12 minute read
Star gazing
In November 2019 , the Solicitors Regulation Authority (SRA) introduced the new SRA Standards and Regulations (STaRs), replacing the SRA Handbook and Code of Conduct 2011. The move to ‘principle’- or ‘risk’-based regulation offers increased choice, but also increases uncertainty and risk for practitioners and the public. The latest iteration streamlines the structure and wording of aspects of the old code, but the underlying obligations remain.
The new SRA Code of Conduct for Solicitors, RELs and RFLs (referred to here as the CfS) and SRA Code of Conduct for Firms, along with the SRA Accounts Rules, Authorisation Rules and Enforcement Strategy, are shorter overall, and place increased emphasis on integrity and professional standards of conduct. This article offers thoughts on key changes brought in by the STaRs, and on the wider environment for conveyancers, with reference to the new CfS.
Client care In order to maintain professional standards in conveyancing, there are key elements that are paramount. I suggest that service, advice and probity remain central pillars. Although it is too early to judge whether the STaRs will mark a significant shift in the way we conduct conveyancing, it is nonetheless a useful exercise for firms to overlay their existing processes against the new regulations to see where efficiencies can be won.
In terms of service, many clients clearly now prefer to use email, text and telephone. This poses challenges in terms of the security of transmission and storage of data, and also requires communication skills to ensure that advice is understood by the client. Not all clients are able to access or choose to use modern devices in the same way, even when there are no compatibility issues. Every solicitor must take responsibility to ensure that their client care not only avoids complaints, but is also effective and in the client’s best interests.
“Conveyancing has long held the record for the highest number of complaints to the Legal Ombudsman and claims under professional indemnity insurance” Michael Garson outlines some of the key features of the new regulatory environment, following the introduction of the new SRA Standards and Regulations
Effective client care does not rest on fixed requirements, but rather the shaping of service according to client needs. While a comprehensive letter at the outset of a matter will remain important, that may not be sufficient to maintain a relationship that clients will value.
Quality of advice Competent advice is a key to client care and retention, as well as being a core element of compliance (see sections 3.1-3.5 of the CfS). Quality of advice rests upon a reliable system for gathering relevant data and ensuring that once work has been allocated according to capabilities and resources, self-management or supervision is effective to deliver competent work. The range of potential issues in conveyancing demands specialist knowledge at certain stages, together with an understanding of regulatory implications and the risks to be mitigated. Risks are wideranging, from money laundering, stamp duty land tax liability, conflicts of interest and cyber-fraud, and can emanate from clients, counterparties or other third parties, as well as from the transaction itself.
Section 2 of the new CfS sets out the requirement for suitable governance, a system of controls, and record keeping. Procedures proportionate to the size of the business will be needed to satisfy insurers as well as regulators. In well-managed firms, the risks specific to carrying out conveyancing will be managed through training and systems that identify potential issues, such as defects of title, planning, onerous leases, or developments with more complex service arrangements and multi-party commercial contracts that need greater time and consideration.
Probity, claims and losses Probity may be taken for granted by clients, but poses the most serious threat to practitioners. There are multiple points of risk, and threats can be internal as easily as external.
Conveyancing has long held the record for the highest number of complaints to the Legal Ombudsman and claims under professional indemnity insurance (PII). The largest claims will be from total loss of consideration, either through a failure to account to a seller or lenders, or from aggregation of claims upon default or repeat errors in advice on leases, a scheme or development.
It has always been prudent to maintain a central register of undertakings, as well as a record on each file. However, the active monitoring by senior managers of the central register and the total amount outstanding, and being aware of how long each undertaking has been outstanding, are what can make a difference.
A review of Solicitors Disciplinary Tribunal cases arising from breaches of the SRA Accounts Rules suggests that problems commonly arise in firms where client accounts are not systematically reconciled within a short time after completion. Firms should pay close attention to this.
Specific changes In addition to the introduction of ‘freelance’ solicitors and solicitors offering non-reserved legal services, there are specific changes to consider. One of the most important is the clear requirement for solicitors to keep “professional knowledge and skills” up to date. This is placed upon each solicitor individually (section 3.3) and, where a solicitor manages or supervises others, they remain accountable for the work and must supervise effectively (3.5) – easier said than done.
