Risk and Compliance: SRA Handbook Changes
27th March, 2018
Coded message – Risk and Compliance: SRA Handbook Changes
The Solicitors Regulation Authority is set to introduce a new handbook regime, and the changes are the most significant since 2011. Property professionals face some of the most controversial changes. Paul Bennett outlines the proposals and their impact
In September 2016, the Solicitors Regulation Authority (SRA) proposed a radical overhaul of the Code of Conduct regime. The consultation closed in December 2017 and we await the SRA’s response, but, if the changes come in as proposed, the timeframe is short – the changes will come into force in autumn 2018 or spring 2019. Therefore we must begin now to review, revise and update our systems, and support our colleagues to get up to speed. The aim of this article is to highlight the underlying challenges so you can start to manage that process – probably through your compliance officer for legal practice and/or senior management team. One of the most controversial proposals relates to the relaxation of the protections around ‘reserved legal activities’, which cover key conveyancing aspects of land transactions. This article looks at both the changes in general, and those which have a specific impact on property practice.
WHY HAS THE SRA PROPOSED THE CHANGES?
In summary, the SRA is aiming to help firms by removing complex layers of bureaucracy and encouraging innovation. In the long term, even a cynic like me will concede that reducing bureaucracy is a positive move. But in the short term, all law firms face a logistical challenge to be ready for the changes, against a backdrop of other compliance challenges, such as the General Data Protection Regulation commencement, and while the new anti-money laundering regime is still bedding in.
When the changes come in, the Code of Conduct  will be simpler and less prescriptive. The new regime is designed to give guidance, while still allowing firms the freedom to develop their own solutions, as appropriate to their clients and skills. The artificial and confusing language of ‘outcomes’ and ‘indicative behaviours’, introduced seven years ago, will be swept away.
Another key aim is to try to encourage and drive innovation, in order to ensure wider access to justice.
THE MAJOR CHANGES
Perhaps the most obvious change is that there will be two Codes of Conduct : the Code of Conduct for Solicitors, and the Code of Conduct for Firms. Solicitors who are owners / managers of the business will be bound by both codes, but most employees will operate under the individual code only. When an ethical point arises in practice at the moment, the obligations of the individual solicitor and regulated entity (firm) are not always clear. This means the firm and the individual professional can come into conflict. The new regime will make clearer whether such an ethical point / issue is an individual responsibility (under the individual code) or a firm responsibility (under the firm code). From a professional disciplinary perspective, the argument we often help advance that ‘I did not know that was expected of me, as the firm handled that’ will to some degree disappear. The onus will be firmly on each solicitor to assume responsibility for their own compliance in all they do.
Fewer principles – but still paramount
The principles are to be reduced from 10 to six. In its 2016 consultation, ‘Looking to the Future – flexibility and public protection’, the SRA stated: ‘These set out high level ethical principles that comprise the fundamental tenets we expect all those that we regulate to uphold. This includes solicitors and other individuals we authorise, and firms and their managers, owners and employees.’
The following principles are removed:
- Principle 5: that you ‘provide a proper standard of service to your clients’
- Principle 7: that you ‘comply with your legal and regulatory obligations and deal with your regulators and ombudsman in an open, timely and co-operative manner’
- Principle 8: that you ‘run your business or carry out your role in the business effectively and in accordance with proper governance and sound financial and risk management principles’
- Principle 10: that you ‘protect client money and assets’.
These disappearing principles appear elsewhere in the Code of Conduct documents.
The principles remain the fundamental core of compliance that every solicitor should work to every day and should have at the forefront of their mind. If you face an ethical dilemma in practice, your starting point should be the principles, and then you will need to move to either or both Codes of Conduct , depending on whether the dilemma raises a matter for individual solicitors or the firm (or both).
This raises two managerial challenges:
- how to ensure every member of staff thinks about the ethical implications in their own practice
- how to evidence the firm’s supervision of these ethical issues.
You will certainly need to train all staff in compliance, and introduce a system to monitor how staff then apply this training. At this stage, you need to ask two questions.
- Culturally, is your firm ready for this personal responsibility approach, and if not, what do you need to do to get it ready?
- What training and supervision changes do you need to plan to introduce?
