Wider Impact of the Legal Services Act on Regulation: Outcomes Focused Regulation

A. Background

The Legal Services Act did not make direct changes to regulation. The legal profes­sions entered the post-LSA 2007 era with their education and training regimes, their codes of conduct and disciplinary arrangements intact.

B. The Politics of OFR

i. Policy of the Legal Services Board

One of the driving motivations of the LSB was to establish ABS. This presented a number of problems, one of which was that ABS would be employing non-lawyers

¹⁵³ ibid, at para 5.59.

¹⁵⁴ ibid, at para 39.

¹⁵⁵ ibid, at paras 6.2 and 6.3. alongside lawyers. Therefore, it would be necessary to ensure that non-professional staff did not interfere with the standards expected of legal businesses. This meant, for example, that legal professional privilege rules would need to apply to all those employed in in ABS.

An LSB consultation on ABS identified three, further ‘key protections’ to protect consumer interests, best professional principles and the public interest. The first was the need for a ‘fit and proper test’ for non-lawyer owners and managers of legal prac­tices. The second was the appointment of HOLPs and HOFAs. The third was creating a forum where complaints about the ‘non-legal’ activities of ABS could be presented.

The LSB’s pursuit of the regulatory objectives, and its obligation to promote the best regulatory practice, resulted in support for principles-based regulation (PBR) and risk-based regulation.^[1159] PBR formed part of a suite of regulatory approaches promoted as an alternative to the sort of rule-based regulation operated by profes­sions.

The financial services crash of 2007 caused the worst world-wide economic crises since the 1930s. This did not, apparently, undermine confidence in the idea of PBR, although it did lead to a change of name. The Financial Services Authority announced a new focus on ‘outcomes focused regulation’.^[1161] This involved the same methods but applied with less of a ‘light touch’. Indeed, there would be ‘a greater depth of analyti­cal rigour’ and a commitment to ‘proactively look to influence outcomes, not merely react to events’.^[1162] OFR in the financial services industry was to involve stronger emphasis on monitoring and inspection, involving more investigations and more ‘intensive supervision’.

ii. The Law Society

Anticipating the challenge of regulating solicitors under the LSA 2007, the Law Society commissioned two reports on regulation in 2008. For the first, the former Tory politician and life peer, and chair of the financial services division of Beachcroft LLP, Lord Hunt of Wirral, was asked to consider ‘ the appropriate regulatory rules, monitoring and enforcement regime to ensure high standards of integrity and profes­sionalism for solicitors and their firms in all sectors’.^[1163] The other report, from Nick Smedley, a former civil servant, was concerned with the regulation of corporate legal work as a sub-strand of the Hunt Review.

a. The Smedley Report

Smedley reported unrest among large firms about the way the fledgling SRA oper­ated, claiming that it had no expertise and insufficient understanding of corporate or international legal work. This had led to ‘a breakdown of trust and relationships between the sector and its regulator over recent years’.^[1164] In his view, simply scaling up the traditional model of regulation for large, corporate firms would not work.

In most cases, Smedley predicted, corporate firms would have low levels of com­plaint by clients to the SRA and could be reasonably assessed as a low risk. They have a low probability of regulatory failure, but with high impact when it occurs, a risk category suggesting regular, strategic systems level regulation. The appropriate regulatory regime for corporate firms, he concluded, taking into account their high motivation and high capacity, would involve a rule book of general principles and strategic supervision.^[1166] Smedley proposed a shift to ‘principles-based regulation’ for large firms.^[1167]

Smedley proposed creating a Corporate Regulation Group within the SRA, led by a Group Director recruited from the practice field or with strong regulatory experience in a comparable sector and with expertise supplemented by a Client and Practitioner Panel.^[1168] The Group would comprise Account Managers to visit firms, examine their business systems and issue low level sanctions as appropriate. Suspension or striking off, however, would continue to be exercised by the Solicitors Disciplinary Tribunal.

Investigations would be focused and short. They would quickly identify the issue, discuss shortfalls with senior partners, and require assurances on system-wide remedial action. Detailed forensic investigations would be reserved for cases of very serious and deliberate malpractice.^[1169] Smedley feared that, although the SRA accepted his recommendations for creating a specialist unit to handle large firms in principle, they would water them down in practice. He urged that, in that case, the Law Society should set up a separate regulator for corporate law firms.^[1170]

b. The Hunt Report

Lord Hunt was familiar with PBR and advocated it in his report.

iii. The SRA

At the end of 2009, the chair of the LSB urged solicitors to seize the opportunity to change the profession.^[1174] The recently established SRA approached the issue of regulating solicitors having received a very strong steer. The LSB, and two consultant reports from the Law Society, had urged it to adopt PBR. Additionally, there seemed every prospect that the SRA would become a licensing authority for ABS.

