A new journey: why everybody in your firm needs to get on board with OFR

The current legal compliance journey started for many firms on 6 October 2011, with the introduction of the new SRA Handbook and outcomes-focused regulation (OFR), but we have seen examples of many firms delaying their journeys, or even worse, not starting them at all.

Firms had to have appointed new compliance officers (COLP and COFAs) by 1 January 2013. For many this was just a continuation of their compliance journey as their compliance officers had taken up the new roles immediately after nomination in mid-2012. Other firms' journeys only really started in January because they thought that OFR and the SRA handbook only took effect once the COLP/COFA regime had come into force. They had therefore done little or nothing to move their compliance processes forward.

More alarming is the fact that a number of firms appear not to have started their compliance journeys at all, thinking the SRA has bigger fish to fry and would take an age to catch up with them. The SRA may have its hands full but the likelihood is that it will be calling sooner rather than later, whether by email, telephone or a visit. I have come across numerous examples of firms being asked by the SRA for details of their compliance arrangements, and being given a matter of days to produce these - so quite clearly firms need to be prepared.

There are numerous areas currently under review by the SRA, for example, personal injury firms affected by the referral fee ban, legal aid firms that could be affected by government cuts, financially unstable firms, etc. So most firms could have contact with the regulator at some point in the near future.

Not just the regulator

It would be wrong of firms to think that the only organisation that is concerned about their risk and compliance is the SRA. There are organisations that are far closer and that can pack a deadlier punch, and they are the indemnity insurers.

Without professional indemnity insurance a firm cannot trade. The only way it can get insurance is to show it is a risk worth covering and that it engages in the regulatory regime under which it operates. The days of risky firms being able to secure insurance via unrated insurers, that perhaps have lower costs and a far more relaxed attitude to risk, appear to be numbered as the SRA is now looking into whether unrated insurance is sustainable going forward. This could result in unrated insurers leaving the market altogether by October 2014 if the SRA thinks it appropriate.

Financial instability is probably the biggest issue currently facing firms. Having seen a number of large practices collapse, or be subject to intervention, it is very much an issue that has now hit home as being one that could affect any size of firm. The SRA is clearly concerned that some firms are not being as well run as they should be. At least 650 are currently under close scrutiny with others being required to feed financial data to the SRA. COLPs and COFAs should be taking the lead in protecting their firms from financial risks and should, where appropriate, be getting partners to change their ways if they could be regarded as 'toxic' by the SRA.

These 'toxic' partners are regarded as the ones that keep financial information to themselves and won't change what are seen by the SRA as bad behaviours. Such behaviours include making payments to partners irrespective of cash in the bank, all net profits being drawn with no reserve pot retained, short term borrowings to fund partners' tax, etc. The SRA requires firms to maintain a watching brief over their finances and report when financial stability becomes an issue for them, but I suspect many firms would be loathed to involve the regulator for fear of regulatory action or damage to their commercial standing if such a sensitive issue became public. ?The SRA has been trying to provide firms with the comfort they need to make such reports but only time will tell if this has the desired effect.

Everybody's problem

Embedding an effective risk culture within some firms is clearly a problem for some COLPs and COFAs, mainly because other staff and partners don't see compliance as being their problem, but firms cannot afford to have their people saying: "compliance is nothing to do with me, speak to the COLP", or "what is a COLP?". Compliance is a team game not just one for certain individuals.

Compliance training for all staff is another issue that COLPs and COFAs ?need to consider, as many non-solicitors seem to be totally unaware that the code of conduct also applies to them, and that they could face disciplinary action and sanctions for failures just like their solicitor counterparts. Even some solicitors are unaware that the code applies to non-solicitors as well as them.

Many employees also seem to think that the code of conduct only applies to them during working hours, and therefore believe that what they do in their spare time is nothing to do with their firm or regulators. This is clearly incorrect, as issues of integrity and bringing the profession into disrepute can arise away from the office, for example, being arrested for drink driving, drunken behaviour at a social event, making extremist comments via social media, etc. Solicitors can also fall foul of the code if they provide legal advice/assistance in a personal capacity. The rules apply to everyone, although some will apply more to some than others depending on their roles, and those thinking their COLP/COFAs are the only ones with their heads on the block need to think again.

One of the real concerns for COLP/COFAs has been the conflict they may ?face when having to consider reporting to the SRA, or getting the support they need from others within the firm, and I am aware of a number of COLPs that have threatened to resign from their positions to get their way or what they need to do the job. Firms need to realise that COLP/COFAs can hold a lot of power, because if they do resign from their positions due to a lack of support, the SRA will want to know on the appropriate form.

Blind eye

OFR requires a new way of thinking. Whereas in the past problems may have been swept under the carpet. This can no longer be the case. In the past many firms may have been willing to turn a blind eye to partners and staff that have caused difficulties, especially where such people have been key rainmakers or fee earners. But they need to change their ways if they don't want to attract the attention of the regulator. Many firms think that the only way the SRA finds out about issues within their organisation is from within, but it can be from clients or other third parties complaining directly to it. What you don't want is a matter coming to the attention of the SRA that you were aware of but chose to do nothing about.

I have come across a number of firms where partners have been identified as being major problems - attracting a high number of complaints or claims - but the firms felt unable to do anything about them because of the power they had within the firm, or poorly drafted partnership/LLP agreements made the firm unable to deal with them. Some firms look to a compromise agreement to resolve issues but I would urge caution where this may involve potential serious or gross misconduct. Allowing someone to creep out of the firm quietly and then go and potentially cause harm to clients in another law firm could raise issues with the SRA. Would you want to face potentially in-depth questioning from a regulator that might be unhappy that you chose to take the easy way out? Again, some firms think that confidentiality agreements would keep the SRA from finding out, but some parties may not be subject to such an agreement, for example, a client or a lender that may make a report direct to the SRA.

One piece of good news for firms is the SRA's decision to remove the need to report non-material breaches on their annual information return. Firms will still be required to record such breaches just in the case the SRA asks to see them and to enable them to track trends that could lead to a non-material breach becoming material and need reporting. The change will not affect alternative business structures.

The compliance journey may be a bit bumpy at times, but firms must accept ?that it is a journey they must take, and ?take quickly.