UK: Outcomes-Focused Regulation – A "Naked Road" Scheme For The Legal Profession?

Last Updated: 20 April 2011
Article by Andrew Blair and Geoffrey Shreeve

As the SRA continues with its timetable to implement outcomes-focused regulation (OFR), it has recently published its new Handbook, containing a principles based Code of Conduct.

The SRA's move from requiring compliance with detailed rules to the spirit behind certain principles is not unprecedented.

In April 2004, Seend, a village in Wiltshire, removed all markings from its roads. In January 2005, it was reported that accidents in the village had dropped by a third and vehicle speed had fallen by five per cent. It seemed that the psychology underpinning the experiment had struck at a truth of human behaviour. As the SRA prepares, in October 2011, to implement a scheme requiring firms to ensure that they abide by principles of good practice rather than avoid breaching rules, can we expect to see an improvement in the profession's management of risk, or will firms be left in doubt as to what exactly the SRA requires?

The new Handbook for the profession (which is subject to approval by the Legal Services Board) will be in force from 6 October 2011 (with some phased implementation from August) and brings together in one place standards and regulations applying to firms including sections and guidance on, amongst other matters, accounting and PII. The Handbook and Code will also apply to alternative business structures regulated by the SRA when they are permitted. The Code is structured so that the profession must comply with mandatory principles and deliver on mandatory outcomes. To do so, non-mandatory indicative behaviours (IBs) are provided to assist. Some sections of the Code also contain notes. The SRA has also published a quick guide to OFR and the new Handbook, which in particular contains some Q&As on achieving outcomes.

The publication of the new Code follows a consultation process that suggested that the profession was broadly supportive of the changes, but considerable uncertainty remains as to how the scheme will work in practice. A recent Legal Week survey suggested that half of City partners did not understand the move towards principles-based regulation. One particular fundamental concern has been the role of the IBs. In response to criticism that the SRA might treat non-compliance with the IBs as failure to achieve the outcomes hence making the IBs de facto rules, the SRA confirmed that firms have the option to achieve the outcomes in other ways. It amended the language used in the Code of Conduct to make clear that acting in accordance with the IBs "... may tend to show that you have achieved these outcomes and therefore complied with the Principles" (our emphasis). At the other end of the scale some commentators have suggested that the new Code does not give enough guidance, and that introduction of the word "may" means that even complying with the IBs will not be enough to ensure a firm is not in breach of the Code.

Much will of course depend on the SRA's interpretation of the Code and its practical approach to enforcing it. The SRA has emphasised that OFR is not "light touch" regulation, but will provide for more efficient, flexible and cost-effective enforcement. To apply the "naked road" metaphor, there may be no markings on the road, but each driver must know the applicable laws and the police will still arrest a driver for not complying with the law.

The SRA is to place an emphasis on dialogue and cooperation as part of a "risk based, proportionate and targeted" approach to authorisation, supervision and enforcement. The SRA envisages that firms will have a more open and constructive relationship with it and states that firms that are already well managed and providing a good service have nothing to fear.

The flexibility of this new approach is considered to be particularly essential to allow the SRA to effectively regulate all firms, from the high street practitioner to the Magic Circle. Some larger commercial firms have been critical of the outgoing detailed rules, which they considered were often focused on the smaller client, and were being enforced by a regulator that they considered did not understand their business. At the same time the approach is intended to make parts of the profession self-regulating allowing the SRA to focus on firms that do not provide a proper standard of service.

COLPs and COFAs

An aspect of the new regime that met with particular resistance from some during the consultation stages is the introduction of a requirement for firms to appoint a compliance officer for legal practice (COLP) and a compliance officer for finance and administration (COFA) contained in Rule 8.5 of the Authorisation Rules. The individual fulfilling the COLP role will have wide obligations to take all reasonable steps to ensure the authorised body complies with its authorisation and its statutory obligations in relation to carrying on authorised activities, to record any failure to comply and make such records available to the SRA on request and to report any material failure (taken on its own or as a pattern) to the SRA as soon as reasonably practicable. The drafting of the Rules has been amended to some degree to reflect concerns raised. For example, it is now specified that a firm must have suitable arrangements in place to allow the COLP and COFA to discharge their role, and it is now clearer that the COLP is not responsible for breaches of all statutory law. There are, however, a number of issues remaining. The burden of compliance responsibility remains on one individual, and it is not clear what is required in all respects from that person, for example what are "reasonable steps". The SRA's guide contains a timeline for when different bodies must nominate a COLP and COFA and from when they must fulfil their obligations.

Conclusion

Although the greater flexibility available under the new rules will no doubt be welcomed, especially by larger firms, we will have to see whether the SRA's new approach delivers the supportive environment required to allow firms to implement the rules in ways that are an improvement for them and their clients.

Perhaps the greatest immediate challenge for the SRA is likely to be dealing with the sheer weight of queries from practitioners as they seek to ensure compliance with the outcomes. A fundamental difference between OFR and the small traffic scheme in Seend is that when the markings were removed from the roads, all the rules stayed the same.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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