The FCA – Transformation to Assertive Supervision
In our last blog commenting on the Solicitors Regulation Authority (“SRA”) Standards and Regulations (“StaRs”) one year on, we noted that we expected publication of the SRA’s second “Upholding Professional Standards” report (“the Report”) to be imminent. That Report was published on 14 December 2020. In reviewing how and when the SRA took enforcement action during the 2018/19 period, the Report highlights, in particular, the impact of two then recently introduced changes in approach. First, from an investigation perspective, the SRA introduced a new assessment and early resolution process focusing on upfront engagement and delivering, where possible, earlier outcomes on concerns reported to it. Additionally, in February 2019, the SRA introduced a revised Enforcement Strategy, setting out its approach to enforcement and the factors it will take into account when considering whether regulatory action is needed.
The SRA’s introduction of a new assessment and early resolution process represents a decisive shift from the previous “risk scoring” approach – an approach which had led to a significant number of lower-level, technical breaches proceeding to the investigation stage. In contrast, the new process aims to apply “threshold judgements aligned to the Enforcement Strategy at the very start of the investigation process” by way of a three-stage “Assessment Threshold Test”. A complaint or report received by the SRA is therefore assessed against three preliminary questions. All three questions must all be answered in the affirmative in order to warrant further investigation by the SRA:
The SRA is first interested in whether or not the information involves an individual/firm it regulates. If so, it then assesses whether a breach is suggested. At this stage there are no requirements for proof of any breach or risk, as the SRA is simply “considering if the information raises a question of risk or wrongdoing”.
In line with its Enforcement Strategy, the SRA is focused on taking enforcement action in relation to the most serious of complaints and reports. A matter may be “serious” either in isolation because it amounts to a significant departure from the standards, or because there has been a persistent pattern of failing to comply. In assessing seriousness, the SRA will consider the nature of the allegation, as well as aggravating and mitigating factors. Where the potential breach is minor, unlikely to be repeated and there is no on-going risk to the public or profession, the SRA is unlikely to refer a matter for investigation.
In assessing the supporting evidence available, the SRA is not bound to consider only the evidence provided by the complainant. Consideration is also given to possible lines of inquiry that may be explored in respect of the complainant’s concerns, including obtaining further information from the complainant, the respondent firm/individual, or any other third party.
Leading this new process at the SRA is the Assessment and Early Resolution Team. The team comprises experienced decision-makers, including experienced lawyers, ethics advisers and investigation staff. Accordingly, members of the team have the knowledge and experience to review concerns raised at the beginning of the process and engage effectively with the complainant/subject of the concern with a view to resolving matters, where this is possible, at an earlier stage than perhaps was previously possible.
The Report discloses encouraging statistics following the SRA’s pilot of this new approach. Over the 2018/19 period, fewer concerns reported to the SRA resulted in a full investigation. A full investigation was deemed unnecessary for 5,108 matters in 2018/19 (the total number of reported matters being 10,576), compared to 4,711 matters in 2017/18 (the total number of reported matters being 11,452). While only approximately 85 per cent of matters (4,335 matters) passed through this new process in 2018/19, given the success of the pilot, the SRA states that it intends to roll out the new approach across its full case load.
What does this mean going forward?
First, there is a chance that we will see an increasing number of reported matters dealt with more efficiently by the SRA. The new three-step assessment process shifts the SRA’s focus to more serious matters (in line with its revised Enforcement Strategy), which should mean that investigation resources are not unduly taken up with scrutinising lower level, technical breaches. Moreover, the emphasis on earlier engagement in the new process should mean that we see an increase in more proportionate and targeted responses from the SRA earlier on in the process. Increased dialogue at an earlier stage between the SRA and those subject to a complaint means that there should be more opportunities to hone in on the issues underlying the reported matters, as well as more flexibility to create tailored responses to address non-compliant behaviours in respect of the individuals or firms being investigated. Finally, with a more streamlined process for triaging complaints, we are likely to see brighter and more consistent lines being drawn in the sand about the types of behaviour that the SRA might consider worthy of a full investigation. This will be welcome news for all those regulated by the SRA: both individuals and firms will be in a better position to look to structure their conduct ex ante in a way that ensures they steer well clear of attracting the regulator’s attention.
The Report also sets out data regarding the outcomes of the concerns/reports the SRA receives, following its investigation of these matters in the 2018/19 period. Of the 10,576 reports:
The SRA carried out an investigation in approximately 34 per cent of the cases (3,602 matters). In summary:
Accordingly, we can observe that only a very small proportion of complaints received by the SRA in 2018/19 ultimately resulted in some form of sanction (approximately 4.2 per cent). Far greater comparatively is the proportion of cases in which there was no finding of a breach/serious breach, or where the result was a product of constructive engagement between the SRA and the subject of the investigation (approximately 29.4 per cent). In interpreting these figures, however, the SRA highlighted that any one case could result in multiple outcomes, and that there was no “linear relationship” between the number of reports received and the number of outcomes in a 12-month period. Nonetheless, the SRA noted that most investigations are resolved within a year. In 2018/19, the median time taken to complete an initial assessment of a concern raised was four working days, and 93 per cent of cases were resolved within 12 months (against a key performance indicator of 95 per cent).
