Performance indicator: the SRA would learn more with a different approach
Unreasonable deadlines and an antagonistic attitude are holding back the SRA, says Susanna Heley
The SRA has focussed on financial stability as an issue for some time now. Drawing on its experience of interactions with 76 firms in financial difficulty, it has now published a report on key indicators. The report itself is not terribly surprising, the SRA notes that financial difficulty may be caused by a number of factors and does not necessarily mean that the management of the firm has been conducted in breach of obligations contained in the SRA Handbook.
The report quotes a number of statistics relating to both contributing factors to financial issues (such as evidence of poor management decisions) and risks arising as a result of financial issues (such as failure to pay debts and Accounts Rules breaches).
Interestingly, the SRA’s report indicated that poor financial and business management was a factor in just 39 per cent of cases. Misuse of client monies was in evidence in 26 per cent of cases.
Whilst it is fair to say that these statistics are potentially significant (assuming that they would hold true over a wider sample of firms), they do rather undermine the SRA’s justification for the approach it is taking to firms in difficulties.
Those on the ground, dealing with firms in difficulties on a day-to-day basis, would characterise the SRA’s approach as often demanding and antagonistic, requiring, for example, vast quantities of information within unreasonably short time frames with little or no appreciation of the continuing demands of running the practice.
The focus on financial stability – and the basis of their approach – is said to be because of the increased risk to client files and funds when firms begin to struggle. In circumstances where the evidence now released by the SRA suggests that a significant majority of firms in financial difficulties do not misuse client funds, one has to question whether the approach adopted by the SRA is cost effective and proportionate in light of the actual risk in regulatory terms as well as the SRA’s published objectives.
The SRA has always said that it cannot and should not prevent firms from failing. Its job is to protect clients, the public and the profession from the adverse consequences of disorderly closures and interventions. Insofar as firms are insolvent but there is no risk to clients’ funds or files, it should be for firms to consult properly qualified and experienced insolvency practitioners.
Unless there has been misconduct, it is not a matter for the regulator.
Sadly, those representing solicitors who are the subject of financial stability exercises, witness daily the mismatch between the SRA’s views at policy level and its actions on the ground. One particularly striking feature of the SRA’s approach is that it seems all too willing to disregard the opinions of experienced insolvency practitioners called in to consult with firms in favour of its own views.
I know of a number of insolvency practitioners who express reluctance to deal with the SRA, particularly in circumstances where an intervention is threatened.
The SRA’s ‘Steering the Course’ report suggests that the incidence of failure to respond to SRA information requests or delayed responses occurred "too often to be coincidental" and claims as a factor in relation to evidence of "poor practices". Whilst I would agree that delayed responses are unlikely to be coincidental, I would invite the SRA to consider whether the coincidence may in fact be down to the SRA’s conduct in requesting too much information in too short a time frame.
When the SRA launched its ‘Risk Outlook’ last year, one of the risks notably absent from the document was the risk presented by the SRA’s activities. I was assured at the time that the SRA is aware of the effect its activities can have on firms, both in practical terms in relation to the time spent dealing with SRA requests which can often be considerable and have a dramatic effect on fee earners’ ability to conduct fee earning work and in reputational terms – the effect of an SRA decision or investigation on the reputation of a practice.
The SRA’s report makes for interesting reading, however, once more, it fails to critically analyse the approach of the SRA.
Whilst I would urge firms to review the report and consider its suggestion of regular financial health checks, I would also invite the SRA to consider what lessons it could learn if it would just step away from the underlying assumption that any problems must necessarily be the result of a poor attitude on the part of firms.
This article was first published by Solicitors Journal and is reproduced by kind permission. You can read the original article by clicking here.
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