Honesty as well as integrity
The meaning of these two closely associated words has been the focus of some case law in 2017 and over recent years. The pendulum in the courts has swung around a bit and the SRA is a little bruised. The current principle 2, to act with ‘integrity’ – note no mention of honesty – is to be replaced with the new principle 4: to ‘Act with honesty and with integrity’.
It is the ultimate principle for law firm managers. If there is any hint of a team member lacking honesty or integrity, you should be reporting it.
The new ‘Why did you do that?’ obligation
Exercising professional judgement is a fact-sensitive challenge. The professional obligation to evidence your reasoning is to be put firmly at the heart of day-to-day practice in the new individual code. It states at 7.2: ‘You are able to justify your decisions and actions in order to demonstrate compliance with your obligations under the SRA regulatory arrangements.’
The new focus is on you, I stress you, being able to justify your actions in every deal, every piece of litigation, and all work that you do. For many solicitors, this will require a significant change in approach, as they probably think only of their professional obligations when a conflict of interest or specific conduct point arises. Now you must be able to evidence compliance at all times.
One useful example of the challenge ahead is the information given to clients at the outset of their matter on service levels, costs and prospects of success. The individual code states at 8.6: ‘You give clients information in a way they can understand. You ensure they are in a position to make informed decisions about the services they need, how their matter will be handled and the options available to them.’ Your professional obligation will be to ensure clients make an informed decision from the options available. How will you show this? How will you make sure those you supervise achieve this?
A similar obligation for firms is set out in the firm code at 2.2: ‘You keep and maintain records to demonstrate compliance with your obligations under the SRA regulatory arrangements.’
How are you going to show this in practice? No guidance has yet been given, but I would suggest the need for file reviews and effective (and documented) supervision has never been greater. Are you sure as a firm that if someone does something unprofessional or covertly, your supervision would pick it up? What if they are a partner? The senior partner? Uncomfortable though it is to discuss this challenge, you need to formulate a plan to demonstrate the compliance with evidence.
You are responsible for others’ actions
The firm code aims to make sure that those who run law firms have less room to excuse their actions (or failure to act) when dealing with the actions of colleagues. The obligations on the profession are rising. This is evidenced at 8.1, which states: ‘If you are a manager, you are responsible for compliance by your firm with this Code. This responsibility is joint and several if you share management responsibility with other managers of the firm.’
The SRA is focusing here on its aim to hold law firm managers to account, and by making the obligation ‘joint and several’, it is highlighting that the excuse ‘it wasn’t me’ or ‘it was a firm decision and not mine’ is not appropriate or valid. No longer can firms delegate compliance to a compliance officer, while the other partners plead ignorance.
In summer 2017, I spoke jointly with the SRA at a Law Society event on this topic, and the speaker publicly agreed with my analysis that the ethos of ‘joint and several’ liability was key to the proposals. In order to maintain standards in the profession, the emphasis is shifting back to the traditional value of ‘you are the professional, you take the responsibility’. This ethos of collective risks is of course familiar to many solicitors who, prior to the Limited Liability Partnerships Act 2000, were trading as a partnership under the Partnership Act 1890, which provided that joint and several liability arose for the actions undertaken by any partner.
The firm code also imposes an obligation to report serious issues promptly (without delay) at 3.9: ‘You promptly report to the SRA or another approved regulator, as appropriate, any serious breach of their regulatory arrangements by any person regulated by them (including you) of which you are aware. If requested to do so by the SRA you investigate whether there have been any serious breaches that should be reported to the SRA.’
This obligation exists under the current Code of Conduct 2011 (under outcome 10.4), but the shorter, simpler firm code removes the ambiguity, so expect more reports and for more professionals to appreciate the importance of the obligation. It will be clearer, so you need to plan how you will handle any concerns.
The new clarity in the individual code highlights the need for property solicitors to have a written agreement in place with property professionals with whom fees and clients are shared. The rules are not new, but talking with practitioners, I have found the awareness of the current obligations poor. In summary: the relationship and any fees need to be communicated to the client before the third party is referred to.
