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COLP and COFA - Where are we now?

COLP and COFA - Where are we now?

Background

We previously looked at the status of Compliance Officers (COLP and COFA) as suitable focal points for the business, rather than being seen by their colleagues as the sacrificial lambs.

The SRA made clear in the press that they would be robust with law firms that failed to nominate COLPs and COFAs - promising the imposition of fines and penalties for failure to comply with Principle 8 - a requirement which now needs no explanation at all.

So, now we are well beyond the SRA deadline for all firms to have known by 01 January 2013 whether their nominated focal points are approved, what is the current status report?

Have firms already changed the model to incorporate an active risk management strategy upon which the firm's reputational stability will rest?

The recent and tragic collapses of well known and substantial law firms have shown that it can still happen. What is a surprise is that some were even shocked that it is still possible. It is likely that we have not seen the last by any stretch.

SRA - your regulator?


Since the SRA introduced the roles of COLP and COFA in January 2013, there has been a hive of activity, including reports in the Law Gazette (12 March amongst others) that the regulator has started to enforce against around 650 solicitors or firms that failed to complete their nominations properly.

The CE Antony Townsend said he was concerned and disappointed at the non cooperation of firms with the SRA. The failures of the 400+ firms included over 100 that had not completed the nominations.

 

The SRA categorised them as; late; or where the nominee put forward by the firm already has pending disciplinary matters against them; or where the SRA are unhappy with aspects of the data supplied regarding the nominee. These can be seen to fit the description by the SRA of "significant suitability issues".

Although the SRA expressed disappointment, it is reassuring that some 9,500 approvals have occurred, mindful there are some 11,000 firms in England and Wales.

Charles Plant Chairman of the SRA to Devon and Somerset Law Society said in late 2012 that the failure of around 500 firms to nominate Compliance Officers was a "breathtaking disregard of regulatory obligations and shows why a (Compliance Officer) regime is so badly needed".

Whilst therefore the debate rumbles on as to what resources the SRA have to apply to struggling law firms and/or to interventions to avoid tragic implosions, businesses seem keen to make the regime of Compliance Officers really work.

Red RAG?

Interestingly for COLPs and COFAs will be the RAG rating system now apparently operated by the SRA. RAG for most businesses is a classic tool. For Compliance Officers it will also be in the bag of essentials.

The SRA look at situations of:

Score 1; Drawings exceeding profits
Score 2; Net assets less than borrowings
Score 3; You borrowing "too much"

A score of 0 means you are green in the SRA eyes. Score 1 and you are amber. Score 2+ and you flash red as a high risk for potential collapse and you will apparently "receive intensive supervision".

Presumably as RAG is adopted, so will SMART, to ensure that this intensive care from the Regulator is not too late for the patient. This is in the context that there are some 11,000 firms to regulate.

Material breaches?

The Law Society website has some brief guidance for COLPs for determining whether something is a material breach, including factors such as the:

  • risk of detriment to clients
  • extent of risk or lost confidence in the business and its services
  • scale of the issue
  • overall impact on the practice, it`s clients and third parties

Patterns of breaches need to be tracked (and indeed be 'trackable') to know whether there is a material breach.

This is pertinent because Executive Director of the SRA Samantha Barrass has recently announced that, subject to Board approval, it plans that compliance officers are no longer required to annually report to the SRA a record of non-material breaches although records of such must be kept. ABSs will still be required to report annually on non-material breaches, although this may be brought in to line in due course.

This announcement was part of the Law Society Risk and Compliance Conference on 15 March 2013, when concern was expressed by the SRA as to 'toxic combinations' resulting from, in part, 'overbearing' senior managers and their 'bad behaviours'. The classic scenario of dominating individuals that the FSA, in its day, looked closely at, in seeking to ensure that Chief Executives of businesses were not also the Chairman of the Board.

As law firms have become more overtly businesses, it is no surprise that they too will need to be mindful about having these checks. An unfettered COLP and COFA is a healthy start.

Old news then?

Your Compliance Officers may, have been operating in their roles for some time prior to the "live" date on 1 January 2013. Now, some months on, we can look at what changes may yet come. How much whistle blowing by Compliance Officers, on their own colleagues, is actually occurring?  As yet there is little hard data, so we will update in a further bulletin once that is available.

What is known is that the SRA, per their own website, remind lawyers that 'through COLPs and COFAs, the SRA will promote the benefits of closer working between the regulator and those who are regulated'.

 

Having rolled out the authorisation, the SRA is, per the guidelines of 19 March 2013, streamlining the process for authorisation of ABSs to 'fast track lower risk applications'. As at 19 March, the SRA had licensed 108 ABSs.

Sanctions but no bailouts?

Unlike the crisis with the Euro zone, the SRA have available to them reprimands and revocations of a firm's licence or 'recognition'. These steps may now be occurring and once news is available we are sure the press will focus on the outcomes.

What is clear is that with the SRA urging firms that are struggling; to plan for insolvency (Principle 8 in action) and the SRA budgeting to spend £2.2M (Law Gazette 18 March 2013) on interventions in failed law firms just for the first quarter of 2013, these are serious steps. That is said to be £1m more than for the whole of 2012.

Apparently the SRA are in talks with some 56 firms where intervention is possible. What is not said is the individual and cumulative effect such a high volume of intervention will have on PII insurer's sustainability for the rest of the market.

The fundamental pressures on law firms will be one aspect close to the minds of the COFAs, who will be asking the pertinent questions of the management executives of their firms. These include the strength of the relationships with the bankers, the levels of distributions to the partners/members and the levels of investment. The RAG process by the SRA is very focussed.

 

The SRA commented recently on the subject of active file management, in the context of intervened firms with large volumes of closed or dead files, which incur high intervention costs to check before final closure. Many readers will recall with a certain fondness, the world of client and office account ledgers and the satisfaction of resolving those. The message is to keep on top of that - just good client care and business sense.

Trust

Much of what challenges a COLP and COFA is the concept of trust. If it is so that many partners ( fixed share or otherwise) have little awareness of what the partners in the management executive team are doing, that flags up that changes are needed on communication and openness. Indeed it may become more focused if the recent news follows through, on looking more closely at National Insurance savings that some firms make by "promoting " lawyers to partner and in so doing, at a stroke ,reduce the NI bill of the firm.

Trust is only there when it is going well. The COLP will be acutely alive to the fundamental folly of having a budget for chargeable minutes, but no budget for expenditure. A train crash waiting to happen, some say.

For further information on this or for a discussion on how Wesleyan Active Risk Management can help your specific business: 

 

Phone: 0800 107 8171

Email: PIIenquries@wesleyan.co.uk

This article is a general guide and is not a substitute for professional advice. No responsibility can be taken for any loss incurred by anyone acting or failing to act on the basis of this article.

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Wesleyan Assurance Society and Wesleyan Bank Ltd are authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Wesleyan Financial Services Ltd, Wesleyan Unit Trust Managers Ltd, Practice Plan Ltd and DPAS Ltd are authorised and regulated by the Financial Conduct Authority.  Advice about investments, insurance and mortgages is provided by Wesleyan Financial Services Ltd.

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