As we continue the countdown to the new Standards and Regulations regime those who are bound to be most concerned to know what is in store will be the COLP and COFA who shoulder the main responsibilities for the compliance profile of their firm. These office holders may well therefore be interested to know how their job roles will be changing under the new regime especially as the SRA has stressed that the duty for ensuring compliance should not be overly focused on them alone.
The revised requirements for COLPs and COFAs
The revised requirements for both of the roles of COLP and COFA will be found at rule 8 of the Authorisation of Firms Rules and at rule 9 in the Code of Conduct for Firms, both within the Standards and Regulations. It is provided that an authorised body must, under r.8(1)
Much as at present, the COLP will continue to need to be a lawyer, though not necessarily a partner or a solicitor. However, as with elsewhere in the Standards and Regulations, the SRA has sought to simplify the arrangements. The previous requirement that both reporting roles be filled by persons of ‘sufficient seniority’ who were in a ‘position of sufficient responsibility to fulfil the role’ have now been removed, although the SRA will still have to approve all nominations.
Who can be COLP or COFA?
More detail on the approval of the role holders is to be found at rule 13 of the Authorisation of Firms Rules and is based in the main on the separate SRA Assessment of Character and Suitability Rules. There are fast track approval processes for small firms which apply when:
- the nominee is a lawyer and partner/director/principal of the practice;
- the firm has an annual turnover of no more than £600,000;
- the nominee is not a compliance officer of any other authorised body; and
- the nominee is not at the time subject to regulatory or disciplinary investigation or an adverse finding of the SRA, the Tribunal or any other such regulatory body.
Otherwise an application will need to be made to the SRA.
In the event of the COLP or COFA resigning or ceasing to act as such for any other reason, the firm must notify the SRA of this fact within seven days and an application must be made for a temporary emergency approval of a successor pending their approval. The role holders are also under a duty to ‘notify the SRA promptly of any information in relation to them which would be relevant to an assessment of their fitness and propriety in accordance with the Character and Suitability Rules’. In judging this, reference should be made to the Enforcement Strategy which appeared on the website in February this year and, in particular, to its guidance on seriousness.
COLP and COFA role responsibilities
As to the role responsibilities, the COLP and COFA have so far been required to:
- Ensure that effective compliance arrangements are in place for their respective area of responsibility;
- Monitor the working of those arrangements to ensure that they are in effective operation;
- Keep a note of all breaches that come to their attention; and
- Report to the SRA ‘as soon as reasonably practicable’ those breaches that are of a ‘material’ nature.
The responsibilities now set out at Standard 9 of the Code for Firms are rather different. In summary, they are to ensure:
- For COLPs
- compliance with the terms and conditions of the firm’s authorisation and all the relevant regulatory arrangements other than the Accounts Rules;
- that managers, interest holders, employees and contractors are not involved in a breach of regulatory arrangements;
- that a ‘prompt’ report is made to the SRA of ‘any facts or matters that are reasonably believed to be capable of amounting to a serious breach’ of these obligations.
- For COFAs:
- compliance with the Accounts Rules throughout the firm;
- that a prompt report is made to the SRA of any facts or matters that they reasonably believe are capable of amounting to a serious breach of the Accounts rules
- that a prompt report is made to the SRA of any facts or matters they reasonably believe should be brought to the SRA’s attention to allow it to investigate whether a serious breach of its regulatory arrangements has occurred or otherwise exercise its regulatory powers.
The introduction of an objective element to the reporting obligation may well mean that more reports should be made of ‘serious’ breaches as opposed to those that are ‘material’ at present.
That apart, the most notable change within the new COLP and COFA regime is that there will no longer an obligation to maintain a list of breaches which are not deemed to be serious. However, it would be inadvisable for the reporting officers not to choose to continue to do so. In any event, there is a general provision at rule 7.2 in the Code of Conduct for Individuals that solicitors will need to be able to ‘justify your decisions and actions in order to demonstrate compliance with your obligations under the SRA’s regulatory arrangements’. Applied to the roles of COLP and COFA, this could easily mean being asked to justify why they did not report an issue when it first arose as a serious breach if it later comes to the regulator’s attention and they commence an investigation.
The involvement of everyone
As to the involvement of other partners, the SRA seems always to have taken the view that responsibility should not be too narrowly focused on the reporting officers. Evidence of this can be found in relation to the current Accounts Rules at rule 6. This provides that ‘all the principals in a firm must ensure that rules by the principals themselves and by everyone employed by the firm’. Other examples can be found in a guidance note to the Authorisation Rules along similar lines where the roles of COLPs and COFAs are set out. That same provision will now be found at rule 8.1 in the Code for Firms which provides that all of the partners/directors will be responsible for compliance with that Code, and in the Accounts Rules at rule 1.2 that they will all be jointly and severally responsible for the firm’s compliance with that part of the new regime.
The SRA has perhaps here taken into account research by Dr Steven Vaughan from 2016 which reported widespread evidence of what was referred to as the ‘insourcing’ of compliance by partners particularly in larger firms. This occurs where those within the firm see the role of compliance as being someone else’s responsibility rather than their own.
Accounts Rules changes
Another factor for the COFA in particular to take on board is that of the changes to the accounts rules. Much has been made by the SRA of how much shorter the rulebook for solicitors will be when the revised Standards and Regulations take effect. The overall reduction will see the current 500 plus page Handbook reduced to nearer 150. Nowhere is this more the case than with the Accounts Rules, shortened now to barely seven pages of A4.
The overall picture is made slightly more complex, however, as the SRA continues to release guidance notes on a range of regulatory topics, many of them relating to the interpretation of the new regime and the operation of the Accounts Rules in particular. In this way the Accounts Rules themselves might indeed be shorter in length, but the total information to take on board will be longer than claimed through the need to refer also to the website guidance.
To date there are six issues of ‘key new guidance’ covering the following:
- Accountant’s report and the exemption to obtain one.
- Do I need to operate a client account?
- Helping you keep accurate client accounting records.
- Joint accounts and record keeping.
- Planning for and completing an accountant’s report.
- Third-party managed accounts.
Of these the most eye-catching are likely to be the enhanced ability to dispense with the use of a client account or an accountant’s report.
Under the new Standards and Regulations, it will be possible to dispense with the client account, and instead to operate through an office (now ‘business’) account, if the only client money that is received by the firm consists of advance payments for fees and unpaid disbursements, and then only those disbursements that the firm would have responsibility for such as counsels’ fees rather than the client’s disbursements such as stamp duty land tax.
Quite how many firms will wish to take advantage of these new freedoms is yet to be seen. The SRA guidance note requires a clear explanation of the risks to be given to clients if practitioners are proposing to operate without a client account. Infolegal director Jayne Willetts has suggested that proposing to use the business account only could be seen to be an ‘own interest’ conflict (even if one permitted by the new rules) in that it will clearly be in the firm’s best interests to have the cash flow benefit of having such funds in advance but to the client’s potential detriment in not having the additional protection of it being in a client account, especially in the event of the firm’s insolvency.
To find out more about the new Standards and Regulations you can purchase the Infolegal Guide “Decoding the Codes of Conduct”