ABS countdown | The honeymoon is over

A recent Law Society survey indicates that outcomes-focused regulation (OFR) has rapidly become unpopular and is more burdensome than the regulatory system which preceded it. The Law Society survey, which is part of its annual performance assessment of the SRA, contained some worrying trends for the regulator, whose chief executive Antony Townsend immediately stepped in to defend the SRA's position. OFR has been in place now for 18 months, the new handbook having been introduced in October 2011. The signs are clear for the regulator that the honeymoon for OFR may well be over.

The Law Society survey involved over 1,000 firms, which is almost 10 per cent of the entire population of firms in England and Wales. Just over 700 of these were also polled in 2011. In October 2011 around two-thirds welcomed the SRA's shift from "rules-based" regulation to OFR but this has changed rapidly to a situation where now two-thirds of firms "disagreed that the new approach was welcomed". The survey also found that 86 per cent of senior lawyers believed that OFR placed too great a burden upon law firms, compared to 77 per cent in 2011. Such a swift change in perception begs an obvious question as to whether the profession ever understood what the change to OFR was meant to achieve in the first place. The SRA is very resistant to allegations that there was a lack of guidance to the regulated community in preparing for OFR. It points out that, in the run-up to October 2011, it undertook large numbers of roadshows, consultations, webinars, a pilot programme, meetings and briefings. All of this is true but was it the correct approach and did it work?

Too little too late

Modern regulators are keen to deal with regulation in a risk-based fashion. The SRA is no exception and seeks to apply its resources in the most efficient way to tackle the greatest risks. The idea of "monitoring" the profession and physically visiting firms at their premises in significant numbers each year is regarded as an inefficient use of resources. The regulator now only visits its firms in relatively small numbers for its "thematic" visits and where it has suspicions of major rule breaches, usually of the accounts rules. The SRA does not have a Practice Standards Unit any longer; it was disbanded at around the same time as OFR came in.

The effect of this is that firms rarely receive one to one explanation of what OFR means to them in practical compliance terms from their regulator - they are left to work it out for themselves. The Financial Services Authority (now the Financial Conduct Authority) took a rather more evangelical approach to its members when it made a similar regulatory shift to what it called "principles-based regulation" in the mid-2000s. The "Treating Customers Fairly" initiative embraced large public meetings and one to one meetings for every financial adviser, looking at their attitude and explaining what each needed to improve upon. Principles-based regulation may not be the most popular regulatory initiative which ever existed but most financial advisers to have a reasonable idea of what the new style of regulation means to them, in practical compliance terms.

There is some evidence that the legal profession is slowly taking on board the notion of a compliance culture. The SRA's own survey of 1,000 firms earlier this year did show that not everyone was happy with this development. 44 per cent of those firms believed that compliance with OFR took up too much time and 34 per cent said that it cost too much money. The perception was that the firm's compliance officers would need to spend around one day per week on compliance, which is clearly a major problem, particularly for small firms. However, this is the very nature of the shift to OFR, firms don't get visited by the SRA monitoring unit once every few years. They have to work it out for themselves instead. The regulator will let them know afterwards if they have got it wrong.

Light touch

Part of the current unhappiness with OFR probably stems from a common misconception as to what it was meant to be in the first place. When OFR was first discussed, there was at the same time much debate about the need for 'light touch' regulation. 'Light touch' regulation was perceived to involve firms to take up much of the regulatory burden by self-regulation, with the regulator only stepping in when this failed. A large number of firms, some with the best of intentions, thought this was what they were getting with the advent of OFR. This was never the case and the results of the recent Law Society survey may indicate that what is now happening is that the profession is at last beginning to understand what OFR actually means.

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