Changes to the SRA’s Reporting Obligation

20 February 2019

On 7 February 2019 the SRA published its response to the August 2018 Reporting Concerns consultation.  As a result of the consultation, the SRA has decided to update its reporting obligation so that it reads as follows:

  1. You must promptly report to the SRA, or another approved regulator, as appropriate, any facts or matters that you reasonably believe are capable of amounting to a serious breach of their regulatory arrangements by any person regulated by them (including you).
     
  2. Notwithstanding, you must promptly inform the SRA of any facts or matters that you reasonably believe should be brought to its attention in order that it may investigate whether a serious breach of its regulatory arrangements has occurred or otherwise exercise its regulatory powers.
     
  3. You must not subject any person making or proposing to make a report or proving or proposing to provide information based on a reasonably held belief under [cross reference to the relevant paragraphs of the Codes of Conduct] to detrimental treatment for doing so, irrespective of whether the SRA or another approved regulator subsequently investigates or takes any action in relation to the facts or matters in question.

The SRA will now submit an application to the Legal Services Board for this to replace the current reporting obligations for individuals, firms and compliance officers.  Assuming it’s approved, this will come into effect as part of the new SRA Standards and Regulations (which are due to replace the current SRA Handbook this summer). 

So how does this differ from the current reporting obligation and what does it mean in practice?

Under the current (2011) Code of Conduct, the main reporting obligations are as follows:

Outcome 10.3: you notify the SRA promptly of any material changes to relevant information about you including serious financial difficulty, action taken against you by another regulator and serious failure to comply with or achieve the Principles, rules, outcomes and other requirements of the Handbook.

Outcome 10.4: you report to the SRA promptly serious misconduct by any person or firm authorised by the SRA, or any employee, manager or owner of any such firm (taking into account, where necessary, your duty of confidentiality to your client).

As well as these provisions the COLP has an obligation to report “material breaches” under Rule 8.5 of the SRA Authorisation Rules and there is an obligation to report certain events such as criminal convictions under Regulation 15 of the Practising Regulations.

The SRA has identified that the existing wording led some to consider that concerns should not be reported until there has been a conclusive determination of the relevant facts and that these facts comprise serious misconduct.  This is an understandable interpretation given that the obligation refers simply to a “serious failure to comply with or achieve…requirements of the Handbook” which implies that it has been concluded that there has been such a failure, rather than there being a suspected failure. 

The new wording makes it clear that there is no need for an investigation to be undertaken or a conclusion reached before a report is made – it is sufficient that there are facts or matters, if proven, that you reasonably believe are capable of amounting to a serious breach. 

Some stakeholders who responded to the consultation were not in favour of such an approach, and considered that a COLP should undertake a preliminary investigation before making a report, to avoid over-reporting.  However, the SRA has ultimately agreed with one respondent who said “It is not the role of a Compliance Officer to make a final determination as to whether or not an omission amounts to a breach of the Code of Conduct”. 

This may lead some COLPs and firms to conclude that it’s safer to simply refer a concern to the SRA as soon as they become aware of it, rather than to take any investigatory steps before making a report.  This would certainly avoid any criticism for not reporting promptly.  However, reporting to the SRA is a serious step which is likely to cause anxiety for an individual even if the SRA ultimately decide not to act.  There may be differing views within a firm as to whether to report particularly when the matter has not been fully investigated.  In addition there may also be overlapping employment or partnership issues around the individual concerned which will require an investigation.   All of these point towards an investigation before making a full report.  The perennial issue is how to balance that need to investigate with the obligation to report promptly. The SRA does point out in its response to the consultation that it is not suggested that firms shouldn’t investigate matters and that compliance officers shouldn’t exercise their own judgment in deciding whether a breach has occurred.  However, the SRA state that they “are keen for firms to engage with us at an early stage in their internal investigative process and to keep us updated on progress and outcomes.  In these circumstances, we are likely to be happy for the firm to conclude their investigation and provide us with a copy of their report and findings.  However, we may, on occasion wish to investigate a matter (or an aspect of a matter) ourselves…” 

We have adopted this approach with some of our clients, as an early outline notification ensures that the firm and COLP cannot be criticised for not reporting promptly, whilst conducting an internal investigation allows the firm to establish the facts which will be of assistance to the SRA as it enables them to more readily understand the issues.   Of course, there has still been a referral and the very fact that the SRA is aware of a matter (which may not ultimately go anywhere) is likely to cause anxiety for the person concerned.  However, this approach may be the best way to ensure that there is no breach of the reporting obligation, whilst allowing enough time to deal with what can be complex issues. 

The second paragraph of the new obligation did not feature in the original consultation and adds an interesting angle.  The word “notwithstanding” implies that, even if there is no obligation to report on the basis of the first paragraph (for example because you do not have a reasonable belief that the facts are capable of amounting to a serious breach), you should still report to the SRA matters you reasonably believe should be brought to their attention.  This is clearly a lower threshold than the first paragraph and on first blush it’s difficult to understand why the first paragraph exists at all.

However, this paragraph is aimed at a different target.  It is designed to capture a different set of circumstances to the first paragraph.   It may well be that those considering their reporting obligations are not able to satisfy themselves to the point of having a “reasonable belief” that there is a serious breach because they do not have access to the relevant evidence.   The following are examples:

  • A firm is concerned about a transaction that it participated in but cannot fully understand the transaction because it does not hold enough information;
  • A firm is concerned about the conduct of another firm but does not have access to any evidence about why the other firm is acting in the way it did.

Both of these examples could fail the “reasonable belief” test but nonetheless the SRA will want to know about them.  It will then be up to the SRA to decide if it wants to use its powers to get further information. If you are considering whether to make a report to the SRA, or are concerned that a report may be made about you, our dedicated legal services team can provide you with practical and detailed advice and assistance.

About the author

Lucy Williams is Legal  Counsel in the Regulatory Department with a particular specialism in legal, healthcare and financial regulationLucy acts for several regulators, both in professional disciplinary matters and in providing advice on policy issues. 

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