Relationship issues

In terms of numbers City firms represent only a small proportion of the Solicitors Regulation Authority’s flock. They have tended to keep their regulatory affairs in reasonable order and except for a few rare headlines they have done their best to stay out of the limelight. It’s not that they didn’t have regulatory and compliance issues, but, according to Nick Eastwell, the SRA’s newly appointed consultant in charge of the relationship with City firms, there was little incentive to share their concerns with a regulator that lacked consistency and expertise. But things are changing.

The 2009 Smedley report reflected City lawyers’ concerns over the SRA’s irrelevance and advocated a separate regulatory body. This wasn’t the route eventually followed but with a separate City taskforce the SRA has acknowledged the issue. Its wider review of its regulatory role, in particular the slimmed down code of conduct which will bring with it a new outcomes-focused approach to regulation, is further recognition that its relationship with firms must change. Regulation should no longer be about slapping lawyers’ wrists for breaching the rules but engaging with them preventively.

As far as City firms are concerned, a number of developments underline the SRA’s new mindset. It has appointed several non-executive members with a City background to its board who bring specialist market expertise to the organisation, such as Norton Rose’s Martin Coleman and its own chair, Charles Plant, formerly a partner and now a consultant with Herbert Smith. These members don’t have a specific portfolio and their remit remains general but their perspective is expected to contribute to a gradual cultural shift within the SRA.

In addition, enforcement is no longer the main compliance method. It is about to be replaced with a less confrontational approach based on ongoing dialogue with individual firms. Each firm will have a dedicated relationship manager at the SRA who will maintain regular contact so that risks are identified before they arise and managed solutions can be found without having to consider the threat of an investigation or SDT referral.

DOWN TO BUSINESS

Nick Eastwell’s appointment as City adviser is the SRA’s fancy cover wrapped around the new rulebook that is intended to get the word out on the streets of the City. As the SRA’s poster boy for the City, the former Linklaters partner’s job is twofold. Internally it is to help the SRA understand how international law firms operate and ensure the regulator is up to the job. Externally it is to sell the SRA’s new approach to City firms and help build the trust between the regulator and the regulated.

Like a super market researcher doubling up as a salesman, Eastwell works to a plan, attending formal meetings to collect feedback from interested groups such as the City of London Law Society and the Risk Liaison Group, and relaying concerns to the SRA.

Engaging stakeholders in conversation is undoubtedly a positive step but it is nebulous and the success of this sort of activity is difficult to measure. Eastwell says it has been “really useful” and points out that the job is also about changing perceptions. “Perceptions are important,” he says, “I can put across the message that the SRA is doing what it’s preaching; I wouldn’t be doing it if I didn’t believe the SRA was committed to it.”

Eastwell’s enthusiasm and his credentials as an international City high-flyer are important tools in his efforts to persuade lawyers in the Square Mile to enter the conversation – he was Linklaters’ managing partner for Eastern Europe, Asia and North Africa and set up Kinstellar, a law firm operating across Eastern Europe which started off as part of Linklaters but is now independent. At first sight, however, it is really the SRA, not City firms, that has most to gain from the creation of this new regulatory order.

If City firms had succeeded in lobbying for a separate regulator the SRA’s standing would have taken a substantial hit. The SRA would also have been left to regulate sections of the market that tend to be, regulatorily speaking, more troubled than the top 100. So it is in its own interest to secure the loyalty of City firms. These big players tend to lead the way for their smaller counterparts, so if the SRA can convince them that it is a credible, knowledgeable regulator, the chances are other firms will follow.

“Law firms and lawyers are naturally conservative people; they like to comply,” says Eastwell. “There’s nothing more frustrating than a regulator that doesn’t really know what it’s doing. So law firms will happily engage with regulators, whether it’s on their own behalf or on behalf of clients, when they feel the regulator knows what it’s doing and is helpful and constructive.”

Judging by Eastwell’s own encounters with the SRA in his previous incarnation, the regulator has its work cut out. “At Linklaters we would operate and run our business without too much thought about what the SRA was thinking because they didn’t engage with us,” he says.

