The Law Society has unveiled a new consulting service to help members meet their regulatory obligations. Launched at the Society’s annual Risk and Compliance conference, the service aims to provide clarity and reassurance to law firms, in particular through guidance to newly appointed compliance officers.
The entry-level service is to be delivered by telephone evaluation and assessment of a firm’s risk profile. The price of this service, £50, will be refunded if further services are purchased later.
The next tier of support available is a full-day visit from a Law Society risk and compliance consultant. After interviewing key staff and reviewing documentation on site, they will provide traffic light scores against 12 risk and compliance priority areas.
Further steps, based on assessed needs, are optional and vary from a more in-depth report with actions and priorities, to fully tailored, bespoke consultancy services.
Law Society chief executive Desmond Hudson said: ‘Many members are telling us of their increasing concerns about fulfilling their regulatory obligations and are looking to the Law Society for more comprehensive advice and support. We have amassed considerable expertise in this area and are keen to share it with our members.
‘This new consultancy service has been developed to meet their needs.’
Opening the conference, Hudson alluded to recent high-profile law firm closures and assured delegates the Society would ‘redouble its efforts’ to help members. Hudson said ‘many questions and concerns remain’ about outcomes-focused regulation, adding: ‘We have long been telling the SRA they have an army of unpaid regulators in the profession – you.’
But he stressed it is ‘reasonable’ for the regulator to expect compliance officers for finance and administration to turn their attention to issues such as: how work in progress is turned into cash; how profits are distributed; and the amount of capital supporting a business.
‘The intellectual construct of OFR is about demonstrating the presence of a cohesive and developed risk and compliance plan,’ he added.
- Get more information about the Law Society’s Risk and Compliance Service.
Compliance officers face fresh scrutiny, says Robert Bourns
Compliance officers passed fit to do the job must not assume they will escape renewed scrutiny, the chair of the Law Society’s compliance reference group told the conference.
Robert Bourns, senior partner at TLT, raised the possibility that the Solicitors Regulation Authority may instigate a thematic review in light of the COLP/COFA suitability issues that arose during the nomination process.
As the Gazette reported in January, convicted criminals and undeclared bankrupts were among the people nominated by law firms to be compliance officers. More than 1,200 nominees failed an automatic verification exercise to check their suitability to police their firms.
‘What the SRA will now want to see is whether you are actually competent in the role,’ said Bourns. ‘Some people are burying their heads in the sand. [They think] the SRA will take a long time to come knocking.’
Bourns also pointed to the importance of keeping records as the professional indemnity insurance round approaches. Will insurers ask to see risk registers, compliance and breach reports as part of the renewal process? Bourns said: ‘You have a deadline of 1 July to think about things because that’s when the renewal process comes along. They will ask for that key information. You may say "they are not entitled to that". Well, you’re not entitled to their cover.
‘The client confidentiality issue is a red herring. Insurers can cut you dead. It’s not a question of "can I get a discount this year?" but "can I get cover?".’
Bourns also raised the cost to the profession of the compliance process, budgeted at about £30,000 for the average firm before October 2011 but now under strain from new demands such as the £400 case fee imposed by the Legal Ombudsman. He also pointed to fee-earning time lost by the compliance officer, which might amount to 25%-75%. ‘If [compliance] is not a separate item in your accounts, perhaps it should be,’ he added.
Earlier, Bourns warned that the recent spate of law firm failures showed ‘we need to keep principles and outcomes in mind as never before’, because ‘the focus has been thrown on the risk management of legal practices’.
On referral fees, he reflected that, while detailed rules on the incoming ban have yet to appear, items that ‘look like a referral fee are coming through from surprising sources, and COLPs need to be [diligent] about that’.
COLPs should record all conversations with practitioners on guidance to the latter, to leave an audit trail, said Bourns. But he counselled against reporting too early, before the COLP has developed a ‘settled view’ of the matter in question.
‘Reporting is not a cathartic dumping ground and nor is the regulator our nanny,’ he warned. [This approach] can indicate a loss of control with consequences for the reputation of the firms and individuals concerned.
‘You as COLPs and COFAs need room and time for proper investigation and reflection.’