The new standards on conflicts and confidentiality are short (see sections 6.1 and 6.2), but assisted by new SRA guidance (tinyurl.com/r4ya6r3). The omission of the indicative behaviours from chapters 3 and 4 of the 2011 code concerning acting on a mortgage will leave many conveyancers scratching their heads. However, the previous guidance remains relevant, and it is unlikely that firms would wish to adopt a radically different procedure from their approach under the 2011 code.
There are changes to reporting requirements, which are important for both compliance officers and solicitors. Solicitors must now report to the SRA on any matter that could be capable of amounting to a serious breach of regulatory arrangements by anyone (7.7). This duty can be satisfied under section 7.12 with a report to the compliance officer and belief that they will make the notification to the SRA. This, of course, assumes that the compliance officer agrees that the matter does need to be reported. Guidance to clarify the position was issued in November 2019 (tinyurl.com/vmroctt).
Another new provision is section 7.11, which requires that a client must be given a full and complete explanation in the event that “things go wrong”, but also permits solicitors to “put matters right”. This may settle the doubt about firms continuing to act in order to remedy mistakes which arose from the regulatory settlement SRA v Howell-Jones LLP (case no. 11846-2018). The position is clarified in a guidance note published in November 2019 (tinyurl.com/u9wev9h).
Professional indemnity insurance To widespread relief, the SRA announced in December 2019 that it would not be taking any further the planned review of PII financial protection. This means the SRA Indemnity Insurance Rules and the minimum level and minimum terms and conditions (MTCs) of the policy cover are retained, alongside the relatively new obligation introduced in 2016 to maintain “adequate and appropriate” PII.
The SRA has produced guidance (tinyurl.com/vygwm8x) which provides a short overview of some of the factors to be considered when assessing what level of insurance is needed for cover to be “adequate and appropriate” for a solicitor carrying out reserved activities as a freelancer. There is a concern that some commercial insurance policies will not give the same breadth of cover as the MTCs, and potentially result in loss of protection for solicitors and clients. The topic is relevant for all regulated practices, as PII must be maintained at a level suitable for the practice and the business conducted, irrespective of the compulsory minimum. The value of single transactions has risen to well above the minimum in some parts of the country, and no assumption can be made that all claims will be for less than the £2m or £3m minimum. Since MTC policies are made on a ‘claims made’ basis, it is not only the risk of claims from current work that need to be considered, but also claims that could arise from past years and from types of work no longer carried on by the practice, as well as the consequences of possible aggregation of claims by insurers.
The SRA guidance does not perhaps fully explore all aspects of this question, so firms should regularly and objectively review their exposure to risk, particularly from work done in the past, and to be aware there is a risk of aggregation.
The PII market has tightened and some players are leaving it, which makes it even more important for firms to demonstrate that they have taken steps to minimise exposure to the risks insurers consider the most important.
Fraud may result in a total loss of sale proceeds to the client (as in Dreamvar); there are also cases such as Godiva Mortgages Ltd v Travelers Insurance Company & Willmett Solicitors [2012] EWHC 3615 (Comm), where the failure to pay off loans to third parties can present very large claims.
Cyber-fraud, whether it arises from weakness at the client’s end or internally at a firm, can result in large claims, and may cause losses outside the scope of the standard policy. While the use of a third-party managed account to manage client account may, in theory, outsource the day-to-day operation of the account, the practical implications and cost of organising and monitoring such an account may not give rise to a net saving of insurance premiums or other accounting costs.
Money laundering compliance In March 2019, the SRA reviewed the money laundering compliance of 400 firms. Some 21% were found not to be compliant, and many others were criticised for delivering risk assessments considered to be of poor quality. As a result, the SRA has now written to around 6,500 firms, requiring them to confirm that they have carried out a firm-wide assessment of risk, as required under the Money Laundering Regulations 2017 (MLR 2017).
