Overseas rules: The SRA's regulation of international practices

On 1 October 2013, the Solicitors Regulation Authority of England and Wales (SRA) changed the way that it regulates law firms with international practices through the publication of the eighth edition of its Handbook. Law firms now have a set of requirements that are intended to be an appropriate, realistic and proportionate means of achieving their regulatory objectives in respect of individuals, branches and connections overseas. The challenge now presented to law firms’ managers, compliance and risk management professionals is how to respond to these new requirements and demonstrate compliance in practice.

It is probably fair to say that firms with an international aspect to their business have found the regulatory requirements to be inappropriately rigorous and unrealistic. In terms of the new compliance culture, with all firms required to have compliance officers in situ as well as demonstrable
risk management measures, there was some relief that, when the SRA Handbook was launched in October 2011, the regulator made it clear that work would continue in terms of fine-tuning its overseas requirements.

The SRA always acknowledged that the first edition of the Handbook was a temporary staging post; the fact that it took two years for the revised requirements to be shaped and agreed perhaps indicates the difficulties that it faced. The challenge was to build a system of regulation that would be a proportionate response to the risks posed by a practice which was not based in England and Wales but which was properly aligned with the regulator’s outcomes-focused, risk-based and entity-based style. In addition, the regulatory system needed to respond to the way in which an international practice manifests itself in the twenty-first century, taking into account market forces, the globalisation of legal practices and the many conflicts which arise with location and jurisdictional regulatory requirements.

The solution has been to create a new regulatory regime focused on:

1. permanent practices overseas (both in terms of regulated individuals and branch offices);

2. non-permanent practices of regulated individuals overseas; and

3. international associations of law firms.

As a starting point, firms will need
to determine which of their practices and practitioners fall under these three categories. Some important new words and phrases have been added to the Handbook’s glossary; compliance
systems will need to be built around
these definitions.

New terminology

To determine whether you are working to comply with the permanent or non-permanent requirements, it is important to understand and distinguish between the SRA’s definitions of ‘established’ and ‘temporary practice overseas’.

Established practice abroad

‘Established’, for the purposes of
SRA regulation and in connection
with an ‘overseas practice’, has the following meaning:

(i) For the purpose of the definition of ‘overseas practice’, the status of an individual as being ‘established’ outside England and Wales may
be indicated by any of the
following factors:

(a) a requirement for a work permit;

(b) the intention to reside outside England and Wales for a period of six months or longer;

(c) a requirement for authorisation with a local regulatory body;

(d) an overseas practising address nominated in mySRA;

(e) an employment contract with a legal practice established outside England and Wales.

(ii) An individual who is temporarily seconded, assigned or transferred to work in an overseas practice, and is supervised and managed for the duration of the secondment, transfer or assignment by partners in the overseas practice, will normally be treated as practising overseas.

Temporary practice abroad

By contrast, a ‘temporary practice overseas’ is defined in the following ways and by reference to the individual:

(i) a solicitor who is practising but not established overseas; or

(ii) a registered European lawyer (REL) who is practising from an office in Scotland or Northern Ireland, but is not practising abroad.

These should be read in conjunction with three further terms:

1. ‘Practising overseas’ means the
conduct of:

(i) an overseas practice;

(ii) a manager, member
or owner of an overseas practice in
that capacity;

(iii) a solicitor established outside England and Wales

for the purposes of providing legal services in an overseas jurisdiction; and

(iv) an REL established in Scotland or Northern Ireland for the purpose of providing legal services in those jurisdictions.

2. ‘Overseas practice’ is defined as:

(i) a branch office of an authorised body;

(ii) a subsidiary company of an
authorised body;

(iii) a subsidiary undertaking of an authorised body (as defined under section 1162 of the Companies
Act 2006);

(iv) an entity whose business, management or ownership are in fact or law controlled by an authorised body or recognised sole practitioner;

(v) an individual acting as a representative (whether as an employee or agent) of an authorised body or recognised sole practitioner; or

(vi) a sole principal whose business, management or ownership are in fact or law controlled by an authorised body or recognised sole practitioner established outside England and Wales and providing legal services, but which does not carry out reserved legal activities and whose practice does not predominantly comprise the provision of legal services to clients, or in relation to assets, located in England and Wales.

3. ‘Responsible authorised body’ means the authorised body or recognised sole practitioner who has established an operation in another jurisdiction.

The overseas practice of a responsible authorised body can be contrasted with ‘connected practice’, which is another new Handbook definition. This is defined as:

“A body providing legal services, established outside England and Wales which is not an overseas practice or an excluded body but is otherwise connected to an authorised body in England and Wales, or a recognised sole practitioner in England and Wales, by virtue of:

(i) being a parent undertaking, within the meaning of section 1162 of the Companies Act 2006, of the authorised body;

(ii) being jointly managed or owned, or having a partner, member or owner in common, or controlled by or, with the authorised body;

(iii) participating in a joint enterprise or across its practice generally, sharing costs, revenue or profits related to the provision of legal services with the authorised body or recognised sole practitioner; or

(iv) common branding.”