The Law Society, an occasional supporter of multi-disciplinary practice, had decided this would be advisable, the President of the Law Society announcing that:

We consider this to be good for solicitors, for the users of legal services and for UK plc. We are a global leader in selling legal services to the world.^[1175]

Had the SRA not stepped forward as a regulator of ABS, other approved regulators may have been tempted to, gaining a market advantage. If none had come forward, the LSB could have done so. It was assumed that regulation of ABS would require a broader approach than professional, rule-based regulation, which applied only to regulated persons.

Regulation of ABS, where regulated persons may be in the minority, and in minor positions, would require regulators to regulate the organisation or ‘entity’ as a whole, rather than just those individuals who happened to be regulated by an approved regulator.

In June 2009, the SRA consulted on its proposed new regulatory regime. It was in a confessional mood. It roundly criticised its existing procedures, stating that the lack of management information on firms prevented analysis of risk. It conceded that its approach to supervision was more focused on identifying detailed rule breaches than assessing the outcome for clients and the public interest. It agreed with criticism that its Ethics Helpline encouraged dependence, with staff spending excessive time advis­ing on detailed cases rather than empowering firms to decide, improving standards or protecting the interests of clients.^[1176]

The SRA consultation accepted a need to assist firms in achieving standards, to focus on risk management systems and on senior managers rather than on investigation of rule breaches. It welcomed new administrative sanctions, such as settlements agreed with offending organisations, rather than disciplinary sanctions.^[1177] This was an example of the shift of focus in regulation, away from the role and conduct of individual solicitors towards the role and performance of their employing organisations.

In March 2009, the SRA implemented rules bringing into effect ‘firm-based regulation’. Thereafter, all legal practices, regardless of size, were to be regulated as a firm or ‘recognised body’ and subject to the SRA’s Recognised Body Regulations (RBR). The composition and structure of recognised bodies, and a description of the services they could provide, was specified in the Solicitors’ Code of Conduct 2007.^[1178]7⁵ Until that point, these regulations had been used only for companies and limited liability partnerships. Afterwards, individuals could only provide services through recognised bodies.

In 2010, the SRA published three major consultations, the first seeking views on the intended move to Outcomes Focused Regulation,^[1180] the second outlining intentions for its practical implementation^[1181] and the third focusing on consequent changes to the Code of Conduct.^[1182] The promise was a ‘proactive, risk-based and proportionate regulation’ and a flexible regime for all types of legal service providers, creating a new handbook of regulatory requirements that would facilitate a ‘flexible regime for all types of legal service providers, enabling them to create the right controls given their own individual business models, structures and client bases’.^[1183]

Despite the different statutory and practical bases for the regulation of first, recog­nised bodies and sole practitioners, and, second, ABS, the SRA considered that two regimes would create confusion for consumers and providers and would be expensive to operate.^[1184] It was therefore proposed, contrary to the recommendations of Smedley and Hunt, to apply the new regulatory system to all those regulated by the SRA, from sole practitioners to ABS.

In October 2010 the SRA published the results of the consultations to date and offered a last chance to comment on the emergent regime.^[1185] There were some objec­tions, but most respondents were said to approve of the general direction of change.

The Law Society raised some serious concerns about the abandonment of rules and the switch to OFR,^[1186] but the SRA brushed these aside. The SRA therefore adopted OFR despite the reservations of the Law Society, against Smedley’s advice that the forerunner (PBR) only be used for corporate firms and Hunt’s advice that a similar system be extended over time.

C. Implementation of OFR: The New Regulatory System

i. The Rule Book

Both Hunt and Smedley envisaged reduction in the volume of rules of conduct. Smedley proposed a single code of conduct with variations in respect of certain types of work.^[1187] When the SRA consulted in 2010, it stated that the new system would ‘not mean the abolition of all detailed rules’ but would offer a high level structure ‘com­bining the flexibility of Outcomes Focused Regulation with the certainty of rules’.^[1188] It was anticipated that rules might be needed in ‘high risk areas’ involving a client’s liberty or money. It was not clear until later consultations that OFR meant the end of rules in the conventional sense.

All regulatory requirements, Code, Accounts Rules, Licensing Rules etc, were consolidated in one handbook, published online. The idea was that new ‘rule book’ would lift the ‘binding regulatory requirements’ (‘rules’) to the level of principles and, would therefore be less detailed and prescriptive, not ‘hinder innovation’ and support providers in achieving ‘good outcomes for consumers and the public interest’.^[1189] The new SRA code was timed to coincide with the introduction of ABS in 2011. The rules applied equally to individuals and entities. Therefore, when the SRA Code of Conduct refers to ‘you’ and ‘your’, this applies to individuals and firms collectively.

a. Principles

The Code identifies 10 principles, the first six taken from Rule 1 of the Solicitors’ Conduct Rules 2007, the last four reflecting the new focus on regulation of businesses, or entities. They provide that regulated parties must:

1. uphold the rule of law and the proper administration of justice;

2. act with integrity;

