How to approach outcomes focused regulation and the new Code of Conduct

1. How to approach outcomes focused regulation and the new Code of Conduct Peter Scott Consulting www.peterscottconsult.co.uk

2. Disclaimer This presentation is for general guidance only. It should not be relied upon or acted on in any way whatsoever and is provided without responsibility on the part of the presenter. You should consult a solicitor or other professional adviser before taking any action in relation to anything contained or referred to herein.

3. Today’s session • To provide a roadmap to help you find your way around outcomes focused regulation and the code of conduct, and what it will mean for you in practice • What COLPs and COFAs will need to do in order to effectively perform their roles • How to implement OFR by systemising your compliance Where to find the new regulations?www.sra.org.uk

4. 1. What OFR will mean in practice • Everyone who works in a law firm is now subject to regulation by the SRA • Managing risk and compliance needs to be seen as ‘everyone’s job’ – and everyone has a role to play • Compliance needs to be ‘lived’ on a daily basis by everyone and there should be no exceptions to following procedures. Otherwise everyone is at risk

5. But it will not be enough just to be compliant … “If you cannot demonstrate compliance we may take regulatory action” SRA – “Outcomes Focused Regulation at a glance” – SRA website

6. Why is it so important that all the new regulations are fully complied with? Consider the impact on a firm and its people of: - Disciplinary action - Bad publicity - Lost clients - Complaints and claims - Increased professional indemnity premiums

7. SRA’s enforcement approach An enlarged set of regulatory tools : • Risk based supervision – desk and firm based • Relationship managers • monitoring visits • regulatory settlement agreements • increased powers to fine • Interventions

8. The Handbook Contains all the requirements to regulate solicitors, partnerships, LLPs, limited companies and ABS and their staff. It includes: • The Principles • Code of Conduct • Authorisation Rules • Accounts Rules • Specialist Services Rules • Indemnity Insurance Rules/Compensation Fund Rules • Disciplinary Procedure Rules • All training requirements

9. The Principles • Overarch the Handbook • Based on the previous core duties (rule 1) in theCode of Conduct 2007 • Mandatory – deal with fundamental behaviour. • Stand alone

10. The Principles Mandatory • Six will be familiar to you: • integrity; • independence; • best interests of clients; • proper standard of service; • uphold rule of law and proper administration of justice; and • maintenance of the trust the public places in you and the provision of legal services. • Four are new …

11. The Principles continued ….. Comply with your legal and regulatory obligations and deal with your regulators and ombudsmen in an open, timely and co-operative manner; Run your business or carry out your role in the business effectively and in accordance with proper governance and sound financial and risk management principles; Run your business or carry out your role in the business in a way that encourages equality of opportunity and respect for diversity; Protect client money and assets.

12. The Code of Conduct • Requirements of the Code are expressed as outcomes, which are mandatory • Outcomes describe what you are expected to do in order to comply with the relevant Principles • NB - the Outcomes set out in the Code are not an exhaustive list of the application of all the Principles • Supplemented by Indicative behaviours, which are examples of behaviour in respect of achieving outcomes and are non mandatory

13. The structure of the Code of Conduct Divided into four sections: • You and your client • You and your business • You and your regulator • You and others

14. You and your client Has 6 chapters setting out Outcomes in relation to: • Chapter 1 Client Care • Chapter 2 Equality and diversity • Chapter 3 Conflicts of interest • Chapter 4 Confidentiality and disclosure • Chapter 5 Your client and the court • Chapter 6 Your client and introductions to third parties

15. Chapter 1- client care • Principles to be achieved – acting in best interests of clients and providing a proper standard of service • Indicative behaviours are grouped into 4 areas: - Dealing with the client’s matter - Fee arrangements - Complaints handling - Accepting instructions

16. Client care outcomes include … • you treat your clients fairly • you provide services to your clients in a manner which protects their interests in their matter, subject to the proper administration of justice; • clients are in a position to make informed decisions about the services they need, how their matter will be handled and the options available to them • the service you provide to clients is competent, delivered in a timely manner and takes account of your clients needs and circumstances; • you have the resources, skills and procedures to carry out your clients’ instructions; • clients receive the best possible information both at the outset and when appropriate as their matter progresses about the likely overall cost of their matter;

17. Client care indicative behaviours include … • agreeing an appropriate level of service with your client, for example the type and frequency of communications; • explaining your responsibilities and those of the client; • ensuring the client is told, in writing, the name and status of the person dealing with the matter and the name of the person responsible for its overall supervision; • explaining any arrangements, such as fee sharing arrangements or referral arrangements, which are relevant to the client’s instructions; • explaining any limitations or conditions on what you can do for the client, for example, because of the way the client’s matter is funded; • in taking instructions and during the retainer, having proper regard to your client’s mental capacity or other vulnerability, such as incapacity or duress;

18. And some more indicative behaviours … • discussing whether the potential outcomes of the client’s case are likely to justify the expense or risk involved including any risk of having to pay someone else’s legal fees; • clearly explaining your fees and if and when they are likely to change; • discussing how the client will pay…;

19. Complaints • The best way to deal with complaints is to prevent them happening in the first place • If you sense even a hint that a complaint may possibly be made, then immediately speak to the appropriate person you work with so the matter can be dealt with.

