Following successive years of regulatory change, including the introduction of outcomes-focused regulation, COLPs and COFAs, risk teams are now in a phase of assimilating those changes. Legal Business tracks progress so far
After five years of reporting on the torrent of regulatory change that has swept through law firms, this year’s Legal Business/Marsh risk management and professional indemnity survey finds risk managers within law firms looking to assimilate those changes. In our sixth annual report on the market, the buzzword is ‘embedding’ – ensuring the upheaval caused by the introduction of outcomes-focused regulation (OFR) and the new high-profile risk management roles (the compliance officer for legal practice (COLP) and the compliance officer for finance and administration (COFA)) are properly implemented.
1) Has your firm completed its processes for dealing with outcomes-focused regulation (OFR)?
2) Do you believe these processes are completely effective and understood within your firm?
3) In relation to OFR, has your firm received an official visit from the Solicitors Regulation Authority to date?
4) Would your firm consider outside investment as a method of raising capital?
Source: Marsh/Legal Business RM Survey
Indeed, new regulatory issues that emerged in 2012 – particularly the supposed threat of new alternative business structures (ABS) that received official sanction from the Solicitors Regulation Authority (SRA) and the arrival of external investors, such as Duke Street Capital and Quindell Portfolio – have been met with little concern. Despite a swathe of ABS gaining licences in 2012, the number of respondents that said their firms would consider outside investment as a method of raising capital has fallen significantly, down from 36% last year to 23%. Most of the people that were saying ‘yes’ last year are saying ‘Don’t know’ now. It seems they have different priorities, with the majority view being that ABS in all its guises is there for the consumer end of the market. As Julia Graham, chief risk officer at DLA Piper, says: ‘The financial environment gives rise to an increase in short-term thinking and a hesitation to take risk.’
TLT’s COFA, practice director Steve Willson, shares this view. ‘Difficult and uncertain economic conditions mean that there is uncertainty in firms’ investment capacity,’ he says. ‘While niche areas may lend themselves to external investment, more general service providers may find it easier to stick with more traditional methods.’
However, one senior risk manager says that market pressures on larger City firms from ABS may not be that far away. ‘Everyone I talk to says that our marketplace is going to change dramatically over the forthcoming years. Whether that’s specifically because of outside investment I just don’t know,’ they say. ‘I suspect that if a firm goes all the way to the market here, like Slater & Gordon did in Australia, the answer to your questions may change again. If the big firms don’t think that it’s going to affect them then they need to wake up and smell the roses. This is all happening at the lower level but in my view it’s going to work its way up.’
Settling in
But for now at least, ABS considerations are some way off. Risk management teams have been forced to bite off a huge chunk of responsibility and now it’s time to try to digest it.
‘I imagine that embedding the new outcomes-focused regulations recently promulgated by the Solicitors Regulation Authority and the roles of the COLPs and COFAs will be high on the list of “things to do”, because these regulations and roles are new and it will take some time for the firms to get used to them,’ says Sandra Neilson-Moore, European practice leader for law firms’ professional indemnity at Marsh.
Emma Dowden, director of operations and best practice at Burges Salmon, says there are two key priorities for risk teams in the coming year. ‘One priority is embedding changes to the systems and culture, such as the new COLP and COFA roles. It seems that every year there has been a new, key project for every risk team to deal with, a new issue at the top of the risk agenda. It would be beneficial for firms to consolidate and use each of these changes to begin to embed a new culture of compliance within their firms,’ she says.
Angela Robertson, general counsel (GC) at Eversheds, echoes this view. ‘Most firms have come to terms with the concept of OFR, the new code had been embedded in, most firms already have their COLPs and COFAs,’ she says. ‘I think it’s “back to business” as usual actually and back to specific projects.’
In particular, selecting the right person for the COLP role (see Part III, ‘Finding the balance’, page 51, for more on this) and getting partners and the rest of the firm to understand the importance of the role has been critical.
‘Embedding the role of the COLP has been a challenge and it is very important this message reaches every individual in the rest of the firm,’ says Robertson. ‘I started to speak about COLP last year and it didn’t achieve the impact I had hoped; but at the beginning of this year, the role became active and I have seen a difference at the firm. Individuals are beginning to understand the importance of the COLP role and I intend to promote this further through various communication channels.’
73% of respondents said their firms have completed their internal processes for OFR and just 27% have not. However, just a third said that those processes are completely effective and understood within their firms, while the rest said they are not.
