Legal Services Act: New forms of practice and regulation

Transcription

1 Legal Services Act: New frms f practice and regulatin Cnsultatin paper 16 Better regulatin: A new apprach t regulating legal services firms and slicitrs 6/1/2009 Page 1 f 12

2 Cntents Intrductin...3 Why a new apprach?...3 The new apprach...3 Impact n disciplinary and enfrcement actin...4 The key benefits f the shift in emphasis...5 A new relatinship?...6 Practical issues disciplinary histry...7 Cnclusin...8 Summary f cnsultatin questins...8 Hw t respnd...8 Submissin deadline...8 Annex Advantages f taking regulatry/disciplinary actin against a firm...9 Advantages f taking regulatry actin against individuals...9 Annex Criteria t determine the fcus f an investigatin:...10 Firm/individual fcus f enfrcement and disciplinary actin decisin tree /1/2009 Page 2 f 12

3 Intrductin Why a new apprach? 1. This paper sets ut the Slicitrs Regulatin Authrity s evlving new apprach t regulatin, and in particular hw the shift twards regulating legal firms will affect the way in which we regulate. There are a number f factrs driving this new apprach: The SRA inherited an apprach t regulatin which had been predminantly reactive, generally secretive, and cncerned with the regulatin f individuals in small practices; The SRA s strategy, published in 2006, signalled a shift t mre explicit risk-based regulatin in the public interest; The principles f better regulatin will sn t apply t all legal regulatrs as a statutry bjective; We als need t build a mre flexible frm f regulatin fit nt nly fr the current wide range f firms but als ne that can be apprpriately adapted t new frms f practice, bth legal disciplinary practices (LDPs) and alternative business structures (ABSs) in future. New statutry pwers give the SRA mre flexibility than we had befre and require firm based regulatin as well as the mre traditinal regulatin f individual slicitrs etc. 2. Much f ur recent wrk has necessarily cncentrated n the changes in rules, regulatins and prcedures t enable new frms f practice frm March This has invlved the cncentratin n what lks little mre than new bureaucratic regulatry prcesses. Thse prcesses are necessary, but are nly part f the changes required t deliver the new apprach. The new apprach 3. We are setting a new visin f law firms regulated by the SRA. We want t cncentrate ur resurces n dealing with serius risk. We want t encurage law firms t tackle risk themselves wherever pssible, reducing the verall regulatry burden and allwing us t cncentrate upn thse wh can t, r wn t, put things right. T d that, we need t build a new relatinship between the SRA, as regulatr, and the firms we regulate. 4. We recgnise that the vast majrity f firms wish t act ethically and t be cmpliant with the relevant rules and regulatins. Firms wh respnd psitively t the new relatinship can expect lighter regulatin. (Thse wh dn t, and thse wh d nt recgnise that this new relatinship needs t be built n sme degree f mutual trust, will be dealt with severely if smething ges wrng as a result.) The develpment f new supervisry visits fr larger crprate firms is part f ur shift in emphasis. Regulatry settlement agreements, which have been used successfully t deliver apprpriate but 6/1/2009 Page 3 f 12

4 prprtinate regulatry actin where firms are willing t take respnsibility fr past breaches, are als part f the shift in emphasis. 5. This paper largely cncentrates n hw the SRA intends t adapt its plicies relating t enfrcement and disciplinary actin in the light f new statutry pwers relating t firms, but these issues shuld be seen as a key part f develping this brader new apprach. Impact n disciplinary and enfrcement actin 6. Histrically, the SRA, like ther prfessinal bdies, has viewed cnduct and regulatry bligatins as an individual matter. The individual takes respnsibility fr their wn actins r missins, and, therefre, nearly all disciplinary and enfrcement actin has been applied t individuals. 7. Hwever, the psitin is changing. Althugh many firms still perate as partnerships, there is an increasing tendency fr firms t practise thrugh an incrprated cmpany, either an LLP r a limited liability cmpany. This has been reflected in the way we nw apply sme f ur regulatry pwers; but, in general, even where the firm has incrprated, we have cntinued t lk t individuals t be accuntable fr bth breaches f rules and fr prfessinal miscnduct mre generally. 8. The principle f firm-based regulatin has been recgnised as apprpriate by Parliament. The Legal Services Act 2007 will require entities prviding reserved legal services t be authrised and regulated as well as the individuals prviding such services within the entity. In additin, the Legal Services Act, thrugh amendments t the SRA s wn statutry pwers, prvides a system f firm-based regulatin fr the SRA. 9. The psitin in respect f statutry pwers will change cnsiderably in 2009, when the amendments t ur statutry pwers cme int frce. At that time: (i) rules will, in effect, apply directly t: individual slicitrs, RELs (including sle practitiners) and RFLs all recgnised bdies (i.e. all firms except sle practitiners); all managers f recgnised bdies (whether slicitrs r nt); and all emplyees f firms (including thse f sle practitiners). (ii) the SRA will have the pwer t impse cnditins n: individual slicitrs, RELs and RFLs; recgnised bdies; and recgnised sle practitiners. 6/1/2009 Page 4 f 12

