COLPs Supplement | FAQs

Question: There are specific outcomes in chapter 7 of the Code of Conduct with regard to out-? sourcing. In particular, we note that we now need to ensure that any contractual arrangements must include clauses allowing the SRA to obtain information from, inspect the records of, or enter the premises of, any company to which we outsource work. What we are not sure about is what sort of activity is caught. Outcome 7.10 refers to “legal activities or any operational functions that are critical to the delivery of any legal services”. This clearly covers things like typing and photocopying but does it cover instructing counsel or other experts?

Answer: The SRA has issued further guidance on this subject and has said that the outcomes apply when “you outsource work that you could have conducted and do not apply when you use a specialist service”. It has said quite specifically that they do not apply to “instructing counsel, medical experts, tax experts or accountancy services”.

The SRA has also given examples of the type of activities which would be caught by outcome 7.10. They include:

• activities which would normally be conducted by a paralegal;
• initial drafting of contracts;
• legal secretarial services – digital dictation to an outsourced secretarial service for word-processing or typing;
• proofreading;
• research;
• document review;
• Companies House filing;
• due diligence, for example in connection with the purchase of ?a company;
• IT functions which support the delivery of legal activities; and
• business process outsourcing.

Two other associated issues to consider when outsourcing work are client confidentiality and the separate business outcomes.

In relation to confidentiality, you need to ensure that your terms of business make clear that you sometimes outsource work. You should ask your clients to signify that they are happy with this. You also need to make sure that the third parties you outsource work to have proper arrangements to protect confidential information.

In relation to separate businesses, Chapter 12 in the Code prevents you owning a company which conducts “prohibited separate business activities”. These activities include “the conduct of any matter which could come before a court, whether or not proceedings are started” and “providing legal advice or drafting legal documents…where such activity is not provided as a subsidiary or necessary part of some other service which is one of the main services of the separate business”. This means that although you could outsource, for example, the drafting of contracts, you could not outsource this work to a company which you own.

Question: We are a firm with three offices in a mainly rural area and conveyancing is one of our main ? areas of work. We have an arrangement with a local estate agent that they will refer the seller of a property to one of our offices and the buyer of that property to another. We believe that this is acceptable under the rules as each client is represented by a different office. Where we are asked to act for the seller and buyer of a property and both are established clients we also ensure that they are represented by different offices. We’re continuing to do so but with some concern as to whether we are, in fact, allowed to do so.

Answer: The Solicitors’ Code of Conduct 2007, and previous sets of rules, had specific requirements which imposed a general prohibition on acting for seller and buyer in conveyancing. There were limited exceptions which allowed firms to act for seller and buyer in the circumstances you describe, provided there was no conflict of interests at either the time of receiving instructions or subsequently. The written consent of both parties had to be obtained. What is apparent is that many firms used these exceptions as carte blanche to act without even considering the issue of conflict.

The SRA Code of Conduct 2011 did bring some fundamental changes to this situation. It treats conveyancing conflicts in exactly the same way as all other conflicts, putting the onus on firms to make the decision in each individual case as to whether it is appropriate to act for seller and buyer. Whether or not the clients are ‘established’ or referred to different offices is irrelevant.

This means that firms such as yours do need to think carefully about how they approach this issue.

The first consideration is that the definition of a ‘client conflict’ includes a ‘significant risk’ of conflict arising. The reason for the previous prohibition on acting for seller and buyer was that the regulator viewed it as a situation where the inherent risk of conflict was high. It is evident from recent guidance that the SRA has not changed its stance.

The second consideration must be the indicative behaviours in the 2011 Code which flag up situations where you might have some difficulty justifying acting because of the risk of conflict. One specifically says that acting for a buyer and seller may tend to show that you have not achieved the outcomes (i.e. you have acted where there is a conflict). Others suggest how you should act to avoid conflict. These include declining to act where you may need to negotiate on matters of substance, for example, negotiating on price between seller and buyer and where there is unequal bargaining power i.e. acting for a builder seller and a buyer.

The bottom line is that while it may appear to be open season to act for seller and buyer because there is no mandatory prohibition otherwise, the SRA clearly regards it as being high risk. Firms should therefore proceed with caution in relation to this apparent freedom.

Suggestions are that firms that do conveyancing work should:

• have a clear policy based on conflict principles setting out when the firm will/will not act for seller and buyer;
• ensure that all fee earners are aware of it and understand it;
• have one senior person with responsibility for giving approval to all situations where it is decided to act for both parties;
• ensure a note is kept which explains why it was felt appropriate to act;
• ensure that the policy requires fee earners to keep conflict under review throughout the transaction.

