The Legal Services Act - are you up to speed?

Getting started with Outcomes Focused Regulation (OFR)

On October 6 2011 the SRA released their new handbook which sets out the standards and requirements that it expects its regulated legal sector to follow. The SRA approaches the regulation with an outcomes focus.  These regulations will be relevant to solicitors and employees in all legal firms regulated by the SRA, but also to new entrants such as non-lawyer managers in alternative business structures, who will also be governed by the handbook.

OFR will be a move away from the rigid rules by which we are used to operating. It will allow your firm to create a more flexible approach to achieving the right outcomes for your clients by implementing more relevant systems and procedures.  OFR also aims to create a more open relationship between the SRA and your firm.

There are ten mandatory principles in the handbook which are the basis for all of the detailed regulation. Most of these look very similar to the old Code of Conduct duties. The handbook defines outcomes as the results that you are expected to achieve in order to comply with the principles and are mandatory. Indicative behaviours are non-mandatory examples of the kind of behaviours which may establish whether you have achieved the relevant outcomes.

In practice, there will be differences seen in the approach of firms to compliance. Two of the key issues being:

1. Risk Management

The SRA expect you to identify all the risks which may impact upon your firm.  You should manage those risks and mitigate against significant ones. They suggest you look at the types of work you carry out for your clients and whether any of this work may pose a risk under the requirements of the new handbook.  You should review your current systems and procedures to evaluate their effectiveness and relevance to your clients, and implement changes if they do not meet the new requirements.

2. Reporting Requirements

A Compliance Office for Legal Practice (COLP) and a Compliance Officer for Finance and Administration (COFA) should be appointed by 31 March 2012 to monitor your firm’s compliance with the new handbook and any relevant legal requirements. The COLP will be responsible for ensuring your firm complies with its statutory obligations, whilst the COFA will be responsible for ensuring the firm, its employees and managers comply with the SRA Accounts Rules. All failings in compliance should be documented and, if necessary, reported to the SRA.  Although the same person can fulfil both the role of the COLP and the COFA, your firm should consider the seniority of the individuals appointed to these roles as risk management is key.

Alternative Business Structures

Alternative Business Structures (ABSs) are a new concept to legal practitioners. They will allow, for the first time, external ‘non-lawyers’ to invest in businesses offering reserved legal services and allow them also to share the management and control of the business with lawyers. 

ABSs cannot be authorised by the SRA until it is a licensing authority.   The SRA announced on 8 December 2011 that it will become a licensing body to regulate ABSs from 23 December 2011.  A firm wishing to take a non-lawyer owner will then have to go through the application process with the SRA, and they will begin accepting applications to set up ABSs from 3 January 2012.  The non-lawyer owner will also have to pass a “suitability test” if they will own more than 10% of the business or if they will be a day to day manager in the business, with the SRA not simply accepting anyone who applies.  They have promised criminal records bureau checks, financial credit checks and professional regulatory checks to ensure that integrity in the professional firm is maintained.

If you are considering an ABS structure, here are some practical issues you will need to consider:

1. Firm Structure

Although an ABS can be operated as a partnership, an LLP or a limited company, when considering external investment, a review of the firm’s existing structure should be carried out to ensure that it is appropriate for an ABS model.  The firm should consider the perspective of an external investor throughout this process to ensure it appears attractive to them.  The structure and proposed owners of the ABS will need to be disclosed on application to the SRA.

2. Business Plan

Any firm planning to apply to be licensed as an ABS is also required to disclose the firm’s business plan. This is a great opportunity for smaller firms as it will help them focus on their strategic objectives. A good business plan evidences strong management controls which are also attractive to external investors.

3. Compliance

An external investor will also look for a firm with good internal systems and controls. When applying for a license as an ABS, a firm should ensure systems and controls are in place to support the Compliance Officers within their roles. The Compliance Officer for Legal Practice and the Compliance Officer for Finance and Administration will need to apply for the position and be confirmed by the SRA by 31 March 2012. They are required to review the firm’s application to be licensed as an ABS.

Those considering applying to become an ABS should be using the next few months wisely in order to protect themselves from the anticipated increase in competition stemming from an open legal market place.

Solicitors’ Accounts Rules changes from 6 October 2011 

On 6 October 2011, the Solicitors’ Accounts Rules 1998 were replaced by the Solicitors’ Regulation Authority Accounts Rules 2011.

Here are some of the main changes to the rules:

Status of Rules and Guidance Notes

The new Accounts Rules form part of the SRA Handbook, which also includes the new Code of Conduct. The Guidance Notes do not form part of the Rules but are an aid to compliance. The notes will clearly distinguish when they are binding. Breaches are reportable on failure to adhere to the Rules and not to the Guidance Notes.

Rule 6: Duty to report – COFA (Compliance Officer for Finance and Administration)

• The SRA Authorisation Rules require all firms to have a COFA. The responsibility of the COFA is to ensure compliance with the Accounts Rules by the Principals themselves and by everyone employed in the firm.
• The COFA must report any material breaches of the Accounts Rules to the SRA as soon as reasonably practical. 

Rule 17: Receipt and transfer of costs

• Guidance note (viii) - Money is ‘earmarked’ for costs when the solicitor decides to use funds already held in the client account to settle the bill. If the solicitor needs to get client approval of the bill before taking payment, then they must agree the amount to be taken with the client before actually issuing the bill. This will ensure that there is no delay caused while waiting for client acceptance, in transferring funds out of the client account, in order to meet the 14 day rules.

Rule 21: Authority to make withdrawals from client account

• The prescriptive list of persons who may sign for authority to withdraw funds from the client account has been removed. Instead it is a requirement that such authority is provided by ‘an appropriate person in accordance with the firm’s procedures for signing on client account’. This means that a person other than a qualified solicitor may make withdrawals.
• Firms must put in place appropriate systems and procedures for withdrawals out of a client account, especially if they are expanding authority to non-lawyers in the firm.

Rules 22 & 23: When interest must be paid

• Interest must now be accounted to the client when it is ‘fair and reasonable’ to do so. The rules however, do not state the definition of ‘fair and reasonable’ and it is therefore for the solicitor to interpret.
• The solicitor must have a written policy for when interest is paid and it must be made clear to the client at the outset of the engagement.
• The interest due to the client is calculated over the whole period for which the money is held.
• The £20 de minimis is no longer referred to in the rules, the guidance notes state that some firms may wish to apply a de minimis amount, providing the amount is reasonable and is reviewed regularly in light of current interest rates.

Rule 29: Accounting records

• Any cash or cheques received on behalf of a client which do not pass through a client account must still be included in the accounting records as a receipt and payment on behalf of the client. This ensures that a full audit trail of transactions is maintained.
• If client monies are held in a currency other than sterling they must be held in a separate account for the appropriate currency with separate accounting records, and therefore separate reconciliations.

Rule 29: Reconciliations and bank statements

• The new rules state that every 5 weeks all bank and building society passbook accounts must be reconciled.
• A firm may use online accounting records, however they must be saved in a format which cannot be altered. There are no obligations to keep a hard copy but the information must be able to be reproduced reasonably quickly and in printed form for at least six years.
• If online bank accounts are used then the online statement must follow the previous closing balance, with no gaps in transactions.