.  The Law Society’s survey said that 56% of respondents were in favour of OFR, so I wasn’t alone in being cautiously optimistic.

Then last Monday I went to a seminar organised by CoreLegal, the message of which shook me out of my complacency.      Granted, I was always slightly suspicious of the SRA’s desire to be warm and cuddly.  How could they give up the pedantic, hard taskmaster image cultivated so successfully over so many years?  Could they really get away from a culture of prescriptive micro-regulation? The desire to “supervise” always had an element of Doublespeak about it.  But, there is force in the SRA’s admission (stated during their “Freedom in Practice” Roadshows earlier in the year) that they can’t micro-manage every law firm and ABS and need to concentrate their resources on the law businesses that do pose a real risk to the profession, leaving those that comply (or show that they are attempting to comply) in peace.

However, the message from the CoreLegal seminar is that nothing in OFR is clear and law firms face great uncertainty in what they are being asked to implement.   Yes, there are Ten Principles that are set in stone, but instead of being clearly understandable they are a movable feast.  Thou shalt not kill is easily understood, no room for confusion there, but “ you must provide a proper standard of service to your clients”, whilst also seemingly unobjectionable and reasonable begs the question, what is a “proper standard”.  Is it a good service or merely middling?  Is it more subjective and does it depend on the type of service being provided, i.e is the level of service demanded of a firm acting for individuals (particularly vulnerable clients) going to be higher than that demanded of a big commercial firm acting for corporate clients (answer = yes).  Where is that level of service to be pitched?  There is no one prescriptive level of service and that is what makes the whole prospect of OFR so daunting for many.  In other words, what constitutes a proper standard for one client may not be sufficient for another.

Similarly Outcome 1.1 “You (must) treat your clients fairly”.  Who judges what is fair?  Isn’t this highly subjective and bound to be interpreted against the solicitor?  But hold on a minute.  Is this really so onerous?  Are there any solicitors who do not want to treat their clients fairly?  The difficulty for practitioners is that we simply do not know how these rules will be interpreted, but surely it is better to have guidelines for behaviour rather than pedantic rules and requirements that must be obeyed, even if they are not relevant to that particular firm’s area of practice?

The Handbook came about from an understandable desire by the SRA not to have a two tier regulatory system – one for “traditional” law firms and the other for ABS law firms.  That means that much of the new Handbook is drafted with ABS in mind, i.e. new entrants to the legal marketplace that may have many other commercial interests.  One of the examples cited at the seminar as being a difficulty for law firms was Outcome 8.4, the mandatory requirement that “clients and the public have appropriate information about you, your firm and how you are regulated”.  I disagree.  For law firms that do not convert to ABS the information to be given is simple and is set out at Outcome 8.5 – you need to inform clients via your letterheading, emails and website that you are authorised and regulated by the SRA. Job done?  For ABS that do unreserved as well as reserved legal activities, or say a firm of accountants that becomes an ABS I can see that these issues might be more problematic, but should it be concerning to the plain vanilla smaller law firms that are owned wholly by their partners/members?

The answer to all these (and other problems), at least according to the speakers at the event, is to communicate with clients to assess what they need and how they perceive the service they receive.  No longer will what is on the file be enough evidence to show that you have provided a proper level of service.  Instead, it was suggested, you will need to have a dialogue with clients throughout the case and afterwards (in the form of questionnaires) to ascertain whether they felt they had received a proper level of service.  That may involve retaining external consultants to send out questionnaires and to interview clients on the retainer relationship. I don’t have a problem with this in principle, indeed probably all successful businesses listen to their clients and work on feedback, but does it require a satellite industry to be created? Is this really a regulatory requirement or merely good commercial practice?  I suspect it is the latter.

There are troublesome aspects to the new Handbook and this is where potential difficulties lie.  If a law firm makes a mistake there is now a positive duty upon the solicitor to inform the client “if you discover any act or omission which could give rise to a claim by them against you”.  Just what should you say in this situation that will not prejudice your PI insurer’s position? There is sure to be much debate over that issue in the future.

Risk management is a main focus in the new regime.  That is not just legal risk, but financial and managerial as well and many firms may struggle to get to grips with it.  For the first time, the business of being a solicitor is a matter of professional conduct.  Consider Principle No. 8,

You must 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

And under Outcome 7.4

you maintain systems and controls for monitoring the financial stability of your firm and risks to money and assets entrusted to you by clients and others, and you take steps to address issues identified;

In other words, if the Bank called in its overdraft to your firm suddenly, what contingency plans do you have?  For those firms that are run properly and prudently do they have much to fear? No one wants to see another Halliwells disaster and I cannot help but feel that these requirements are prudent and sensible.   If you read Chapter 7 of the Code of Conduct it reads to me as though it is written with the ABS in mind, not with law firms that already are used to supervising staff.  It must surely be in the profession’s interest that rogue firms, or firms that are shambolically run, are forced out of business and also to make sure that no such businesses are allowed to enter.

The CoreLegal seminar was very thought provoking, but there could ve usefully been much more on the role of COLP and COFA, which was somewhat glossed over toward the end. Both roles need to be undertaken by people of sufficient seniority who will act as the eyes and ears of the SRA within each firm.  In other words, COLP and COFA have the unwelcome burden of reporting any breaches to the SRA.  Failure to report a breach may have to be justified at a later stage.

 Undoubtedly challenges lie ahead, but I cannot help thinking that many of the people prophesying regulatory doom actually have much more idea of what lies ahead than others. The force in the Corelegal seminar was to make the point that we are entering a regime of retrospective regulation, which isn’t a particularly comfortable place to be. We are all in the same boat: no one quite knows what is expected and that is indeed an unsatisfactory state of affairs. I don’t think that requires large numbers of small practices to shut up shop:  finding new work, paying ever increasing indemnity premiums and coping with pressure on fee income are probably greater threats to many practices.  However, the profession has claimed for years to be over-regulated and now the SRA has, hopefully, taken steps to remedy it.  Put the doom-mongers to one side for the time being and give it a chance. In turn the SRA has to ensure that it doesn’t lose this opportunity to build bridges with the profession.  It will only take a few well-publicised harsh regulatory decisions to alienate practitioners and throw OFR into disrepute.