With the introduction of Outcomes Focused Regulation (OFR) on 6th October many firms have been trying to get to grips with the profound changes in the regulatory landscape.
The main challenge for firms has been to acquaint themselves with the range of obligations set out in the 574 pages of the SRA Handbook and to familiarise themselves with the new terminology of mandatory Principles, Outcomes and Indicative Behaviours.
It is vital for all firms to get to grips with all the provisions of the Handbook because it is made clear in Chapter 7 – Management of Business that compliance extends to all elements of the Handbook and spells out the duties in the mandatory Outcomes 2 and 3 as follows:
O(7.2) you have effective systems and controls in place to achieve and comply with all the Principles, rules and outcomes and other requirements of the Handbook, where applicable;
O(7.3) you identify, monitor and manage risks to compliance with all the Principles, rules and outcomes and other requirements of the Handbook, if applicable to you, and take steps to address issues identified;
So who in your firm will be checking that you are able to show that you are meeting these Outcomes?
Designating and appointing the Compliance Officer for Legal Practice and Compliance Officer for Finance and Administration is not required until 31 March 2012 but plainly firms need to decide now who is going to take charge of compliance issues as the new regime starts on 6th October.
Most firms will be guided by the SRA’s ‘Quick Guide’ on who could be appointed and where responsibility and accountability will lie.
The COLP must be a lawyer and can be either a manager (i.e, partner, member or director, depending on how the firm is constituted) or an employee. The COFA need not be a lawyer and again may be a manger or employee. The critical issue is that the appointee in both cases must be of sufficient seniority and in a position of sufficient responsibility to fulfil the role. Essentially, this must mean that both roles will have to be taken by full equity partners because it is hard to envisage that some partners will accept the decision of an employee, irrespective of their seniority. In small firms it is likely that both compliance roles will be fulfilled by the same person and this is permitted by the SRA.
A number of those in firms who are likely candidates for the role of COLP or COFA have been concerned that they may be a ‘scapegoat’ because of the positive obligations upon them imposed by Chapter 10 (you and your regulator) of the new Code of Conduct and Authorisation Rule 8.5 to ‘record any failure to comply and make such records available to the SRA on request’.
The SRA have been at pains to emphasise that the COLP and COFA will not have sole responsibility for compliance with the Handbook requirements and in their introduction to the Handbook set out the regulatory framework thus:
Our approach to regulation has two elements: firm-based requirements and individual requirements. It focuses on the practices of regulated entities as well as the conduct and competence of regulated individuals. This approach allows us to take regulatory action against firms or individuals, or both, in appropriate cases.
The ‘Quick Guide’ goes on to confirm that both the firm and compliance officers have responsibility:
All individuals in the firm have a role to play in complying with the requirements of the Handbook. Ultimately compliance is the responsibility of the firm. The COLP and COFA have a key role in ensuring that systems and controls are in place and in reporting material issues to the SRA.
The SRA’s regulatory model has at its hub the Risk Centre that will essentially be conducting desk-based reviews on the information that firms will have to provide to the SRA under the new regime. Already firms are being asked to analyse the causes of complaints made against them and firms will have to rate or self assess their achievement of Principles and Outcomes together with compliance with other Handbook requirements – see Outcome 7(3) above. How can this be achieved?
One approach may be to complete a self assessment against the draft version of Lexcel version 5. Although the final version is not due to be published until October the draft contains many useful additions that reflect the introduction of OFR. One commentator has said: ‘Version 5 of Lexcel…addresses the requirements of OFR. It is a one-stop solution to remaining compliant after 6 October 2011.’
It is hardly surprising then to note that there have been reports of a significant surge of interest in Lexcel among firms.
The language of the Handbook emphasises that firms must have effective systems, controls and procedures in place and the requirement for firms to embrace business management is illustrated by its elevation to the status of a Principle as Principle 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.
Action points for COLPs and COFAs:
- Assess extent to which you comply with SRA Handbook (‘GAP’ analysis)
- Use Lexcel draft version 5 as a framework for your assessment
- Identify gaps and areas of weakness
- Address shortcomings, introduce formal systems and procedures where needed
- Consider internal audit and training for on-going compliance
- Involve partners and senior lawyers in the tasks
Peter Warner Solicitor, MBA
Peter was involved in the SRAs pilot project on Relationship Management during 2010 and advises and trains Law firms on compliance, risk and quality standards such as Lexcel.
