Even though the Solicitors Regulation Authority (SRA) has put reform of Solicitors Professional Indemnity on the back burner for the time being, 2019 looks set to be a busy year for Compliance Officers for Legal Practice (COLPs) and all those responsible for risk and compliance. In this latest edition of Risk Focus, Jayne Willetts, leading regulatory expert with Jayne Willetts & Co Solicitors and director of Infolegal shares her Top 10 Regulatory Issues for 2019.
What does 2019 have in store for them? With so much to choose from and in no particular order, here are ten of the significant compliance issues facing law firms this year.
1. SRA transparency rules
Firms should by now have published price information on their websites but that is only the start. Keeping the information up to date will be a continual struggle. Changes in hourly rates, fee earners and scope of work all add to the daily challenge. Firms should not forget the requirement under these Rules to publish their complaints procedures as well as the new SRA digital badge which was made from 6 December 2018 and will be mandatory from a date yet to be fixed in Spring 2019. For some, these new Rules may prove to be a business opportunity but for others a shock to the system.
2. Solicitor employees at unregulated firms & freelance unregulated sole practitioners
Despite robust opposition from the Law Society, the Legal Services Board has agreed to the SRA’s proposals to permit solicitors to offer paid-for unreserved legal services through unregulated firms – for example an unregulated will-writing company could employ a solicitor to deliver services to the public.
A further change will allow self-employed solicitors to operate on a freelance basis provided that they do not hold client money or employ people. They would need adequate indemnity insurance whereas those working for unregulated businesses would not require insurance. Clients must be told in advance about insurance and that they would not have access to the Compensation Fund. The concern is that clients will find it difficult if not impossible to differentiate between the regulated and unregulated sector and that ultimately this can only damage the reputation of the profession. Firms will need to decide whether there is anything here that might be of benefit to their business model. Costs for running non-reserved legal services through an unregulated business will be lower but will require very careful signposting for clients who must be informed of the risks through websites and other information. Any move to take advantage of this relaxation should not be undertaken lightly. Some firms however may decide that deregulation is not for them.
3. Anti-money laundering (AML) procedures
With the SRA itself under pressure from the National Crime Agency to do more, it is demanding more from firms in terms of AML procedures. To demonstrate its vigilance, it has been visiting firms to audit their AML procedures. More of the same is anticipated in 2019. What was once acceptable to the regulator is no longer so. More firms are adopting centralised procedures to avoid fee earner omissions. Increased emphasis on staff training is key as well as ongoing monitoring of performance.
4. Regulatory defence costs
The eye-watering amount of legal costs (estimated at £7m after the Solicitors Disciplinary Tribunal hearing) needed by Leigh Day to defend itself against the SRA allegations has brought into sharp focus the benefit of insurance cover for regulatory defence costs. Extensions to existing professional indemnity cover and/or directors and officers management liability insurance are becoming more commonplace and a source of reassurance for many firms in case of SRA investigation.
5. Cyber security
This number one risk to all firms should not be underestimated. With the police unable to offer an effective deterrent and with ever more sophisticated techniques from fraudsters, self-help appears to be the only answer. Awareness training for staff not just for accounts staff is essential, backing up offline, culling social media activity and cyber liability insurance should all be considered.
6. Insurance distribution activities
Following an EU Insurance Directive, the SRA has issued amended rules for firms engaged in insurance distribution activities. Law firms involved in personal injury, conveyancing and probate are most likely to be affected. The focus is on strengthening client protections so firms need to update their existing procedures.
7. Revised principles
The Principles effective from April 2019 and applicable to individuals and firms are reduced in number from ten to six. Those removed are Principles 5 (proper standard of service), 7 (dealings with regulators), 8 (proper governance and risk principles), and 10 (protecting client money and assets). All are dealt with to a greater or lesser extent elsewhere in the Handbook, mostly in the Code and the Accounts Rules. Firms need to be aware that the SRA is already using the existing Principles very widely in framing allegations of misconduct and this is likely to increase when further significant detail is removed from the rules. Difficult ethical decisions should always be made with proper regard for the Principles – possibly with a written note to show how they were applied.
8. Two codes of conduct
There will be two Codes from April 2019 – one for the individual solicitor which focuses on behavioural standards, and one for the firm, which looks more at business controls. In both Codes, outcomes are to be replaced by standards and indicative behaviours are to be discarded. The Codes are more high level as the SRA strips detail to try and give firms greater flexibility for service delivery. The good news is that there are no changes of substance but COLPs should start familiarising themselves with the content of the new Codes. With greater flexibility brings greater uncertainty so firms would do well not to dispose of the earlier versions of the Handbook in case of any differences of opinion with the SRA.
9. Simplified accounts rules
Again, there will be a removal of detail to allow for greater flexibility but the emphasis remains on keeping client money safe and separate from office money. These rules do not require firms to make any significant changes to their procedures but Compliance Officers For Finance and Administration (COFAs) need to digest where the discretion lies. Prescriptive timetables, for example, to make certain transfers within 14 days, are replaced by requirements to do so within a reasonable time. Third party managed accounts are specifically covered by Rule 11. Finally, you should note that the rule on using client account as a banking facility is to be amended in the new Rules to “regulated services” as opposed to “an underlying legal transaction”.
And last but not least Brexit. The Government has published a technical notice on the implications of a “no deal” EU exit as it affects legal services. The SRA has supplemented this with its own guidance. A “no deal” will particularly impact upon Registered European Lawyers (REL), law firms that employ RELs and anyone providing legal services across the UK/EU border. The Law Society has also published more detailed guidance including the effects of a no deal on family law, data protection and civil and commercial co-operation. Firms will need to keep a close eye on developments as the EU negotiations grind inexorably to 29 March 2019.
For further information please contact our Legal Practice Group team:
James Frost on +44 (0)121 626 7841
Matthew Baker on +44 (0)117 968 9628
Tony Brown on +44 (0)161 242 5329
Mike Mortlock on +44 (0)20 7309 8352