Same but different
Martin Coleman, SRA board member representing City firms' interests, tells Jean-Yves Gilg why one size can't fit all when it comes to regulation
When City firms hinted that they might apply to set up their own regulatory body, it was a wake-up call for both the Solicitors Regulation Authority and the Law Society. They quickly realised more attention needed to be paid to a chunk of the profession which employs a quarter of all private practice solicitors '“ and rings in a much larger proportion of the profits generated by the legal services sector.
A new City office was opened by the SRA this year as a visible signal of its new-found commitment to the sector. It went on to declare its intention to create a 'special relationship' with large commercial firms. Five of its 16-strong board are now lawyers with a City background, including Martin Coleman, head of antitrust at Norton Rose '“ and the only one of two still in full-time practice in the Square Mile.
'There is a recognition that you can't have a set of rules that covers on one hand global practices with hundreds of partners and on the other hand small high street practices,' says Coleman. 'It's important that there should be a common set of principles and guidelines for all but the application of these rules has to reflect the particular circumstances of each practice. Large firms will have comments and queries about how this works but the principle is welcome.'
Coleman speaks as an SRA board member, but, as the only one of the five newly-appointed City lawyers still working full time at a large firm, it is difficult not to think he is also speaking as one of them '“ a key reason behind his appointment. And while he is confident large firms and the SRA can work together effectively, there is still a sense that the regulator has a long way to go to bring City lawyers fully on board.
Because they are structured so differently and operate on a larger scale than their high street counterparts, large commercial firms have different problems. Their main gripe with the regulator is that its standardised approach is just not synched in the realities of legal life. One criticism in particular relates to its generalised tick-box approach, irrespective of the type or size of the firm and of the significance of a particular behaviour or breach of conduct rule.
'Instead the regulator should consider the consequences of a particular behaviour and at the ways law firms are organised, which is the idea with the new outcomes-focused regulation,' Coleman continues. The question of letters of engagement is a good example he says. While it's important that a client should be sent an engagement letter so that he knows exactly the terms on which the service is being offered, failure to send an engagement letter should not automatically be treated as a serious offence. Only in cases where a firm systematically fails to follow up with a client is the issue a serious concern.
Greater appreciation
Organised as they are, City firms have not taken kindly to the blanket tick-box approach and whether the SRA can achieve the required cultural shift to remain a credible regulator will be key.
'Of course it's right the SRA should exercise control over large firms but until now it didn't understand the way large firms work,' Coleman explains. 'SRA staff had been brought up in an organisation where the culture was about smaller firms and they didn't understand the more complex ways in which larger firms work. One of the aspects of OFR and the new regime is that SRA staff will have a better understanding of large firms.'
It's not that large firms don't want to be regulated. One main concern for them is professional credibility in a competitive environment, and the effectiveness of regulation raises important reputational issues with potentially far-reaching implications for the sector as a whole.
Clients expect their law firms to meet appropriate standards in areas such as conflicts, client accounts, effective internal governance and competence. The issue is not just at the point of entry into the profession but at all levels. 'Education and training are important issues, and large firms have a commercial interest in supporting this,' Coleman insists. 'Most large firms have significant training and education departments that take that on board but a client who uses a professional expects that professional to be of a standard that is externally validated.'
This is where the regulator has a fundamental role to play. But accepting the regulator's legitimacy will also require large firms to make an effort and learn to live with the regulator, according to Coleman: 'If you have a regulator with a tick-box mentality, which is divorced from the reality of what goes on, it's easy to say the regulatory regime doesn't relate to what you do. On the other hand, if you have a regulator which understands our business and shows a level of regulatory engagement, the challenge for large firms will be to work with the regulator on a constructive basis.'
At this stage the SRA is considering having a 'relationship management scheme' with large firms '“ a group of people who focus on and are a point of contact for City firms. 'This means the SRA will be able to build a body of knowledge; rather than waste its and law firms' time asking irrelevant questions it will look at significant issues,' says Coleman.
'The SRA should interfere only where necessary,' he continues. 'Regulated businesses shouldn't expect the regulator to give them an easy time, but they will expect one that is properly informed, competent and proportionate in its dealings with them.'
All systems go
Perhaps the most interesting twist in the regulatory story is how, having threatened to set up their own runaway regulatory body, large firms could now offer a model for the whole of the profession.
'The new regime will be looking at whether there are internal systems and whether they are applied effectively,' Coleman continues. The SRA shouldn't 'jump at your throat if something goes wrong every now and then', he says. 'What we're concerned about is whether these are exceptions, and that when things do go wrong you are able to deal with them effectively. But if things keep going wrong it suggests that systems aren't working properly or they're not being monitored properly, and that's rather different.'
Flexibility is at the heart of outcomes-focused regulation and, to that extent, there is no difference between large and small firms. Just like Lord Hunt's 'authorised internal regulation' model, the premise of OFR is that a firm should regulate itself; the role of the SRA should be to make sure that that internal regulation is effective and that there is proper protection.
'There can be different models as long as the regulatory outcomes are protected,' says Coleman. 'Size is an element in the equation because the larger you are the more the systems may have to be different and more complex. You can't expect partners in a 200-partner firm to know what's going on in other parts of the firm in a way a partner does in a two-partner firm. But the important factor is the appropriateness of the system to the business of the organisation.'
Large firms have dedicated compliance teams, with systems to deal with conflicts and so on, and they spend a lot of money and resources doing that. In smaller firms it is usually the responsibility of one of the partners but there is nothing stopping them from implementing similar mechanisms, just not with the same level of complexity. 'Over time, it is probable that there will be off-the-shelf systems they can just buy in,' says Coleman.
Coleman's appointment and the setting up of a City-focused team have been essential steps in appeasing the rebels and silencing criticisms that the SRA was an irrelevant regulator. There is no doubting the SRA's intention to remain the regulator for the whole profession now and as the legal services sector goes through its most radical structural changes in decades.
For now City firms are happy to play ball. But the SRA is facing a tough challenge: to bring about an internal change in culture that can truly be proportionate and to provide both the external validation large firms need as well as a lightness of touch. With so much else on its plate, whether it can achieve this result is not yet certain.