One of the main areas of concern, widely reported among risk managers interviewed for this report, is the new duty on firms to record ‘non-material’ breaches of the SRA Handbook under OFR and report these breaches to the SRA annually.
‘For me the most significant cultural change in terms of impact is this requirement to report non-material breaches,’ says Dowden. ‘This is quite a seachange in the way the regulator regulates firms and the mindset of individuals I think.’
Another risk manager says they were at a consultation day hosted by the SRA in December, which tackled the issue of reporting non-material breaches. The problem was, no-one seemed completely clear what was required under OFR. ‘The SRA said it would not require firms to report every non-material breach but would be expecting firms to tell them what trends they have discovered. Those of us that were there on the day looked at each other and said: “where’s this coming from?”’
However, it is clear that everyone is still coming to terms with OFR. Law firms and the SRA are still only a year down the road, and will be continuing to find their feet for a while. The SRA admitted that it still has work to do in a statement in February.
Neilson-Moore agrees that a successful transition to OFR will not happen overnight. ‘Anything this new and different takes time to be properly understood, particularly by busy fee-earners, with lots to do and client deadlines to meet,’ she says. ‘You may recall that the original objections to OFR were that it was too “fuzzy” and that “outcomes focused” and “principles based” rather than prescriptive rules were confusing to lawyers who had grown up with, and were used to, the imposition of rules. It will take time for firms to trust that the way they are interpreting how the new rules work is in line with what the SRA expects from them.’
Working together
Risk teams report that the SRA has been working hard to help firms complete the transition to the new principles-based regime of OFR, largely through visits from their relationship manager. The SRA’s Relationship Management programme was piloted from the end of 2010 and was eventually rolled out to the large and global law firms a year later.
The overwhelming majority of firms (71%) have received a visit from the SRA so far. For most, there was no set agenda but rather a fact-finding mission and a general discussion of the firm’s structure. Where firms have had a second visit, quite often this has focused on financial operation.
‘We had a couple of visits last year,’ says Robertson. ‘The first was very informative and involved relationship building. The second visit was an attempt to understand more about Eversheds and how we manage risk. Trust is a two-way thing – it’s important for the SRA to get to know the COLP and COFA at firms, and this will help them understand a firm’s approach to regulatory requirements.’
‘We found it very useful to have a known, specific contact point for the regulator because you get consistency of contact and you can develop that knowledge and understanding,’ says Dowden.
That said, some risk managers have reported more than a few teething problems with the SRA’s management of the entire process, not just with approving nominations for the COLPs and COFAs, which seemed to take an inordinately long time but also with their dealings with relationship managers. Reports have filtered through of a lack of continuity with changes to relationship managers handling the firm, and a lack of communication between relationship managers when handing over firms. Some firms have said they’ve had as many as three separate relationship managers; others report the feeling that relationship managers are working to the same script, without asking questions tailored to the particular firm.
‘Embedding the role of the COLP has been a challenge
and it is very important this message
reaches every individual in the firm.’
Angela Robertson, Eversheds
‘Engaging with the regulator should have a benefit but one size does not fit all,’ says Graham. ‘Firms might expect agendas driven by the knowledge of the regulator of firms and the maturity as perceived of firms in their risk and compliance journey.’
However, most risk teams accept that there is an effort to improve and that the SRA itself has admitted that it is finding its feet in many respects.
‘I think the SRA is still taking time to understand how different firms work and how they are structured. The scope and nature of the visits may change – and become more beneficial to law firms – as that bank of knowledge grows,’ says Craig Perry, GC at CMS.
‘To form a relationship with a firm, you have to understand its systems and procedures and its financial structure, so I don’t think there is much difference. I think that’s what the SRA is trying to do. At this stage, they’re coming in to understand rather than stating the dos and don’ts,’ says Jo Riddick, COLP at Macfarlanes.
This experience is something Neilson-Moore has been hearing: ‘Many of the SRA relationship managers are new to their roles as well. I have been told that the SRA relationship management visits seemed to some as if they were “fact finding” missions, aimed at educating the relationship managers. I imagine the SRA wants to know what makes firms “tick”, so that they can compare and contrast and also so that they can do a review, if something happens to a firm after they have examined them.’
What’s clear is that everyone – risk managers, partners and the SRA itself – needs to collaborate to foster a sophisticated understanding of the impact of OFR on a practical level in 2013. Bedding down is not without its challenges. LB
mark.mcateer@legalease.co.uk
Legal Business would like to thank Marsh for its sponsorship of this survey.