RULES OF ENGAGEMENT

“The only times we ever saw them was when they would come in, wanted to crawl through every file with a fine-tooth comb and tick lots of boxes. There was a perception they were trying to catch you out. They weren’t interested in what a regulator should be interested in, which is the overall business: how the firm functions and what the real risks are.”

But the biggest driver behind the regulator’s change in attitude is the commercial significance of the legal services sector, and it is also the reason why City firms are prepared to play ball with the regulator.

According to research by TheCityUK, the trade body for the City, the top 100 firms last year brought in more than half of the sector’s £23bn contribution to the UK’s economy (£13.7bn, or 1.8 per cent of the gross domestic product). Exports represented about a quarter of the revenue generated by City firms (£3.1bn). So City firms operating internationally are rightly concerned that a poorly regulated market could let rogue firms through the net, potentially damaging the international reputation of the whole profession.

“In the past ten to 15 years, City firms have been very successful at exporting English law as a product around the world and one of my focuses at the SRA is the importance about maintaining ‘brand UK’ internationally,” says Eastwell.

The reason for this success, according to Eastwell, is that City firms have had to build resilient businesses able to deal with risk across several jurisdictions. “Over a period they’ve developed large risk and compliance functions, not because of compliance and regulatory requirements but because they’re running sophisticated international business which rely for their continued success on making sure they have dotted all the Is and crossed all the Ts.”

In the absence of a credible regulator, City firms have, in effect, taken the collective responsibility to set sector standards and self-regulate. Which raises the question: even if the SRA takes a more constructive approach to regulation why would City firms suddenly respond more positively to the regulator’s wooing?

Eastwell’s answer is pragmatic. “About 50 per cent of all cross-border contracts are governed by English law, and, as English law spreads around the world you have to think more about what the concept of collective responsibility means, and that’s where a modern regulator has a role to play,” he says.

“The SRA needs to be more hands on when it comes to big picture regulation as firms continue to expand their business overseas and spread the sale of English law. It has to be done so in a way that ensures there is a minimum standard and that no one rogue firm is going to damage the pitch for everybody else by damaging the brand. City firms’ collective responsibility becomes the responsibility of the SRA as it becomes a wider ranging issue.”

The impending OFR regime contains a paradox that will be felt particularly acutely in City firms. The simplification of the code of conduct will allow firms to organise the way in which they manage risk as they see fit within the parameters set by the code’s broad principles. So, in practice little should change for City firms, except for the requirement of regular meetings with their designatedSRA contact.

Many in the Square Mile have expressed reservation about this, saying it will make compliance more burdensome and costly. But Eastwell says much of these fears have been allayed. City firms already have risk management teams in place, he says, who will be able to absorb the new relationship model without any additional time or cost.

RAISING STANDARDS

“There isn’t going to be somebody from the SRA in your firm every week,” he says, before adding that the result of the current pilot, which includes seven City firms, have been positive and have not unveiled any causefor concern.

He is also keen to point out that there would also be a major benefit for the City as a whole in that by regularly reporting to the SRA City firms would, together, contribute to a better understanding of the risks and help raise practice standards.

“It should make City firms much more open and much more prepared to share ideas with the SRA,” Eastwell says. “At the moment, each firm has its own best practice but not all address everything in the same way, so there’s no way at present concerns and solutions can be shared; this will allow the SRA to look at what firms are doing and share it among peers. That’s an area where it could be really helpful to what City firms are doing.”

Commenting on Eastwell’s appointment in October last year, Charles Plant described him as “a bridgehead”. The military meta-phor may have been a bit harsh but it described the state of the relationship between the regulator and City firms.

Eastwell has now been just over four months in the job; not enough to test whether his efforts have paid off but at least the noises back from his City brethren sound sufficiently encouraging that he will enable both sides to move harmoniously to the next stage of their relationship.

 

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Jean-Yves Gilg is editor of Solicitors Journal // jean-yves.gilg@solicitorsjournal.co.uk