Devil in the details?

The profession's watchdog is proposing a risk-based approach to regulating law firms. But this risks upsetting lawyers with its demands for more information, reports Lucy Trevelyan


Those law firms that huff and puff at the information they have to pass to the Solicitors Regulation Authority (SRA) at practising certificate renewal time are in for a shock – their information requirements are set to increase.



In a recent consultation paper, the SRA says the Legal Services Act 2007 (LSA) requires the regulation of firms as well as individuals. This means that law firms – and whichever other bodies wish to practise law after the act kicks in – could bear the bulk of the cost of regulation, rather than individuals taking the strain through their practising certificates.



The regulatory body is also keen to develop a risk-based approach to regulation, but to do this, and to even begin to create a coherent strategy for regulatory cash collection, the SRA says it needs more information from firms on a regular basis.



‘It makes sense to charge the firm rather than individual solicitors,’ SRA consultant Alison Crawley says. ‘It is likely there will be more legal disciplinary practices (LDPs), and then you’ll have more and more non-lawyers in firms who, under the current system, will not be paying any fees towards regulation or anything else – the whole system would collapse. That’s why we have to replace it. We have to evolve a new structure for charging.’



It is proposed that the extra information should include details of a firm’s ownership, turnover, work areas, financial stability, negligence claims, links with other bodies, and employee/management misconduct. Firms could also be asked about: employees’ citizenship status; bank details of where client money is held; other sources of income; fee-earning staff and their qualifications; equality and diversity; complaints received and other legal claims made against a firm; proof of compliance with codes of conduct; and training.



Crawley concedes that these demands for extra information could pave the way for some ‘higher-risk’ practice areas to pay

more than others – regardless of the regulatory records of the individual firms – simply because some sectors generally cost more to regulate. She stresses, however, that this is only a possibility and not a plan.



‘The Financial Services Authority has different charging structures according to the authorisation that the firm has… banking carries different regulatory risks to insurance; the retail investment market is different to the wholesale; and firms that hold client money cost more to regulate than those that don’t. While it is possible that in future we could charge in that way, we do not have the information to allow us to create such risk categories at the moment. We don’t even know if it’s possible with the solicitors’ profession.’



Law Society chief executive Des Hudson agrees that the SRA needs some information, but stresses that the value of information against the burden or cost of providing and collecting it must be considered. ‘Information should only be requested if there is a clear regulatory need and benefit,’ he says.



‘In principle, we support the move towards risk-based regulation. A “one-size fits all” model of regulation would not be effective or fair in an entity-based system. It is important to ensure that significant additional burdens are not imposed on firms.’



Tony Williams, principal of consulting firm Jomati, says regulation pricing is what one would expect. ‘If some areas are higher risk than others, they should bear the price for that, as long as the SRA is regulating them of course. It’s fine getting information and saying these are the higher-risk areas, but are you actually putting more resources into those areas?’



But Simon Young, a solicitor and legal management, training and compliance consultant, says he cannot see how a risk-based scheme could work without a lot more detail. He argues: ‘If you said, for example, that property and conveyancing was inherently more of a problem than, say, defendant insurance work, you couldn’t simply charge more for the work-type without considering other factors, such as the type of property, the type, size and managerial structure of the firm. You would have to work out some sort of risk scoring overall, and charge according to that. The problem would be that – for some years at least – the banding would largely be guesswork.’



Williams explains that traditionally conveyancing is regarded as higher risk – particularly with mortgage fraud scandals coming out of the woodwork – but that the SRA would have to look at it on a year-by-year basis, analysing the claims received by insurers and claims on the compensation fund.



Crawley concedes that deciding which areas could be considered ‘high risk’ will not be easy. ‘It depends how you define risk. Some may say that those who hold other people’s money and could steal it are higher risk. Others may think that criminal solicitors pose a higher risk because someone might end up in jail when they don’t need to. All we’re suggesting is that we charge depending on the different types of work undertaken. To be able to carry out that risk-based analysis, we need more information.’



The SRA, she says, already operates a risk-based system to a certain extent, with its actions largely dictated by information received. ‘This extra information will tell us which firms are doing what. For example, if you go back to the beginning of the mining compensation crisis, we had no idea which firms were doing this type of work. If we knew which firms were doing what we wouldn’t need to make so many visits,’ she says. Such risk regulation, Crawley adds, is likely to benefit firms that can show they have their house in order.



‘We are more likely to do something about a complaint if information we have about a firm indicates they present a higher risk with regard to that particular issue. That’s what proportionality is all about. We won’t waste money sending out an inspector because of a complaint we think is groundless.’



Crawley argues that the information requirements will not add an unduly onerous burden, so long as the SRA asks firms for the sort of information they currently give to their insurers, and in a similar format.



‘It might affect sole practitioners most but they should know this information and if they don’t have it available, they should do,’ Crawley adds. ‘It may also be a challenge to smaller high street firms with branch offices but again, these sorts of practices, what with legal aid management and insurers demanding better risk management, should have this information to hand, and if they haven’t this will help them get themselves in order.



‘We’ve spoken to quite a few mid-sized firms and they say “of course you should have this sort of information, as long as you don’t make it complicated to give it to you”.’



Jeff Zindani, managing director of personal injury firm Forum Law, says the information being sought will impose a burden on small practices, particularly sole practitioners or, as in his case, a sole shareholder of an incorporated practice. However, he adds: ‘The focus upon risk from an organisational perspective, rather than based upon individuals, represents a significant shift in approach. It will be the practice’s profiles that will be monitored rather than individual partners.’



Zindani adds: ‘We can also see for the first time a transparency on the part of the SRA when identifying practices which are failing. This has to be welcomed and, while the detail of what they have proposed is unduly complicated, the approach is spot on.’



The LSA allows some LDPs to have a choice of regulator. For example, the Council for Licensed Conveyancers (CLC) would be able to regulate firms, including licensed conveyancers, solicitors and others, so long as those firms offer the kind of legal services licensed conveyancers may provide. In addition, the Bar Standards Board (BSB) may change its rules to allow barristers to go into partnership with solicitors in an LDP that is regulated by the BSB.



Crawley says: ‘The SRA isn’t worried. This is what the government intended. If people want to specialise and go with the CLC or the BSB, that’s the intent of the act. All solicitors would still need a practising certificate though, even if they do become employed by a firm that’s regulated by the CLC.’



Williams reckons there is always a risk, when you have a multiplicity of regulators, that people will look elsewhere. ‘The SRA could indeed lose out. It is important that it achieves a combination of light touch regarding bureaucracy and cost, but is effective when it comes to protecting consumers – that’s what the legislation is all about.



‘I think the SRA has a lot to prove and this process will be a good test for them, because the jury is still out on how good they are.’



Lucy Trevelyan is a freelance journalist