Outcomes, or own goals?

Should your practice, as well as you as a solicitor, come under the direct regulation of the Law Society of Scotland? Should it, like you, be subject to the disciplinary regime? Should it also pay an annual fee to the Society, with you paying a lower practising certificate fee to compensate? And should the whole approach of the practice rules be changed, leaving you to exercise more judgment as to how to fulfil your professional obligations to your clients?

These fundamental questions are among those being put to the profession through two consultations from the Society, on whether it should – in principle – adopt either or both of two new approaches to regulating Scottish solicitors. Entity Regulation and Charging sets out the issues regarding a greater focus on practice units; Principles and Outcomes Focused Regulation deals with the potential rewriting of the practice rules.

The first point the Society emphasises is that no decision has yet been taken to pursue either of these goals – what it wants is a steer from members as to whether it should. So why have the exercises been put in motion?

Some potential misconceptions should first be laid to rest. First of all, there is no necessary tie-in with the arrival of alternative business structures (ABS). While similar reforms have proceeded in tandem in England & Wales, other countries are looking at similar regulatory changes without going down the ABS route.

Secondly, it would be wrong to think of the proposals as simply importing the English model, though there are potential lessons to be learned from that. And finally, while there are potential connections, the papers are not interdependent. In fact, though potentially the more significant change, principles and outcomes focused regulation (“POFR”) could be progressed under the Society’s current powers, whereas entity-based regulation would mean amending the Solicitors (Scotland) Act 1980.

Fit for modern practice?

Looking at the “entity” proposals first, you might ask how much would in fact change. The Master Policy, financial compliance inspections, and service complaints as now dealt with by the Complaints Commission, are all based on the practice unit – and admissions, practising certificates and CPD, for example, would continue to focus on the individual.

But as Philip Yelland, the Society’s director of regulation, explains, the individual-based approach of the 1980 Act, which predates even the advent of incorporated practices, fails to accord with modern practice.

“If you look at other jurisdictions, if you look at what is going to happen in terms of licensed providers, there is the ability to take what is the equivalent of a conduct complaint against that business,” he comments. “And one of the challenges we have is that there are times, perhaps particularly in the financial compliance area, where breaches of rules ought to enable us as an effective regulator to deal with the business, but what we currently have to do is deal with the individual solicitors involved.”

Increasingly, non-solicitors are involved in providing legal services, a trend that will be accelerated by new, IT-related legal jobs. And if, as it appears, clients generally engage with the firm rather than the individual solicitor, should the profession’s framework of rules have the same focus?

Yelland also suggests that the move could tighten the regulation of startup practices. “At the moment if you have Master Policy cover you can just start your business,” he says. “The question has been posed whether there might be other tests to be met before a business starts – for example around the provision of a business plan. In other jurisdictions you have to get over other hurdles, which are not necessarily high, but are about making sure that the business is in fact going to function.”

The Society’s member surveys consistently report that what solicitors expect of it first and foremost is effective regulation of the profession. Since the Legal Services (Scotland) Act 2010, it now has a statutory duty to operate in accordance with best regulatory practice. So it should not come as a surprise to find it asking whether long-standing law and practice still reflects the best approach.

Culture shift

While the Society has taken no decision on the basic principle, Christine McLintock, the current Vice President, is a supporter of the reform, based on her experience when responsible for risk management at McGrigors and subsequently Pinsent Masons. “I strategically always took the view that compliance had to be holistic and firm-wide, and not about individuals, and certainly not just legally qualified individuals,” she states. “Compliance was a responsibility of everyone in the firm, from the people looking after the print room to the senior partner. And I happen to think entity regulation is quite helpful in encouraging that kind of culture, which is around ‘This is how we do business’, rather than ‘It’s nothing to do with me really’.”

The culture change that brings about is that everyone in a business understands the framework they operate in, and their own part in making it work. In addition, McLintock supports the consultation paper suggestion that it could help cut the “blame culture” when things go wrong, if the real issue is system failure.

“For me it just makes sense from a regulatory perspective,” she sums up, “because that is just the way legal businesses now operate.”

