Why is it important to comply with regulations

All solicitors and firms are required to comply with the SRA Codes of Conduct and other regulations like those related to money laundering, bribery, sanctions, tax evasion, etc., and although most firms take their obligations seriously (put the fence at the top of the cliff), some don’t (will need an ambulance at the bottom of the cliff); this may not be because they don’t care, but because they don’t have the time, money or resources to dedicate to compliance.

As we have recently seen with an increasing number of fines for anti-money laundering procedure breaches, compliance is not an optional requirement, it is mandatory, and non-compliance will be addressed by the Solicitors Regulation Authority or the Solicitors Disciplinary Tribunal.

But it is not just the Solicitors Regulation Authority that firms should be thinking about in terms of compliance, it is also the Legal Ombudsman for poor service, professional indemnity insurers in relation to negligence, and the Law Society for breaches of accreditations like CQS and Lexcel.

What is the regulatory and compliance risk?

As outlined above, there are a number of third parties that are interested in ensuring regulatory and compliance obligations are met:

The Solicitors Regulation Authority

• The regulator now has increased fining powers enabling it to fine up to £25,000; it already had the ability to fine alternative business structures up to £250m and individuals within them up to £50m. It can also now use fixed penalty fines for low level offences like transparency breaches and failing to submit diversity data.
  
  
• In recent cases we have seen firm fines ranging from £750 (fixed penalty fine) to £500,000 (after a hearing at the Solicitors Disciplinary Tribunal); a partner at this firm was fined £11,900 for his part in the breach.
  
  
• As a consequence of the Economic Crime and Corporate Transparency Act the regulator will be given unlimited fining powers, and it is its intention to obtain these powers for all cases rather than just those related to financial crime.

The Legal Ombudsman

• Prior to complaints going to the Legal Ombudsman they have to handled in line with a firm’s complaints procedure, and this can take up valuable management and fee earning time, so getting compliance right from the start can save firms from potential disruption.
  
  
• If a complaint does go to the legal Ombudsman, not only will there be a case fee of £400 to pay (not payable if a complaint in unwarranted), but it can also require a considerable amount of management and fee earning time to be expended to reach a resolution, with potential compensation having to be paid or fee write-offs.

Professional Indemnity insurers

• We know from recent years that the PII insurance market has been very tough, with insurers either turning their backs on poor firms or raising their premiums to very high levels; firms must have good risk profiles and this means implementing and policing excellent compliance strategies.
  
  
• Due to the high cost of premiums over the last few years, hundreds of firms have gone out of business or merged with other firms, so maintaining a appropriate risk profile is essential.

Law Society Accreditations

• Thousands of law firms hold the CQS/Lexcel accreditations, which require them to meet the various standards and Scheme Rules, and a serious failure to do so could result in membership being suspended or withdrawn.
  
  
• Firms that hold CQS do so because it is a requirement in order to get on to lender panels, and without it a firm could be removed, losing all the work it normally received where lenders where involved.
  
  
• In the early days of Lexcel insurers offered a 10% discount if a firm obtained the accreditation, however, some of the largest negligence claims came from such firms and so this discount was removed.

Reputational damage can flow as and when non-compliance reaches the public domain, with clients and employees potentially leaving and going to competitor firms, with fee income being reduced and having a dramatic impact on profits and future investment in the firm.

How does a firm mitigate compliance and regulatory risk?

The simple answer is, do the right thing!

However, this is easier said than done, especially when the SRA Codes of Conduct require solicitors and firms to interpret how to meet the required standards depending on the needs and circumstances of each client. In effect, if a solicitor is unsure on how to proceed they should try and put themselves in the shoes of the regulator and assess what it would see as being acceptable/unacceptable. Most solicitors will know right from wrong, so making a judgement shouldn’t be that difficult. However, when you look at events like the Post Office scandal, it is clear that some solicitors have difficulty in maintaining their independence from their clients, acting with integrity and honesty, following the rule of law, and maintaining the trust the public has in the legal profession.

Ensuring those employed within a law firm are competent and are supervised properly, will go a long way in mitigating the risk of non-compliance, and this needs to include those who have vast amounts of experience. Experience has shown that many claims and complaints have been generated by those who should have known better, the problem is that many people at higher levels are not subjected to the same level of supervision and auditing as those more junior, and therefore think they are free to do as they like.

The cost of non-compliance vs the investment in compliance

There is a saying that goes, “If you think compliance is costly, try non-compliance”, and when you look at the costs that can be incurred it is clear that getting compliance right is the cheapest option in the long run.

Some firms see compliance as a barrier to doing business, however, it should be seen as a benefit to doing business, a good level of compliance can be used as a means of attracting more clients and reducing regulatory interventions

By way of example, I remember working with a firm where a partner created so many problems (came to light after they had left) that the costs (compensation, increased premiums, excesses, lost management and fee earner time) to remedy the complaints and claims that were generated came to the same level as the fees they had generated in a year; they may as well have stayed in bed for 12 months!

It is difficult to put a precise figure on the costs involved in ensuring compliance as many of them are hidden, and circumstances in each firm are different, however, when you look at the costs of non-compliance (see above) it should be a ‘no brainer’ that doing the right thing is the common sense approach to take!

Technology in compliance

When I was in practice back in 2006, I was asked to help break-away part of an existing law firm and start a new one, and knew that within 18 months the regulator would be coming around to make sure we were doing the right thing from a compliance perspective, but I wanted to keep compliance costs down as much as possible, so went looking for a compliance solution. The problem was that there weren’t any and risk management was not taken that seriously within law firms.

So, in the absence of an available system I decided to develop one and this went on to become the market leader, its name is Access Legal Compliance (formerly named Riliance).

When the regulator did visit I sat them in front of Access Legal Compliance and showed them how we clearly had risk and compliance under control; rather than being with us for two days they left very happy after 5 hours!

Risk and compliance services for law firms

At Access Legal we have a range of Risk and Compliance services we can offer to law firms provided by our team of experts who have extensive experience working in regulated sectors and advising businesses on various quality and accreditation schemes.

We are also in the unique position of being able to provide and utilise our Risk and Compliance system, so that it can be used to record and manage a firm’s compliance and quality related data.