There is much to like in the new proposed SRA codes of conduct and accounts rules. By Melanie O’Brien, Matthew Howgate, Sarah Charlton and Paul Bennett.
The current focus on firm-based regulation has created a generation of solicitors with sparse understanding of their professional and ethical obligations.
With the expansion of the legal market anticipated by the Legal Services Act 2007, it is now ever more apparent that the current regime is also stifling innovation. It is therefore no surprise that the team at the top of the Solicitors Regulation Authority are proposing radical change.
Some of the so-called big ideas from the 2011 SRA Handbook are evolving, some are reversed and some dispensed with entirely.
Unfortunately, the SRA’s phased consultation and development process makes it difficult to comment fully on these proposals. A significant omission in the current consultations is the lack of any real detail about the SRA’s intended future approach to enforcement (which is to be consulted on later in 2016).
Not before time, the SRA seems to be shifting the regulatory focus back from firms and on to individual solicitors. Two codes of conduct are proposed:
1. The SRA Code of Conduct for solicitors, registered European lawyers and registered foreign lawyers. This will deal with all solicitors, no matter where they practise. All solicitors at all levels will be obliged to observe this code.
2. The SRA Code of Conduct for firms. This will focus on the systems and controls firms will need to have in place.
It is a neat, practical and reasonable solution to resolve the challenges that have emerged when solicitors and firms each consider the other to be responsible.
Rather than abolish entity regulation, the proposals clarify responsibility. As the consultation document states: ‘If things do go wrong, we will take a proportionate response. But where we find that solicitors or firms have wilfully, carelessly or negligently misused their freedom, or have abused their position, that response can be robust’ (emphasis added).
Reaffirming the personal and strict conduct and ethical obligations of solicitors refocuses everyone’s minds on the fact that this is a profession and one at the heart of the justice system. Upholding the rule of law and the proper administration of justice means very little to a firm, but can underpin the actions of an individual solicitor dedicated to achieving justice for clients and a fair society. As more and more non-solicitor-owned practices emerge, this restatement of solicitors’ personal obligations is, in our view, essential.
Prescriptive v non-prescriptive
The SRA’s apparent move away from imposing defined outcomes, which are meaningless for some firms, will be welcomed.
On the flip side, sacrificing detail for simplicity may be superficially attractive, but not when it comes to defining a clear path through the grey areas, or indeed for enforcement purposes.
Inevitably, detailed guidance and case studies will be necessary to support the codes, lest there be a real risk of losing clarity. It is already hard to know where to look for guidance on a tricky issue and SRA staff have too often found it difficult to understand and advise practically on certain elements of the existing code. There will, therefore, be a perceived risk that a simplified and vague rule may lead some solicitors to make errors of judgement that subsequently trigger enforcement action.
Whatever the outcome of the consultation process, it is critical that the SRA curates the rules and guidance in such a way that solicitors can easily understand where to look and how to find them.
From an enforcement perspective, where a firm has been in dispute with the SRA or has encountered a visit from one of its forensic investigators, the current, more prescriptive rules have been a protective shield. The removal of this shield requires a maturity and restraint rarely seen from any regulator. It would not be wholly surprising if we see a rise in public law challenges and appeals of enforcement decisions to the High Court by solicitors and firms while the rules are clarified in the immediate aftermath of the changes coming into force.
On balance, the new approach appears sensible and pragmatic in theory. But there is a risk that solicitors or firms that engage with the SRA in future from a misconduct perspective face a regulator with more discretion and therefore more scope for error. However, for the overwhelming majority of the profession who act appropriately (assuming that the SRA can strike the right balance with its supporting practical guidance) the benefits could be significant; as solicitors face a potentially shorter, simpler and easier-to-understand Handbook.
In-house solicitors will no longer be prevented from only acting for their employer. This is intended to enhance access to justice for consumers. This move is wholly in keeping with a theme of the consultation – reducing costs for consumers and for firms.
In practice, this change will mean any solicitor can provide advice and assistance to the public, provided they are not carrying out one of the reserved legal activities arising from section 12 of the Legal Services Act 2007.
The right to provide reserved legal activities in-house for an employer is to be retained: albeit slightly extended in that, so long as the ‘client’ is not a member of the public, it will be permitted. In practice, this is likely only to be applicable to commercial clients.
In light of the statutory requirement for a head of legal practice (COLP) and head of finance and administration (COFA), as set out in sections 91 and 92 of the Legal Services Act 2007, the existing role of compliance officers cannot be abolished.
