Allison Wooddisse, head of Legal Futures Associate LexisPSL Practice Compliance, looks at the whether and how law firms should indemnify COLPs against adverse consequences from taking on the role
The deadline for nominating your compliance officer for legal practice (COLP) to the Solicitors Regulation Authority (SRA) is 31 March 2012. In many firms, this has sparked a game of pass the parcel. In fact, it’s a game with two parcels: the COLP role itself and ultimate liability if things go wrong.
The lucky recipients of the first parcel will be largely dictated by the SRA’s qualifying requirements. Here we unwrap and examine the second parcel.
Where does the buck rest?
The COLP must take “all reasonable steps” to ensure the firm, its managers and employees comply with:
- the SRA Handbook (apart from the Accounts Rules);
- any terms and conditions of the firm’s authorisation; and
- other relevant legislation, such as anti-money laundering, bribery, data protection.
The phrase “all reasonable steps”, combined with the rules relating to COLP disqualification and withdrawal of approval, gives a strong signal that the SRA doesn’t intend to impose strict liability on the COLP for all compliance failures within the firm.
The authorisation rules make it clear that the firm and its other managers cannot abdicate responsibility for compliance simply by appointing a COLP. The SRA hammers home this message in guidance notes to the rules: the firm and its managers are not absolved from any of their own obligations and remain fully responsible for compliance.
To indemnify or not to indemnify?
Despite the SRA’s “no strict liability” message, many COLPs are feeling somewhat jumpy and asking for an indemnity from their firm. This is not as straightforward as it may first appear.
Who should give the indemnity?
Whoever gives the indemnity should have the financial means to honour it. An indemnity given by a limited company or LLP will be worthless in the event of insolvency.
What situations should the indemnity cover?
The SRA has power to withdraw approval or disqualify a COLP. The SRA also has wide-ranging, generic enforcement powers against individual solicitors; it can issue fines or rebukes, make costs orders, or refer a solicitor to the Solicitors Disciplinary Tribunal. It’s too early to know whether the SRA will use its generic enforcement powers against in
dividual solicitors for something they did or didn’t do in their capacity as COLP.
Taking this into account, should a COLP indemnity:
- be limited to disqualification and withdrawal of approval by the SRA?; or
- cover the SRA’s wide-ranging, generic enforcement powers (including disciplinary sanctions that may be available to other quasi-regulators such as the tribunal or Legal Ombudsman)?
How should the indemnity be quantified?
It’s important to strike a balance between protecting the COLP against any adverse consequences of their appointment and protecting the firm against open-ended or ill-defined liabilities.
A simple agreement to indemnify a COLP against any losses could have unforeseen consequences; for example, disqualification by the SRA could damage the COLP’s employment and earning prospects over a long period. Most firms wouldn’t expect to be liable for an open-ended loss of earnings claim.
A sensible balance may be to limit the indemnity to things that can be readily identified and quantified, such as financial penalties, legal or other costs and expenses.
What should be excluded?
Taking all this into account, firms may wish to consider excluding:
- any consequential losses, including loss of earnings or opportunity;
- loss of reputation; and
- any financial penalties, costs, expenses or losses caused by their COLP’s fraud or wilful neglect.
Insuring the risk
COLP insurance could be an attractive proposition, either to underwrite or stand in place of an indemnity. At least two professional indemnity insurance brokers are known to be interested in developing a COLP product.
You should look closely at the policy wording. Some element of wrongdoing is generally required on the part of the COLP before the SRA will disqualify or withdraw approval. If the policy excludes losses caused by the COLP’s misconduct, much of its benefit could be negated.
Where does this leave you?
COLP indemnity and insurance has become a hot topic in the lead-up to the SRA nomination deadline.
Bearing in mind the SRA’s clear message that COLPs are not solely and strictly liable, this may turn out to be something of a red herring. It’s not common practice for nominated officers to be indemnified or insured against breaches of the anti-money laundering regime. Firms may ask why their COLP should be treated any differently.
Firms that do decide to go down the indemnity route should draft the deed of indemnity with care to avoid exposing the firm to open-ended or ill-defined liabilities. If COLP insurance does become available, do not assume it’s a complete solution; study the exclusion clauses carefully.
Ultimately, if COLPs take their new responsibilities seriously and are supported by the firm, the issues discussed here should not arise. As always, prevention is better than cure.