The buck stops with management

Solicitors have traditionally regarded compliance as primarily a question of ethics, and compliance has therefore been a personal matter for individual practitioners, involving moral judgement as much as regulatory requirements. Indeed, the pop-up on the Handbook section of the Solicitors Regulation Authority (SRA) website still asks: ‘Do you have a question about ethics?’

Now, the greatest proportion of law firms are limited companies, and compliance is increasingly becoming a corporate issue. Hence the adoption by the SRA of the Code of Conduct based on the precedent of the Financial Services Authority (FSA) – now the Financial Conduct Authority (FCA) – and the requirement for firms to appoint compliance officers. But how many compliance officers for legal practice (COLPs) or finance and administration (COFAs) fully understand their roles?

Overarching responsibility

According to the SRA’s guidance notes, the principal function of the COLP is to take all reasonable steps to ensure compliance by the firm, its employees, and managers with the terms of the firm’s authorisation, the SRA’s regulatory arrangements, and the relevant statutory obligations. But the role of the COLP confers no authority within the firm and equally, as the SRA has been at pains to emphasise, the COLP is not a sacrificial lamb for the firm’s shortcomings. The buck stops with management.

The point is illustrated by a financial services case concerning an FSA-approved compliance officer by the name of McGrath, whose firm was guilty of regulatory shortcomings, and who was found by the FSA to have failed to take reasonable steps to ensure the protection of client money and to demonstrate a sufficient knowledge of the rules with which a compliance officer is expected to be familiar. Nevertheless, the FSA fined McGrath only £3,000, whereas his firm, ActivTrades plc, was fined £85,750.

It is chapter 7 of the SRA Code of Conduct which addresses the issue of management. This states that ‘overarching responsibility for the management of the business in the broadest sense rests with the manager(s)’, while outcome 7.1 requires ‘a clear and effective governance structure and reporting lines’ and outcome 7.2 requires ‘effective systems and controls’.

However, the wording of chapter 7 is perfunctory compared with the Handbook of the FCA, which devotes a whole chapter to systems and controls, leaving no doubt that the regulator will hold the CEO accountable under the immediate authority of the firm’s management for the conduct of the whole of its business; that individual responsibilities are defined; and that the business and affairs of the firm must be adequately monitored and controlled by the managers. 

Systems and controls

When the FSA assumed responsibility for the regulation of the financial services industry, it had to contend not only with a multiplicity of different business models but also with widespread bad practice. The issue of multiplicity was addressed by the introduction of principles-based (now known as outcomes-focused) regulation, and the bad practice was addressed not only by introducing higher qualifications and subsequently banning commission, but also by insisting that the overriding requirement for the orderly conduct of business and the minimisation of risk should be the establishment within regulated firms of management systems and controls. 

Firms subject to the FSA/ FCA approach to regulation have benefited enormously from the requirement to install robust management systems. These are precisely what many law firms lack, and what they are going to need if they are to withstand the competition for legal services that is now starting to appear. Too many firms still operate as confederations of sole practitioners, with individual partners continuing to assume that they can do things their own way, without regard for any central co-ordination or control – particularly in firms with more than one office.

The lack of organisation within many law firms is the main reason so few have risen to the challenge presented by the Legal Services Act of moving away from their transactional business model and providing a more holistic service that will secure their clients’ ongoing loyalty. It has been left to newcomers to the legal profession – not least the chartered accountants – to seize the business opportunity. A straw in the wind was the recent prediction by the Legal Services Board that small businesses are more likely to seek legal advice from accountants in future than from solicitors.

Business success depends on management, and solicitors are slow in adapting to the role of business managers. Arguably their regulator could be doing more to help.

Ian Muirhead is director of SIFA www.sifa.co.uk

Copyright & permissions