Proposed changes by the SRA
This article first appeared in The Times' The Brief on 23 September 2016
Corinne Staves warns that the legal professional is facing the risk of permanent damage if the Solicitors Regulation Authority (SRA) does not listen to the City’s warnings about its proposed regulatory changes. This could be bad news for clients, solicitors, and the City.
The Law Society has even written to all of its members calling them to action and warning of the dangers of creating a ‘two tier profession’.
The SRA says that the changes will bring regulation up to date and lead to better innovation and competition, but interested parties are not convinced.
Currently, firms must be fully regulated when individuals operate as solicitors or perform ‘reserved legal activities’, which includes Court work, conveyancing and drafting deeds. In future, it is proposed that all solicitors will be subject to a Code for Individuals, imposing competence and ethical standards, but only regulated entities will be subject to the Code for Firms and its stringent prudent and ethical business management obligations.
Of course, City legal work is often not ‘reserved’, for example, M&A deals and capital markets transactions. This should mean that de-regulation offers City clients better choices and lower costs. Under the current proposals, it is not that straightforward.
Professional indemnity insurance (PII)- Solicitors in unregulated firms will not be required to carry a minimum level of PII to cover claims for negligent advice. Unregulated entities may choose to carry it, but clients will have no comfort on cover levels, nor that these will not reduce in future.
Client monies- Regulated firms will continue to be subject to strict rules when handling client monies (e.g. completion monies). While individual solicitors will be prevented from holding client monies, the unregulated entities through which they operate can hold monies without being subject to any rules on how these must be handled and segregated from business monies.
Legal privilege- Advice from regulated firms and individual solicitors will continue to attract legal privilege, and the client confidentiality this assures. Unregulated entities will not, meaning clients will have an unenviable choice: instruct the unregulated entity and forgo privilege, or instruct the individual and secure privilege but (in the event of a claim) have recourse only to the uninsured individual and their personal assets.
Conflicts and Confidentiality- While solicitors in unregulated entities will be bound by conflict and confidentiality rules, the entity will not. What scope will individual solicitors have in influencing entity-wide policy decisions about systems and processes, including on client acceptance, to ensure that conflicts do not arise and confidential information is sacrosanct?
Clients will not be able to quickly, easily and clearly understand the implications of instructing a solicitor in an unregulated entity rather than a regulated firm. Costs should arguably be lower due to reduced overheads, which will be welcomed. But it may not be until after the event that clients fully appreciate the value of having tightly regulated, well-supervised and well-insured advisers.
So what does the future hold for the legal profession if the proposals are implemented in 2017? Training and supervision will fall to regulated firms. If they reduce in number and/or size (e.g. if current firms split into two divisions), the number and quality of future solicitors will arguably reduce. There is also widespread fear that deregulation will cause permanent damage to the perception of the profession; the solicitor ‘brand’.
Unless the SRA takes heed of the warnings from the City and overhauls the current proposals, the future looks gloomy for clients, and for the legal services industry as a significant contributor to the UK economy.
Corinne Staves is a partner in Maurice Turnor Gardner LLP’s professional practices team and facilitates the COLP Forum, founded to enable COLPs to share views on best practice in law firm risk management.
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