Finally, some firms have decided to limit their retainers with their conveyancing clients to reduce the possibility of conflict arising. They make it clear that they will not advise on any negotiations involving price or other considerations such as fixtures and fittings where they act for both parties. What the SRA might make of this approach is not yet known. It may be acceptable but there may be circumstances where it would not be if, for example, one of the clients was particularly vulnerable. It is also possible that the SRA may bowl a low ball and ask in its annual information report for details of when firms act for seller and buyer – so be prepared! The bottom line is that whatever approach a firm decides to take it must be prepared to justify it on the basis of the conflict outcomes.

Fuller guidance on this issue, along with precedent client forms, are provided in one of the factsheets made available to Colpline subscribers.

Question: Money laundering remains one of our main compliance concerns. Do we need? to adjust our policy in the light of the appointment of our COLP?

Answer: There is no direct reference in the Handbook to link the issue of money laundering and terrorist financing to the regime required by the Authorisation Rules and, in particular, the need for a Money Laundering Reporting Officer as opposed to a COLP. All firms are well advised to review their AML measures from time to time, however, and if you are overhauling your compliance programme – perhaps through a review of your office manual – then now would be as good a time as any. So far as the management obligations are concerned Outcome 7(5) does require firms to ensure that they meet their legal obligations, with money laundering specifically being mentioned in this regard along with data protection.

Key to understanding the AML regime is to remember that there are two different sources of potential liability – the offences contained in the main Acts (the Proceeds of Crime Act 2002 and the Terrorism Act 2000) and then the compliance obligations imposed by the Money Laundering Regulations 2007. Where they do arise the need to conduct ‘customer due diligence (‘CDD’) on clients and to comply with the other requirements of the regulations is quite distinct from the issue of whether illegal activity is actually occurring. It is the area of regulatory compliance that appears to cause more problems to most firms, with confusion as to the precise requirements that they are subject to.

One area that firms need to keep under review is whether the entire firm is subject to the regulations. Not everything that many firms will do will be covered by the Regulations, but most firms err on the side of caution and extend the regime to all parts of the practice even if they might not technically need to do so. The most common exemptions are areas of litigation such as personal injury or most instances of one-off advice, and if conducting the normal full identity checks in these areas is a problem there is the possibility that the policy could fairly be amended on this point.

Another modification that has benefitted many firms is to make available the prospect of dispensing with the usual checks where the client is well know to someone in the firm – usually a partner. This is permissible under the Law Society Practice Note, but is one that most firms will wish to use under strict controls, if at all.

Common non-compliances in firms often relate not so much to the initial process of identifying the client as to the other issues that arise under the regulations. Where they do apply there is also a need to:

• Establish the identity of anyone associated with the client by way of ‘beneficial ownership’;
• Ensure that the ‘nature and purpose’ of the instructions is clear; and
• Subject clients to subsequent ‘ongoing monitoring’.

Beneficial ownership involves, in simple terms, an interest in more than 25 per cent of the entity involved. Situations where the firm acts as an agent will give rise to similar issues in relation to the principal.

Ongoing monitoring involves maintaining up-to-date evidence on clients and also considering whether instructions received are consistent with what the firms already know about that client. The Law Society suggests renewing the CDD evidence if there is a gap of three years or more between instructions, but this might be relaxed where the firm has more of an ongoing relationship with clients and there can be no real risk of confusion as to their credentials.

Finally, it should be remembered that the Law Society, through the SRA, has been nominated as the ‘supervisory body’ for solicitors in relation to the Money Laundering Regulations. There have, in consequence, been a number of proceedings at the Disciplinary Tribunal for failure to adopt a suitable policy.

Question: Treating clients fairly is a very general, high level outcome in the 2011 Code. We? are a large national firm which has many different areas of work which range from high turnover, process driven work where we rarely see the client to significant commercial work where we have a close relationship with the client. How can my firm be sure of meeting this requirement?

Answer: Outcome 1.1, requiring that you ‘treat your clients fairly’, sets out the core value of outcomes focused regulation. Compliance will be judged not just from the perspective of the information you give your clients in your terms of business and retainer letter, but also the whole approach of your firm to the way it deals with its clients. OFR therefore introduces a philosophical approach to compliance in addition to many of the more familiar client care rules which now appear as the outcomes of chapter 1 of the Code ?of Conduct.