Individuals practising outside firms
Property and land transactions have long been protected by statute to limit the risk to consumers (the SRA thinks in terms of consumers rather than businesses or clients) given the risks associated with transactions involving the buying and selling of assets of significant value. Schedule 2 to the Legal Services Act 2007 (LSA 2007) sets out (at paragraph 5) the meaning of ‘reserved’ activities: those which can only be carried out by individuals who are part of an SRA-regulated firm, or regulated by one of the other regulators under the LSA 2007, such as the Council for Licensed Conveyancers or Bar Standards Board.
‘5(1) “Reserved instrument activities” means—
(a) preparing any instrument of transfer or charge for the purposes of the Land Registration Act 2002;
(b) making an application or lodging a document for registration under that Act;
(c) preparing any other instrument relating to real or personal estate for the purposes of the law of England and Wales or instrument relating to court proceedings in England and Wales.’ Most transactions in the property field will be caught by this wide definition. The SRA regime until now has meant that individuals could not simply act alone without being part of what the SRA calls a ‘legal entity’ (which most of us would probably call a law firm). But the new handbook proposes to relax these restrictions. The SRA set out the following in its second phase of consultation.
‘49. We therefore propose to allow individual self-employed solicitors and [registered European lawyers (RELs)] to provide reserved legal services to the public or a section of the public on their own account without the need to be a Recognised Sole Practice or to work through an authorised body. The solicitor or REL would need to be practising as an individual (and therefore without employees or partners and not through a service company) and would need to be engaged personally by the client. They would be required to maintain adequate and appropriate professional indemnity insurance and to be based in the UK.’
How would your practice engage with such an individual? The SRA is not proposing that they should be permitted to hold client funds, so completion would be more complex, and perhaps would need to involve funds going direct to clients and/or third parties.
It simply is not clear what safeguards you would be expected to have in place at this stage, but checking the identity of each firm and solicitor you deal with will be essential.
Solicitors as estate agents
The SRA previously adopted, in the Property Selling Rules 2011, some of the provisions in the Estate Agents Act 1979. It is likely to retain some of these provisions, because it is keen to protect consumers when law firms also act as estate agents – as is apparent from this consultation extract.
‘107. We propose that two provisions from the existing Property Selling Rules should be retained, but in the form of guidance. These are two of the key terms used in defining fee structure: “sole agency” and “sole selling rights”. Under the Estate Agents Act 1979, estate agents must communicate the meaning of these terms to clients. Our guidance will set out that solicitors should adequately explain these terms if they are used.’
The consultation makes clear that the SRA believes that few solicitors act also as estate agents, but paragraph 108 adds that the SRA ‘would welcome any data on whether this is widespread’.
There has been some confusion in the property field as to the likely impact of these changes. The Law Society’s consultation response noted that the removal would require a change to the conflict of interest rules relating to ‘transactions in which you have personal interest’, to reflect section 21 of the Estate Agents Act 1979; while this is a narrow point, every firm will need to address the new risk unless the SRA amends its draft rules, which seems unlikely on such a narrow point.
Compliance officers of law firms and management teams should be reviewing the changes, attending training events and, once they understand the proposals, focusing on developing a plan for implementation within their firm.
All firms will need to:
- update their practice manual
- amend the procedures of the firm change supervision arrangements
- retrain their entire workforce for the new regime (including on the principles and the two codes, and how the two codes interact)
- review any estate agency work the firm may do
- consider the new risk of the self-employed individual undertaking ‘reserved legal activities’ who cannot hold client funds or complete transactions in the normal manner.
But these steps are only the starting point: law firm managers also need to assess the impact in the widest sense, and plan for the changes accordingly.
As produced by Paul Bennett for The Law Society Property in Practice magazine – March issue
You might also be interested in...
16th November, 2018
It is reported that a quarter of all complaints dealt with by the Legal Ombudsman revolve around costs therefore to avoid complaints and confusion, it is important to be clear from the outset. The new Transparency Rules (which the SRA have now confirmed will come into effect on 6 December 2018) require that accurate and relevant information is... Read More »
5th November, 2018
Aaron & Partners LLP has once again seen improved rankings in The Legal 500 – a comprehensive guide... Read More »
10th October, 2018
In the lead up to World Mental Health Day on 10 October 2018, we have been posting a series of short articles discussing mental health and stress in the workplace. In this final article, we will be providing tips, to employers and employees, for managing stress and dealing with mental ill health in the workplace. Click here to... Read More »