UK: COLPability – Third Update

The Compliance Officer for Legal Practice (COLP) regime, has now been in place for five months. In this briefing note we provide a short summary of our current views on the regime in action.

Key issues for COLPs at the moment

The majority of COLPs will by now:

  • Have in place systems and processes for obtaining the information that they need from the firm to fulfil their role
  • Have reviewed the firm's compliance procedures and policies, and where necessary have updated those policies and procedures or put new ones into place along with a means of checking compliance
  • Will have a reporting system up and running for the purpose of recording breaches of regulation or relevant law and will have educated staff on the new regime and what must be reported to the COLP

What is likely to be important for COLPs at present is assessing whether the processes that they have in place provide them with the necessary information to fulfil their role, and ensuring that they are continuing to assess the areas of risk the firm faces and are monitoring compliance generally on an ongoing basis.

Exactly what constitutes a serious material breach of regulation, reportable as soon as reasonably practicable to the SRA, also remains a central issue, that some but not yet all COLPs will no doubt now have had to consider. Some firms with relationship managers are dealing with this difficulty by raising any issue in this area with their relationship manager.

Non-material breaches

The SRA has recently indicated its plans to remove the requirement for law firms (although not Alternative Business Structures) to report non-material breaches of regulation in an annual information report.

Although this is a welcome development, the practical consequences are unlikely to be great as firms will still need to keep a log of non-material breaches in order to identify patterns of material non-compliance that do need to be reported. It is also likely that the SRA may ask to see the log of non-material breaches, for example if there are other issues in relation to general management of the firm. If the log does not contain much information, then it is possible that the SRA will consider this to be an indicator that the firm does not have in place adequate systems for reporting breaches, or does not take the responsibilities of the new regime seriously.

International regulation and financial stability issues

Financial stability is a key priority for the SRA at present in light of a number of high-profile failures of law firms, including Cobbetts, Blakemores and the US firm Dewey & LeBoeuf. For firms headquartered overseas with offices in the UK, there may be some concerns about what the COLP is required to report in respect of the overseas offices and what sort of information the SRA might require, particularly with regards to financial information about the foreign parent.

The SRA released a further consultation on its new overseas rules on 20 May 2013. The SRA's approach is as follows:

  • There will be a new section of the Handbook that sets out the Overseas Rules. The Overseas Rules include modified versions of the Principles contained in the Handbook. The SRA consultation states that the intention is to require compliance with the Overseas Principles by all solicitors practising overseas, all managers in overseas practices and, where there are entity related provisions, to the overseas practice itself. An overseas practice is a body established overseas under the control of an SRA authorised body or sole practitioner in England and Wales (so for example a branch office of the English LLP).
  • There are some reporting requirements in respect of practice overseas. The SRA requires that material and systemic breaches are monitored and reported when they occur. The SRA indicates that in this context notification will be required if: Partners, managers, solicitors or professional employees are convicted of a criminal offence or become subject to disciplinary action by a regulator
  • There is a belief that the firm or overseas practice is in serious financial difficulty
  • There is also an obligation to provide the SRA with the documents held by the overseas practice "to which it is entitled and any necessary permissions to access information as soon as possible following a notice from the SRA to do so". It seems strange to us to have an obligation imposed to provide something to which the SRA is already entitled
  • The SRA must be provided with an annual return that identifies the contact details of the overseas office and confirms that reporting and notification obligations have been fulfilled
  • Notifications can be made by the COLP in the UK or by another person on behalf of the overseas practice
  • There are also a number of obligations on the domestic practice to be added to the Handbook in relation to overseas practices and to "connected practices". A connected practice is a body providing legal services established outside of England and Wales that is connected to the authorised body, for example: by means of certain verein structures; being jointly managed or owned, or having a partner, member or owner in common or controlled by or, with the authorised body; or sharing costs, revenue or profits related to the provision of legal services with the authorised body. Draft outcomes 7.11 and 7.12 provide the following: You identify, monitor and manage the compliance of your overseas practices with the Overseas Rules
  • You identify, monitor and manage the risks to your business which may arise from your connected practices
  • You maintain systems and controls for managing the risks posed by any financial inter-dependence which exists with your connected practices
  • You control the use of your brand by any body or individual outside of England and Wales which is not an overseas practice

The new rules make it clear that, for example, the SRA is not attempting to extend the remit of its regulation to a US parent firm that has established an English, SRA authorised, LLP in London. However, there will still be a requirement for a COLP in London to obtain some information from the US headquarters, in order to manage the risks to the English LLP, including financial information, and potentially to disclose that information to the SRA. We know that this is of concern to a number of firms. Exactly what will be required by the SRA is not clear. Although it is in keeping with the approach of Outcomes Focused Regulation ("OFR"), the requirement to "manage risks" arising from connected practice is vague. Anecdotally speaking, the SRA, via its relationship managers, has not so far seemed to require very much from UK offices of foreign parent firms in relation to financial information. The SRA's focus has been on debt, and if firms can satisfy them that their debt is non-existant or under tight control the SRA will not ask for more. However, once the SRA has had more time to get to grips with the issues and what they are looking to use the financial information for, it is possible that they may start to press firms for more detail, although the SRA's time and budgetary constraints may mitigate against this. The continuing lack of resource at the SRA is illustrated by recent figures indicating that only 17% of calls to the SRA's contact centre in the first quarter of 2013 were answered within the service level of 60 seconds!

Conclusion

The COLP regime has not yet had a long time to bed in, and many of the uncertainties surrounding the role and the new OFR system in general that have already been flagged up by commentators remain. There appears, in general terms, to be a changing mood in the profession towards OFR, with a recent Law Society survey indicating that 86% of senior representatives of law firms now agree that OFR places too great a burden on law firms (an increase on 77% who felt this way under the rules-based regime).

However, our view is that larger law firms are becoming increasingly comfortable with the new regime and are embracing its requirements so as to better manage their businesses. No doubt by this time most COLPs at these firms are well on their way to establishing the systems and processes that they need, and are starting to feel more at ease in their role, because their firms are generally providing them with the resource and support necessary to do the job properly.

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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