Closed Consultation

1 Executive summary

• 1.

  The SRA signalled its move to outcomes-focused regulation (OFR) in our strategy paper "Achieving the right outcomes" in January this year and in our April consultation paper "Solicitors Regulation Authority: Outcomes-Focused Regulation – Transforming the SRA's regulation of legal services". This paper represents the first major step in the practical implementation of OFR through the development of the SRA Handbook of regulations. At the same time it introduces the regulatory requirements for alternative business structures (ABSs), which we intend to license from October 2011. The new Handbook will be finalised and published in April 2011 and implemented on 6 October 2011.

• 2.

  Our overall objective has been to put public protection at the heart of our outcomes-focused approach, by achieving a common standard of client protection across all types of firm and improving standards. In furtherance of this objective, the foundation stones of our new approach are:

  • a new set of Principles that define the fundamental ethical and professional standards that we expect of all firms and individuals when providing legal services;
  • a new SRA Code of Conduct which illustrates the practical application of the Principles in particular contexts, by explaining what outcomes we expect firms and individuals to achieve;
  • a Handbook that for the first time brings together all of our regulatory requirements, enabling you to understand how the elements of our regulatory regime inter-link. This Handbook is designed to be accessible online.
• 3.

  Public protection is at the heart of our approach and these foundation stones lay the groundwork for our overall objectives of achieving a common standard of client protection across all types of firm and improving standards. Our outcomes-focused approach is also designed to bring the following benefits to clients and firms:

  • (a)

    culture – a greater focus within firms and the SRA on quality assurance and professional principles;

  • (b)

    business value and cost effectiveness – our approach will assist firms by giving them flexibility over the manner of compliance – in other words, the right controls to mitigate and manage the risks that they are running. At the same time our Principles and outcomes encourage firms to consider the longer term value that their business will derive from acting in a principled and client focused manner;

  • (c)

    flexibility and innovation – over-detailed regulations can constrain firms in terms of their choice of business model and in their manner of compliance. In designing the new Handbook – and in particular the SRA Code of Conduct – we have therefore removed regulatory requirements that cannot be justified on the basis of the Better Regulation Principles.

• 4.

  The policy expressed in our new Handbook is based on the evidence available to us about the:

  • risks that firms and individuals pose to our regulatory objectives;
  • costs and the benefits of policy options to firms and the SRA (see paragraph 11 on our cost-benefit analysis work); and
  • likely impact on equality and diversity, human rights and competition.
• 5.

  Alongside our requirements for the conduct of legal services, and provisions for the protection of clients, are new provisions which define how firms and individuals will engage with the SRA. These provisions extend from the point of authorisation to orderly wind-down and, in the worst cases, disciplinary action, and they reflect our desire to change the nature of our relationship with firms. In doing this we are seeking to develop mutual trust through greater understanding of our regulated community, enabling our supervision of firms to be proactive, risk-based and proportionate.

• 6.

  The new Handbook is only one element in the implementation of our approach to OFR. Other key elements are

  • an approach to authorisation that is risk and evidence based, only allowing principled, competent firms and individuals to deliver legal services;
  • effective, risk-based supervision of firms based on information received from firms and other sources. The introduction of the new approach to the supervision of firms is intended to encourage firms to be open and honest in their dealings with us and to manage risks and address issues themselves. This will enable us to concentrate on those who can't, or won't, put things right;
  • credible deterrence of serious non-compliance through fair and proportionate enforcement actions.

  These other elements are dealt with in more detail in our April consultation and will underpin the way in which the Handbook will be applied. In a nutshell, we will take a holistic approach to regulation by supporting and encouraging firms to work with us to achieve compliance. We will not, however, hesitate to take action against firms which pose a serious risk to clients and refuse to take corrective action.

• 7.

  This is the first step towards our new regulatory regime and will be followed by a further consultation in October, which will:

  • set out the final form of the rules which we are consulting on now, taking into account the responses from this consultation; and
  • consult on other rules and regulatory procedures which it is not possible to finalise at present, such as the Compensation Fund Rules (where a change to our statutory powers is needed). We will also be consulting on the final form of the Code, together with relevant guidance. The final Code will include the outcomes or rules for regulating conflicts of interests and rules on annual reporting and notification.

  Annex J details the contents of the October consultation.

2 Introduction

• 8.

  This consultation introduces a major package of regulatory requirements for the provision of legal services. It is the first stage in the SRA's transformation of our approach to regulation through our move to an outcomes-focused and risk-based approach. For this reason, we believe it is vital for members of the profession, consumers of legal services, other stakeholders and those proposing to set up new legal services businesses, to engage with us in the development process of our new Handbook and provide feedback on the contents of this paper.

