Were compliance officers really necessary?

So, how has the first month of the full self-regulating era been for you? The answer for most practices will no doubt be “Not so very different from those that went before,” but there is a clear and widespread sense of unease and – in many cases – disenchantment among practitioners as to the new regime. News that there were apparently 1,000 firms without COLPs and COFAs at the turn of the year provides further evidence, if required, that the imposition of the compliance officer roles has been problematic for many more firms than had been envisaged, and for the regulator itself.

For all of the current problems, the concept of self-regulation does make a good deal of sense. The former regime worked on the basis that it was, for the most part, the job of the regulator to find out about transgressions. There were, of course, clear exceptions when incidents of fraud or serious misconduct arose - the current such obligations at O (10.4) of the 2011 Code of Conduct has clear similarities to the former rule 20 on this point. But the former self-reporting obligations did not deal with the more general managerial and service standards in law firms. The now disbanded Practice Standards Unit of the SRA was acknowledged to have spent a good deal of time and resource monitoring good firms, while at the same time problems persisted elsewhere. Shifting the regulatory burden from the regulator to ?the regulated – primarily through the roles of COLP and COFA – was likely to inform the SRA as to where problems did exist, and so enable them to maintain and ?raise standards.

Policy decision

If it is not so much the concept of self-regulation that has caused the current malaise, then perhaps it arises from the way that it was actually implemented. Some have also questioned whether the roles of COLP and COFA were ever really needed in private practice firms at all. The compliance officer roles have their origins in sections 91-92 of the Legal Services Act 2007, but these provisions are limited to licensed bodies, or alternative business structures (ABSs). It was thus a policy decision by the SRA to extend the need for COLPs and COFAs to private practice, rather than a legal requirement.

This extension might have had the advantage of symmetry for the SRA, with all of their authorised bodies being subject to much the same regime, but this overlooked the very different management structures that are to be found in law firms, as opposed to the commercial organisations that would mostly account for the new ABSs.

It may well therefore have made a good deal of sense to personalise the compliance responsibilities to named individuals in large, anonymous and multi-faceted commercial concerns, but it is questionable whether there was really the same need to do so in law firms. Partners in law firms, or directors of law firm companies, not only have joint and several liability as between themselves, but personal obligations as solicitors and managers to the SRA as well. The degree of personal accountability is even more, if anything, for sole practitioners where, no doubt, the overwhelming majority of the appointments that have been made have been of the sole principal. It seems fair to question, therefore, whether COLPs and COFAs were really needed at all, or if the appointments had to be linked quite so closely to the statutory arrangements that were required of ABSs.

Continuing obligations

As if recognising the above the SRA seemed to stress the continuing obligations of those who would not be a COLP or a COFA almost as soon as the roles were announced. Not only was there clear guidance to this effect in the ‘OFR at a glance’ document, which accompanied news of how nominations should be made, but much the same was specifically written into the SRA Accounts Rules. Section 6 of these rules provides that the principals’ responsibility to ensure compliance with the rules is not affected by the appointment of the COFA.

Perhaps the most common cause ?of confusion encountered among nominees and, now, office holders, is the extent to which the reporting officer roles are personal roles divorced from the legal ?and professional obligations that already apply to them as sole principals, partners or employees.
A linked issue is whether COLPs and COFAs therefore truly need their own personal insurance, or whether they will be adequately covered by their usual indemnity insurance, especially if extended to reinstate the professional liability that used formerly to be part of the Minimum Terms and Conditions.

Rejection rates

The SRA has reported that less than 200 firms had failed to nominate their COLPs and COFAs before by the end of 2012, but anecdotal evidence suggests that many of these might be duplications in the SRA records. Of the remaining firms that make up the reported 1,000 some will be rejections of nominations by the SRA. Many others were those firms that have not received a response to their nominations, notwithstanding the SRA’s insistence last year that all practices would receive a response before the 1 January start date.

As to rejections, COFAs will have to have shown that they have the necessary expertise in the operation of the Accounts Rules and the authority to address serious issues within the firm. In many firms it is the head of accounts who has the requisite expertise in the Accounts Rules, but the managing or finance partner will often have the authority to get things done, so neither might qualify as such.

COLP nominees, on the other hand, were more likely to nervously await a decision from the SRA in relation to some former minor personal or professional transgression that was not deemed sufficient to have prevented them from being or remaining on the Roll, but which might have had a bearing on their nomination.

Either way, it has to be questioned why if, as Lord Bingham once famously stated, a solicitor must be capable of being “trusted to the ends of the earth” that different standards should apply at all. Why should an individual be trusted to hold and manage client money – or to be allowed to practise at all – but somehow be unsuitable for a particular compliance and reporting role within their firm? If the highest standards apply to all solicitors then surely the SRA could have made the last few months much easier for all concerned had they simply said ‘good enough to be in practice – good enough to be a reporting officer’. How much easier the run-up to 2013 would have been had the suitability checks been limited to the non-solicitors nominated by many firms – in most cases for the role of COFA since the COLP has to be a lawyer?

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