5 (iii) the SRA will have the statutry pwer t rebuke and / r fine and t publish such a decisin in relatin t: individual slicitrs, RELs (including sle practitiners) and RFLs; all managers f recgnised bdies (whether slicitrs r nt); all emplyees f recgnised bdies and sle practitiners; and recgnised bdies. (iv) the Slicitrs Disciplinary Tribunal (SDT) will als have additinal pwers, and will be able t: fine all r any managers/emplyees f recgnised bdies; fine emplyees f recgnised bdies and sle practitiners; fine recgnised bdies and sle practitiners; and refer particular managers r emplyees t their wn prfessinal bdies. 10. In additin, the SDT s pwer t fine, previusly limited t 5,000 per finding, becmes unlimited, which will be significant when determining wh and hw much t fine. 11. The SRA s key bjectives already reflect the mve t firm-based regulatin. Fr example, there is the bjective t tackle unacceptable prfessinal r rganisatinal perfrmance miscnduct and dishnesty by firm, fair and timely regulatry and disciplinary actin. The SRA nw needs t change its plicies in the light f the new statutry pwers. In future, disciplinary decisins can be made against firms as well as individuals. The SRA Bard believes that there shuld be a significant shift in emphasis t taking actin against firms, where apprpriate, rather than individuals, althugh it will still be necessary t take actin relating t individuals in certain circumstances. The key benefits f the shift in emphasis 12. Lking ahead, the Legal Services Act requires bth the Legal Services Bard and apprved regulatrs t have regard t the principles under which regulatry activity shuld be transparent, accuntable, prprtinate, cnsistent, and targeted nly at cases in which actin is needed. Cdes f practice issued by the Better Regulatin Executive recgnise in particular that investigatin, enfrcement and disciplinary activities are cstly, and regulatrs are encuraged t invest in preventin rather than a cstly cure. 13. In many cases, enfrcement and disciplinary actin are nt required as the interventin f the regulatr can ften encurage firms wh have been in breach t put things right fr the future. Disciplinary prcesses therefre shuld nly be used when required. The fcus f regulatin must be n public prtectin, and disciplinary actin is smetimes required t maintain public 6/1/2009 Page 5 f 12

6 cnfidence, t encurage better behaviur in the rest f the regulated cmmunity, and t perate as a credible deterrent. Disciplinary actin need nt always fllw an adversarial prcess and can nw be delivered thrugh regulatry settlement agreements 14. Risk assessment is key t these issues, and the SRA has already develped a new risk assessment system t ensure that cmpliance and inspectin activity is apprpriately targeted. (This has been develped against a backgrund in which the SRA has very little infrmatin abut the firms it regulates. The new statutry pwers n firm-based regulatin will imprve the SRA s ability t seek infrmatin frm firms and use that in risk assessment fr the future.) The SRA Bard believes that better regulatin indicates that allegatins, cmplaints and infrmatin giving rise t cncern shuld first be addressed as the firm s respnsibility unless the allegatin r cmplaint is in a particular categry which makes it necessary t deal with it as an individual issue. Annex 1 sets ut sme advantages r disadvantages f mving twards a firm first apprach. 15. The grundwrk fr this firm-based apprach has already been laid in rule 5 f the current Cde f Cnduct dealing with business management. That rule requires all principals in a firm t make arrangements fr the effective management f the firm as a whle; t prvide fr cmpliance by bth the firm and individuals with key regulatry requirements, and t prvide systems fr apprpriate supervisin f and cmpliance with a number f regulatry issues including cnflict f interest, client care, undertakings, etc. 16. Allegatins r infrmatin that pint t dishnesty r fraud which may ptentially need t be dealt with by the Slicitrs Disciplinary Tribunal are likely t require investigatin and actin against individuals. Hwever, in thse cases, it will als be imprtant t assess the relevant firm s respnsibility t have in place systems which seek t minimise the risk f dishnesty r fraud in a firm. Annex 2 sets ut the criteria that we believe indicate that an individual shuld be investigated. It als cntains a suggested decisin tree shwing hw the new plicy will apply in practice. Questin 1 What are yur views n the suggested criteria and decisin tree? A new relatinship? 17. Self-regulatin systems tend nt t prescribe the relatinship between the members f the prfessinal bdy and the bdy itself. The current Cde f Cnduct, in rule 20, reflects nly the aspects f the relatinship seen as necessary in the cntext f self regulatin. 18. Rule prvides a duty t cperate with the SRA and LCS, in an pen, prmpt and cperative way. Rule prvides a duty t reprt serius miscnduct by ther slicitrs and firms r yur wn emplyees t the SRA again based n the fact that a prfessin has an ethical duty t uphld high standards. 6/1/2009 Page 6 f 12

