The SRA Suitability Test – COLP and COFA appeals

COLP and COFA

An individual who applies to become a COLP or COFA will be subject to the SRA Suitability Test 2011 because section 15.1 of the SRA Authorisation Rules states that the SRA will take account of the criteria in the SRA Suitability Test and any other relevant information when considering whether to approve an application to become a Compliance Officer.

The application of the SRA Suitability Test to COLPs and COFAs

The SRA Suitability Test sets out five categories of conduct which could prevent prospective COLPs and COFAs obtaining authorisation:-

1 Criminal offences
2 Behaviour not compatible with that expected of an authorised role holder
3 Financial circumstances
4 Regulatory history
5 Corporate offences and insolvencies

In practice, those applying to become a COLP and COFA are most likely to have difficulties with the sections of the suitability test which relate to incompatible behaviour, financial problems and regulatory history. Those sections are considered in more detail below.

Incompatible behaviour

Section 3.1 of the SRA Suitability Test states that unless there are exceptional circumstances the SRA will refuse an application if the prospective COLP or COFA has:

(a) been responsible for behaviour which is dishonest or violent or where there is evidence of discrimination towards others, or
(b) misused his position to obtain a pecuniary advantage or to abuse the trust owed to vulnerable people or been responsible for other behaviour which demonstrates that he cannot be relied on to discharge his regulatory duties.

The reference to discrimination could have far reaching consequences. It places applicants in a position where they are at risk of refusal if an employee has obtained a finding of discrimination against their firm in Employment Tribunal proceedings.

Financial problems

Section 5.1 of the SRA Suitability Test states that unless there are exceptional circumstances the SRA will refuse an application if there is evidence that the prospective COLP or COFA:

(a) cannot manage his finances properly and carefully, or
(b) has deliberately sought to avoid responsibility for debts or has acted dishonestly in relation to the management of his finances.

Section 5.2 states that there will be a presumption of evidence that an applicant cannot manage his finances properly and carefully if a County Court judgment has been entered against him or he has entered into a voluntary arrangement or been made bankrupt.

A guidance note states that the presumption may be rebutted if (a) the financial difficulties occurred “many years ago” and there is evidence of “subsequent sound financial management and conduct to show that creditors have been repaid” or (b) the applicant was affected by exceptional circumstances beyond his control which he could not have reasonably foreseen.

Part (a) of that guidance note is particularly harsh. It appears to disregard Parliament’s intention that insolvent debtors should be released from their debts after a bankruptcy or voluntary arrangement. It places applicants who have entered into voluntary arrangements in a position where they are unlikely to be able to become a COFA unless they repaid their creditors in full.

Section 10.1(c) of the SRA Suitability Test states that unless there are exceptional circumstances the SRA may refuse an application if the prospective COLP or COFA has been a manager or owner of a corporate body which has gone into administration or another form of insolvency.

It is unclear whether section 10.1(c) is intended to include situations in which a manager of a corporate body resigns some years before the insolvency.

Regulatory history

Section 6.1 of the SRA Suitability Test states that unless there are exceptional circumstances the SRA will refuse an application if the prospective COLP or COFA has:

(a) been the subject of a serious disciplinary finding, sanction or action by a regulatory body or Court or
(b) failed to disclose information to a regulatory body when required to do so or has provided false or misleading information, or
(c) has significantly breached the requirements of, been refused registration by, or failed to comply with the reasonable request of, a regulatory body.

Section 6.2 of the SRA Suitability Test states that unless there are exceptional circumstances, the SRA may refuse an application if the prospective COLP or COFA has been rebuked, reprimanded or received a warning about his conduct by a regulatory body.

The suitability test does not provide a definition of a “serious disciplinary finding”. In Solicitors Disciplinary Tribunal proceedings a “serious” finding is generally regarded as a finding which results in a decision to strike off or suspend a solicitor and there is a passage in the guidance notes to the Solicitors Code of Conduct 2007 which describes “serious misconduct” as conduct involving dishonesty. However the construction of section 6 suggests that the SRA is likely to now say that any disciplinary finding beyond a rebuke, reprimand or warning is a serious disciplinary finding.