• 9.

  In summary, the paper sets out:

  • an explanation of our new outcomes-focused approach to regulation and how it has influenced the development of the new Handbook;
  • the structure of the new SRA Handbook (which will contain all of our regulatory requirements for both firms and individuals);
  • the new Code, Accounts Rules and Specialist Services rules;
  • how firms will engage with the SRA from authorisation to disciplinary action;
  • how we intend to protect clients through professional indemnity requirements for firms.

3 A new approach to regulation

Strategic objectives – our evidence-based approach

• 10.

  In developing the new Handbook of regulatory requirements, we have had four strategic objectives:

  • to promote the regulatory objectives contained in the Legal Services Act (LSA), which include protecting and promoting the public interest and the interests of consumers, and supporting the constitutional principle of the rule of law;
  • to secure standards for the delivery of competent legal services whilst protecting clients' interests;
  • to place restrictions on firms and individuals only to the extent that it is necessary to do so in order to mitigate risks to the regulatory objectives;
  • to develop a flexible regime for all types of legal services providers, enabling them to create the right controls given their business model, structure and client base.
• 11.

  In furtherance of these objectives, we have adopted an evidence-based approach to policy making. This approach takes into account the information received from firms through annual returns, visits to firms, disciplinary cases and from other sources, and uses it to identify key risks to the regulatory objectives and the most proportionate regulatory means of mitigating these risks. Thus, the approach is designed to help us understand our policy options in the light of:

  • the public interest and the promotion of the regulatory objectives;
  • the potential costs and benefits of different options for firms and the SRA. We recognise that different firms can be affected in different ways by our policy decision. For this reason we will be interviewing and holding workshops with a range of firms to understand the impact of our proposals. A full cost-benefit analysis of the new Handbook will be published in October;
  • the need to achieve a common standard of consumer protection and harmonisation of the regulatory requirements across all types of firm;
  • equality and diversity implications – see section 8 of this paper;
  • Human Rights Act compliance – a full Human Rights Act audit is being conducted to ensure that our requirements comply with the legislation.
• 12.

  We would welcome comments regarding the new Handbook in relation to the above matters.

Alternative business structures

• 13.

  The LSA enabled new forms of legal practice to develop:

  • legal disciplinary practices (LDPs), which are firms providing exclusively legal services but involving different kinds of lawyers, and up to 25 per cent non-lawyers; and
  • alternative business structures (ABSs) which will allow external ownership of legal businesses and multi-disciplinary practices (providing legal and other services).

  The SRA will apply to the Legal Services Board to be a designated competent licensing authority (LA), in order to be able to license and regulate ABSs. We intend to make our application early in 2011. Our objectives in defining the regulatory regime for ABSs have been to:

  • achieve the same degree of consumer protection for clients of firms of solicitors and ABSs;
  • facilitate transition between the two statutory regimes (i.e. for recognised bodies and licensed bodies – see below), since we believe that some firms may, during their lifetime, switch status not infrequently.
• 14.

  In other words, we are seeking, wherever possible, to achieve "harmonisation" of regulatory requirements for all types of firm. Where differences exist, the justification for them will be based on the proportionality of regulatory burden, and the degree of risk posed by different types of firm to consumers and to the public interest.

• 15.

  Harmonisation of licensing requirements is hampered to some extent by the legislative framework. The effect of the LSA is to create two statutory regulatory regimes:

  • recognised bodies and recognised sole practitioners continue to be regulated under the Solicitors Act 1974 (SA), the Administration of Justice Act 1985 (AJA) and the Courts and Legal Services Act 1990 (CALS) – in each case as amended by the LSA;
  • ABSs will be regulated as "licensed bodies" under Part 5 of the LSA.
• 16.

  The practical implications of the different regimes and our approach to addressing them are set out throughout this consultation paper. Examples are as follows:

  • under the LSA, approved regulators have unlimited fining powers for licensed bodies, whereas the SRA currently only has the power to fine recognised bodies up to a limit of £2,000;
  • under the LSA, approved regulators do not have the power to recover the costs of investigations from licensed bodies (which power the SRA currently has for recognised bodies);
  • licensed bodies under the LSA are authorised on the basis that they intend to conduct specified reserved legal activities, whereas this is not the case with recognised bodies.
• 17.

