Last week, the Solicitors Regulation Authority held the first conference of its kind for international regulators.
While regulators in the finance industry and other sectors have held international summits for some time, this was the first such event in the legal sector, with more than 100 delegates, most of whom were legal regulators, plus a smattering of academics and others. The size of the turnout and the vibrancy of debate showed that this open forum was long overdue, and national regulators – who can feel isolated – were keen to vent their frustrations and discuss their problems with others facing similar challenges.
Indeed, one theme that emerged clearly from the event was that regulators across the globe are facing a very wide range of problems. Not only are they encountering growing levels of misbehaviour by the profession which must be tackled on shrinking budgets, but in the changing legal market, many regulators are also in a period of introspection, questioning what precisely is their remit; the extent to which they should assist and guide solicitors as well as punishing them; and how far they can go in trying to proactively tackle issues before any wrongdoing is committed.
Breaking the rules
Inevitably, the tough economic climate has led to more wrongdoing by solicitors, with cash-strapped lawyers increasingly tempted to dip into the client account to tide them over – and regulators are reporting more of this behaviour coming from firms that would not normally be on their radar. In the US, regulators reported a surge in solicitor fraud in relation to mortgage foreclosure. Lawyers have been fraudulently filing bankruptcy proceedings on behalf of clients who were often unaware that they had done so, purely to stall foreclosure proceedings against the client – but with no intention of actually following through with the bankruptcy. The proceedings were simply a means of charging fees to clients, who believed their foreclosure problem had been solved, when in fact it had merely been delayed.
But while fraudulent behaviour by lawyers can present practical difficulties for regulators, it is at least clear-cut. Other issues are more blurred, and the way they are handled will depend on the type of regulator. Regulators at the conference – who were mainly from common law countries – fell broadly into three main groups. By far the largest was the professional association model, whereby regulation is carried out by national bar associations or law societies, with varying degrees of separation between the representative and regulatory functions. This is the model followed in the Canadian provinces, Ireland, Denmark, Zimbabwe and others.
The US state regulators formed a second group. As a branch of the judicial arm of government, their role is more akin to pure gun-toting law enforcers, and they struggle to understand the self-regulation model. As Robert Hawley of the State Bar of California puts it, if you are both a representative professional body and also a regulator, then you are ‘a schizophrenic’.
He was not alone in his criticism of that model; a delegate from South Africa, where regulation is carried out by a separate body, likened the practice of allowing bar associations to regulate as akin to ‘leaving the fox with the chicken’. But in defence of self-regulation, a Zimbabwean delegate pointed out that the US system relies on an independent judiciary which is not present in all countries; and in Zimbabwe, the independent bar had been the ‘last bastion’ of support for the people during land reform.
Out on its own in a third group is the SRA, and its closest cousin, the Office of the Legal Services Commissioners in New South Wales; grouped together primarily because they are two jurisdictions where multi-disciplinary practices are permitted. But with the introduction of outcomes-focused regulation, the regulator of England and Wales has gone further than any others present in taking a ‘proactive’ approach to regulation.
Proactive or reactive?
Most regulators at the conference classed themselves as reactive, addressing issues once they have arisen; though some tackle problems earlier than others. In Denmark, the Law Society operates a ‘yellow card’ system, whereby one or two minor issues stemming from a firm will trigger a meeting in which the Society will examine the firm’s business and identify any problems, to be dealt with early on.
But as Steve Mark, Legal Services Commissioner in New South Wales, pointed out, as all regulators now face a squeeze on their budgets, they have little choice but to become more proactive rather than reactive. That means more engagement with firms, offering guidance on avoiding problems, and expecting the better firms to self-assess, so that regulators can focus their efforts on the bad apples. This can only be achieved if regulators are armed with the necessary powers.
Mark said: ‘What we really need are very good legislative tools. I do not think lawyers in New South Wales would have embraced our self-assessment process if we had not said, if you don’t, here is what will happen to you. It is about carrot and stick, but we like to hit people with carrots… One of our most effective carrots is that firms can get cheaper insurance if they undergo certain training.’
Samantha Barrass, executive director at the SRA, explained that under OFR, the organisation has become much more proactive in its approach. She said: ‘We are already seeing that firms are taking the requirements to appoint finance officers for legal practice and finance and administration seriously, and this is having an impact on firms’ behaviour. That gives us capacity to focus on the firms that aren’t.’
Barrass said being proactive often meant staff had to challenge firms’ behaviour before any breach had actually been committed; that is a more difficult thing to do, and SRA staff are being given training to support them on this. Chris Kenny, chief executive of the Legal Services Board, the overarching legal regulator in England and Wales, suggested there can be a proactive role for regulators in setting benchmarks for ethics, and considering how they can intervene in the market to create positive incentives and promote competition.
This leads on to one of the key questions the regulators are currently grappling with: what precisely is their remit and how far should they interfere in legal markets?