 

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Practical considerations in complying with the SRA’s Overseas Rules

• What agreements will you need to put in place with your other offices?

• Should your domestic standard be applied internationally?

• Is a gap analysis needed to identify pinch points, particularly with reference to jurisdictional conflicts?

• How will you obtain buy-in to what may seem like remote domestic requirements?

• Do you need to deliver training about both the SRA’s and your firm’s expectations?

• Should you establish local compliance ‘champions’ to assist with communication?

• How will you demonstrate to the SRA that you are effectively monitoring your policies and people?

• How will you ensure that you are in a position to complete the annual return?

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Overseas practices

The starting point in respect of overseas practices is the newly-created SRA Overseas Rules Section of the Handbook; a standalone section which contains the SRA Overseas Rules 2013 that specify the conduct obligations of “SRA
regulated individuals and authorised bodies providing legal services outside England and Wales”.

These rules are designed to be a proportionate and appropriate response to the risks associated with this type of practice. Rule 1 contains the Overseas Principles, which should be familiar as they are based on the SRA Principles, but with modifications to make them suitable for overseas practices.

Rule 2 answers a longstanding regulatory conundrum of jurisdictional conflicts by stating that this is resolved by local obligations taking precedence, except in terms of principle 6, which must be observed at all times. (Principe 6 states that you must not do anything which will or be likely to bring into disrepute the overseas practice, yourself as a regulated individual or responsible authorised body or, by association, the legal profession in and of England and Wales.)

Rule 3 comes into effect in October 2014 and imposes obligations on both regulated individuals practicing overseas and the responsible authorised body
to notify the SRA of certain categories
of breaches:

• material and systemic breaches;

• criminal convictions;

• disciplinary action by another regulator; and the firm being in serious financial difficulty.

The responsible authorised body will also be required to complete an annual return.

While it is clear that, while the SRA does not expect the same level of detailed reporting and notification from overseas practices as it does domestically, it nevertheless shows its intent to know about international practices by adding a further mandatory outcome to chapter 7 of the SRA Code of Conduct: “You identify, monitor and manage the compliance of your overseas practice with the Overseas Rules” (outcome 7.11).

This means that, having identified that the firm is a responsible authorised body, your managers and compliance officers should develop systems and controls to demonstrate adequate oversight of this part of the business. In keeping with outcomes-focused regulation, the SRA does not prescribe how this will be achieved, and firms will be expected to develop methods that best suit their business models.

Temporary overseas practices

The SRA’s Overseas Rules do not apply in circumstances where an individual is temporarily practicing overseas, as may be the case when working abroad on a client matter for a short period of time.

Instead, that individual must understand the obligations which arise through the newly-introduced chapter 13A of the SRA’s Code of Conduct, which modifies existing outcomes and applies other outcomes and requirements including, for example, that you do not discriminate unlawfully according to the jurisdiction in which you are practicing.

The rest of the Handbook’s requirements will continue to apply. The challenge for compliance officers will be to ensure that any individual falling within the definition understands what is expected of them. Training and/or firm policies and procedures can be used to support this.

Connected practices

Finally, it is important to understand the difference between an overseas and connected practice. Many international law firms will find that, because of the alliances and associations which they have formed, they fall into the latter category. Here, there is no equivalent to the concept of a responsible authorised body; instead, there is a focus on risk managing the relationship. New mandatory outcomes and non-mandatory indicative behaviours have been added to chapter 7 of the SRA Code, as follows:

O (7.12) – identify, monitor and manage risks to your business which may arise from your connected practices;

IB (7.4) – maintain systems and controls for managing the risks posed by any financial interdependence which
exists with your connected practices; and

IB (7.5) – control the use of your brand by any body or individual outside of England and
Wales which is not an overseas practice.

This means that compliance officers will need to ensure that there is a sufficiently open and transparent relationship between the two entities so that communication of risk matters is understood and agreed. As a starting point, compliance officers should find out if any existing agreement records identified risks and facilitate regular discussions with their counterparts in the other organisation.

More will follow in terms of the SRA’s review of international practices through its Handbook requirements and the development of its supervision and enforcement strategies. Compliance officers should keep up to date by regularly reviewing the SRA website.

Tracey Calvert is a regulatory compliance specialist (www.oakallsconsultancy.co.uk). She is the author of Conflicts and Confidentiality for Law Firms and co-author of Outcomes-Focused Regulation: Compliance in Practice and COLP & COFA: Compliance in Practice.