Acting to stop harm: the FCA and Appointed Representatives
On 14th June 2018 the SRA published the response to its consultation on the new SRA Handbook along with a revised draft of the new SRA Handbook. The SRA will now seek Legal Services Board approval of the SRA Handbook which is expected to be received in the autumn. The SRA’s intention is that the new Handbook will come into force in April 2019. It is not anticipated that the LSB’s review process will lead to any major amendments. We have therefore reached the stage where firms can begin to plan their own implementation. This note is intended to provide an introduction to the main changes.
The SRA has recognised that the current Handbook is long, complex and costly to apply. They have therefore reviewed all of their rules in order to streamline and simplify the Handbook, removing duplication and making it more user-friendly. The amendments are also aimed at bringing regulation up-to-date with the demands of the changing legal services market.
There are completely new sections, such as the SRA Application Notice Review and Appeals Rules, which combine general provisions about applications to and notices from the SRA into one area; and the SRA Transparency Rules (arising from the Competition and Markets Authority’s report in December 2016 on the lack of transparency for consumers of legal services). It is anticipated that the Transparency Rules will come into force earlier than the full Handbook, possibly at the end of 2018.
There are also new provisions to reflect or facilitate changes in legal services. For example, the updated policy statement for Multi-Disciplinary Practices and new rule which allows self-employed solicitors or RELs to provide reserved legal services to the public on their own account without the need to become a Recognised Sole Practice or to work through an Authorised Body. However, the biggest overall change is a simplification and consolidation of the existing rules.
The Principles, comprising “the fundamental tenets of ethical behaviour” which apply to all individuals and firms regulated by the SRA, have been reduced in number from 10 to 7. The need to act with honesty is now a stand-alone Principle, in addition to the need to act with integrity. The meaning of the latter was recently considered in the decision of the Court of Appeal in Wingate and Evans v SRA; SRA V Malins  EWCA Civ 366. Four Principles have been removed (5: provide a proper standard of service to your clients 7: comply with your legal and regulatory obligations and deal with your regulators and ombudsmen in an open, timely and co-operative manner, 8: run your business or carry out your role in the business effectively and in accordance with proper governance and sound financial and risk management principles and 10: protect client money and assets), given that these are already covered by existing Principles or rules.
The Code of Conduct is now divided into a Code for Solicitors, Registered European Lawyers (RELs) and Registered Foreign Lawyers (RFLs) and a Code for Firms (which includes requirements for COLPs and COFAs). The Code for Solicitors, RELs and RFLs describes the “standards of professionalism” expected by the SRA, whereas the Code for Firms describes the expected “standards and business controls”. The structure of these new Codes make more explicit the approach of the SRA which is to focus on the behaviour of individuals and the systems and culture of firms.
There is a marked simplification of the current structure, which has 5 Sections (You and your client, You and your business, You and your regulator, You and others and Applications, waivers and interpretations), each containing Chapters dealing with particular regulatory issues, within which there were mandatory Outcomes and non-mandatory Indicative Behaviours.
The two separate Codes now simply provide a set of requirements. The key obligations have not changed, but replacing Outcomes and Indicative Behaviours with one set of requirements makes the Code, on one level, easier to digest. The SRA intends that the core standards (referred to by the SRA as “the golden thread running through what it means to be a solicitor”) are maintained, while allowing for flexibility of application. For example, each new Code of Conduct has a section on Conflict of interests which succinctly sets out when you should not act, when you may act and the conditions for acting in two substantive paragraphs of less than 150 words. The equivalent section in the existing Code contains 7 outcomes (with sub-paragraphs) and 14 Indicative Behaviours. However, it is inevitable that the economy of drafting will leave more gaps for interpretation and understanding. Many solicitors would feel more comfortable with prescriptive rules. They will be disappointed.
The quite prescriptive Accounts Rules have been whittled down to 7 pages. As would be expected, the key requirements remain (for example, rules in relation to holding and dealing with client money, operating a client account and paying interest) but these have been significantly simplified. For example, there are two very brief paragraphs relating to the payment of interest, a subject which previously covered several pages of rules and guidance notes. There is also a notable addition: the ability to use a third party managed account as an alternative to a client account. This is a significant move away from the traditional model of holding money in the Client Account apart from in very limited prescribed circumstances.
Similarly to the new Code of Conduct, the Authorisation Rules in the new Handbook are divided into a set of rules for firms and amended regulations for individuals.
The Assessment of Character and Suitability Rules (currently referred to as the Suitability Test) make it clear that, when considering character and suitability the overriding factors which the SRA will have in mind are the need to protect the public and the public interest and maintain public confidence in the profession.
The new rules reduce the categories of criminal conduct from three (those in relation to which the SRA (1) will refuse the application unless there are exceptional circumstances, (2) are more likely than not to refuse your application and (3) may refuse your application) to two (criminal findings which are (1) likely to result in a refusal or (2) may result in a refusal).
The new Regulatory and Disciplinary Procedure Rules are less prescriptive in relation to the misconduct which may result in a disciplinary decision. Under the current rules, three conditions must be met for the SRA to give a written rebuke or to direct the payment of a penalty. The first condition is that the act or omission falls within one or more of nine categories, which are essentially descriptions of behaviour which may be serious (such as being deliberate or reckless, causing or potentially causing loss to another person, misleading clients or the court etc). The second condition is that the outcome would be proportionate in the public interest and the third condition is that the act or omission was not “trivial or justifiably inadvertent”. The new rules simply refer to professional misconduct or serious breaches and provide that a financial penalty may be directed when this is appropriate to (1) remove any financial or other benefit from the conduct, (2) maintain professional standards or (3) uphold public confidence in the profession. The focus has therefore shifted from describing the type of behaviour to describing the impact of the behaviour.
April 2019 is not that far away. Firms should consider now what impact the new Handbook will have on their business. This will vary but could include: (1) should we take advantage of the more liberal practice structures? (2) do we have an obligation under the new transparency rules? (3) what training do we need to do? (4) how will this affect how our compliance and risk function operates? (5) what documents do we need to amend?
The good news is that the new SRA Handbook is not a radical departure from the previous Handbook in terms of the requirements placed on solicitors and law firms. If anything it marks a liberalisation of the current framework particularly around the ways in which solicitors can practise. It also seeks to enable a wider level of discretion or proportionality in the relationship between the regulator and the regulated.
Whilst fewer rules and wider discretion is in principle a good thing it will all depend on how it works in practice and in that sense the new Handbook places more obligations on solicitors and the SRA. The new Handbook does not provide all the answers and it will require solicitors and law firms to understand the policy, law and ethics which lie behind the rules to ensure that they are doing the right thing. It will also require the SRA to respond proportionately even when faced pressure from other stakeholders. The SRA will need to fully understand the difference between a solicitor or a firm who has made a genuine mistake and one whose behaviour poses a risk. This is regulation for grown-ups and requires a cultural change on both sides.
Skip to content Home About Us Insights Services Contact Accessibility