7 19. If firms are t be expected t take n a greater degree f respnsibility fr regulating the quality and cnduct f their emplyees, this shuld be reflected in the Cde. We believe that a new cre duty may be required, alng the lines f the FSA principle: A firm must deal with its regulatrs in an pen and cperative way, and must disclse t the FSA apprpriately anything relating t the firm f which the FSA wuld reasnably expect ntice. 20. This ges beynd the current requirements in rule 20 but wuld be the basis f a relatinship which recgnises that the public interest is best served by an pen relatinship which encurages firms t demnstrate t the regulatr a willingness t disclse prblems and take actin t put things rights. 21. It has been suggested that in sme situatins, perhaps where the allegatins relate t particular types f breach f rules, the SRA culd g further and, in effect, leave firms t take actin t identify and put right minr breaches themselves. The SRA Bard cnsiders this may be smething fr future develpment. But such a prpsal wuld certainly require an amendment t the cre duties as suggested in paragraph 19 abve, and may rely n there being cmpulsry rles in all firms as will be required under the Legal Services Act 2007 fr ABSs in future (e.g. the rle f a Head f Legal Practice and Head f Finance and Administratin ). Questin 2 What are yur views n the adptin f a new cre duty defining a firm s relatinship with the regulatr? Practical issues disciplinary histry 22. An imprtant cnsequential decisin is whether a decisin r finding against a firm shuld frm part f the recrd f the managers f the firm albeit simply as a recrd that the individual was the manager f a firm which itself was fund t be in breach. 23. Clearly, if a decisin is made against a firm and als against an individual, then any decisin against an individual will be part f their individual recrd. 24. The SRA believes that it is in the public interest t have a system which can demnstrate where individuals have wrked in the past and whether they have wrked in a firm that has been disciplined. This is particularly imprtant in an LDP envirnment r, in future, fr ABS. Nt t have such a recrd wuld allw thse included in firms with a pr disciplinary histry t set up phenix firms. Questin 3 Where a disciplinary penalty has been applied t a firm, d yu agree that it is imprtant fr the recrd t shw thse wh were the managers in a firm that has been disciplined? 6/1/2009 Page 7 f 12

8 Cnclusin 25. We wuld welcme cmments n the new apprach described in the intrductin t this paper. 26. Als, in the cntext f the SRA using new pwers t regulate, and s investigate and take disciplinary actin against a firm, we wuld welcme cmments that directly address the questins set ut belw. Summary f cnsultatin questins Questin 1 What are yur views n the suggested criteria and decisin tree? Questin 2 What are yur views n the adptin f a new cre duty defining a firm s relatinship with the regulatr? Questin 3 Where a disciplinary penalty has been applied t a firm, d yu agree that it is imprtant fr the recrd t shw thse wh were the managers in a firm that has been disciplined? Hw t respnd Fr infrmatin n hw t respnd, please visit ur website. G t Select Better regulatin: A new apprach t regulating legal services firms and slicitrs. Click Hw t respnd. Submissin deadline The deadline fr submissin f respnses is 31 March /1/2009 Page 8 f 12

