The controversial rule requiring firms to have separate compliance officers will definitely not come into force in January, the Solicitors Regulation Authority revealed today.
The separation of management and compliance roles – expected to affect hundreds of firms where the same individual holds both – was paused last month amid a backlash from the small firms.
The regulator said that the rules will be put on the back-burner at least until it has completed wider engagement on the best approach. In the meantime, the SRA is actively identifying higher risk firms and directly working them on establishing separate management and compliance roles where necessary.
The rule change was consulted upon earlier this year and rubber-stamped by the Legal Services Board over the summer. But as the potentially disastrous effect on small firms emerged, campaigners pressed the SRA to rethink the plans.
The SRA believes this pause will give the opportunity to work with stakeholders, including through working groups, to further explore issues relating to the proposed separation rules. It will also allow the regulator to test alternatives and consider wider approaches to making sure appropriate governance arrangements are in place.
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Aileen Armstrong, SRA executive director of strategy and policy, said: ‘As the regulator, we are committed to acting decisively where consumers are being placed at potential risk of harm. This includes both targeted activity with individual firms and working toward the introduction of wider regulations and requirements which will safeguard consumers of legal services.
‘Already we have had productive conversations with stakeholders and will have even more moving forward. The insights we gain from these discussions are proving very useful in helping refine and develop our next steps.’
The SRA had been keen to separate the compliance and management roles following some high-profile law firm collapses where client money was subsequently found to be missing. It was felt that an extra safeguard, distinct from those running the practice, would help to prevent a repeat.
But the regulator has now acknowledged that the approach could have had ‘unintended consequences’ within smaller firms and sole practices.
The newly formed SME & Boutique Law Firm Alliance called for a vote of no confidence in the SRA board at this month’s Law Society annual general meeting. The group said the change was unmanageable and would make little practical difference, except to place extra regulatory and financial burdens on firms.
The SRA said that once a decision on future approaches and requirements has been made, it will make sure there is an ‘appropriate’ time for firms to implement any changes needed.
The revised approach will be more targeted to identify higher-risk firms rather than seek to change how the whole sector operates. The SRA will seek assurances that such firms have appropriate governance arrangements in place and that their compliance function is able to operate with the necessary independence.
Responding to the long-term pause, Law Society president Brett Dixon said: 'We are pleased to see the SRA has listened to the serious concerns raised by the Society and our members about its compliance officer measures and committed to take action to address them. We welcome the commitment to establishing working groups which must have representation from those businesses and practitioners most affected.
'The regulator is right to take these measures off the table to allow time to review the impact of the current proposals and make appropriate changes to ensure a risk-based approach is taken which draws on reliable data and evidence. It’s vital that any new measures reflect operational realities for law firms and solicitors, while also protecting consumers.'
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