Closed Consultation

• 1.

  We are consulting on proposed changes to how long the SRA keeps files following an intervention into a firm and/or an individual's practice. Under the current practice, the SRA is required to retain substantial quantities of client files for very long periods, at considerable cost. This cost is passed on to those we regulate and, in turn, to consumers. The SRA considers that these costs could be reduced without significant detriment.

Background

• 2.

  The SRA has powers to intervene into a firm, or an individual's practice, when it has reason to suspect that the interests of clients are threatened by dishonesty, failure to account for client's money, or a breach of the Code of Conduct.

• 3.

  Upon intervention, the SRA ensures that all client papers are removed as soon as possible. This includes client files and original documents as well as accounting records. Following an intervention, the appointed agents will make every effort to return live files to clients. There will, however, be some clients who cannot be traced. There will also be files which were stored in the archive of the intervened firm in respect of which we will take no steps. The residual current files and the archived files of the intervened firm are in those circumstances stored by the SRA in the Intervention Archives Department ("IAD") which is currently operated on an outsourced basis by Capita. A client of the intervened firm can contact IAD to seek the return of their files or papers. However, the vast majority do not and the files will therefore remain in storage.

• 4.

  The issue for consideration is how long these papers should be retained after intervention. The SRA's file retention policy must balance the rights and interests of the individuals affected by an intervention and the costs to those we regulate and the public. In each case we have to apply to the court for approval to destroy files – we therefore need to be able to show the court that what we propose is reasonable. For the reasons set out in this paper, we consider that considerable reductions in the retention period could be made safely.

• 5.

  The proposal in this document concerns what the SRA should do with physical files/papers it takes control of, following an intervention into a firm. Different, and sometimes complex, issues are presented when taking control of electronic documents and the SRA is therefore considering that matter separately. It should also be noted that this paper considers only the policy for retention of papers by the SRA following an intervention. The policy is not intended to apply to the retention policies of law firms, where different considerations apply.

• 6.

  We particularly welcome views from the practitioners and firms we regulate, consumers of legal services, other regulators and from those who may have an interest in how the SRA's Compensation Fund is applied given that the cost of interventions, which includes the cost of dealing with the archived files of the intervened firm, are met by the Fund.

Interventions

• 7.

  The powers to intervene are contained in the Solicitors Act 1974 (as amended) and other legislation. The powers exist in order to protect the public, whether they are exercised on the grounds of suspected dishonesty, breaches of the SRA Accounts Rules or a breach of the Code of Conduct. The powers enable the SRA to step in, for example, to prevent escalation of default, including where some other regulatory breach is the basis of the exercise of the powers.

• 8.

  The powers also exist to protect the Compensation Fund. The powers of intervention have their origin in the need to protect the Compensation Fund which was established under the Solicitors Act 1941. The costs of the exercise of the powers in suspected dishonesty cases were, under the 1974 Act, recoverable from the Fund. That was extended to all interventions by the Legal Services Act 2007.

• 9.

  A decision to intervene will only be made where one of the grounds set out in legislation have been met and it is necessary to intervene in order to protect the public interest.

• 10.

  The SRA's primary objective when engaging with firms is to ensure that clients are protected and to avoid intervention unless absolutely necessary. Intervention will usually be the last resort in such cases but will often be necessary more urgently in other situations such as to avoid risk to the public arising from the activities of a practitioner suspected to be dishonest or continuing risk to clients arising from a client account shortage.

• 11.

  Costs which follow an intervention include:

  • the cost of the in-house team of intervention officers,
  • the cost for the external services of intervention agents (solicitors firms on a panel),
  • the costs of Capita which provides logistical supports on an intervention such as the collection and transport of files and the data-basing of live files; and
  • the cost for the archiving, repatriation and ultimate destruction of closed client files taken into the SRA's possession at the point of intervention.
   
• 12.

  The most significant "in-year" variable costs (driven by the number of interventions and the scale of each) are the second and third of these elements. The final element is also affected by the number and scale of interventions but the costs associated with this have a longer term impact given the current approach to the length of time for which closed client files from intervened firms must be kept.

File retention

• 13.

  The SRA's current policy is to hold all files for a certain number of years depending on the file type. The minimum period is seven years from the date of intervention. That policy was approved by the Court in 2009 and is in Annex 1.

