Background to the reform programme

The regulation of legal services is undergoing another round of review and reform under its new executive director of policy, Crispin Passmore.  The SRA’s recently announced ‘reform programme’ heralds radical change in this field, some of which has already begun to take shape.

Announced in May this year, the latest proposed programme is set to last for two years.  The SRA is looking to embark upon significant changes to the way in which it regulates. The publically stated agenda is to strip away unnecessary regulatory barriers and burdens and enable increased competition. The pace of change embarked upon has been swift: four consultations have already been issued and completed, each with a shortened 6-week response-period. From that initial series, two of the consultations have been decided upon and the SRA promise more to come in the pipeline further on, which is set out below.

In recent years, change has been driven by and has been required in response to the opening up of the market permitted by the Legal Services Act.  Therefore, this latest programme of reform is intended to be radical, set against the backdrop of a legal services market that has already evolved significantly in the past few years. Most notably and recently, the SRA has moved to ‘outcomes focused’ regulation, taking on the responsibility for regulating multidisciplinary practices and allowing a greater breadth of choice to consumers in routes of access to legal services.

Progress to date

In early July, the SRA Board agreed significant changes to the regulatory framework after the consultations on indemnity insurance and the compensation fund ended in June.

Indemnity insurance

The SRA has agreed to a reduction in the minimum level of professional indemnity insurance (PII) cover required by firms, from £2m to £500,000. Firms must still ensure they have an appropriate level of PII cover and top up where necessary. Another proposal not implemented, was a requirement for PII insurers to have a financial strength rating.  It will however, be kept under review.

Compensation Fund

The eligibility criteria for the compensation fund has been altered meaning that applications can now only be considered where the turnover, income or assets of the individual, businesses or charity is less than £2m. Absent any objection from the Legal Services Board, these proposed changes are set to come into force in October 2014, when the 11th version of the SRA handbook is set for publication.

What are the further proposed changes?    

Decisions on the other two consultations, proposing significant changes to the regulation of multi-disciplinary practices and to the solicitors’ accounting requirements, were deferred.

Multi-disciplinary practices

In line with its stated agenda to increase competition, the SRA is recommending changes to allow increased entry of multi-disciplinary ABSs to the market. Other proposals include removing non-reserved legal activities within ABSs from regulation altogether.

Accounting requirements

Changes in this area suggest removing the requirements for accountants' reports on client accounts, with the Compliance Officers for Finance and Administration (COFA) taking responsibility for the role of the ‘reporting accountant’ instead.

To follow…

More consultations are expected later this year, including themes on reducing the regulatory burden on small firms (expected summer 2014), a review of the separate business rule (expected November 2014) and on the regulation of in-house solicitors.

Existing programmes of reform will continue alongside these consultations, including the planned revisions to the systems for educating, training and developing solicitors. In addition, opening up entry to the profession is envisaged with the traditional training contract losing its supremacy.  This will open the door to paralegals and legal executives with on the job experience qualifying as solicitors.

Are they clear, practical and likely going to be successful in achieving their aim? What are the remaining grey areas?

The proposed reforms are certainly clear and are likely to go some way to achieving the twin stated aims of ensuring that regulation is proportionate and targeted, whilst at the same time removing unnecessary barriers and restrictions and enabling increased competition, innovation and growth. The easing of accounting requirements and the opening of the market to multidisciplinary practices for example are likely to be popular measures, particularly with small firms.  Until the full programme is complete, it is not possible to evaluate the extent to which these laudable aims have been met; it is the unintended consequences that have stirred so much debate about the reforms.

Could there be any unintended consequences?

Given the speed and reach of the reform programme , unintended consequences are inevitable. The changes to the level of PII required could have an unintended impact on clients, both in terms of the level of protection available to them and in relation to the lack of certainty over the different levels of cover that will exist. There is an argument that not all firms will be able to obtain the top-up cover at the level they require, raising a question mark over whether the reforms will benefit consumers as much as they do solicitors.  In relation to the relaxing of rules on accountant’s reports, it is likely that many firms will choose to continue with their existing arrangement with their accountants for the benefit of both them and their COFA, muting the effect of the reform in the first place. 

Whilst changes to the CPD regime may be out of date, finding a replacement system will be a difficult task. In a profession where lawyers are tending towards ever greater specialisation, consumers will want to be reassured that their lawyer is maintaining his skills in a manner that focusses on the specific but recognises the value in a lawyer who has access to broader learning.  On a similar note, whilst opening up qualification routes to the profession is to be applauded in principle, the concern remains that the luxury of training staff as part of a training contract is not always available to staff who are taken on for a specific business need.

What are the most important thing for lawyers and law firms to take note of?     

COLPs and COFAs will obviously need to be clear on the detail of all of the reforms, many of which are likely to be popular with solicitors. The changes may result in cost benefits for firms: the reduction in the level of PII required may mean that premiums paid by firms will decrease, whilst the changes proposed to the accounting requirements for client money may also see cost benefits accrue to firms by way of a reduction in accountancy fees where they dispose of accountants’ services. Balanced against this, there will of course be the added burden on the COFA  to ensure and certify that clients’ accounts are being properly used.

What are the trends in this area? Any suggestions for the future?

The SRA shows no signs of slowing down the pace of regulatory change; we can expect the rule book to change and most likely expand rather than shrink over the coming months and years.

There is an increasing call on the SRA to review the Handbook and make the rules simpler and easier to follow; we wait and watch to see if this makes the next round of reform.

This blog first appeared in Lexis Nexis in August 2014.