Regulatory update – January 2018
I hope 2019 has started well for you. I thought I would start my first column by doing some crystal ball gazing and considering what lies ahead...
‘The times they are a-changin’ – what’s in store for 2019?
I hope 2019 has started well for you. I thought I would start my first column by doing some crystal ball gazing and considering what lies ahead of us in 2019.
Bob Dylan will not have been thinking about SRA regulation (or any regulations) when he wrote the lyrics to ‘The times they are a-changin’, but changing times are certainly what we will face in 2019. I’m fairly sure there will be more, but the areas referred to below are enough to consider as we start the new year, hopefully refreshed from what I hope was a good break for all, and before we’ve broken all of the resolutions made as we turned the page on our new calendar (for those like me who still have a paper calendar, as well as an electronic one!).
New SRA Handbook
Whilst at the time of writing, the SRA have not confirmed the date for the introduction of the new SRA Standards and Regulations (no longer to be called the SRA Handbook), the word on the street is that this is likely to be in or around Summer 2019. There have also been rumours that it will be introduced in phases, but again, this hasn’t been confirmed, and I, for one, hope that is only a rumour. There will be a new set of Principles (reduced in number from 10 down to 7, 2 new codes of conduct (one for solicitors and one for firms)), new SRA Accounts Rules and, overall, a smaller handbook focusing more on ethics. In both codes, outcomes are replaced by standards and indicative behaviours have been removed. While there are no changes of substance, COLPs should start familiarising themselves, and the rest of the firm, with the content of the new codes. I anticipate there will be some changes to the draft submitted to the LSB before the final version is released (the LSB made a number of proposals to satisfy its concerns), but these are likely to be relatively minor. Embedding the new standards and regulations, ethics and principles in your firm will be key to managing risk and compliance going forward.
Going forward, the SRA has said it will produce more guidance based on issues it is seeing, requests from firms, feedback from the professional ethics helpline, etc., so it will be important to feed back to local and/or national law societies, COLP and COFA forums etc. so the SRA knows what issues are causing difficulties when applying the new codes. It remains to be seen how long the guidance to go alongside the Standards and Regulations will be, or how soon the new ‘handbook’ will be expanded/amended (the 2011 Handbook reached version 21 on 6 December 2018!). The SRA’s Risk Outlook Autumn update released on 28 November indicated that it would be the last time it publishes its quarterly updates, and going forward it will be publishing changes in trends as and when they happen through SRA Update, Compliance News and social media channels. Those responsible for risk within firms will need to be on your toes to look out for new guidance as it is introduced.
The SRA Accounts Rules will also be amended, with a removal of detail to allow for greater flexibility but the emphasis remains, as you would expect, on keeping client money safe and separate from office money. Firms will not need to make any significant changes to their procedures but COFAs need to understand where the discretion lies. Prescriptive time limits, for example to make certain transfers within 14 days, are replaced by requirements to do so ‘within a reasonable time’, and the rule on not using the client account as a banking facility is to be amended to “regulated services” rather than “an underlying legal transaction”.
Despite robust opposition from the Law Society, which is still ongoing, the LSB has agreed to the SRA’s proposals to permit solicitors to offer unreserved legal services to the public from unregulated businesses and this will form part of the new regulatory approach, as will the facilitation of freelancers to provide reserved legal services without being authorised as an entity, provided that they do not hold client money or employ people, but I don’t anticipate the impact to be immediate.
The Compli team will be providing face to face training and workshops on the new SRA Standards and Regulations and what it means for you and your staff, so do get in touch to discuss how we can help embed them in your firm.
6 December marked the date for the introduction of the Transparency Rules, so those firms affected by the Rules should by now have published on their websites pricing information, details of who is doing the work and the time it is expected to take, but that is only the start. Keeping the information up to date will be required, together with changes in hourly rates, fee earners and scope of work. Under the rules, all firms are required to display their complaints procedures and the SRA digital badge online. The badge was available to download from 6 December, but will not be compulsory to display until Spring 2019 (date still to be confirmed). The SRA have said they will give firms time to comply but it will be carrying out a thematic review to check firms are publishing the right information and will be proactive with those who refuse to comply.
One of the expected themes for disciplinary cases in 2019 will be sexual harassment misconduct. The SDT in its budget for 2019 sought an increase to accommodate an anticipated additional 25 cases currently being pursued by the SRA relating to sexual harassment against solicitors, which follows on from the #MeToo campaign and the issue of NDAs. The SRA has asked the country’s largest firms to divulge how they deal with and prevent allegations of sexual harassment in the workplace, and has pledged to share examples of both “good and bad behaviour”. This revelation forms part of the SRA ‘Balancing Duties in Litigation report’ published in November 2018 which updates the previous March 2015 risk paper, and includes a section on NDAs and harassment.
