Resisting temptation

‘OFR’, or outcomes-focused regulation, will be with us on 6 October 2011. Although the start date for the SRA to become a regulator of ABS has been pushed back “probably” until the end of the year, it is full steam ahead for the new handbook, approved by the LSB with some amendments in June 2011.

Unfortunately, those firms wishing to get in early to prepare for OFR will not be able to look at the final version of the handbook until it is published in September. Until then, one must cross reference the draft handbook with the schedule of LSB approved changes. Given that many of the changes approved by the LSB are, essentially, semantic, one could perhaps be forgiven for thinking that there is little there of note. Having trawled through the code of conduct and realised that there are no changes worthy of the name, one might be tempted to abandon further examination of the changes. Do not give in to temptation.

COLPs and COFAs

Buried within the changes to the Authorisation Rules is a significant change. I have written before about COLPs and COFAs and their roles. For the sake of clarity and contrary to what may have been inferred from an earlier article, COFAs do not have to be lawyers; they merely have to be capable of fulfilling the role and have sufficient seniority to deal with matters appropriately. At that time, the SRA had sensibly abandoned the idea that COLPs and COFAs should report all breaches of the rules to the SRA, in favour of reporting ‘material breaches’. This has now changed. COLPs and COFAs will need to report all breaches “as soon as reasonably practicable”; however, non-material breaches will be regarded as reported in time if they are reported in the firm’s annual report.

In practice, this change will require all firms to report all breaches of all rules, no matter how trivial, to the SRA. The SRA then will receive tranches of annual reports, all at around the same time and all setting out any breaches of the rules. The SRA will then have the unenviable task of trying to sort through all this information to develop the risk profiles of firms.

Compliant today, compliant tomorrow?

Although COLPs and COFAs are probably the most significant change to the regulatory system, OFR does bring with it a number of other changes which may catch the unwary off guard. The SRA maintains that those who are compliant now will remain compliant. In many respects, that is true. Full compliance with the current version of rule 2 will fulfil client care requirements of the new code of conduct.

There are some areas though where firms will have to revise their procedures even if they are currently compliant. Development of a new conflicts policy is an obvious candidate given the significant change to the conflicts rules.

Managers of firms will need to review rule 7 of the code of conduct carefully. Firms will all need systems to identify and monitor risk – in practice, this means some form of risk register which allows firms to note and track risks within their practice. Firms also need systems to monitor financial stability.

The Accounts Rules

The new Accounts Rules will also require detailed consideration. Provisions of the Accounts Rules which were formerly mandatory guidance have been converted into rules. Guidance in the new rules is no longer mandatory, in keeping with the rest of the handbook.

Of particular note though is the requirement for firms to have a “fair” policy on interest which is communicated to clients at the outset of their retainers. The detailed rules as to when interest is payable have been abolished and there is no longer any de minimis provision allowing solicitors to retain interest of less than £20. A guidance note provides that failure to pay a reasonable amount of interest may lead the client to complaint to the Legal Ombudsman. Firms are, of course, obliged to pay a fair and reasonable amount of interest and failure to do so will be a breach of rule 22 if interest is not paid when it ought to have been, or rule 23 if the amount paid is not fair and reasonable; in both cases, the breach is reportable to the SRA by the COFA and the reporting accountant. It is permissible “in appropriate circumstances” to contract out of paying interest with the specific consent of your client. It will not be appropriate for firms to seek to contract out of paying interest as a general measure.

The new provisions about SRA monitoring and enforcement largely mirror the old rules. A key change is that the SRA will provide reasons for inspections/investigations of firms unless providing such information would jeopardise the investigation.

The Accounts Rules state that SRA powers override any obligations of confidentiality and privilege owed to clients. This remains a guidance note and will no longer be mandatory. It is open to speculation whether this was an intended change or not. However, solicitors may wish to obtain a more secure guarantee that providing records to the SRA will not breach their obligations to clients in future.

Susanna Heley
RadcliffesLeBrasseur

This article was first published by Solicitors Journal and is reproduced by kind permission.


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.