3. not allow your independence to be compromised;

4. act in the best interests of each client;

5. provide a proper standard of service to your clients;

6. behave in a way that maintains the trust the public places in you and in the provision of legal services;

7. comply with your legal and regulatory obligations and deal with your regulators and ombudsmen in an open, timely and co-operative manner;

8. run your business/carry out your role in the business effectively and in accordance with proper governance and sound financial and risk management principles;

9. run your business/carry out your role in the business in a way that promotes equality and diversity and does not discriminate unlawfully in connection with the provision of legal services;

10. protect client money and assets.

b. Outcomes

The SRA Code comprises sections devoted to different topics, for example, client care, equality and diversity and conflicts of interest. Each section contains mandatory out­comes that must be achieved, by organisations and individuals. The mandatory nature of the outcomes is the element of the new rule book that most closely corresponds to conventional rules. Most outcomes are however, broader than rules would normally be. Curiously, some outcomes are expressed negatively, giving them something of the character of rules. For example, an outcome for publicity is that it must not be misleading.^[1190]

c. Indicative Behaviours

Indicative behaviours are not mandatory, because outcomes might be achieved by different routes.^[1191] Like some outcomes, some indicative behaviours are expressed negatively, giving them the character of rules. Take, for example, the indicative behav­iours for publicity. The relevant outcome is that solicitors ‘do not make unsolicited approaches in person or by telephone to members of the public in order to publicise your firm or in-house practice or another business’.^[1192]

The Code follows the outcome against unsolicited approaches with eight indicative behaviours, such as approaching people in the street, which would ‘tend to show that you have not achieved these outcomes’.^[1193] The idea is that the firm may advance some reason why they had to approach people in the street. If, as seems likely, no reason for such approaches could be acceptable, this is the same as saying that not approaching people in the street for publicity reasons is a rule. Perhaps it would be fair to say that indicative behaviours are rebuttable presumptions about acceptable and unacceptable behaviour.

11. Personnel

a. HOLPs and HOFAs/COLPs and COFAs

In its new regulatory framework, the SRA has taken the roles defined by the LSA 2007 (HOLP and HOFA) and renamed them compliance officer for legal practice (COLP) and compliance officer for finance and administration (COFA). It also required that all authorised bodies were required to nominate members for these roles. Therefore all law firms, including sole practitioners, were required to have posts that the Act only required ABS to have.

The SRA Authorisation Rules for Legal Services Bodies and Licensable Bodies outlines the requirements for the roles of COLP and COFA. Both must be an autho­rised person and either managers or employees of an authorised body. They must be registered with the SRA and able to prove that they have suitable skills. Therefore, a suitably qualified barrister could be a COLP. The primary obligation is that COLPs and COFAs must record any failures of a practice to comply with authorisation or statutory obligations, and make such records available to the SRA on request.

b. Suitability

In 2011 a Suitability Test was introduced to apply to those seeking admission or restoration to the roll as a solicitor and to legally qualified and non-legally qualified applicants for roles in authorised bodies as authorised role holders, that is a COLP or a COFA. Therefore, solicitors must show that they are of the required standard of character and suitability, while an authorised role holder must show that they are a fit and proper person.^[1194] The regulations include strict stipulations of behaviour that will debar applicants. There are 10 paragraphs, many lengthy, setting out prohibitions and factors weighing on suitability decisions.

The SRA states that it will refuse applications where the person has been con­victed of certain criminal offences, for example, involving dishonesty, fraud, perjury or bribery.^[1195] It will refuse applications, except in exceptional circumstances, where applicants ‘have been adjudged by an education establishment to have committed a deliberate assessment offence which amounts to plagiarism or cheating to gain an advantage for yourself or others’.^[1196] It may refuse applications for lesser infractions, for example where the applicant has received a caution by police.^[1197]

iii. Method

a. Relationships

OFR implicitly involves a move from reactive regulation, the prosecution of default, to a more proactive approach, looking at systems and anticipating problems. The Law Society’s traditional method of investigating default, descending on a firm, probably after a tip-off, and going through the books with a fine toothcomb, will presumably be reserved for extreme cases under the new regime. What was promised was a more diagnostic approach, with routine visits to discuss issues. Standard visits to organisa­tions might examine the evidence used for internal monitoring, results of audits and training or be thematic, for example, looking at client care or conflicts of interest. The focus would be discussion of issues and advice on how to deal with problems.

b. Sanctions

Under the new system, the SRA retains the right of intervention in solicitors’ practices and to refer individual solicitors to the Solicitors Disciplinary Tribunal (SDT). The shift in regulatory focus from individual to corporate responsibility should, however, ensure that only the most serious cases follow that route. For many cases, particularly less serious cases, there may be greater use of administrative sanctions, fines and regu­latory agreements. These are imposed on or negotiated with organisations direct, and can be administered without reference to the SDT (see further chapter eight).

VI.