Amid all the publicity surrounding the introduction of alternative business structures and outcomes-focused ­regulation, a third part of the revolution in the regulation of legal services has attracted little comment - the move to entity regulation. Yet it is at least as important as either of the other two, and has the potential to turn on its head the entire concept of professional misconduct that has underpinned the regulation of the ­profession for centuries.

Although the SRA and its predecessors had statutory powers over recognised bodies from 1985, these were little used, and entity regulation in its current form can be traced back to March 2009, when the 2007 Code of Conduct and other rules were amended to make clear that the SRA was able to regulate not simply solicitors and others bound by the code, but also the firms in which they operated. So far so good. Nobody would quarrel with a regulatory and disciplinary regime which involves entities as well as individuals being prosecuted where the entity concerned is blameworthy and a prosecution is plainly justified by principles we can all understand. But that is not how the SRA (or at least some within the SRA) sees entity regulation working.

I recently defended an LLP in the Solicitors Disciplinary Tribunal. The LLP was charged with disciplinary offences - breaches of the 2007 Code of Conduct - which would never have been prosecuted in earlier times. Although the SRA eventually agreed to withdraw the allegations, the LLP was and remains absolutely livid about the way it was treated by its regulator. Those who read this article will have to decide whether the LLP was right to feel so aggrieved, and whether the SRA’s methods of dealing with entity regulation are correct.

The facts were these. The LLP is a small to medium-sized operation (five-15 members) operating in a niche area of practice, in which it is very highly regarded, rated by Chambers and Partners in the first tier of firms for that area of work. It employed a very experienced consultant, who carried out some probate work from time to time. The consultant took on a client in a probate matter, and mishandled the file. The client became disaffected, instructed another firm, and ­complained about the service she had received.

The matter was resolved amicably by the LLP reducing its fees, making a compensation payment to the client and a contribution towards her solicitors’ costs, and providing a personal letter of apology from the consultant. The LLP took a decision that the consultant would no longer carry out any probate work and ­voluntarily provided an undertaking to this effect to the SRA.

Pausing there, the regulatory ­system had worked well in the public interest. The client’s complaint was properly investigated and amicably resolved. The LLP took a proactive and responsible approach, and ensured there could be no repetition. The public interest was protected and satisfied. But matters did not end there. The LLP was hauled before the SDT and accused of breaches of the 2007 Code of Conduct. No action whatsoever was taken against the consultant - no disciplinary proceedings, no internal reprimand, no informal warning, no practising certificate conditions.

As a further irony, the partner responsible for supervision of the consultant had left the firm in the meantime (although the SRA did not allege that there had been any failure of supervision). In consequence, neither of the individuals who could possibly be open to personal criticism was targeted for any action at all. This underlined that the personal fault, while clearly amounting to a rule breach, was not serious.

The SRA did not allege that the LLP did anything blameworthy, or that any of the remaining members had done anything wrong at all, or had behaved other than impeccably when they learned that something had gone wrong - it simply relied upon the fact that the entity (as well as individual solicitors) was bound by the Code of Conduct: it relied upon the fact that there had been a breach of one or more rules by the consultant, and that therefore the entity, the LLP, should carry the can. The result was that seven individually blameless solicitors were, in effect, hauled up before the SDT.

Although, technically, the individuals were not being prosecuted, to the solicitors in question the distinction is completely illusory. They, as individuals, have to meet the cost and suffer the consequences; the reputational damage sticks to them, as much as to the firm. For centuries, the concept of professional misconduct or conduct unbefitting a solicitor has been easy to grasp. It is conduct worthy of condemnation by those responsible for the maintenance of professional standards - the disciplinary tribunal and the courts. The SRA no longer believes this concept holds sway: in his submissions to the SDT in due course, leading counsel for the SRA asserted that ­misconduct was a different concept from rule breaches. The unspoken corollary was that the SRA believes that it is justified in prosecuting an entity for rule breaches alone, whether or not the entity could be said to have misconducted itself. That, in my view, is a very dangerous approach.

I was sufficiently concerned when first instructed in late 2011 to write a detailed advice, suggesting to my clients that it be sent to Antony Townsend, chief executive of the SRA. They did so, but I am convinced that the advice was not seen by him, on the basis that it is not part of his responsibility to intervene in individual prosecutions. Six months went by without meaningful response. By now I had drafted a defence case statement describing the prosecution as ‘thoroughly unfair’, and Andrew Hopper QC, my co-author of The Solicitor's Handbook 2012 and chair of the regulatory processes committee of the Law Society, had raised the matter, in that capacity, with an executive director of the SRA.

The happy result was that finally the SRA caved in and agreed to withdraw the prosecution, in exchange for meaningless confirmations as to the strict interpretation of the rules as to which there was no dispute. It nevertheless instructed senior leading counsel to apply to have the proceedings withdrawn, presumably because it was concerned to avoid embarrassment.