Is that, however, basically a “big firm” standpoint? “I suppose if you were a sole practitioner just working on your own with one other employee, you might think it’s all a bit of a nonsense,” she concedes. “But in a small entity, if the sole principal is out of the office much of the time it is essential that those left behind take responsibility for compliance. Even in partnerships with a small number of partners, there are often many other people involved in the business, and increasingly I think we’ll see more of that. From a principle perspective, it should apply across the board. We come back to the point about who is providing the service.”

Looking for balance, the consultation paper itself suggests some possible drawbacks. Under ABS, it may be difficult to identify the entity you are attempting to regulate, if a business is part legal services and part something else. Also, how would it sit with the rule that a partner change in a traditional partnership brings about a new entity? Again, firms will have to adapt and perhaps create new management structures – possibly requiring a head of legal services and head of practice to take charge of compliance, as with licensed providers under the 2010 Act.

Who pays?

For some at least, the choice could come down to money. The section in the paper on fee charging offers a model that would collect 40% of current practising certificate fee income from entities instead, that being the estimated costs of regulation. That would bring the PC fee down from £550 to £330. But the business itself would pay a flat fee (banded by turnover) plus a fraction of a per cent of turnover, also banded. Most sizes of firm would pay somewhat more in total, the difference being more marked for very small firms, but in-house lawyers would almost certainly pay less.

“There are different ways that you can do this,” Yelland points out, “but the reality is of course that, if you are going to charge entities for regulation, there will inevitably be a change in what people are paying for their practising certificates.”

“But that’s not the driver for this,” McLintock adds. “This is not about money making; it’s about best regulatory practice and what’s better for both the profession and the client.”

Is it fairer? That’s one of the questions on which the paper invites your views.

Principles in practice

What of POFR? The second consultation introduces the concept by quoting one leading writer, who describes it as “moving away from reliance on detailed prescriptive rules and relying more on high level, broadly stated rules of principles to set the standards by which regulated firms must conduct themselves”.

Another key element is proportionality: “the drive to simplify regulatory burdens on solicitors and to eliminate the one size fits all approach to regulation means focusing resources and regulatory compliance tools on those areas where there is considered to be a greater risk to the public and consumers”.

That is the theory. As applied by the Solicitors Regulatory Authority in England & Wales, it has resulted in a very large (600+ pages) and regularly changing handbook, with a hierarchy of “overarching principles”, below which sit (mandatory) outcomes – what solicitors are expected to achieve in order to comply with the principles in specific contexts – and “indicative behaviours”, non-mandatory examples of “the kind of behaviours which may establish whether you have achieved the relevant outcomes and complied with the principles”, in the SRA’s words. There also remain in force traditional rules in areas like indemnity insurance.

Interviews by the Journal suggest that while some practices have grasped the POFR concept and made it work, many others are simply falling back on what they have always done as being the safe course to steer (see the online version of this feature).

Rules and limitations

Solicitors as a breed like the certainty of rules. What is to be gained from doing things differently?

For one thing, rules can only achieve so much. Consider last year’s hot topic, the proposed “separate representation” rule change. What began as a simple attempt to close off an exception to the conflict of interest prohibition evolved into a very elaborate proposed restriction. While the meeting voted against the concept, when the matter went back to the Regulatory Committee it was suggested that perhaps it was the rule itself, rather than the exceptions, that needed a fresh look. Could it be restated in terms of a principle with desired outcomes?

Another instance is the rather complex rule about taking a benefit under a will. “Should that simply be guidance?” Yelland asks. “Because, at the end of the day, the principles we have got, acting independently, not being in conflict as examples, should arguably govern that situation.”

Alberto Costa, the Society’s London-based Council member for England & Wales, is sceptical. He observes that when “OFR” was first brought in by the SRA, it “promised a mature relationship between regulator and regulated and looked like an end to the prescriptive, tick-box approach to regulation”. Experience, however, has taught him that the system “appears to contain so much grey”, with firms and individual solicitors being asked to exercise their own judgment far more than before.

