ABS countdown | Avoiding an avalanche

The last SRA Board meeting contained both good and bad news for those beleaguered defenders of all things compliance, the COLP and COFA 'volunteers'. On the one hand, it looks as though they may no longer have to report non-material rule breaches to the regulator every year. On the other hand, 928 individuals or firms are being investigated over compliance officer nominations, with 21 of those serious enough to warrant a "forensic" investigation. Four months into the SRA's compliance officer regime it looks as though further adjustments may be needed.

The attempt to reduce the burden on COLP and COFA is an unsurprising outcome of the SRA's initiative to reduce red tape. It was plain from an early stage that compelling firms to report both material and non-material breaches to the regulator was likely to result in an avalanche of pointless information. Material breaches must be reported "as soon as reasonably practicable", a requirement which will stay in place, but even non-material breaches must currently be reported by firms in the SRA's annual information-gathering exercise.

The SRA has a problem here in that the reporting obligations derive from sections 91 and 92 of the Legal Services Act, so it cannot remove the duty to report all breaches without change to the statute. However, what is to be proposed in the new consultation, later this month, is that firms continue to record such breaches in case the SRA wants to see them at any time, but not to report them annually.

This good news might not actually be as helpful as it first appears to be. From what solicitors ask me on a regular basis, the most time-consuming issue is trying to decide whether or not a rule breach is material. The textbook answer is that is that the judgement is subjective and depends upon the impact on the firm and the profession; the scale of the problem; and its overall impact on the firm, its clients and third parties.

Interestingly, it appears from the SRA Board paper on the subject that the reason for the change is the difficulty for the regulator that the requirement imposes, not that upon the practitioner. The SRA states that it "cannot be justified in the context of proportionate, risk-based and cost-effective regulation".

This is understandable when there are over 10,000 firms doing the reporting but the SRA stresses that "continued recording by all firms of non-material breaches will allow firms to identify and manage their own risks, and help us identify patterns of non-material breaches".

At the same board meeting, SRA Chief Executive Antony Townsend reported upon the fate of the 928 people or firms being investigated over compliance officer nominations.

The number has risen significantly from the 600 reported in March and is a cause of great concern to the profession and its regulator.

The firms that failed to respond at all to the SRA's COLP and COFA nomination exercise probably deserve no sympathy and those that responded late not much more, though some may be mindful that the SRA missed its own deadline in this area. However, we are told that there are 545 enforcement matters that relate to non-disclosure.

Presumably these relate to the three suitability tests at the core of the application forms. These concern the individuals' criminal records, regulatory records and civil debt positions. The SRA does not break down the 545 cases into categories but it would be interesting to know how many relate to civil debt. Even a 20-year-old county court judgment must be declared.

Chief Executive Antony Townsend noted that only a small minority of the 928 would face sanctions, with 21 serious enough to face full investigations, some of which may result in closure of the firms concerned and possible Solicitors Disciplinary Tribunal (SDT) cases. He was keen to emphasise that "we're concerned to be helping firms to improve and get structures in place. We're not there to wield a big stick."

It was interesting that, for the first time, the SRA produced a diversity profile of the affected firms. As expected, 36 per cent were sole practitioners and a further 13 per cent had one owner. These individuals may have a different view on stick usage.

It is probably wise to view the current situation as partly inevitable, given the radically different nature of outcomes-focused regulation from that which preceded it, but both regulator and regulated community appear to have some distance to travel before they entirely understand each other.

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