Most regulators with links to national bar associations felt they had a combination of duties, primarily protection of the public, but also ensuring access to justice, and – for some – protecting the reputation of the profession itself. US regulators, however, felt their duty was predominantly about enforcement, while acknowledging that they also have role to play in ensuring the administration of justice. ‘We talk about access to justice, but do the police worry about access to crime?’ quipped Hawley.
SRA chair Charles Plant highlighted the body’s change of approach towards the more difficult area of regulation of business practices. He said: ‘It is very easy to deal with a case where you have a breach of undertaking. But what is more difficult – and something that we faced three years ago – is how to deal with business practice issues.
‘There was a firm offering to do property transactions for a ridiculously small amount of money, and in the end the firm went bust. Information [was coming] in to us from other firms asking, "How can a firm survive when it is offering conveyancing for £100?"
‘Should we really be seen to be intervening in a market where, if a consumer is being offered conveyancing at a very low rate, you might say, what is wrong with that? Of course, what is wrong is if that is all that firm is doing, and the firm is bound to fail; we do not mind people loss-leading. Three years on, with OFR, I think we would approach it in a different way. [It’s about] what we do when word comes in that a firm’s business practices are going to fail.’
But Sandra Neilson at insurance broker Marsh cautioned: ‘I worry about regulators going too far down the road of looking at firms’ business practices. Regulators are subjective; they are human beings. Just because you think a model won’t work and isn’t right, doesn’t give you the right to close [that model] down. Regulators need to concentrate on what behaviour they are trying to control; bad behaviour or sloppy behaviour? It is bad behaviour that you should be trying to control; sloppy behaviour is just part of the market.’
In England and Wales, alternative business structures have added a new dimension to regulation. SRA chief executive Antony Townsend explained that the SRA’s approach to licensing ABSs has already developed in the six months since they were first introduced. ‘We have already issued 30 ABS licences, with another 100 on the block,’ he said. ‘One of the lessons we have learned is that we have stopped seeing it as a yes or no decision as to whether [the ABS] gets a licence. It is a question of, if we bring this firm into our regulatory structure, how would we manage that risk? It is showing up that our traditional approach has not been as sophisticated as it should have been, and so the lessons will flow right through the system. We are putting in place a pretty intelligent approach to managing risk in all firms.’
Gene Shipp of the Washington DC Bar explained that, while MDPs are not permitted in most US states, they are in fact allowed in DC, though takeup has been low because it restricts firms’ abilities to practise elsewhere in the US. Shipp put forward a scenario in which a firm practising family law might take on a social worker as a partner. He said this could create a problem if, for example, information came to light which might damage a client’s application for custody of his children. For the lawyer, this information would fall within client confidentiality rules, but the social worker might be under a professional duty to disclose it to the authorities – a clear conflict.
Addressing how such an issue would be dealt with in an ABS licensed in England and Wales, Townsend said: ‘Where we have regulated people, there is clear primacy for the licensing authority’s code. But it is more difficult where a conflict arises where there is a statutory obligation.’ The LSB’s Kenny added: ‘A requirement on the entity will always trump a requirement on the individual.’
In New South Wales, the OLSC has examined how a stock exchange listing might affect a law firm’s ethics by carrying out a research project on listed law firm Slater & Gordon, which is an ‘amalgamation of small firms’. Mark said the research showed no diminution of the ethical standards of lawyers at the firm after listing. He continued: ‘But the problem they are now facing is the problem of growth. If you list on the exchange, growth becomes a necessity. What we found was that when you grow, you tend to have centralised systems, and they become restrictive.
‘We are now making this a bigger study, looking at other firms, looking just at growth. With growth, [firms] have cultural changes.’
For many jurisdictions, however, the SRA’s approach in allowing ABSs has been a step too far. Germany has been the most forthright jurisdiction in voicing its concerns, and German regulators – who did not attend the conference – regard the structures as illegal in Germany, posing difficulties for any ABS seeking to practise there. As one speaker from Germany revealed, Plant encountered an unreceptive audience recently when he travelled to Germany to explain the reforms that have taken place in England and Wales.
One common theme among most of the regulators present was a desire to improve the flow of information coming from the profession. As TP Kennedy of the Law Society of Ireland explained, lawyers have a tendency to believe their regulators are ‘all seeing and all knowing’, whereas in fact they need solicitors to notify them of unethical behaviour. In the US, some states operate a ‘snitch rule’ where lawyers are compelled to notify the regulator of any improper conduct by other lawyers; something that has proven very effective.
Legal regulators also felt there was scope for better sharing of information across national borders, and more dialogue between regulators to address common problems. To this end, those present agreed to form what Townsend termed a ‘coalition of the willing’; an informal group aimed at greater international collaboration between regulators. The next meeting is already pencilled in for San Francisco in 2013.
Rachel Rothwell is editor of the Gazette’s sister publication Litigation Funding