Filling the COFAs

From 31 October 2012, all entities regulated by the Solicitors Regulation Authority must at all times have both a compliance officer for legal practice (COLP) and a compliance officer for finance and administration (COFA). Both roles are new but COFAs in particular '“ their appointment, role and SRA approval '“ need to be taken seriously.

Because of the way in which the role of the COFA is framed by the regulations, many smaller firms may find that a partner will have to undertake the responsibilities of COFA. This may seem not make any difference in practice. Collective responsibility for regulatory compliance is to remain. So what is different?

Put simply, if something were to go awry with the firm's compliance with its obligations under the SRA Accounts Rules (SARs), the firm may be at considerable risk if its COFA is not performing as he ought. There is no strict liability rule. However, remember this is outcomes-focused regulation (OFR), so if something has gone wrong then the firm's systems and controls must be at fault, or they are not being enforced by the COFA. And that will lead to the COFA having liability for such a breach, as well as the firm.

Time pressure

All firms must nominate an appropriate individual who is an employee or partner to be its COFA. Nominations are to be made no later than 31 March 2012. It is intended that the SRA will give approval by October 2012, although recent experience with mySRA calls into question whether the SRA will meet this deadline. The COFA and COLP can be the same person. There are distinct qualifying requirements for each role and candidates for the roles must be approved by the SRA.

There is real time pressure on firms to now determine who will undertake the role of COFA. By 31 March 2012 the profession's many sole practitioners will be passported to become recognised bodies, by which time they must have nominated a COFA and a COLP. Do such firms have a suitable person to undertake the COLP role, or will the owner have the requisite skills to wear two hats?

How a firm organises itself to comply with OFR is a matter for the individual firm. The question is whether there are adequate systems and controls in place to ensure compliance with the requirements of the law, applicable regulations and the SRA handbook. Of course, firms should be compliant now with all aspects of OFR, irrespective of the appointments of COLP and COFA becoming effective from 31 October 2012.

The COFA is responsible for ensuring the firm complies with the requirements of the SARs. The implementation of systems and controls to comply with SARs by all managers (including partners) and staff fall to the COFA. For this reason the COFA must have appropriate authority and status within the organisation to take all reasonable steps to ensure senior managers comply with internal procedures. The SRA has a great deal of guidance concerning seniority of the COFA within the organisation of a firm.

Where there are any breaches of SARs the COFA is responsible for accurately recording them and then reporting them to the SRA.

Bookkeepers as COFAs

The basic requirements are that a nominee for COFA must be: a manager or employee of the firm; approved by the SRA (and not disqualified by the SRA or any other relevant regulator); and sufficiently senior and have sufficient responsibility to fulfil the role.

Many small firms engage part-time bookkeepers on a consultancy basis. As only a manager or employee can hold the position of COFA, a bookkeeper engaged as a consultant cannot. It is possible to adapt this model to one of part-time employment, but this brings with it the baggage of employment rights and increased overheads. The firm and the employed bookkeeper will be subject to PAYE and NI in respect of the salary paid. Other employment rights may also accrue. So, provision for holidays and sickness, maternity and paternity rights, etc, have to be made.

Even if the bookkeeper is employed on a part-time basis, he/she may not be sufficiently senior and have sufficient responsibility to adequately fulfil the role. This will be a question of fact. However, the likelihood is that the balance of seniority and responsibility between the owners/managers of the small firm and their bookkeeper would not permit that independence of action and control that the SRA is looking for in a COFA.

There will be other circumstances where the part-time bookkeeper has considerably greater knowledge about the SARs than any of the owners/managers of the small firm. In such circumstances the part-time employed bookkeeper may be the best choice for the firm, even taking into account the additional overhead costs involved. The key appears to be complexity of the financial transactions undertaken by a firm.

The owner/manager COFA

Many smaller firms may reluctantly take the decision that one of the owners/managers will undertake the role of COFA and rely on the advice of the consultant bookkeeper. This is a far from satisfactory solution but is likely to be the one that sole practitioners and owners/managers of small firms will be compelled to take.

Before going down any particular route, firms and individuals who may be put forward as candidates must take account of the SRA suitability test. The test requires people applying to enrol as a student and at admission to pass part 1 of the test and for those wishing to be authorised as COLP or COFA to pass parts 1 and 2. Assuming that the candidate is of good character, and will pass part 1 of the test, part 2 has one or two provisions, most notably in rule 10.1 of the suitability test 2011, in part 2 of the handbook, that may catch the unwary (see table).

Many solicitors may have been directors in the past. Indeed, it was at one time common practice for solicitors to undertake the roles of director and secretary to undertake basic post-incorporation actions. There is quite a considerable likelihood that a solicitor who has had a substantial number of directorships (nominal or otherwise) may fall foul of rule 10.1(c) and possibly also rule 10.1(b). Where an allegation is made under rule 10.1(h) the evidential burden falls upon the candidate to disprove what may be a presumption of influence.

The dangers of busking

In addition to the very substantial burden of internal audit and taking all reasonable steps to ensure that the firm, its managers and employees are complying with the Accounts Rules, the COFA must maintain records and report to the SRA details of any failures in compliance. This requires an in-depth understanding of the rules, and keeping up with changes to them.

The test makes it clear that the ten principles of the SRA handbook are all pervasive. Experience of the way in which the FSA approaches breaches of compliance suggests that it is much easier to successfully assert a breach of a vague principle than to bring disciplinary action in respect of breaches of rules. In the event that a less than technically accomplished COFA 'busks' the role and there is a breach of the Accounts Rules, inevitably, there will be breaches of the principles set out in the handbook. With the exception of principles 3 and 9, there may well be breaches of all the principles.

Sole practitioners in particular will have to look at the detail of the regulations, and, if necessary, take specialist advice before proceeding with the nomination of their candidate for COFA. Nominations will be required very soon and this is not something that can be put in the 'too difficult' tray.

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