The SRA acknowledges that feedback on these roles, from their inception in January 2013, has been mixed, but as the consultation states: ‘The existence of the roles has also created a compliance officer community for passing on good practice and sharing knowledge.’
Although the roles cannot be removed for statutory reasons, the SRA is nevertheless seeking feedback on the duties of COLPs and COFAs and how things could change. The consultation may therefore lead to a revised approach which is not yet clear. It may even indicate a willingness to seek evidence to justify a push for a legislative change.
The SRA is finally taking the opportunity to address the anomaly of ‘special bodies’ – agencies such as law centres that have been locked in an unhelpful, unclear and seemingly never-ending transitional period where the employed solicitors are regulated by the SRA but the law centres themselves are not.
Understanding the complexities of the ways in which legal advice charities operate will be essential. It may be a stretch for SRA staff to appreciate the implications of charity law, restricted funding and the mechanics of small charitable organisations (that may lack significant management infrastructure), which may simultaneously be providing reserved legal services, public legal education, generalist advice, campaigning activities and so on. Some have struggled to get their heads around seemingly straightforward ABS business models. Dialogue with the relevant representative bodies will be essential.
The SRA’s suggested approach is to treat special bodies in the same way that it currently treats multi-disciplinary practices. This seems eminently sensible, provided that the SRA also understands the implications of restricted funding and the associated lack of flexibility in terms of deciding how grant funding is used.
In the second of its two consultations, the SRA is proposing significant changes to the SRA Accounts Rules and the concept of what constitutes ‘client money’.
On the whole, the suggested versions of the accounts rules are likely to be well received as they are concise and easy to read.
It has always been important that the ‘spirit’ of the rules is applied in conjunction with the rules. A very good benchmark for a solicitor would be to ask themselves how they would feel if their actions were in the public domain. If the answer to this is in
the negative, then there lies their answer. We would like to see characteristics of this within the supporting toolkit that will be published with the new rules.
Sceptics who feel that the new rules appear to reduce protection for client money should ask themselves one question: do they really believe that it makes a difference to those who intend to misappropriate client money if the rules are nine pages, 19 pages or 129 pages? If someone intends to misappropriate client money then this is rarely because of a lack of understanding of a particular rule. But the rules do need to be clear enough to assist any disciplinary action and this must have been considered through the process of condensing them.
There are some real, practical risks associated with the revised definition of ‘client money’ which do not appear to have been adequately assessed. Notwithstanding the various risks for clients, some of which have been identified by the consultation document, there is of course the issue of the tax authority.
It is likely that the receipt of costs would trigger an ‘actual tax point’ for VAT purposes and as such a firm would need to pay HM Revenue & Customs (HMRC) any VAT contained within the payment it has received. Billing costs at this point would likely not be beneficial to a firm because it would be recognising income in its accounts some significant period before completing the work. This would also prevent the SRA from ascertaining in an intervention what client money is due from the business account if it has all been billed. Most systems are unlikely to support the payment of VAT to HMRC outside of the billing routine.
While the new rules do provide the profession with the flexibility to use third-party services to hold client money, which is a positive and progressive step, this is often impractical for most law firms. However, there appears little, if any, evidence of the ‘additional protections’ suggested in the consumer protection analysis outside of third-party managed accounts (TPMAs). The profession pays heavily for the minority who do misappropriate client money and TPMAs are not the answer for most firms who have active client accounts.
There is much to like in the new proposals. Simplification of the handbook, deleting superfluous repetition and reference to obligations already contained in statute or regulation is, by itself, a welcome departure.
Unlike the content of the present handbook, the draft codes of conduct and the draft accounts rules are written in plain English and a person new to the profession would likely understand them.
There remain, however, many issues which need to be assessed. Enforcement of the new rules will be a challenge, in particular the adaptation of in-house practice to the revised codes and the SRA’s policing of the codes not only to protect consumers, but also to treat solicitors and firms fairly. There are also a number of practical dilemmas (especially those in relation to tax accounting) which require a solution.
We can only hope that as many practitioners as possible actively consider how the proposals will affect their practice and respond to all or parts of the consultation papers. Likewise, we hope that the SRA will listen carefully to legal and accountancy practitioners and draw on their comments and suggestions in the development process.
Melanie O’Brien is a director and Matthew Howgate and Sarah Charlton are consultants at DG Legal. Paul Bennett is a partner at Aaron & Partners