The SRA's laissez-faire approach to compliance

When the Legal Services Board (LSB) invited applications from would-be front-line regulators of legal services, it made clear its requirement that they should adopt principles-based regulation following the model of the Financial Services Authority (FSA).

In both cases, the wide range of different business models involved made it impossible to construct a rigid regulatory regime, and flexibility was required. Hence the approach of identifying objectives and letting regulated firms decide for themselves how best to achieve those objectives in their individual circumstances.

Management principles

The FSA quickly determined that the starting point for principles-based regulation should be to require firms to install management systems and controls. When visiting firms, the FSA's successor, the Financial Conduct Authority (FCA), will ensure that these requirements have been satisfied, on the basis that if firms are running a tight ship, the scope for erring is necessarily limited.

Consequently, the questions which financial firms face are:

• Is there a clearly-defined management structure, with individual accountabilities and responsibilities, reporting lines, and job descriptions?

• Are management decisions promulgated and adhered to?

• Are policies and procedures in place which are understood and observed by all members of the firm?

• Is client advice clearly documented, in a consistent manner?

• How robust are controls for money laundering, data protection, and complaints, and are compliance audit trails in place? and

• If the firm has received any complaints, what steps have been taken and documented to prevent recurrence?

The Solicitors Regulation Authority (SRA) Code of Conduct contains essentially similar provisions in principle 8 and chapter 7, but chapter 7 is brief and couched in generalities, and lacks the detail provided by the FSA/FCA.

Perhaps for this reason, awareness of the principles of business management is lacking in many law firms, and many solicitors still tend to assume that compliance is largely a matter of ethics. This is unfortunate, because management systems and controls are vital to making firms viable commercial enterprises rather than the confederations of sole practitioners of old.

Separation of responsibilities

Part of the problem may lie in the separation of responsibilities between the SRA and the Law Society. Whereas the FSA/FCA (and the Institute of Chartered Accountants in England and Wales (ICAEW)) provide integrated regulation and business support, many law firms place their reliance for the latter on Lexcel, which continues to be provided by the Law Society. Significantly, the ICAEW was not required to divest itself of its regulatory function as a pre-condition of approval by the LSB.

Firms which have become accredited by Lexcel have often assumed that this would assist them with their regulatory compliance. However, Lexcel focuses on ethical issues and largely neglects management issues.

The SRA says that when one of its supervisors or regulatory managers visits a firm, they will ask questions of the sort listed above, but it is for individual entities to decide for themselves what particular controls and systems to adopt. The FCA, by contrast, would tend to regard unsatisfactory answers as prima facie evidence of non-compliance.

This apparently laissez-faire approach on the part of the SRA is all the more remarkable when seen in the context of its proposal to relieve smaller law firms of the requirement to appoint compliance officers. In the absence of such an appointee, who is to be regarded as responsible for ensuring that everyone in the firm is au fait with the requirements of the Code of Conduct and that the firm's management really does lay down the law internally?

And to cite another development, how can outcomes-focused continuing professional development work in the absence of a centrally administered structure for personal development plans, key performance indicators, and periodic personal assessments?

The regulator seems as uncomfortable with the regime it has been asked to adopt as the firms it regulates, but if the FSA/ FCA precedent is taken fully to heart, it does have the potential not only to ensure compliance but also to equip firms to face up to the commercial realities of the post-Legal Services Act world.

Regulatory compliance should ideally equate to best business practice. SJ

Ian Muirhead is a director of SIFA

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