20. A few questions for you … • Do your client care procedures and letters of engagement need review? • In particular, do you need to reconsider complaints handling? • How will you demonstrate that you are treating clients fairly? • Is your costs information clear?

21. Chapter 2 – equality and diversity • Principle - Equality of opportunity and respect for diversity • Unlawful discrimination and victimisation are not acceptable Outcomes • Your Equality and Diversity Policy – do you know what it says? • NB – the Indicative Behaviours

22. More questions for you … • Do you need to review your E and D policy? • Does it contain procedures which will enable you to demonstrate compliance with the Outcomes? • What would be appropriate training for your people?

23. Chapter 3 – conflict of interests • Deals with - own interest conflicts – you must never act - client interest conflicts – can only act in 2 limited circumstances • Outcomes, include - O (3.1) you must have effective systems and controls in place to enable you to identify and assess potential conflicts of interests. - O (3.6) and O (3.7) – exceptions where you may act when there is a client conflict

24. conflict of interests Client conflict - “…any situation where you owe separate duties to act in the best interests of two or more clients in relation to the same or related matters, and those duties conflict, of there is a significant risk that those duties conflict.” Own interest conflict - “…any situation where your duty to act in the best interests of any client in relation to a matter conflicts, or there is a significant risk that it may conflict, with your own interests in relation to that or a related matter”

25. Exceptions where you can act where there is conflict • Outcome O(3.6) - The clients have a substantially common interest in relation to a matter; or • Outcome O(3.7) - The clients are competing for the same objective. • Conveyancing conflicts - Buyer / Seller? - Lender / Borrower? “The difference with the new code is that the decision whether or not a conflict exists will be a matter for your professional judgment – the decision rests with you”- SRA Professional Ethics Team

26. More questions for you … • Do your conflict checking procedures need review? • “Own interest conflicts” – do you have a register of interests? • Do you have a policy for conveyancing conflict situations? • Do you have a ‘conflicts committee’ to consider conflicts? • Staff training

27. Chapter 4 - confidentiality • Principle – acting in the best interests of clients • Outcomes require that confidential information is protected • Do you have effective systems and controls in place to preserve client confidentiality? • Outcomes also require that: • you must disclose to your client information of which you are aware that is material to their case • if your duty of confidentiality to one client comes into conflict with your duty of disclosure to another the duty of confidentiality takes precedence

28. Chapter 5 – your client and the Court • Principle - Upholding the rule of law and administration of justice • Outcomes must be demonstrated if you conduct litigation or advocacy • Responsibilities to court • Versus duties to clients – note O (5.5) • Treatment of witnesses and witness evidence

29. Chapter 6 – Introductions to third parties Principles - Independence and Integrity and acting in the best interests of clients Applies to all introductions including to other lawyers How can you demonstrate compliance with these outcomes?

30. You and your business • Chapter 7 Management of your business • Chapter 8 Publicity • Chapter 9 Fee sharing and referrals

31. Chapter 7 – management of your business • Must have effective systems and controls in place to achieve compliance with all the regulations in the Handbook • ensuring staff are trained to maintain an appropriate level of competence, • Supervising clients’ matters and checking of quality of work. • Outsourcing • links to COLP’s and COFA’s responsibilities

32. Chapter 8 - publicity • Principle – to maintain the trust the public places in you • Accurate publicity • Clarity on charges • Prohibition on unsolicited approaches • Clear information about your regulatory status • Risk areas in relation to publicity?

33. Chapter 9 - Fee sharing and referral arrangements • Outcomes emphasise the importance of the core duties – independence of professional judgement, integrity and clients’ best interests etc. • Requirement to inform clients of any financial or other interest the introducer has in referring the client now extends to referrals between solicitors. • Referral fees – now under review by government.

34. Chapter 9 - Outcomes • Your independence and your professional judgment are not prejudiced by virtue of any arrangements with another person; • Your clients’ interests are protected regardless of the interests of an introducer or fee sharer or your interests in receiving referrals; • Clients are in a position to make informed decisions about how to pursue their matter; • Clients are informed of any financial or other interest which an introducer has in referring the client to you; • Clients are informed of any fee sharing arrangement that is relevant to the matter; • You do not make payments to an introducer in respect of clients who are the subject of criminal proceedings or who have the benefit of public funding. • Where you enter into a financial arrangement with an introducer you ensure the arrangement is in writing

35. More questions … • Do you have a record of all referral arrangements which happen in the firm? • If payment made for referrals - is agreement in writing? • How do you monitor compliance with the Outcomes? • How do you demonstrate achievement of the Outcomes relating to information which the client must have?