One partial exception relates to the requirement of Principle 8 relating to sound financial and risk management: ‘I argued against early reporting but in this context [threat to financial viability] it does give the SRA a "heads up" on what might be coming down the line.’
Bourns also advised that a COLP’s responsibilities are not ringfenced from the accounts rules; financial viability also falls within their remit. He suggested therefore that the role of the COFA ‘is perhaps subordinate’.
He added: ‘I have heard that some COFAs have sought to take control of day-to-day financial management. It seems to me that this is impracticable.’
Are you doing the right thing?
Do you have:
- An effective firm-wide compliance culture
A comprehensive ‘living’ risk register
Appropriate policies and procedures
An effective SRA reporting policy (‘If you are unsure, it is probably worth letting us know’ – SRA, October 2012)
A record of material and/or non-material breaches
The ability to maintain a comprehensive evidence base (audit?)
Source: Robert Bourns/CRG
Combating cyber breaches
The legal profession comprises a ‘major part of the solution’ to Britain’s cyber-security problem, according to the senior civil servant responsible for digital policy. ‘Companies listen to their lawyers,’ said Ken McCallum, head of the Information Economy Unit at the Department for Business, Innovation and Skills.
McCallum advised that three-quarters of UK companies have incurred a ‘significant cyber breach’ in the last 12 months – and that law firms are especially vulnerable.
Fraudsters seek to compromise the security of legal practices, he added, because firms occupy ‘a position of trust’ and serve as a ‘stepping stone’ into the systems of their clients. ‘You have a real role to play in educating people toward the right kind of behaviours,’ he said.
McCallum said that 80% of cyber-security problems can be defeated through simple hygiene measures.
He hopes lawyers will take up a new cyber-hygiene equivalent of the Investors in People quality mark, for which proposals are expected shortly.
Cobbetts’ plight a ‘wake-up call for the profession’
The Solicitors Regulation Authority turned the spotlight on troubled and badly managed law firms at the closing conference session. Executive director Samantha Barrass said Cobbetts’ administration should serve as ‘a wake-up call for the profession’.
She added: ‘Financial failure is a more clear and present danger than ever.’
However, Barrass stressed that ‘failures cannot all be down to the financial and economic crisis,’ alluding also to the culpability of ‘poor leaders’ in firms. ‘Senior people’s decisions determine whether firms sink or swim,’ she argued.
Senior partners were guilty of hiding the true financial position of some firms from other partners, Barrass said, commonly allowing such practices as treating ‘VAT-received’ as ‘cash-received’. Partner drawings in many failed firms were also too high, the regulator has found.
Firms which had contacted the SRA early about financial problems, and subsequently avoided intervention or administration, are taking steps such as sending monthly bank statements to all partners.
Controlling property costs is also critical, said Barrass: ‘Responsible firms renegotiate leases, reduce partner drawings and give up excess space. They take action early.’
The SRA’s scrutiny of law firm management comes at a time when its own finances are under strain from the volume of interventions. An annual budget allocation for interventions of £1.3m is already overspent – Blakemores and Atteys alone are expected to cost £1.8m.
If it were mismanaged, the cost to the profession of a failure on the scale of Cobbetts could be in the region of £6m, she added.
The regulator has moved to lighten the load by dropping the much-criticised requirement for compliance officers to report all non-material breaches. Barrass told delegates: ‘Requiring this information from 10,000 firms is unsustainable and experience tells us it is unjustifiable. We are acutely alive to the need to redress this imbalance.’
The move is subject to consultation, but the SRA expects to scrap the requirement from October 2013.
The regulator had required non-material breaches to be reported in order to spot ‘patterns of behaviour’ at firms which were not otherwise exhibiting signs of stress. The regulator will in future rely on other signs of trouble, and early engagement with firms.
Regulation expert Andrew Hopper QC, co-author of The Solicitor’s Handbook, made a brief and unscheduled appearance on the platform to warn compliance officers that they could not evade accountability by resigning. Where conflict arises between a partner and a compliance officer over disclosure, his ‘personal opinion’ is that ‘the obligation on the compliance officer is personal and a failure to report is a personal fault’.
He added: ‘The obligation arises when you know [about a matter that should be reported to the regulator]. As compliance officers you have enormous power. You are obliged to report even if that [involves] considering resignation.’