9 Annex 1 Advantages f taking regulatry/disciplinary actin against a firm Bradly, there culd be said t be the fllwing advantages: such a plicy wuld be in line with the SRA s strategic bjectives and better regulatin principles; it is mre cst effective imprving regulatry cmpliance in firms prvides a psitive utcme fr all clients and prspective clients; it enables fcus n the real issue (e.g. if it is a case f pr accunts rule cmpliance, it shuld be irrelevant that an individual slicitr has an unblemished recrd/has suffered persnal recent lss etc.); it avids the need t apprtin respnsibility amngst partners in rder t ensure that the prceedings are brught against the right individuals, which can take mre investigatin resurce and s mre time; it is arguably less emtive, s leading t a less emtinal respnse frm the affected firm as it nt a questin f persnal r mral culpability; it encurages cllective respnsibility. Advantages f taking regulatry actin against individuals These culd be: there is much t be said fr individuals taking persnal respnsibility fr their wn actin and that f their firms, and that is a strng traditin in prfessins; a plicy f rutinely regarding regulatry breaches as the firm s respnsibility rather than that f an individual r individuals wuld run cunter t the traditin f regulatin in the slicitr s prfessin and may mean that such breaches were regarded as nt s serius; rather than prmting cllective respnsibility, it may prmte the abdicatin f respnsibility; firms can cme and g; cncentrating actin against the firm may lead t phenix firms and an inability by the SRA t track risk thrugh individual respnsibility fr nn-cmpliance; sme managers in firms wh have nt been invlved in whatever has gne wrng may, in fact, bject t the firm as a whle being held liable rather than the individuals wh are respnsible. 6/1/2009 Page 9 f 12

10 Annex 2 Criteria t determine the fcus f an investigatin: The primary respnsibility fr ensuring cmpliance with a firm s regulatry bligatins rests with the firm itself. Hwever, there may be instances in which there is evidence f persnal culpability and where, in cnsequence, the SRA may wish t investigate the individual as well as, r instead f, the firm. The presence f any the fllwing circumstances might suggest that the SRA shuld investigate the individual: fraud including mrtgage and prperty fraud, mney laundering and high yield investment fraud dishnesty/deceptin deliberate and intentinal behaviurs misleading intentinally misleading the curts, third parties and clients discriminatin abuse f a psitin f authrity r trust fr example when acting as Receiver r Attrney a reprt abut an individual under Rule serius cnduct which was systematic, deliberate r pre-meditated with ptential fr significant adverse impact r invlving a vulnerable persn serial repeated r systematic cnduct having regard t previus histry criminal cnvictins persnal respnsibility at law failure t cmply with persnal regulatry requirements including practising uncertificated, breach f PC cnditins, breach f sectin 43 rder Slicitrs Act ffences including hlding ut, reserved wrk r ffences under sectins 41 and 44 cnduct utside practice which warrants investigatin, fr example, dishnesty r serius miscnduct SRA plicy ( if relevant) public interest raises issues abut the cnduct f an individual which it wuld be in the public interest t investigate r issues f particular sensitivity r imprtance When deciding whether t investigate the individual, the SRA will need t cnsider nt nly the type f matter but als the persnal behaviur f any individual invlved and in particular whether there is evidence f any f the fllwing with regard t the individual which may indicate sme direct persnal respnsibility: 6/1/2009 Page 10 f 12

11 recklessness persnal mtive such as gain fr self r family members/friends criminality repetitive behaviur adverse persnal regulatry histry relevant t the allegatin Althugh in almst all matters the individual investigatin will be in cnjunctin with an investigatin f the firm, there may be sme instances where nly the individual will be investigated and the firm will nt be part f any investigatin. Such instances will be infrequent but may include, fr example, persnal criminal behaviur utside f practice, such as drink driving. The decisin tree belw sets ut the factrs t be cnsidered when cnsidering the mst apprpriate fcus fr any investigatin and when, althugh the decisin as t wh t investigate can be recnsidered at any time during an investigatin. 6/1/2009 Page 11 f 12

12 Firm/individual fcus f enfrcement and disciplinary actin decisin tree N Refer t Firm Start Des matter require SRA cnsideratin? Yes Cnsider individual nly Carelessness Recklessness Yes Is matter as a result f a criminal cnvictin f Individual r behaviur utside practice? Persnal gain Cnsider individual & firm N Are there fitness t practice issues? (nt an exhaustive list) Yes Dishnesty N Incmpetence r repetitin Cnsider firm nly The enfrcement and disciplinary prcess cntains 3 key stages - risk assessment, investigatin r inspectin and utcme. This decisin tree is used at all stages and can be used multiple times within a stage. Criminality Persnal disciplinary histry Start Risk Assessment Investigatin r Inspectin Outcme End 6/1/2009 Page 12 f 12