The Solicitors Regulation Authority (SRA) has today laid out the detail of its proposed new approach to regulation, including first sight of an outcomes-based code of conduct that at 46 pages is around a sixth the size of the current code.
In ‘The Architecture of Change: the new SRA Handbook’, the SRA has issued for consultation all of the elements that it intends will make up the regulation of solicitors under outcomes-focused regulation from 6 October 2011, including the 10 core duties – four of which are new – which will be the guiding principles of all regulatory activity (see story).
The consultation also outlines the SRA’s approach to regulating alternative business structures (ABSs), which will not be to regulate the non-legal activities of an ABS (unless they are subject to specific conditions on the ABS’s licence). However, the SRA will still have the power to regulate the entity as a whole and to have regard to the manner in which the firm as a whole is being governed. As explained below, it also plans to impose the restrictive separate business rule on ABSs.
The code is split into the key outcomes solicitors will be expected to achieve, supported by non-mandatory “indicative behaviours”, which specify the types of behaviour that tend either to establish achievement or non-achievement of the outcomes. It has not yet published the accompanying non-binding guidance.
The SRA has yet to decide on the best way forward on conflicts, and that section of the code remains empty at the moment. It puts forward three models:
- Firms do not act where there is a conflict of interests;
- Firms only act where there is what is called a “non-substantive client conflict of interests” and subject to certain conditions;
- Firms are permitted to act where there is a client conflict of interests subject to certain conditions.
The SRA expresses a preference for the second model, which would allow solicitors to act where a conflict exists but the risk to clients’ interests is insignificant and can be managed.
Interestingly, the SRA proposes applying the provisions of the current separate business code to all firms, including ABSs, through specified outcomes. This means that firms will not be able to conduct certain non-reserved legal activities via a separate unregulated business, even though “this imposes a significant restriction on firms’ freedom in developing their business model”.
The SRA explains: “We believe that this is justified in the interests of consumer protection and the broader public interest. Based on our experience to date, where firms already seek to evade regulatory reach, there is a significant risk that in the absence of a separate business rule firms will seek to deliver all but reserved legal activities through a separate unregulated business. There will be a big incentive to do this because it will reduce costs, and avoid the possibility of regulatory scrutiny. It is unlikely that clients will understand the risks of dealing with an unregulated legal services business or indeed fully appreciate that it is unregulated. Thus, the risks to both clients and the reputation of the legal profession, associated with the delivery of legal services through an unregulated firm, are such that the SRA must seek to prevent such activity.”
The SRA has also proposed two significant relaxations of the accounts rules, which otherwise will remain detailed:
- The current prescriptive regime setting out who may sign on client account will be replaced by a requirement for firms to have appropriate systems and controls in place for withdrawals from client account.
- The detailed interest provisions have been replaced by a requirement for the payment of a fair and reasonable amount of interest, when it is fair and reasonable to do so. Firms will need to have a policy on interest, the terms of which must be drawn to the attention of the client.
The consultation on all these rules and the SRA’s approach closes on 27 August. A second version of the handbook will then be published in October, before the final version is published next spring.
See the consultation here.