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The SRA’s new approach to regulation depends on solicitors doing the right thing

Law firms must regulate their business culture to ensure compliance, says Crispin Passmore 

3 December 2015

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By Manju Manglani, Editor (@ManjuManglani)

The current length and complexity of the SRA Handbook is hindering innovation in law firms.

That’s the view of Crispin Passmore, executive director of the Solicitors Regulation Authority of England and Wales (SRA).

He has argued that a principles-based approach to regulation will give law firms greater business flexibility and opportunities to be innovative.

“Complexity gets in the way of innovation and variety,” he said at ARK Group’s Risk Management for Law Firms conference in London on 1 December.

On 26 November, the SRA published a position paper on its plans to change the way it regulates solicitors.

“We want to move away from a prescriptive set of complex rules to focus on core professional standards, with additional restrictions only when necessary,” said Paul Philip, CEO of the SRA.

“I want to see an end to the long and unwieldy Handbook and instead give the profession simple, clear guidance on what we require.”

During Passmore’s keynote conference presentation, he noted that the SRA has cut “36 pieces of unnecessary regulation” in the past 18 months. These include accounting requirements, training regulations and the management of small firms.

It now plans to do much more, with a major reform of the SRA Handbook potentially in place by spring 2017.

Current issues which the SRA has identified with the Handbook include: it is too restrictive and focused on legal structure; it remains overly detailed and prescriptive; it is large, complex and wide in scope and applicability; and operates on a ‘one size fits all’ basis.

A concern was raised from the floor about the SRA’s plans to move towards a more principles-based approach to regulation and to reduce the size of the Handbook to around 50 pages.

It was argued that law firms are complex businesses which are used to dealing with complex issues; they need complex regulatory advice rather than broad-based principles.

However, Passmore rejected the suggestion, referencing regulatory standards in other industries.

“Lots of businesses operate in complex ways without regulatory details of the same complexity,” he said.

“If they can manage, so can you. I can’t guarantee you’ll be comfortable, but you’ll cope.”

Trusting law firms to do the right thing

For Passmore, the SRA’s new approach to regulation is ultimately about trusting individual lawyers to do the right thing by their clients and to manage their businesses well.

“If you can be trusted to be solicitors and advocates and do all sorts of important things for clients, we should trust you to run your business and not be prescriptive about that,” he said.

“We need to help you to comply, but we will do it by being clear about what you need to achieve and what would be a serious issue, giving you tools to manage those issues.”

He linked this approach with the SRA’s controversial changes to continuing professional development (CPD), where mandatory CPD hours will be replaced by a self-declaration of continuing competence from November 2016.

“Different solicitors need different types of training; we are recognising that you are professionals and that you can be trusted to make the right decisions as individuals and law firms,” he said.

However, getting lawyers to self-direct their learning and development is the number one challenge facing law firms, April 2015 research by Managing Partner found.

Concerns were raised by many respondents that law firms will view the self-declared competence approach to CPD as a cost-cutting opportunity.

This echoed the findings of Managing Partner’s August 2014 survey of the UK legal sector, to which more than three quarters of respondents said they believed the switch to the new CPD regime would not result in any significant improvement to learning and development for solicitors.

CPD can be more valuable to law firms that billable hours. But, this depends on law firms recognising that the skills development and knowledge growth of their staff is key to their long-term business sustainability.

Similarly, a move towards a principles-based regulatory approach to compliance can only work if law firms view regulatory compliance as a critical risk management tool rather than a burden.

Culture – or the ‘way we do things around here’ – can undermine even the best regulatory objectives. Too often, partners are so focused on achieving profit goals that they take 'shortcuts' on critical risk and compliance processes and are allowed to get away with it.

“You are responsible for the culture of your business, which will make people comply – it’s your responsibility, not mine,” commented Passmore.

“Fee earners and junior lawyers will follow your culture, so it’s up to you to set it. The best way to get compliance is for you to decide to comply, not for me to tell you to comply.”

Law firms which have in the past few years suffered the consequences of partners covertly engaging in fraud include Blake Lapthorn, Hogan Lovells, Addleshaw Goddard and Ince & Co.

In the high-profile case of Christopher Grierson, who made 57 false or misleading expense claims amounting to £1.27m at Hogan Lovells, the firm responded swiftly and conducted a thorough internal investigation.

This enabled the regulator to “sit back” and trust the firm to ensure affected clients were protected and compensated, Philip Barden, head of litigation and dispute resolution at Devonshires, said.

More recently, when Blake Lapthorn identified a shortfall in its client account, it engaged the SRA’s forensic investigation team, which uncovered the misuse of £221,858 in client funds by former partner David Harry Salt.

A culture audit can be an effective way to understand what is truly happening within a business, underneath its glossy vision and values statements, before a compliance scandal like that which is currently engulfing VW emerges.

The rising volume of regulation and fear of a scandal are now the biggest drivers of compliance in organisations worldwide, research by The Risk Advisory Group has found.

“Culture measurements from structured interviews and diagnostic surveys alone do not measure people’s propensity to take risk or cut corners,”warned Stephen Gould, Stephen Lucas and Russell Davis in their Managing Partner article ‘Cobwebs and skeletons: Cast light on your law firm's real culture’.

They noted that culture assessment and monitoring is taking place in numerous organisations, including those in the financial services, legal, pharmaceutical, aviation, commodity trading and public sectors.

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