SRA reaches out to firms posing financial stability risk

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7 September 2012


Financial trouble: SRA can help firms

All law firms judged to present a risk of financial instability are to be contacted by the Solicitors Regulation Authority (SRA) by the end of this month, Legal Futures can reveal.

However, officials in the SRA’s supervision department have urged firms facing financial difficulty to overcome their mistrust and contact them early rather than leaving it too late and risking intervention.

They insisted that a new policy of ‘constructive engagement’ based on rapidly building trust between firm and regulator has replaced the ‘case work’ approach in which formal letters were sent out giving short deadlines for action.

Feedback from firms the SRA has engaged with so far under the new regime has been universally positive, they claimed.

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Speaking to Legal Futures about the SRA’s ‘thematic’ work into financial stability – which involves proactively contacting firms by telephone or visiting in person after a risk assessment based on annual renewal information – two senior SRA supervision officials were at pains to stress that firms’ traditional fear of regulatory intervention was outdated.

The new strategy has been live since October 2011, after a pilot on supervision of low and medium-risk firms was judged to be successful. According to the SRA’s regulatory outcomes report covering the period to the end of June 2012, its firm-based supervision scheme “is actively engaging with in the region of 2,200 firms” out of the total of more than 11,000.

Thematic risk manager Helen Venn said that by the end of this month the SRA will have contacted all firms considered to present a financial stability risk, “flagging up the fact that if they have got potential issues, then they need to get in touch”.

She reported that after engaging with “a significant number” of firms, “I’m pretty sure we haven’t had any negative feedback about our approach of picking up the phone and even going to visit firms”.

Marc Baker, the SRA’s director of supervision, said that early engagement with the authority could assist firms that were determined to ‘trade through’ a financially precarious situation. “Actually we can do some very constructive things with them to help them [make] progress – particularly help negotiate with banks and that sort of thing.”

He added that an important part of the SRA’s approach was to operate a ‘know your firm’ policy whereby supervisors already have background knowledge on the firm before making contact. “We can put them into context; we understand the firm, we know what sort of clientele they’re dealing with and we know some of the key people – such as the compliance officers for legal practice and for finance and administration.”

Ms Venn admitted that firms continue to harbour suspicions about the SRA’s motives. “I think they are certainly reluctant; there has traditionally been a lack of trust between us as the regulator and the regulated community… I think the biggest fear for a firm in financial difficulty is… that there is going to be some sort of immediate intervention.”

While intervention was a “very necessary tool” in cases “where we need to think about protection of the clients”, her colleagues had found that “constructive engagement is incredibly positive at building quickly quite a lot of trust”. A number of firms had subsequently e-mailed the SRA to express satisfaction that their initial mistrust had been misplaced, she said, adding: “Simply picking up the phone has made a huge difference because rather than seeing a letter, which is pretty stark.” Some of the questions that firms have can be answered immediately and their fears allayed.

Showing firms case studies demonstrating how supervision officials approached engagement “is really the best way for firms to understand the work we do”, she said.

Mr Baker concluded: “The evidence is that more proactive up-front engagement with the regulator is much, much better than waiting for these things to become problematic and big issues, because actually there aren’t that many options when you get to that stage. Whereas if you contacted us early enough… we can be a lot more constructive in our engagement.”

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