That could have far reaching consequences for Sole Practitioners who have faced Solicitors Disciplinary Tribunal proceedings in the past. They are at risk that their application to act as a COLP or COFA will be refused and that they need to merge in order to survive.

A guidance note states that an applicant should disclose details of any disciplinary investigation or proceeding and that the SRA will not determine the application until the applicant can confirm that the matter has concluded. That could well have harsh consequences for some applicants as SRA investigations can last for a number of years and a solicitor who is under investigation has little prospect of controlling the speed of the SRA’s investigation.

Exceptional circumstances

Regrettably, the suitability test does not define or provide examples of exceptional circumstances.

We consider that the following could be examples of exceptional circumstances:

1 Lapse of time since the event.
2 Good conduct since the event. It should be noted that there is an emphasis in sections 7 and 8 of the SRA Suitability Test on rehabilitation and the applicant’s attitude towards the event.
3 The fact that the applicant has been permitted to manage a practice without any Practising Certificate conditions or any other restriction prior to the introduction of COLPs and COFAs.
4 The consequences to the practice if the application is refused. There may well be a stronger argument for saying that exceptional circumstances apply in small firms with a limited number of partners if the implementation of the suitability test places them in a position where due to previous financial difficulties or SDT proceedings none of them are apparently suitable to act as COLP or COFA. We believe that failure to treat that as an exceptional circumstance could raise issues relating to convention rights.

It may be difficult to persuade the SRA that exceptional circumstances exist as the suitability test provides that the burden of proof is on the solicitor. The introduction states that it will always be a matter for the applicant to discharge the burden of satisfying suitability under the test.

Disclosure

The applicant for the role COLP or COFA is under an obligation to disclose all material information relating to the application and great care must be taken to ensure that there is full disclosure.

Section 2 of the SRA Suitability Test states that failure to disclose material information will be treated as prima facie evidence of dishonest behaviour. If the presumption of dishonesty can be rebutted, the SRA will still be able to refuse the application under section 6.1(b) for non disclosure unless there are exceptional circumstances.

The steps to take if authorisation is refused

If an application to become a COLP or COFA is refused the SRA will provide the authorised body and the individual with written reasons for the decision

A decision then needs to be taken as to whether to appeal the SRA’s decision or apply for a different person to act as the Compliance Officer or take both of those steps.

Appeals

Sections 30.2 of the SRA Authorisation Rules provides that a Legal Services Body and the individual who applies to become the COLP or COFA can appeal an SRA decision not to approve the individual.

The appeal is an internal appeal under the SRA’s appeals procedure and the appeal must be made within twenty eight days after notification of the decision and the reasons for the decision.

The Authorisation Rules do not say whether there is a right of appeal to the High Court if the internal appeal fails and it is at present unclear whether the decision can be appealed to the High Court. If there is no right of appeal, it will be possible to challenge the decision by judicial review.

Section 31.2 provides a different route of appeal for decisions relating to an ABS. In those cases, the appeal is ultimately made to the appellate body, which is the Solicitors Disciplinary Tribunal.

Applications for alternative Compliance Officers

Section 8.5 of the SRA Authorisation Rules provides that an authorised body must at all times have a designated COLP and COFA. approved by the SRA.

The requirement to have a COLP and COFA cannot be waived by the SRA and an authorised body should consider whether to submit an application for an alternative individual to be appointed pending the outcome of an appeal.

In practice a firm may be tempted to take a commercial decision not to pursue an appeal for reasons of costs and to instead make arrangements for an alternative individual to act as the COLP or COFA. However that decision needs to be considered very carefully. A refused application is a regulatory finding which could have adverse consequences in the future for the individual. It could also affect the firm’s standing with insurers and it could result in adverse publicity of the SRA publicise the decision. It may well be prudent to challenge the decision if there are any prospects of success.

Nigel West, Partner
e: nigel.west@rlb-law.com
t: 020 7227 7232

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Disclaimer

This briefing is for guidance purposes only. RadcliffesLeBrasseur accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.