The SDT will also announce its decision on whether the burden of proof in SDT proceedings is to change from the criminal to the civil standard following its recent consultation. The SRA has been crying out for change for some time and any such change would be in alignment with most other professional regulators, including barristers, as the Bar Standards Board switches to the civil standard in April 2019.The SDT has said that if it doesn’t lower the burden of proof from the criminal standard to the civil standard, solicitors could be seen as being given preferential treatment. However, a counter argument runs that there are serious consequences of a SDT finding for a solicitor and the current high prosecution success rate are good reasons for facts to be established ‘beyond a reasonable doubt’ in the SDT. My prediction is that the burden of proof will be changed to the civil standard.
We have also seen recent Tribunal sanctions overturned by the High Court relating to dishonesty which arose in circumstances involving well being and mental health issues. These high profile cases have received widespread attention across the legal profession and highlighted issues faced by solicitors working in high pressured environments, especially with reference to mental health and raised concerns regarding well being within the profession.
Commentary following the decision to strike off the three individuals suggested some support for a regulatory requirement that firms have policies and procedures in place to manage mental health and well being. Whether the SRA will act on this and introduce a standard within the new Codes remains to be seen, but even if it does not, from a risk management perspective, 2019 should be a year in which firms review their culture, policies and procedures for creating a productive and healthy working environment and support for their employees who, in turn, should also seek to develop skills to deal with pressure and strengthen their resilience.
The huge legal costs needed by Leigh Day to defend itself against the SRA allegations (estimated at £8m after the SRA’s unsuccessful appeal to the High Court) has brought into sharp focus the benefit of insurance cover for regulatory defence costs. If you do not already have such cover, or your existing cover would be inadequate, now is the time to speak to your broker/insurer.
After the intense activity of 2018 to become compliant with GDPR, I anticipate that attention in 2019 will be on ensuring that the internal systems and procedures are working well. We have already been instructed on a number of data breaches post-GDPR, including, for example, criminal records in a file left on a car roof, reports emailed to the wrong client, and copies of medical records stolen from the boot of a car.
Guidance is still being issued on interpretation for GDPR and this will continue throughout 2019. There has been an increase in DSARs and the number of requests will continue to rise as more people become aware of their rights and seek to exercise them. The ICO is inundated with complaints and data breach reports, in addition to high profile investigations of businesses such as Facebook and Cambridge Analytica, but I have no doubt that we will see some high level sanctions under the ICO’s increased powers in the not too distant future. The Privacy and Electronic Communications Regulations (PECR) were amended on 17 December 2018 by the ePrivacy Regulations, and while they were not introduced with a fanfare, mass emails and potential panic, there could be considerable financial consequences as they increase the powers of the ICO to include the ability to fine officers (which includes a director, manager, secretary or other similar officers of a company, a member or partner) up to £500,000. It will be interesting to see how and when the ICO uses this new power, but in my view it will be used as the ICO has been asking for this for some time, and in the meantime, firms should review their policies and procedures to ensure compliance and check they have adequate D and O/management liability insurance cover in place.
It is clear that professional firms are being targeted more than ever before. The SRA’s recent Risk Outlook update indicated there had been a 10% increase in the first half of 2018 and there is no sign of this abating. Cyber resilience within firms is fundamental. Awareness training for all staff, not just accounts staff is essential; backing up offline; culling social media activity and cyber liability insurance should all be considered. Now that cyber insurance policies on the market provide better and more effective coverage at reasonable price, purchasing such cover should be considered as an essential part of a firm’s cyber security risk management plan.
The SRA has yet to announce the outcome of its consultation on PII and the Compensation Fund, but it indicated in December that the controversial proposal to reduce the minimum cover from £2m to £500,000 would again be put on the back burner, with priority being given to changes to the compensation fund qualifying criteria. A decision is expected in 2019 which, if the proposed changes were to be implemented, will have an impact throughout the profession.
It is clear that the Home Office recognises that professionals such as lawyers and accountants are instrumental in the prevention of organised crime, but it warns that they may also be complicit, negligent or unwittingly enabling the facilitation of money laundering practices and the Home Office is committed to prosecuting proactive professional enablers, so we may see more prosecutions in 2019. A number of firms who were the subject of the SRA thematic risk project on AML in 2018 are being investigated and disciplined for not having robust enough systems and procedures in place to prevent money laundering facilitation, and the SRA indicated at a recent conference that its approach is to be really tough, even on firms which have not suffered an AML event; the absence of adequate auditable process will be enough. The SRA published its AML sectoral risk assessment on 2 March 2018 and if you haven’t yet done yours, and we know from risk audits we have carried out for clients that this is still a weakness in some firms, this needs to be a key priority for you in early 2019 to avoid the SRA taking its promised tough approach against you.
Civil Liability Bill
The impact of the Civil Liability Bill, whilst likely not to come into force until April 2020, will mean that PI firms will need to take stock in 2019 of the impact that it will have on their business and financial stability. Regrettably, we may see a rise in firm closures, orderly or otherwise, as a result.
And finally... Brexit
This is where my crystal ball gazing talents run out! Unless something has happened since writing this article to stop it, Brexit is just round the corner. No-one yet really knows what the impact on legal services will be and I am not even going to try and second-guess!