“Solicitors are busy enough without the need to invest large amounts of unpaid time giving careful thought and coming to a judgment over whether a particular action or omission complies with OFR,” he maintains. “Much easier to look up a prescriptive rule, find an answer rather than a general principle with voluminous vague guidance, and get on with your paid work.

“Under OFR, it is the regulator which will have the benefit of hindsight when interpreting and applying OFR, and the consequences for firms and individuals alike can be harsh.”

Home-grown version?

Could Scotland deliver a more user-friendly outcome than the SRA’s? McLintock believes so. “I think the Scottish system is closer to a principles-based approach in any event, because we have our standards of conduct, which are quite short and effectively set out our principles. If we went down the POFR route, I don’t think it would be that different – perhaps just give more clarity as to how those principles are approached. We’re almost in a hybrid system at the moment.”

Yelland indeed poses the question: “Should we have as much in the rulebook as we do at present?” – but answers it this way: “It’s not necessarily reducing what’s there, it’s actually looking at what’s there to see what its purpose is, because you could argue that some rules which have been there for a long time, are now outdated. You could argue that there are some rules which actually only need to be guidance.”

While the practice rules were codified in 2011, that was a consolidation rather than a revision exercise. Yelland is clear that POFR could, if adopted, mean a fresh look at the rules and guidance, with “huge opportunities for the profession to be involved in that, and to contribute to moving what we have forward in a modern way”. McLintock insists that if the decision were taken to go down this route, it would not be a case of just adding things on top of what is there. “If you’re going to do it, you should do it in a way that is going to make it clearer for everyone, make it up to date and relevant to modern practice.”

Judgment before and after

Advantages and disadvantages? The paper suggests that it could assist public understanding of professional values, and a better focus on client needs. Solicitors would be encouraged to use their professional judgment against a set of clear principles. But is it better, as the paper puts it, to have “clearly defined rules rather than principles which could be judged differently in hindsight”?

Costa thinks so. “Unless there is a demand for change, my experience in England & Wales would suggest that moving to OFR is absolutely unnecessary,” he concludes.

(A 2013 impact paper from the SRA, also on the Society’s website, finds that exactly 50% of solicitors at that time “felt ‘favourable’ about OFR”.)

One can readily envisage the Professional Practice helpline having a busy time with POFR, but at least it is there as a service – one of the complaints from south of the border is that the SRA has to date shied away from offering similar advice, though that may be beginning to change.

England is only one jurisdiction, and the consultation – and the more detailed background briefing paper prepared for the Nova Scotia Bar, also on the Society’s website – attempts to take a wider look at what is still a fairly new and in some ways challenging concept. Would POFR help or hinder consumer and public protection? Would it provide a fairer basis for regulation?

Again, over to you.

Online extra

What has been the impact of outcomes-focused regulation in England & Wales? Two advisers to the legal sector give their views

Granted that outcomes-focused regulation (OFR) as operated by the Solicitors Regulation Authority in England & Wales involves a very elaborate practice manual compared with what might be envisaged for Scotland, does the English experience teach us anything useful? The Journal spoke to two accountants and business advisers, from different firms, both of whom specialise in the legal sector, advising practices from sole practitioner up to top 100.

“Overall I'm of the opinion that the move has been a positive one”, says Andy Harris of Hazlewoods. “The SRA felt they had to do it because of the Legal Services Act and the fact that they were trying to open up the market to other types of entity and other types of people, and I think they have moved from being overly prescriptive in some areas to more of a hands off, proportionate approach. But I would say that perhaps the way they have gone about it hasn't been as successful as they would have liked, or perhaps as they might even think.”

“In my experience solicitors quite like having lots of rules to follow", Harris continues. "They do that as part of their day job, and there are all sorts of rules such as data protection and money laundering, and some of them have struggled to get to grips with the fact that there are no hard and fast rules any more on the running of the practice – they just seem to be doing what they were doing before and hoping that that's OK."