Client care policy

A good starting point to demonstrate your approach is a client care policy which sets out how you aim to deal with your clients. It should embed your firm’s ethos and culture towards its clients and all staff should be aware that their actions are to be judged by it. It is likely to form part of your compliance plan and to appear on your website for public consumption. Elements of it may appear in your terms of business. It should set out from the clients’ perspective how they would expect you to deal with them. It could, for example, set out your intention to be courteous, approachable, and prompt and to communicate clearly in language the client can understand.

Terms of business and client care letters

The detail of how you treat your clients will be contained in your terms of business and client care letter. Together they should contain the standard terms which form the basis of your retainer with your client and define the work you will carry out. They should also give a clear indication of your likely charges and any additional expenses. However, the same terms of business and type of client care letter may not be appropriate for all clients. This was the main reason for the use of high level outcomes relating to client care. They give flexibility to reflect the different needs of your clients. If you have not already done so, now is a good time to review the information you give your clients.

Things to consider might be these:

• Vulnerable clients. If you deal with clients who might be particularly vulnerable through age, mental impairment or language or for other reasons, the need for special care to meet their needs has been emphasised by the SRA and the Legal Ombudsman. It might be sensible to make absolutely clear that you are willing to explain face-to-face any information that the client does not understand and that you are happy for the client to be accompanied by a friend or family member to reassure them. A wider consideration might be how you meet your obligations under the Equality Act 2010 to make reasonable adjustments for clients with disabilities.
• Costs. In relation to costs information, how clear is your explanation of how your costs will be calculated? The Legal Ombudsman says on his website; ‘Since we opened, costs have been the single most common reason for people contacting us. Costs issues represent 20 – 25% of the problems people come to us with’. In particular, he flags up the problems that estimates can cause if not updated and the need to explain clearly what disbursements are anticipated and how much they will cost. He also suggests that making additional charges for things like photocopying may not be fair and that these should form part of a firm’s overheads that are reflected in the charging rate. They should certainly never be described as ‘disbursements’ if undertaken in-house in accordance with IB(8.8).
• Limiting liability. Outcome 1.8 requires that clients have the benefit of your indemnity insurance and that you must not exclude your liability below the minimum cover required under the Indemnity Insurance Rules. Many firms have a standard clause restricting their liability to the minimum - £2m or £3m depending on the structure of the firm. However, this might not always be considered fair if, for example, you are accepting instructions for a multimillion pound transaction. Any such restriction could leave the client exposed to huge liability if your firm were negligent. Rather than using the standard clause, it might be fair, at the very least, to agree to discuss the issue of limiting liability with the client. To treat all clients in the same way, regardless of the risks they face in instructing you, doe run the risk of failing to treat them fairly.
• Process driven work. Where you are unlikely to meet the client and are dealing with high volume work, such as personal injury claims, it is important to remember that you are dealing with individuals who all have different needs. Automatically generated letters can confuse and annoy clients. It might be helpful if your client care letter explains how they can raise specific questions concerning their case.

Other outcomes to bear in mind when reviewing the information you give your clients are these:

• that clients are in a position to make informed decisions about the services they need, how their matter will be handled and the options available to them (O1.12);
• clients receive the best possible information, both at the time of engagement, and when appropriate as their matter progresses, about the likely overall cost of their matter (O1.13);
• clients are informed at the outset of their matter of their right to complain and how complaints can be made (O1.10).

Meeting these outcomes will help you demonstrate that you are treating your clients fairly and further detail on how to meet them is contained in the indicative behaviours in chapter 1 of the Code.

Complaints handling

Complaints handling is another area you may need to review. The Code does not require you to have a written complaints handling procedure as the focus is on ensuring that complaints are dealt with ‘promptly, fairly, openly and effectively’. Having a written complaints procedure will, however, help to demonstrate this by showing that complaints are being dealt with consistently through a planned and agreed process. Beyond that, handling complaints effectively is largely an ‘attitude thing’. This will be demonstrated by the correspondence you have with your clients about their complaints and the steps you take to ensure clients understand your procedures.

Overall, are you prepared to spend time with the client to ensure that you are clear as to their concerns? Any indications that you find your complaining client to be a nuisance or try to belittle their complaint will not help you prove you are treating them fairly!

The Legal Ombudsman sets out on his website tips for lawyers on complaints handling and gives examples of where he has found against firms and the reason why. It is worth taking the time to read what he has to say.