36. Chapter 10 – you and your regulator Principle - Dealing with regulator and ombudsman in open, timely and co-operative manner Notification requirements Production of documents and information Dealing with SRA’s and ombudsman’s enquiries Key Indicative Behaviours include actively monitoring achievement of the outcomes; The firm will only be able to do this if everyone in the firm immediately reports compliance problems to the appropriate person

37. You and your regulator “You notify the SRA promptly of any material changes to relevant information about you including serious financial difficulty, …serious failure to comply with or achieve the principles, rules, outcomes and other requirements of the Handbook.”

38. Chapter 10 - key Indicative Behaviours Compliance with outcomes demonstrated by, inter alia: • actively monitoring achievement of the outcomes; • actively monitoring you financial stability; • notifying SRA promptly of indicators of serious financial difficulty such as inability to pay indemnity insurance, rent or salaries and breach of bank covenants; • having a whistle-blowing policy;

39. You and others Chapter 11 – relations with third parties Principles - Integrity and trust Not taking unfair advantage Undertakings - connected with Chapter 7 Outcomes

40. Chapter 12 – separate businesses • Principles - Best interests of clients and Integrity • Who is bound? • Prohibited separate business • Permitted separate business activities • What customers must expect from you

41. 2. COLPs and COFAs Compliance officer for legal practice Compliance officer for finance and administration

42. Challenges for the COLP and COFA • Understanding the COLP’s and COFA’s roles and responsibilities • The planning COLPs and COFAs need to do to effectively fulfil their roles • How COLPs and COFAs can secure ‘buy-in’ and ‘accountability’ from everyone in a firm • Identification and assessment by COLPs and COFAs of a firm’s compliance risks - in order to be able to DEMONSTRATE to the SRA that a firm is compliant

43. Role of compliance officers • A senior person • A manager or an employee • COLP must be a lawyer or REL • COFA – no required qualifications

44. Time scales for approvals • 31 May 2012 – nomination forms available on SRA website • 31 July 2012 – deadline for nominations • 31 October 2012 – approvals process to be completed NB – declarations to be given (see handout)

45. The scope of the COLP’s role under Rule 8 of the SRA Authorisation Rules is extensive and very wide 8.5.(c) SRA Authorisation Rules • Take all reasonable steps to: (A) ensure compliance with the terms and conditions of the authorised body’s authorisation except any obligations under the SRA Accounts Rules (B) ensure compliance with any statutory obligations of the body, its managers, employees or interest holders in relation to the body’s carrying on of authorised activities (C) record any failure so to comply and make such records available to the SRA on request;

46. 8.5.(c) SRA Authorisation Rules (continued) (ii) As soon as reasonably practicable, report to the SRA any failure so to comply provided that: (A) in the case of non-material failures, these shall be taken to have been reported as soon as reasonably practicable if they are reported to the SRA together with such other information as the SRA may require in accordance with Rule 8.7(a): and (B) a failure may be material either taken on its own or as part of a pattern of failures so to comply.

47. What is a ‘material’ failure to comply? Guidance Notes to Rule 8 provide: (x) In considering whether a failure is “material” and therefore reportable, the COLP or COFA, as appropriate, will need to take account of various factors, such as: • the detriment, or risk of detriment, to clients • the extent of any risk of loss of confidence in the firm or in the provision of legal services • the scale of the issue • the overall impact on the firm, its clients and third parties. In addition, the COLP/COFA will need to keep appropriate records of failures in compliance to: • monitor overall compliance with obligations • assess the effectiveness of the firm’s systems • be able to comply with the duty to report breaches which are material because they form a pattern.

48. The COFA’s role under Rule 8.5(e) of the SRA Authorisation Rules is to • take all reasonable steps to (A) ensure that the body and its employees and managers comply with any obligations imposed upon them under the SRA Accounts Rules; and (B ) record any failure so to comply and make such records available to the SRA on request; and (ii) as soon as reasonably practicable, report to the SRA any failure so to comply, provided that: (A) in the case of non-material failures, these shall be taken to have been reported as soon as reasonably practicable if they are reported to the SRA together with such other information as the SRA may require in accordance with Rule 8.7(a); and (B) a failure may be material either taken on its own or as part of a pattern of failures so to comply.

49. Additional responsibilities for COFA’s Ensure that they have access to all accounting records Carry out regular checks on the accounting systems Carry out file and ledger reviews ensure that the reporting accountant has prompt access to all the information needed to complete the accountants report take steps to ensure that breaches of the SRA Account Rules are remedied promptly, and report any breach to the SRA as required Monitor, review and manage risks to compliance with the SRA account rules

50. Why will the COLP/COFA need to keep records? • Allow for inspection by the SRA • Monitor overall compliance with obligations • Assess the effectiveness of the firm’s systems • Be able to comply with the duty to report breaches They will only be able to effectively carry out their roles if everyone in the firm works in the way they are required to do