Andrew Allen of Francis Clark suggests that OFR is good for larger firms: “They are given freedom to do things which are appropriate and proportional for themselves, which is often good because it means they get the chance to focus on the things that they see as important, high risk, relevant to them commercially, and get away from things that are less relevant. So I see the upside there. Other firms, and I think some sizeable firms still fall into this category, haven't got the resources or the skills to do the things that OFR suggests they do, so invariably what happens is they just fall back and do what they always did, and it's quite hard for a regulator to say that wasn't appropriate, because that's what they had in place previously.”

Harris however suggests that size of practice is less of a factor. “Some firms seem to have grasped the whole OFR thing really well, they have dedicated a lot of time and effort to it, but there are still quite a high proportion of firms that haven't. I can think of some practices which are quite small partnerships and one senior partner has taken on the COFA [compliance officer for finance and administration] role and another partner has taken on the COLP [compliance officer for legal practice] role, and they spend quite a lot of time making sure it is done properly. And I can think of larger practices where the COFA really hasn't made any effort to do very much at all.”

He adds: “People are generally fairly happy with the principles, but less knowledgeable about the outcomes behind those, and even less knowledgeable about the indicative behaviours that are supposed to help you comply with the outcomes.”

Much, it seems, depends on the attitude of the regulator. “There is definitely a feeling among a lot of firms,” Allen comments, “that they had moved from a regulator that is giving advice, albeit sometimes uncommercial advice, as to what should be done, to a position where the regulator now is waiting for something to go wrong and then tell them why it is wrong. This is not a criticism of the SRA; it is the only logical outcome under an OFR regime and mirrors what we experience from other regulators such as the Financial Conduct Authority, where OFR originated.”

Regarding the complexity and level of detail, he observes: “I think some of those problems could be solved relatively quickly by the regulator being prepared to give more practical and commercial examples. What they appear to be very worried about doing is giving commercial illustrations and then that being viewed as precedent, accepted practice, and I think actually what firms would like is more practical examples even if it's covered with lots of disclaimers.”

Harris agrees that that would make a difference: “It's not helped by the fact that if you call the SRA asking for advice, they will tell you that it's up to you to come up with your own policy and procedures, and people struggle with that, because they are used to having things laid out for them in quite prescriptive rules.”

He also points out that under OFR, English firms are supposed to be “self reporting”: “The SRA expects that if there is a material breach of say an accounts rule, the COFA should be reporting the firm to the SRA, but my understanding is very few firms have done that. This seems at odds with the fact that most accountants' reports prepared by external reporting accountants are qualified.”

Overall, Allen takes the view that “I haven't seen a massive amount of change from OFR”, but a push from the SRA on financial stability in the past 12-18 months has had more impact. “They've done that through OFR, and what has become more apparent in that process, I think, is that the SRA have realised that the financial resources in firms are weak so where you're talking about cash flow forecasting and things like that, relatively basic management tools, there are an awful lot of firms around that aren't able readily to do some of those things, and aren't able to produce timely or in some cases reliable financial management information.

“I think that OFR started off being more about the quality of legal advice and how that's delivered, and the overarching regulatory framework, but it got quite quickly focused on financial stability, mainly because of the issues in the sector that have come out in the last few years.”

He also sounds a warning, however: “Since the financial crisis in 2008 (and since OFR commenced), on a fairly regular basis I get phone calls from lawyers asking me to correspond directly with their clients or to confirm to them that we undertake audits of their client money or the way that they manage it, and I don't remember ever having to do that before 2008. This tells us that to clients regulation of the sector and in particular client money is more important than ever.

“The legal sector gets a lot of fee income from people trusting it to handle their money, to do things on their behalf, and they need reassurance that that's going to be done properly. It's crucial that OFR provides that assurance to them.”

Make your view count

Both consultation papers, and the background material, can be accessed on the Society’s website at www.lawscot.org.uk/members/regulation-and-standards/regulation-consultations/

The deadline for responses is 10 October 2014 and the feedback will be considered at the November Council meeting.

The consultations are also part of the agenda for the Society’s September regulation roadshows, the last of which are in Edinburgh on 16 September and Inverness on 30 September.

Finally, the Society has commissioned consultant Fiona Westwood to interview solicitors in different sectors, in private practice and in-house, and report back. Anyone interested in taking part should contact Philip Yelland, who will put them in touch.