COLPs Supplement | Reporting responsibilities

One of the most significant features of the new regime is that a good deal of responsibility for regulating for compliance switches from the SRA as the regulator to the law firm, or other ‘authorised body’, as the regulated. Early on in the consultation process there were references to the concept of ‘authorised self-regulation’, and even if this phrase is not being used quite so widely now, it does continue to encapsulate the thinking at the SRA.

The other main change of philosophy by the SRA in the Handbook was the introduction of outcomes-focused regulation (OFR) and the abandonment of rules and guidance (in the Code of Conduct at least) in favour of simpler statements of what each firm must achieve. The thinking here is that ‘what’ the firm does is more important than ‘how’ it does so.

Need for COLPs and COFAs

To establish an internal regulatory regime all firms had until the end of July to nominate a COLP (Compliance Officer Legal Practice). There will, in addition, need to be a Compliance Officer for Finance and Administration (COFA), who might be the Finance Partner or the in-house accountant. Their brief is to monitor and report on accounts irregularities in the light of the SRA Accounts Rules, but it has been suggested that this might be widened to embrace the need to monitor the financial viability of the practice in accordance with O(10.3) and IB(10.3).

The need for the appointment of both compliance officers arises from the ‘Authorisation Rules for Legal Services Bodies and Licensable Bodies’, to be found in the Handbook under part D (Authorisation and Practising Requirements).

It is important to stress that the appointments are not optional, nor should any firm run the risk of overlooking the need to comply with SRA requests. It is provided at rule 8(2) that all practices must “at all times have suitable arrangements in place” to ensure that they comply with the SRA’s regulatory requirements (as required by section 176 of the Legal Services Act) and the principles. This means that there must ‘at all times’ be one or two persons who have been designated to each role.

As to the qualifications of the officer holders they do not have to be a partner (manager) but must be of ‘sufficient seniority’ and be in a ‘position of sufficient responsibility to fulfill the role’ and, in the case of the COLP but not the COFA, be a lawyer. Their designation as such is subject to the approval of the SRA (rule 8(5)). Neither role may be outsourced and anyone who is to be nominated for either role must consent to so acting.

A number of firms do seem to be nominating employees to the COFA role in particular, but it is worth thinking through the potential implications of this. Both COLP and COFA will have personal responsibility to report problems to the SRA, and the implications of so doing may well be significant for the firm. If the sole practitioner or partners does or do not agree with their employee’s analysis of the situation and, in effect, order them not to do so, then not only do they place the office holder in an invidious position but they would also risk being in breach of O(10.7) to the effect that it is prohibited to “prevent anyone from providing information to the SRA or Legal Ombudsman”. To overcome this risk it might be better to nominate the Finance or Managing Partner as the COFA, so that they have the ultimate choice as to whether to report or not, based on the recommendations of their Head of Accounts.

Roles of COLP and COFA

The COLP is unlikely to be the supervisor of all work done in most partnerships (depending on size and range of services provided) but they will have to maintain an active interest in overseeing the legal work of the firm, and to ensure compliance with the Principles and Code of Conduct in particular. The broad approach to supervision – mostly as set out in chapter 7 of the Code of Conduct - remains that it must be effective, taking into account all the particular elements that make each practice unique. File reviews, or some equivalent form of quality checking, are mandatory on the basis of O(7.8), but other than this how each practice manages itself is largely for it to determine.

The main responsibilities of both roles are to ensure compliance with the areas of their responsibility and to record any non-compliances. After several changes of approach by the SRA during the lengthy planning and consultation process the eventual position is that both COLP and COFA will have to maintain records of non-compliances, and then report those that are “material breaches” to the SRA “as soon as practicable”. In the case of the (no doubt) much more numerous lesser breaches these are deemed to be duly reported if they are made available as part of the annual practice renewal process. The COLP will have a more general brief to ensure compliance with all the firm’s statutory and professional obligations, other than compliance with the SRA Accounts Rules.

Nomination process

Most firms should, by now, have received their invitations from the SRA to nominate the office holders. As ever, the SRA’s computer programme has not been without its complications, but the questions asked of the ‘authorised signatories’ have at least proven to be much simpler than had been suggested even quite shortly before the process went live. It had been stated at a conference in early May that all firms would have to certify that their compliance arrangements were already in place as part of the nomination process – to the alarm of the many delegates in attendance, who clearly had yet to address the management implications of the new roles. Now, at least, we have time to refine the all-important ‘compliance plan’.

One of the oddities of the regime is the long period that will now elapse between having nominated the office holders and their taking up their formal roles, which will not occur until 1 January 2013. No doubt most office holders will be using this time to develop the necessary management policies, systems and controls and ensure that they are working effectively. The SRA takes the view that most of this should have already been in place as a result of the combined effect of chapters 7 and 10 of the revised Code of Conduct – dealing with management of the practice and the relationship with the SRA and other regulators (such as the Legal Ombudsman).

Current reporting responsibility

One of the most intriguing elements of the current state of affairs is the extent to which practices are already obliged to consider the need for reports to the SRA. Although not linked to the compliance officer roles as such there is already within chapter 10 the need to report “material changes to relevant information about you including serious financial difficulty” or “serious misconduct by any person authorised by the SRA” (outcomes 10.3-4). Both outcomes state that such reports must be made “promptly” and, being part of the Code of Conduct, are already in force for all within the profession – realistically, proprietors and partners in particular.

The SRA deals with the relationship of these obligations with those that will take effect in 2013 - when the compliance officers become fully authorised - in the guidance note that accompanies the nomination request. The rules will then require them to report “material” breaches “as soon as reasonably practicable”. The note suggests that there is no real difference between the “serious” breaches described in the Code and the “material” breaches that might arise under the Authorisation Rules, nor is there any real difference between the concepts of “promptly” and “as soon as reasonably practicable”.

This advice may well suggest that the nominated compliance officers should be alert to the need to report the more significant problems that arise within the firm in advance of the formal start date next year. More intriguingly, it throws into yet further focus the continuing uncertainly as to what, precisely, will in due course need to be reported as a “material” breach.

The guidance provided by the SRA on this point in the Authorisation Rules is far from specific, but if it is limited to what most firms would regard as “serious” misconduct it might be limited to instances of dishonesty or situations causing or risking serious harm to a client’s best interests. On the other hand it may be that the repeated failure of a solicitor or department to provide adequate costs information, for example, is perhaps to be regarded as not just potentially a “material breach” of chapter 1 of the Code of Conduct but “serious misconduct” also and so be reported now. The guidance note suggests erring on the side of caution and choosing to report if there is uncertainty on the issue. Further guidance is surely needed on this issue well in advance of the full implementation of the rules and, in particular, detailed case examples.

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