There is some confusion, and often divergent approaches within firms, regarding the multiple requirements of modern-day anti-money laundering checks. That could be partly because there are so many elements to the regulations, and while almost everyone can understand the broad principles, the detail is harder to apply in practice. It is for the senior managers together with the money laundering reporting officer to establish clear policies and training for the business.
Deciding whether a suspicion is reasonable or ‘fanciful’ may be challenging where there are no rules or objective yardstick. What one person may regard as high risk, another may not. Here, the SRA resources, updated in November 2019 and January 2020, are helpful (see tinyurl.com/ssq9dcq).
As well as carrying out the firm-wide assessment, which will be different for every firm, each will need to make an assessment at the start of and during every conveyancing transaction. It is important to keep a record of the assessment for each matter, and of any change if new facts emerge. The process may appear of little relevance, for example, on the replacement of one family residence for another. This will, for most firms, appear to be a low-risk case where money laundering problems are not likely, but each firm must risk-assess its position in relation to the wider environment and specific facts of the case – including client profile and borrowings, location and price.
In situations where solicitors have accepted money into client account but there is no legal service provided, this has been be viewed as serious non-compliance. Client accounts must be used only for delivery of services regulated by the SRA, and not used to provide banking facilities (SRA Accounts Rules, section 3.3).
The 5th Money Laundering Directive and the resulting Money Laundering and Terrorist Financing (Amendment) Regulations 2019 came into effect from 10 January. There is no change to the underlying principles of the MLR 2017, but there is an extension of scope: regulated persons now include, among others, art dealers, letting agents where rentals exceed 10,000 per month (lettings agents which also operate as estate agents were already within scope), and cryptocurrency dealers. However, the greater impact is likely to be from the requirements for checking the beneficial ownership of companies and trusts, and reporting to Companies House any discrepancies with the Persons with Significant Control register.
The regulations also extend the definition of “tax adviser” so that solicitors providing support with tax matters, even using accountants, will now need to apply risk assessment and reporting obligations in such matters where they are not already treated as within scope.
Changes to requirements for the registration of trusts are extended by the 5th Directive, and new regulations are expected so that these measures are brought into effect before the end of March 2020. The requirement for registration of all UK express trusts with HM Revenue & Customs, regardless of whether there is a taxable activity, will affect many property and probate practitioners.
All in all, there is much to ensure that conveyancers have plenty of new additions to their daily task lists in 2020. ■
Michael Garson Kagan Moss & Co.
Michael Garson is Managing Partner of Kagan Moss & Co, a member of the Property Section and Professional Indemnity Insurance committees, and chair of the Professional Standards and Ethics Committee.
The SRA is consulting on minor changes to exemptions for qualified lawyers who are seeking admission through the new Solicitors Qualifying Examination (SQE) once it is introduced in Autumn 2021, subject to Legal Services Board approval.
Some qualified lawyers – lawyers who have qualified in a jurisdiction outside England and Wales or qualified as a barrister - depending on their level of experience and knowledge, may be able to get either a full or partial exemption from taking the SQE2 assessment.
The revisions provide assurances that qualified lawyers who may be exempt from all or part of the SQE2 assessment have the necessary language knowledge to practise as a solicitor.
The proposed changes include:
■ removing the requirements for qualified lawyers seeking an exemption from the SQE to be from a jurisdiction the SRA recognises. The SRA’s focus will be on the qualification and experience of the individual applicant.
■ making clear that qualified lawyers can demonstrate their language knowledge in either Welsh or English.
■ clarifying that qualified lawyers who are partially exempt as well as fully exempt from the SQE2 must demonstrate their English or Welsh language knowledge through a range of approaches.
The principles also apply to lawyers regulated by another approved legal services regulator in England and Wales, such as chartered legal executives, licenced conveyancers or barristers.
Julie Brannan, SRA Director of Education and Training said: “The public needs to be able to trust that a solicitor, wherever they have trained, has the right skills, knowledge and competence to practise. Our proposed revisions mean that we will be in the right place to gain those assurances for qualified lawyers, ready for the planned implementation of the SQE in 2021.”
The consultation runs until 8 May 2020. ■
