Efficiency drive

The introduction of outcomes-focused regulation and the SRA handbook on 6 October heralded the dawn of a new regulatory regime within the legal profession. We will shortly see the introduction of SRA-regulated alternative business structures (ABSs), although the first Council for Licensed Conveyancers-approved ABS started operating on 6 October.

One of the new regulatory requirements is that all authorised bodies will have to have compliance officers for legal practice and finance and administration (COLPs and COFAs). These roles will have wide-ranging responsibilities, including: ensuring organisations comply with all terms and conditions of their authorisation, comply with relevant statutory obligations, record any failures to comply, make records available to the SRA and report any material failures to the SRA. COLPs will have to be lawyers but COFAs, who will be responsible for all aspects of SRA Accounts Rules compliance, can be non-lawyers. These roles will not be for the faint-hearted and those nominated will have to be SRA approved and agree to their appointment; COLPs/COFAs will retain the right to relinquish their roles at any time during their appointment!

Although the COLP/COFA roles will not become effective until October 2012, firms will have to submit their nominations to the SRA by March 2012; it is strongly recommended that they take steps now to find the right candidates and get them looking at the areas that they will be responsible for.

COLPs/COFAs will have very onerous reporting obligations and they will be expected to report any material failures they find to the SRA. It will be for firms to determine what they consider to be a material failure so consideration should be given to this as early as possible. These reporting obligations could put COLPs/COFAs in direct confrontation with their fellow partners so it is critical that a workable reporting policy is developed and agreed so everyone knows where they stand.

A recent survey published by the Law Society found 23 per cent of firms with fewer than ten partners did not know how much dealing with compliance cost them; the firms that did said they spent an average of 27 days a year on compliance issues, equating to nearly £30,000. The survey took place in April and May 2011, and therefore did not take account of the new compliance requirements under OFR and the new SRA handbook. It will be important for COLPs/COFAs and their partners to understand the time and costs involved in ensuring compliance, and I recommend that a separate budget is allocated to this, although this should have enough flexibility to cope with new regulatory requirements that may be introduced in the future.

So, what should you, as a prospective COLP/COFA, expect to encounter and what should you be doing now to prepare for the role(s)?

The answer to the question will depend on a number of factors, including how big your firm is, what type of work your firm deals with, how many people your firm employs, etc. It will also depend on whether you intend doing the job in line with the SRA handbook, as envisaged by the SRA, or whether you will do the bare minimum because of time and/or cost restraints.

Working out your role

I am going to work on the basis that you are going to fulfil the role as envisaged by the SRA. First, you need to sit down with your partners and work out what your role will entail, what authority you will have in carrying out the function, what resources and finances will be made available to you and obtain agreement that you will be given complete support in ensuring you are able to comply with your COLP/COFA obligations; this includes formulating a policy for reporting issues to the SRA as appropriate. It is essential that all parties agree this policy at the start as it will avoid potential conflict situations when a material failure is identified and needs reporting.

The next big issue for you will be to get a full understanding of the regulations that apply to you and your firm '“ the SRA handbook will be a good start but don't forget that other regulations may be appropriate; for example, the Data Protection Act, Claims Management Regulations if you receive referrals covered by the Ministry of Justice, the Financial Services Act if you are dealing with work in the finance arena, etc.

Once you have a grasp of the regulations you will need to review what your firm does and the risks that it could face; this is where a full assessment of risk would be appropriate so you can compile your risk register and compliance plan, both of which could be inspected by the SRA. Once you have assessed the risks, and how you think you can mitigate them, you will need to ensure that appropriate systems and procedures are in place to help reduce these risks. Part of the risk assessment process will need to include looking at the firm's finances (turnover, profits, cash flow, balance sheet, fee earner gearing, WIP, debtor days, working capital, borrowings, etc.) as you will only get a true picture of the firm and its ability to trade and expand with this information.

It may be at this point that you are asking yourself 'Why, as a lawyer, did I agree to do this?' Hopefully, you won't have given up, and will now have in place the foundations of an effective compliance system, communicated it to your staff and embedded a workable risk and compliance culture into your firm.

You may be thinking that having done all this the hard work will be over and you can get back to being a lawyer, but unfortunately this will not necessarily be the case. As the COLP/COFA you will need to ensure you continually monitor the systems you have put in place and adapt them as appropriate. If you are to maintain a complete grasp of your role it will be necessary for you to be included in all matters that could impact on compliance and this could include finance meetings, complaints, PII claims, file audits, checking post, signing cheques, entering into referral arrangements, dealing with the SRA, staff disciplinary matters and many more '“ in effect all areas of the business could have an impact on risk and could therefore fall within your remit.

A recent case highlighted the need for compliance officers to ensure they do all that is required of them. It involved David McGrath, a compliance officer in a financial services firm (the legal profession is following the finance industry in introducing OFR, so it follows that we may see the issues it encountered) who was responsible for ensuring his firm had all appropriate systems in place. The FSA carried out a thematic visit to the firm and found that it did not have adequate systems in place to protect client monies; although there was risk to clients there was no actual loss, and no deliberate breach or recklessness. Mr McGrath was fined £20,000 and issued with a prohibition order preventing him from acting as a compliance officer for life.

Having read about the McGrath case you may be thinking that remaining a full-time lawyer would be the most preferable option; however, if you work in a small firm your options may be limited. I do not quote the McGrath case to frighten you off becoming a COLP/COFA, but merely to point out that you cannot 'play' at the roles and that commitment to them will be essential if you are to ensure you and your firm do not become a concern for regulators.

From the frontline

I have been undertaking the role of a COLP for many years, and therefore I have a very good insight into the commitment that will be required, and the knowledge that will need to be gained to ensure you are able to fulfil the role effectively. I estimate that a fee-earning COLP could lose between 25 and 50 per cent of their fee-earning capacity, so it will be essential to try and ensure your compliance systems are effective and efficient.

So, what sort of issues do I look at daily? The first thing I normally do is look at regulator alerts in my email box and see if there is anything I need to address, if there is I need to fit it into my list of priorities. I then review the websites of key legal publications to see if they have picked up anything that I should review as part of my business intelligence assessment.

I review all incoming post to see if there are any issues I should be aware of; for example, claims, complaints, client feedback, work levels, using old Ts&Cs, etc. As well as forming part of your supervision function this task can give you a good insight into the business and help you assess what areas you may need to address.

I could also be asked about potential conflict issues, money laundering matters, be required to complete lender panel applications/reviews, deal with regulator requests, etc. You can never stop looking and listening as you go through your day as there will always be something that could require your input; a key priority is to always keep enough flexibility in your diary to be able to deal with matters that need urgent attention.

Life as a COLP/COFA will not be easy, so the more you prepare for it the better it will be for you and your firm.