• 14.

  We have reviewed this policy and we now believe that the retention periods are too long for a number of reasons.

  • Very few clients ever come forward to claim their old files. The table at Annex 2 shows that only 0.55 per cent of client papers are ever claimed. Of that small figure only a little over half relates to files rather than original documents (which will be retained for much longer periods). The table also shows that of the clients who do come forward, most do so within the first two to three years of an intervention. We therefore continue to hold just over six million files knowing that very few will ever be returned to the clients.
  • The policy places us in a position where a firm could quite properly destroy a very old client file one day and the following day, after an intervention, the SRA is compelled to retain it for a further seven years. We therefore think that the retention period should run from closure date of the file rather than the date of intervention.
  • A number of interventions only relate to the archived files of a firm which had closed down many years earlier. Retaining those files for a further seven years seems disproportionate.
  • Recent interventions into larger firms have revealed numbers of archived files well beyond anything envisaged at the time of the previous court application. Based on interventions over the last 20 years, the historic average number of archive files was 4,000/5,000 files. With interventions into larger firms, we are seeing unprecedented numbers of archived files – on one intervention this year, we took possession of some 450,000 files. In other words, 100 times more than the historic norm with the consequent costs that will bring of applying the existing retention periods.
   
• 15.

  In cases where intervention into a firm seems probable or where practitioners have taken the decision to close their firm, the SRA is pressing firms to address historic archiving issues as a matter of urgency. The Law Society has provided guidance to the profession to assist firms in their archiving and destruction of client files in certain areas of practice.

• 16.

  However, the SRA continues to encounter firms which have failed to manage their archives effectively. The SRA is seeing archiving contracts where law firms only pay costs to storage companies/third parties when files are deposited or extracted; so there is a cost to the firm attached to managing their archive properly and a financial incentive not to do so.

• 17.

  Given this, and for the reasons set out above, the SRA proposes to adopt a more proportionate file retention policy and thus significantly reduce archiving costs. By taking a more targeted approach and only sifting certain types of files which are most likely to reveal original documents, this will result in a reduction of costs.

• 18.

  It is important that the SRA takes initiatives as a mature regulator to ensure that the impact on the Compensation Fund (which bears the costs of interventions) is managed. It is therefore, necessary to consider whether the SRA's regulatory policies and processes work in the public interest.

Proposal

• 19.

  The SRA proposes to secure and retain client files for a reasonable period which gives clients the opportunity to contact the SRA. Original documents will continue to be retained for longer periods and our proposed new list of what shall constitute an original document and the retention periods that shall apply are in Annex 3. The document in Annex 3 is the proposed guidance document for IAD and includes an explanation of why we no longer believe that certain types of document which were identified in the previous policy as needing longer storage periods need to be retained. We have therefore, reduced the list of original documents significantly as the Annex sets out.

• 20.

  The SRA also proposes that there should still be varying retention periods for files depending upon the types of matter concerned. It is proposed that for sensitive matters, for example concerning children or trusts, wills and probate, longer retention periods should apply. The proposed retention periods are set out in Annex 4. Again there is an explanation of why the reduced periods (when compared with the previous policy) have been applied.

• 21.

  To inform our view, we have examined approximately 30 interventions which have been carried out in the last 18 to 24 months and have calculated the cost of storing those files in line with the current policy as £4.4m.

• 22.

  Applying the proposed list of what shall constitute an original document and the time periods that shall apply, we have made estimates of the numbers of files falling into the new categories. Based on these estimates and applying a blanket seven-year retention period, it is envisaged that the costs of storage in line with the new policy would be approximately £1.9m.

• 23.

  The savings on the 30 interventions would therefore, be £2.5m across the lifetime of the interventions. These savings are only based on the interventions which have been carried out recently. The proposed policy would apply to all future interventions and therefore, will continue to produce savings in the future.

• 24.

  We believe that our proposal is proportionate and targeted, in the sense that it achieves the necessary level of protection for consumers and safeguards the public interest while allowing us to keep the costs of the storage process to a manageable level. The proposal will allow for the efficient allocation of our resources. Having regard to the relatively small numbers of clients (of an intervened firm) who contact the SRA to retrieve papers it is considered that the proposed retention periods have a minimal impact on consumers. The risks associated with the proposed amendment are therefore, considered to be minimal.