The Report also referenced the number of agreed outcomes over the 2018/19 period. An agreed outcome occurs when a matter is referred to the SDT, the SDT determines there is a case to answer, and the individual/firm admits the allegations. Instead of the matter progressing to a full hearing before the SDT, the matter is concluded by way of both parties’ agreement to a set of facts, a proposed sanction and costs. Generally, these matters are then considered on the papers by the SDT before an outcome is reached. During 2018/19, 33 agreed outcomes were concluded. Of those, 19 matters resulted in a strike off, 12 matters resulted in a financial penalty and four matters resulted in suspension.
While the number of agreed outcomes in 2018/19 is lower than in 2017/18 (where there were 37 agreed outcomes), we consider that the overall trend appears to indicate an increased willingness by the SRA to resolve matters swiftly and in a cost-effective way without necessarily resorting to a full hearing. For example, the 2014/15 and 2015/16 enforcement periods included only seven agreed outcomes between them, and the 2016/17 period included 27 agreed outcomes. Taking into account the SRA’s apparent focus on early resolution and improved engagement with solicitors/firms, it is likely that there will be a continued increase in the number of agreed outcomes going forward.
The Report sets out a number of key focus areas that were subject to SRA investigation and enforcement in 2018/19, as well as the relevant warning notices and thematic reviews recently issued by the SRA. There was an increased interest in certain areas such as money laundering and sexual harassment in the workplace.
In terms of money laundering, the SRA noted the “sustained” number of reports in 2018/19, some 197 in total, with 14 of those being prosecuted at the SDT. A number of documents have already been published in respect of this topic, including the SRA’s Warning Notice on firm’s anti-money laundering risk assessments (updated 25 November 2019), the Anti-Money Laundering Report (dated 14 December 2020), and the recent Sectoral Risk Assessment on anti-money laundering and terrorist financing (dated 28 January 2021).
In terms of sexual harassment, the SRA received 64 reports of inappropriate sexual behaviour in work-related environments (ranging from inappropriate messages and comments to allegations of serious sexual assault). In this respect, the Report references various warning notices and guidance documents on reporting obligations to assist firms in improving their wider workplace culture and practices. Given the extensive documentation published and referenced on both of these topics, the SRA states that it is likely to rely upon the contents of its warning notices as something which a solicitor/firm should have been aware of and acted in accordance with. In fact, our experience is that this is already happening.
The SRA appears to be also interested in a number of other recurring topics:
Finally, the Report makes reference to several other themes which, although not directly related to the investigation/enforcement process, nonetheless comprise areas which the SRA is likely to continue to monitor closely. The SRA is concerned with the increase in cases where “work pressure” is the reason for intervention, and reaffirmed in the Report the importance of solicitor wellbeing (which we have previously expressed is integral to the promotion of a good working culture in law firms). It also highlighted the continuing risk of cybercrime in the legal sector, especially the use of website scams. In addition, diversity and inclusion remains a major theme with which the SRA is concerned, an area on which we have previously commented.
At the conclusion of its Report, the SRA notes that it will “build on the findings from 2018/19, which have given us a baseline for future monitoring and will be part of wider plans for evaluating the impact of our new Enforcement Strategy and new Standards and Regulations”. In addition to its continued work to establish an in-house ‘arms-length’ quality assurance team as part of the Assessment and Early Resolution process, the SRA has stated it will be undertaking a “forward review of decision making in our assessment and early resolution process, where the decision to refer a matter for investigation is made”. Further reports and independent research into diversity monitoring by the SRA can also be expected, including working to increase disclosure of diversity characteristics, annual reports on people profiles in enforcement processes, and on-going work to support small firm compliance. It is becoming apparent that the SRA is interested in equality, diversity and inclusion (“EDI”) issues as they relate to all aspects of conduct in which it regulates, including (as we see from the Report) the “factors that drive the reporting of concerns about BAME solicitors” to the SRA, as well as their overrepresentation within SRA enforcement processes. This appears to be consistent with our previous observations regarding the SRA’s increasing scrutiny and heightened expectations with respect to EDI matters in firms’ workplace culture.
The Report, in setting out the SRA’s approach to enforcement action and outcomes in 2018/2019, encapsulates a number of interesting developments and trends. It also suggests early signs of the effectiveness of the new assessment and early resolution process, which is clearly informed by the SRA’s revised Enforcement Strategy. This serves to reinforce the point we have previously made about the Enforcement Strategy being the golden thread underpinning the wider regulatory reform seen with the launch of the StaRs. It is not a coincidence that the Enforcement Strategy pre-dated the launch of the StaRs. While there are recurring themes that are likely to remain top of the SRA’s agenda in terms of monitoring and investigation, going forward, we anticipate that there will be a steady increase in early engagement by the SRA in terms of complaints relating to both individuals and firms. This should lead to more cost-effective and proportionate resolutions to at least some, but clearly not all, regulatory concerns.
Jessica Clay is a senior associate with extensive experience specialising in legal services regulation. Jessica’s work in this sector focuses on advising her clients in relation to complying with regulatory obligations, better understanding the importance of legal ethics within regulation, regulatory investigations and public law matters, including reviewing regulatory frameworks and decision making processes. Jessica is Deputy Editor of Cordery on Legal Services.
Ian Ko an associate, New Zealand qualified, in the Regulatory team. He assists and advises in regulatory investigations and public law matters, including provision of advice to professional and financial services regulators.
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