Risk and compliance: challenge of change

It is now 45 years since I was admitted as a solicitor. My admission certificate, signed by Lord Denning, sits on my desk at the SRA. In that time the legal world has undergone transformational change. Not all of this change is recent and not all the product of the Legal Services Act. We too readily forget the major changes in the legal services market throughout the 1970s, 1980s and 1990s, driven largely by innovative solicitors and their firms.

The 2007 act, and the liberalisation of the legal services market it has enabled, have accelerated the pace of change. In my view, and the view of the SRA, the current rate of change will at the least continue, and almost certainly increase, for the foreseeable future. So what does this mean for the SRA and our approach to regulation?

The starting point for answering that question is to be absolutely clear about why we regulate solicitors and legal service providers and what we are seeking to deliver. We regulate for two reasons:

• to protect consumers – because the nature of legal services means that many consumers can be vulnerable when purchasing them; and
• to ensure that solicitors and firms properly fulfil their obligations to the court and to the proper administration of justice.

That takes me back to my opening comments – in 45 years of significant change in the legal services market, the core purpose of regulation has not changed. Indeed, principles that encapsulate that purpose are central to the regulatory framework, established by the 2007 act, in the Professional Principles:

• independence and integrity;
• proper standards of work;
• acting in the best interests of clients;
• complying with the duty to the court to act independently in the interests of justice; and
• keeping client affairs confidential.

For me these principles capture the essence of what it means to be a solicitor and would be as familiar to a solicitor in 1969 (or even Lord Denning) as they would be today or, in my view, will be 45 years from now. This clear understanding of the core purpose of our regulation is critical to the SRA in meeting two sets of key challenges that we face.

First, the LSA 2007 contains a range of regulatory objectives to which we must have regard when making decisions about how we regulate. These objectives can face us with opposing choices. For example, we could mandate very high levels of protection for consumers, but this might result in such a high-cost system of regulation that competition or access to services were reduced.

Similarly, for example, we could reduce entry standards to increase competition but with the result that the quality of services delivered was unacceptably poor: to the detriment of consumers or the proper administration of justice. So, in deciding on our regulatory requirements, we need to make a judgement about where the correct balance lies.

The second challenge comes from the innovation and change we have seen in the legal services market. Much of this has been enabled by the 2007 act, but much has taken place regardless of the act, driven by other factors such as a greater use of new technology. Indeed, much is taking place outside the scope of regulation. These changes have broadened the range of businesses in which solicitors work.

For decades, solicitors worked almost exclusively in solicitor-owned law firms or ‘in-house’, delivering services to their employer. That is no longer the case. Individual solicitors work, and will increasingly work, in a range of entities: some regulated by the SRA, some regulated by other regulators and some not regulated as entities at all. Even in what are considered to be ‘traditional’ law firms, there is a greater reliance on technology and people other than solicitors to deliver services.

Our regulation has to remain relevant to this market. We cannot simply be passive, or react to changes, we must actively examine our approach to regulation and the rules we set. We must ensure that we are not, unnecessarily, getting in the way of individuals and businesses that have found new ways to meet their clients’ needs while – and this is of fundamental importance – still meeting those critical professional principles to which I have already referred.

Regulation by the SRA can provide a pillar of certainty among all of this – clarity and leadership about what it is to be a solicitor and what it is to be a regulated person.  

Within this increasingly complex environment, the SRA must focus on its core regulatory purpose and on the core professional principles. Outside those, the choices we make about how we regulate and the requirements we place on individuals and firms are finely balanced, and will tend to change over time as we seek to continue to deliver our regulatory purpose in the public interest.

Over the past four years we have made major changes to the way we regulate, but there is more to do if the SRA is to be an effective regulator with an approach that provides the minimum level of intervention with individuals and firms necessary to deliver our core purpose. As a part of this process the SRA board and executive have taken stock of our current regulatory requirements and approach.

There is much that is working well, but there are some important changes we need to make. I want to set out some of the areas that we are looking at and about which we will engage with stakeholders over the coming period.

There is a common thread to many of them, and that is we need to focus strongly on the core professional principles but, in our regulatory requirements, ensure that they are necessary and proportionate interventions to ensure those principles are delivered. Where current requirements are not necessary or proportionate, our aim will be to amend them, or remove them altogether.  

First, we believe we need to make it simpler for different types of business to be regulated by the SRA and simpler for solicitors to work within a range of different types of business – some regulated by the SRA but others not. We have already announced work that we are taking forward to enable multi-disciplinary practices to enter the market more easily.

