The issues surrounding the COLP role for firms and those individuals taking on the role continue to be of concern and interest. Furthermore, the SRA have now delayed the role coming into force until the start of next year. In this update we consider the up to date position.
A few months ago we wrote a briefing note on the role of Compliance Officer for Legal Practice click here to access it. Since that time debate and discussion has continued, as have developments at the SRA.
As a knock-on from the delays in processing practising certificate renewal applications, the COLP nomination process was deferred to run from 31 May 2012, to 31 July 2012. We understand that a number of larger firms experienced some difficulties with the SRA systems particularly where the firm comprised of more than one authorised entity.
The SRA is now considering the nominations. It has indicated that it will take a risk-based approach to the review on the basis of information that it has about the firm and the individual.
COLPs will be authorised and perform their role from 1 January 2013 (a delay from the original date of 31 October 2012).
Reporting obligations to the SRA
To recap, under Authorisation Rule 8.5 a COLP is required to report to the SRA failures of compliance that are "material" as soon as reasonably practicable. Non-material failures must be included in the firm's annual information report.
In terms of the logistics of reporting, the SRA has indicated that there will be no template or form for the COLP to report a material breach, so that it will be up to the COLP what form a report of a material breach takes, which might include an oral report being made by way of a telephone call. It is currently unknown whether reports will be made to a central portal or to an individual supervisor (or both).
It is clear that one of the key concerns for a COLP is what failures of compliance would be considered to be "material" and so reportable to the SRA as soon as reasonably practicable. Obviously, at either end of the scale (the dishonest partner stealing client money, or the one-off inadvertent failure to give a client a minor piece of information of no consequence) it will be obvious whether something is or is not reportable, but there will inevitably be grey areas in between. It may be particularly tricky to determine the point at which a series of minor errors becomes material as part of a pattern of non-compliance.
The SRA's Q&As indicate that, in deciding whether a matter is reportable, points to consider include:
- How prolonged the issue is
- How severe the problem is
- Whether clients' interests are at risk
- Whether there is a risk to client money
- Whether you can still say that you are being open with the SRA if you keep the information to yourself
The SRA ends with the view that if in doubt, the COLP should contact the SRA, and they will give a view as to whether or not they consider that the issue is one that needs to be reported immediately.
There is however a source of guidance outside of the SRA for firms. The Law Society has been piloting a compliance reference group service for the Top 100 firms, which will answer queries from COLPs where no answer has been received from the SRA or Law Society guidance. The group answering the queries comprises volunteers who are each going to be COLPs for their firm. The Law Society has indicated that it will stand behind the advice and support the individual or firm if it follows the advice and action is considered or taken against them by the SRA. Such a service is also provided by the Law Society's Risk and Compliance Service.
Apart from consulting the reference group, probably the best piece of advice for a COLP in difficulties is obvious but bears repeating: if something falls into a grey area but you decide that it is not reportable, then ensure that you make proper records of your decision. It will be much easier to demonstrate to the SRA that you gave the matter proper consideration even if they do not ultimately agree that you reached the correct view. As a consequence the SRA may be less likely to consider that there has been a failing on the part of the COLP that requires disciplinary action. As set out in our previous briefing, it would be prudent for the COLP to have in place an agreement with his or her firm that allows him or her to take legal advice on the position where it is not clear whether to report or they are at odds with the firm.
Staff obligations to report to the COLP, and whistleblowing policies
COLPs and their firms will be required to make certain that they have arrangements in place to ensure the COLP's principal duties of ensuring compliance, and recording and reporting any failures in compliance, are met.
The importance of such arrangements is paramount, particularly in larger firms, where the COLPs cannot be expected to know everything about the running and operation of the firm and its daily business. Because of this, our view is that the arrangements must include a mechanism whereby the eyes and ears of staff within the firm are employed to feed back information to the COLP.
One feature of the regime created by the Authorisation Rules and the Code of Conduct is that legally qualified staff have their own personal obligation to report to the SRA regardless of whether the COLP makes a report. Outcome 10.4 of the Code provides: " you report to the SRA promptly, serious misconduct by any person or firm authorised by the SRA, or any employee, manager or owner of any such firm (taking into account, where necessary, your duty of confidentiality to your client)". However, conversely there is no personal reporting obligation on individuals within firms to the COLP unless one is created by the Firm.
It is for this reason that Samantha Barrass (an SRA Executive Director) made mention in a speech delivered in April 2012 that some firms are changing their contracts of employment to place obligations on staff to report compliance breaches to the COLP, although she noted that she was not suggesting that all firms had to do this. But is it necessary to go as far as actually amending staff contracts?
Certainly some firms will choose to do so. Having your staff expressly obliged under contract to disclose any compliance issues to the COLP is clearly a concrete arrangement which it would be hard to criticise! However, there is an administrative burden to amending contracts, and there are always issues to consider around how employees will be treated as having consented to the contractual change.
We believe that, as an alternative, many firms will simply seek to bring in policies requiring staff to feed information to COLPs as appropriate. Provided these are adequately communicated to staff, and staff are told they are expected to comply with them, we believe that this should achieve the same objective as changes to contracts for all staff – particularly where staff have already agreed in their contracts to comply with their firm's policies (which we would expect to be the case with most firms).
Firms should also ensure that their whistle-blowing policies are wide enough to cover, and are compatible with, this reporting regime. This will re-assure employees that their concerns can be raised without retaliation, and at the same time will further act to bolster the firm's arrangements to ensure its COLP is told what he or she should be.
A departing COLP
Whilst firms have their attentions firmly fixed on the potential appointments of their COLP, they should also have an eye on what may happen if the COLP leaves. We discussed in our previous update various provisions that we recommend should be included in the COLP's written arrangements. Firms should also consider whether they want their COLP to have to serve notice to leave his or her position – particularly in light of the fact that a firm needs always to have a COLP, and without a notice period the COLP can arguably leave the role on no notice at all. Firms may also want to consider whether they appoint their COLP on a permanent basis, or for a set term.
Firms may also have to exercise caution when exiting their COLP in certain circumstances, particularly where the rationale for the exit is a disagreement over what has been reported to the SRA (perhaps with the COLP taking the view that a certain failure was "material" whilst management think it was clearly "non-material"). In such circumstances we can see COLPs potentially seeking to bring whistleblowing claims against their firms, with potential reputational disputes then being ventilated in public at an employment tribunal.
The best advice remains to put into place the necessary arrangements to ensure that the firm has the reporting lines and information gathering structures to enable the COLP to carry out their role effectively. Although the further limited guidance from the SRA has been helpful, there is no doubt that uncertainties remain, and it is unlikely that we will have any level of clarity in areas such as what is a material failure until the COLP regime has been in operation for a while. By way of comfort to future COLPs, the SRA continues to make clear that it will not be looking to make a scapegoat of any COLPs.
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.