PREDICTIONS 2014: COMPLIANCE

Despite the lack of clarity over fundamental concepts such as 'material' breaches and the scope of compliance officers' roles, law firms should get ready for 2014 as 'the year of enforcement', warns Michelle Garlick, particularly with financial stability being set to remain a key concern

2013 will be remembered for a number of reasons, notably LASPO; financial instability; COLPs and COFAs and the professional indemnity insurance debacle, and there are signs 2014 will be just as tumultuous.

Year of enforcement

It is now two years since the launch of outcomes-focused regulation (OFR) and the SRA has had enough time to determine its enforcement strategy. At a seminar in November 2013, SRA executive director Richard Collins ominously announced that "2014 will be the year of enforcement".

The slaying of the COLP/COFA?

January sees the one year anniversary of the COLP/COFA and still there is confusion as to what constitutes a breach and whether it ought to be considered material. While this is unsurprising given the lack of guidance available from the SRA, the regulator is now seemingly keen to make example of firms, meaning it is time to ensure your COLPs are holding the reins. Do not give the SRA any excuse to bring you to account:

• Review your compliance plan, risk register and any systems you have in place - make sure they remain relevant and effective;

• Review your central records and registers and look for any patterns that give you cause for concern. Promptly take steps to effect any remedial action;

• Check staff understanding of compliance and provide refresher training where necessary.

LASPO

The consequences of the referral fee ban rumble on into 2014, with enforcement action likely for those with sham referral agreements or who are flagrantly in breach. Towards the end of 2013 the SRA announced that it had "engaged" with 45 firms and launched forensic investigations into ten of them as a result of its probes into breaches. Whilst it is questionable if such a sample is an accurate barometer of compliance, it is clear that now is not the time to "play chicken" with the SRA.

More rigorous sanctions?

The SRA is consulting on proposals to increase the fines it can impose on traditional law firms, bringing the penalties in line with those that apply to ABSs. At present the SRA can only impose fines of up to £2,000 on traditional law firms. More severe penalties can only be issued by the Solicitors' Disciplinary Tribunal. In contrast, the SRA can fine ABSs up to £250m!

While the current disparity does seem unfair, increasing the SRA's fining powers is not guaranteed to "fix" the problem. Further, the integrity of any system that allows the same body investigating the alleged misconduct to also unilaterally impose such potentially eye-watering penalties is debatable.

Financial stability

Financial stability remains a clear focus for the SRA and the SRA is aiming to identify and address instability early, rather than face a costly cleanup exercise when it is too late.

What are some of the prevalent issues faced by the profession, which could impact on financial stability? The ongoing fracas for those involved in the delivery of legal aid continues. No doubt serious financial implications are in store for those legal aid firms whose crime contract tenders are unsuccessful. Clear consideration needs to be given to the strategy and structure of those firms to ensure their longevity.

The SRA has expressed disappointment at the clear lack of understanding firms demonstrate when it comes to financial management; in particular, the control and monitoring of cashflow and other financial management information, and the actions of partners when it comes to their drawings. With this in mind, it is important to question what you are doing to monitor, understand and act on the financial information being produced within your business. Not only is this crucial for maintaining a healthy business, but also to satisfy the SRA and your insurer that your business risks are being considered and addressed.

Death of a law firm

The end of 2013 saw 117 firms facing closure as they failed to secure professional indemnity insurance. The immediate concern for these practices is to ensure a compliant, orderly wind down of the business. In addition, a number of firms simply failed to withstand the economic pressures and ceased practising, some with the help of SRA intervention. It will be interesting to observe what disciplinary action the SRA takes against the individual managers involved in these firms over the coming year.

The ongoing insurance conundrum

Even for those practices sitting comfortably in the knowledge that they have secured their professional indemnity insurance for the next 12 months, it would be very dangerous to leave 2014-2015 renewal to the last minute and every effort needs to be made in the coming year to manage the risk and ensure that a sound proposal can be put forward.

Firms need to assess and manage the risks in their business, consider their compliance arrangements and also implement risk management and prevention measures that are reviewed and amended on an ongoing basis. If the firm has provided an action plan to insurers at last renewal, make sure the actions are undertaken.

Risky pricing models?

The end of last year saw QualitySolicitors announce that all their members will be ditching hourly billing in favour of fixed fees. There is a long-standing debate around which model is better, and ultimately it always boils down to the client's choice/demands. As the legal services market evolves, pricing models become increasingly creative and competitive. However, the key to a commercially successful pricing model is to ensure that you understand the cost implications of undertaking such work. Basic tips include:

• Assess the profitability and break even point for each revenue stream;

• Pinpoint the cost to your business of opening a file;

• Know your financial limits when tendering for work;

• Understand your competition and what they charge. Identify loss leaders and do not be tempted into undercharging for work unless it is part of a sustainable business strategy.

Employee v Partner

Historically, the partnership structure has provided some clear financial benefits for many firms. However, HMRC's proposed changes in relation to LLPs, which come into effect on 6 April 2014, will have a significant impact on the tax liability for both the partners and the firm. Not only may this change affect the PAYE and national insurance costs to your business, it may seriously impact on your partners' earnings expectations.

It is imperative that all LLPs review their position and, where appropriate, consider if their structure is at its most effective going forward. Take legal and financial advice on the implications for your firm and the structure needed.

Organic beasts

With such challenges ahead, it is important to remember that OFR, risk management, strategy development and financial management are organic beasts. Whilst many firms spent 2013 implementing a risk management framework to facilitate compliance with the Handbook and appease the insurers, none of this is static. In an increasingly competitive and precarious environment, the hallmarks of a successful firm in 2014 and beyond will include serious and ongoing focus upon regulation and compliance together with continuous review of the business and the risks that it faces. This must be underpinned by the agility to respond and evolve to meet new challenges and exploit new opportunities.

 

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Michelle Garlick is head of Compl-i, a consultancy service for law firms and author of the COLP Toolkit. She is a member of Weightmans LLP's Legal Services Group which is dedicated to providing regulatory advice and support to lawyers

www.weightmans.com

 

 

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