We also need to look at how we can simplify the regulation of in-house solicitors and of SRA-regulated firms, and enable traditionally structured and owned law firms to provide a wider range of services. This includes reviewing the restrictive ‘separate business’ rule, possibly by replacing it with arrangements that more proportionately protect consumers while enabling firms to develop their businesses without unnecessary restrictions.

Second, we have done much over the past four years to improve our working relationship with larger commercial firms but we have not made the same progress with many individual solicitors and smaller firms. I speak to many solicitors at meetings and events throughout the country and I read the Gazette and the comments from its readers. It is clear that, at best, many small firms believe that the SRA is indifferent to them.

Some think that the SRA has a positive policy to drive small firms from the market. None of this is true but it would be arrogant to ignore these concerns. There is clearly, at least, a very strong perception that this is the SRA’s approach and we need to take that seriously and consider what it means for the way we are regulating and the way we engage with small firms.

Our aim is to have a system of regulation and approach which facilitates innovation in service delivery and enables as diverse a range of firms as possible, including small firms and sole practitioners. Importantly, we need to engage more effectively with small firms and make sure that our requirements are proportionate for those firms and that we do not set, as minimum standards, requirements that are unnecessarily onerous for them.

At present I do not believe that we have got the essential balance right and therefore we will be consulting on a package of measures designed to reduce unnecessary burdens for small firms and improve the ways in which we engage with them.  

Our consideration of our approach to small firms has led to a wider examination of the requirements we place on all firms. A number of the options we considered to reduce the burden on small firms led us to question whether similar changes might be applied across the board to all firms.

This has led to the third area on which we will be engaging and consulting: whether our general requirements are proportionate and targeted or whether there are areas where they are unnecessarily onerous.

Let me use our arrangements to ensure client protection as an example. We have recently consulted on changes to our professional indemnity requirements which would require insurers to have a minimum financial strength rating. We have had a good response to that consultation and the board will reach its decision shortly.

However, there is a more fundamental issue which we must consider and that is whether the requirements for minimum levels of PII cover are too high, with the result that either premiums are higher than they need to be for a large number of firms or that insurance is simply unobtainable. This comes back to the issue I have already referred to about the requirement on the SRA to make balanced judgements in the light of all of the regulatory objectives.

Very high levels of mandatory cover might be considered positive for consumers, but is that the case if competition or access to legal services are harmed because the cost of such a system is too high or because insurance is unavailable to many firms? At its simplest, if you are a sole practitioner with a modest turnover undertaking relatively low-risk and low-value transactions, do your clients require the protection of PII cover of £2m, or £3m (especially given that the cost of the services they are purchasing will be higher as a result)?

Similarly, if a client is a major corporate institution, a sophisticated purchaser of legal services, does it require regulatory protection by the SRA regarding indemnity insurance? We will be making proposals not only on PII but also on ensuring that the compensation fund is properly focused on protecting ordinary consumers.

This is one example of what we shall be looking at over the coming months with the aim of ensuring that what we are requiring is proportionate and necessary; that is, necessary to achieve our core regulatory purpose and appropriate given the broader objectives to which we must have regard. I believe that we will be in a position to engage and consult on a range of options on this, and similar issues, over the next few months.

In many ways I believe the debate about the regulation of solicitors and firms has become unnecessarily complex. There has been too much focus on regulatory theory, and insufficient clarity about the simple core purpose of our regulation. I hope I have begun to address that in the way I have set out matters here.

Regulation remains necessary for two purposes: to protect consumers and to support the rule of law. I hope there is a broad consensus around that, just as I hope that there is a broad consensus around our primary focus on ensuring that the professional principles are met. How we set about that task, the requirements we place on individuals and firms, and how we supervise those requirements is a matter of judgement, and in making that judgement we have a wide range of factors to consider.

On balance the SRA’s view is that our current requirements and approach still err too much on the side of being overly prescriptive and unnecessarily burdensome. They can still get in the way of individuals and firms finding new ways to meet clients’ needs or providing services to a new range of consumers. They can still be too onerous and one-dimensional for small firms and simply unnecessary for firms with only corporate clients.

We have begun to address this through a range of initiatives we have already announced, and we intend to bring forward more far-reaching proposals for change both over the next few months and through to 2016.

In May we will publish a document which brings together all of these proposed changes so that we establish a clear basis for engagement with the whole of the profession and other stakeholders. I hope that many of you will engage with those proposals and, importantly, contribute your own ideas to the debate.

Our aim is to make sure we have a system of regulation that delivers against the core professional principles in a way that enables good, committed lawyers and firms to better meet the diverse legal needs of an increasing number of consumers. I look forward to a robust debate on how we can best achieve that aim.