To bring a solicitor or an entity before the SDT is a massively stressful and disruptive event for the solicitors concerned. The SDT should only be required to deal with the most serious examples of professional misconduct committed by solicitors. The less ­serious matters can and should be dealt with in-house by the SRA, either through the ‘supervision’ process, ie a sensible dialogue to address shortcomings and prevent recurrence, or if there is a need for ‘enforcement’ then by way of proportionate penalty.

Such matters can be rapidly dealt with, and may or may not be publicised to the world at large. The fact that a breach of a rule of conduct may be professional misconduct does not mean that it must be so. Or putting that another way, if the SRA wants forever to abandon the concept of misconduct in favour of strict liability rule breaches, there must be a clear understanding as to when disciplinary proceedings or ‘enforcement’ of any kind is justified.

Plainly, not every breach deserves a sanction. All must depend upon the context and gravity of the breach and the mindset of the solicitor at the time. It is also worth considering the wider effect upon an entity of a disciplinary prosecution against it. The reputational damage from a successful prosecution can be immense and out of all proportion to the gravity of any ‘misconduct’ by the entity. The LLP that I represented acts for many household names in the financial ­services industry. Much of this work is secured by success in competitive tendering. Large financial institutions now routinely ask tenderers for details of any regulatory or disciplinary ­matters recorded or outstanding against the firm. If the firm has to tick the ‘wrong’ box, its prospects of obtaining the work must be minimal.

Additionally, in an increasingly internet-focused world, details of the LLP’s prosecution and ‘conviction’ would be available to clients and prospective clients of the firm. Such information is readily available to those who wish to find out about a solicitor’s or firm’s disciplinary or regulatory history, and it is bound to have an effect upon the desire of a potential client to instruct the solicitor concerned.

If the SRA is now to target entities for disciplinary action, it is submitted that this should be only where it considers there is blameworthy conduct by the entity, such as systemic failures which cause important rule breaches. It is not permissible for the regulator simply to treat the individual and the entity as interchangeable and pursue the entity rather than the individual. The crucial question should be whether the entity has acted or failed to act in a way that can properly be criticised to the extent that it is appropriate to make a disciplinary finding against it.

Indeed, through Andrew Hopper’s efforts I have learned that this is, in truth, understood to be the ‘official position’ of the SRA in terms of policy – that entity regulation should primarily involve ‘supervision’ with ‘enforcement’ being deployed only in two circumstances: (a) where there has been a serious failure of management - something fundamentally attributable to the way that the firm is being run; or (b) where on a problem being identified the firm is unwilling or unable to work with the SRA to put things right. We believe that it was a realisation at a senior level that this case was not being dealt with in accordance with those policies that led to the last minute change of heart. And that is why I believe that if Mr Townsend had seen my advice six months ago some common sense would have prevailed. As it is, there seems to be a major dichotomy between what should be happening and what is actually ­happening. It should not need this kind of intervention to prevent injustice.

My clients were left collectively shaking their heads at the way they were treated by their regulator. They asked me how on earth the proceedings against them were consistent with outcomes-focused regulation and the oft-quoted comments from senior personnel that the SRA was going to change, was going to adopt a more adult relationship with the profession, and was going to move away from a rigid rule-based, box-ticking approach to its job of regulating the profession. I was unable to answer that question. Likewise, when one of the partners observed acidly to me that Clifford Chance would not have been treated as her firm was being treated, I remained silent. It was hard to disagree.

It seems that in its approach to ­entity regulation, the SRA is adopting concepts imported from the financial services industry, where large fines against entities are regularly imposed. But there is no real comparison. Barclays Bank can be fined £290m, shrug its shoulders, construct a ­suitably worded apology, and continue as normal, safe in the knowledge that there is unlikely to be any material damage to its business. But in the legal profession, reputation is all. Solicitors are fiduciaries: bankers are not. A disciplinary finding against a firm or solicitor is infinitely more ­damaging than an equivalent finding against a bank.

Above all, there is a need to tread carefully, with an understanding that in entity regulation - in the solicitors’ profession at any rate - individuals are seriously affected. It is also deeply worrying that there are people ­responsible for taking disciplinary ­proceedings, inside and outside the SRA, who appear to be adopting ­practices which its board and senior managers would not endorse. Happily, wise counsels eventually prevailed, and the SRA is to be congratulated for withdrawing the prosecution. I can only hope that the lessons of the case are fully absorbed, and that henceforth entities are only targeted for ­prosecution when they deserve to be.

Gregory Treverton-Jones QC is a barrister at 39 Essex Street Chambers, London, and co-author with Andrew Hopper QC of The Solicitor’s Handbook