Thomas Eggar's Eve McBrinn and Katie Papworth on the overhaul of the SRA's regulatory powers

Following on from the Solicitors' Code of Conduct 2007, the implementation of the Legal Services Act 2007 and the development of the Legal Services Board at the end of 2009, the Solicitors Regulation Authority (SRA) has recently published further plans for regulatory change.

These plans are characterised by a new consumer-focused approach and, specifically, the proposed outcomes-focused regulation embodied in the draft code of conduct coming into force on 6 October 2011.

Outcomes-focused regulation

In June, the SRA published a consultation paper entitled Outcomes-Focused Regulation: Transforming the SRA's Regulation of Legal Services. The proposed changes to the regulation of solicitors, and in particular the SRA's regulatory powers, will be achieved through the use of a completely new code of conduct with its focus on outcome as opposed to conduct. It is intended that by October next year, the SRA will:

• Put in place a new outcomes-focused code of conduct as part of a new handbook of all regulatory requirements;

• Implement a risk-based and outcomes-focused approach to regulation; and

• Have begun licensing alternative business structures.

A draft of The Architecture of Change: the new SRA Handbook is online and consultation is under way, with final publication expected in April 2010. In the handbook, the SRA has set out the 10 core duties that will form the backbone of all regulatory activity. These broadly repeat the six core duties in Rule 1 of the Solicitors' Code of Conduct 2007 and add four more, which require solicitors to:

• Comply with legal and regulatory obligations and co-operate with regulators. (There is some concern that this may undermine a solicitor's own professional judgement on matters – see Connolly v Law Society, which held that "the honest and genuine decision of a solicitor on a question of professional judgement does not give rise to a disciplinary offence".)

• Run the business effectively with proper governance and sound financial and risk management principles.

• Promote diversity (going beyond the prohibition of discrimination at Rule 6 of the Code) in accordance with the objectives set out at section 1 of the Legal Services Act, which encourages an "independent, strong, diverse and effective legal profession".

• Protect client money and assets.

The SRA's focus on outcome will be achieved by shifting the supervisory emphasis of its role towards the assessing of a firm's risk management systems, in particular whether they are achieving the outcomes prescribed by the handbook, as opposed to a detailed consideration of a firm's procedures.

New code of conduct

The handbook also includes the outcomes-focused new draft code of conduct, which is far more compact than previously. The draft code sets out the key outcomes solicitors will be expected to achieve, supported by non-mandatory 'indicative behaviours', which specify the types of behaviour that are likely to establish achievement of the outcomes. The purpose of the new code is that solicitors will be judged by results as opposed to compliance with the rules.

Currently, the new code does not read comprehensively as a set of rules and is likely to leave some scope for interpretation by practitioners and by those enforcing it.

Conflicts

There has been much debate for several years now calling for a review of the rules on conflict. Despite a round of consultation, the SRA determined earlier in the year to halt the proposed relaxation to the conflict rules. The SRA remains undecided, although three models for consultation have been put forward:

1. Firms do not act where there is a conflict of interest;

2. Firms only act where there is what is called a 'non-substantive client conflict of interest' and subject to certain conditions; or

3. Firms are permitted to act where there is a client conflict of interest subject to certain conditions.

The second proposal would allow solicitors to act where a conflict exists but the risk to the client's interests is insignificant and can be managed. Further review is required on this aspect.

Solicitors' Accounts Rules

The Solicitors' Accounts Rules 1991 will not change, with the exception of two significant relaxations:

• 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 only from client account; and

• 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.

Legal Services Ombudsman

One of the most significant aspects of the SRA's new governance regime, so far as practitioners are concerned, is the introduction of the Legal Services Ombudsman (LSO). The complaint-handling system will enable individual consumers to utilise a scheme that is intended to ensure a swift and cost-free resolution of complaints. The only entry requirement is that the consumer must have already exhausted the solicitor's internal complaints handling procedure.

Alongside the focus on outcome, the introduction of the LSO underlines the SRA's objective to promote the interests of the public and consumers. There is expected to be much advertisement of the LSO's function (ultimately at the expense of practitioners) in the hope of bringing the regulation of solicitors into the public conscience and promoting a user-friendly procedure for making complaints about legal services.

It is envisaged that the LSO will work along similar lines to the financial ombudsman, with the power to order the firm or solicitor in question to issue an apology, take steps to rectify the complaint and/or pay compensation. The LSO currently has jurisdiction to award up to £30,000; however, it is proposed that this will be increased to £100,000 over time. There is no right of appeal.

The costs of dealing with a complaint will be of particular concern to both practitioners and their insurers. When a complaint is lodged, the firm in question will prima facie be liable to pay the LSO's administrative costs of dealing with that complaint, unless it can demonstrate that it dealt with the complaint adequately through its own internal procedures and was not guilty of the allegations made. Accordingly, even if the LSO finds a firm innocent of any wrongdoing, that firm will still be liable for the LSO's costs if its internal complaints handling procedure is not considered adequate.

Burden of change

The new code of conduct will require some adjustment. Although the emphasis is on simplicity, the rules will require guidance to help firms interpret the required regulatory approach. The implementation of the new regulation will result in firms that are compliant and those that are not. It is not clear, however, how this decision will be made and firms will be expected to provide a great deal of information to allow the SRA to form risk profiles for them.

Accordingly, the level of supervision by the SRA will be dependant on the risk-based analysis, with larger and higher-risk firms having specialist input from SRA staff. The range of enforcement also varies widely. In addition, there has been discussion about the potential need to re-authorise solicitors during the course of their career and the requirement for a greater degree of pre-qualification training on financial management, risk and ethics.

In the short term, firms need to ensure that they are compliant with the current Code of Conduct and seriously consider the implications that the changes will have on their practice. Law firms will be required to invest more money on risk, complaints handling and insurance premiums. Meanwhile, the overhauling of the SRA's regulatory powers is likely to result in an increase to the practising certificate fee. This may have to be passed to the consumer.

The SRA is keen to emphasise that the reforms provide greater flexibility to firms as to how they operate. Ultimately, the shift to the outcomes-focused approach presents an increasing burden of regulation, costs and potential enforcement action on firms, in an already challenging business environment.

Eve McBrinn is a partner and Katie Papworth a solicitor in the insurance team at Thomas Eggar.