  We do not consider it is in the public interest, nor in the interests of firms, to operate under two different regimes because this is likely to create confusion for consumers and providers as to which set of provisions apply in any given situation, particularly where firms move from one regime to another, and would be expensive to operate both for the SRA and firms. We are therefore seeking to harmonise the statutory regimes, where such harmonisation can be justified from a risk perspective and in the public interest. Section 69 LSA provides a mechanism for this, but involves securing the agreement of the LSB and the Lord Chancellor. The SRA is in discussion with the LSB about the possibility of securing one (or more) section 69 order(s). Further information on this harmonisation will be contained in our October consultation paper.

• 18.

  Given the above, our approach to implementing ABSs has been as follows:

  • the new Principles and SRA Code will apply to all firms – recognised bodies, ABSs and recognised sole practitioners;
  • the application of other Handbook rules has been extended to cover ABSs as appropriate and where justified from a risk perspective. This is the case with the Accounts Rules, Indemnity Insurance Rules, Indemnity Rules and the Statutory Trust Rules.
  • some rules have different provisions (to some extent) depending on the type of body – for example, the Authorisation Rules and the Disciplinary Procedure Rules;
  • some rules cannot (as yet) be applied to ABSs (e.g. Compensation Fund Rules, Cost of Investigation Rules, Property Selling Rules and Financial Services Rules). Relevant sections of this paper discuss these points in more detail.

Multi-disciplinary practices (MDPs)

• 19.

  MDPs represent one particular type of ABS, where both legal and other services (e.g. accounting, financial or surveying services) are provided within the same entity.

• 20.

  MDPs raise a number of particular challenges:

  • extent of our jurisdiction – and therefore how requirements will apply to MDPs;
  • relationship with other regulators.
• 21.

  Our intention is that the SRA should become an LA. On that basis, we will issue a licence to an ABS in respect of one or more reserved legal activities. Once licensed, the ABS places itself within the SRA's jurisdiction.

• 22.

  Our view is that, as an LA, the SRA's jurisdiction should be limited to:

  • the reserved legal activities in respect of which the licence has been granted (e.g. conveyancing, litigation etc.);
  • non-reserved legal activities undertaken by the ABS (e.g. legal advice); and
  • non-legal activities (e.g. property management) which are subject to conditions imposed on the ABS's licence.

  The fact that the SRA's jurisdiction will not necessarily apply to all the activities of an ABS takes nothing away from our power to regulate the entity as a whole and to have regard to the manner in which the firm as a whole is being governed. Similarly, our Code applies to all managers of an entity in relation to the delivery of legal services. Therefore, if we believed that a firm was taking advantage of sensitive confidential information for the purposes of cross-selling other services, we would question whether the firm was acting in the best interests of those clients.

• 23.

  The SRA has established a working group of regulators to address issues relating to MDPs. That working group will:

  • develop a memorandum of understanding (MoU) between the regulators, detailing how they will work together to regulate firms;
  • look at options for harmonising regulatory requirements, where such harmonisation can be justified by reference to the levels of risk involved.

  Question:

  1. Do you agree with our overall approach to implementing ABSs?

4 Architecture of the new Handbook: bringing principles and outcomes to the heart of our regime

The SRA Handbook

• 24.

  The development of the new Handbook is driven by:

  • the SRA's move to OFR; and
  • the need to re-draft sections of the regulatory regime to accommodate ABSs.
• 25.

  The SRA's move to OFR will not mean the abolition of all detailed rules in the Handbook. In developing the Handbook we sought to create a high-level structure which combines the flexibility of OFR with the certainty of rules which protect consumers and provide clarity and transparency for firms. A challenge has been to determine which elements of the Handbook should primarily be expressed as rules, and which should be totally outcome focused.

• 26.

  We identified a number of critical success factors for the development of the Handbook:

  • define the fundamental Principles that govern activities by firms and individuals;
  • give necessary prominence to the revised set of Principles through the Handbook structure;
  • define the outcomes that we are expecting firms to achieve in fulfilling their regulatory obligations – these are mainly contained in the Code but the introductions to each section of the Handbook define high level outcomes for firms;
  • provide clarity and flexibility to firms, whilst maintaining appropriate consumer protection and enforceability;
  • create a regulatory regime that is proportionate for all types of firm, be they a large city firm, a national ABS or a sole practitioner solicitor, and also different modes of practice, e.g. in-house solicitors.
• 27.

  The content of the Handbook can be summarised as follows:

  • Principles – these are the ten Principles which are mandatory and apply to all those we regulate and to all aspects of practice. The introduction to each section of the Handbook highlights those Principles which have particular application to that section. For example, we consider that Principle 2 ("You must act with integrity") is particularly relevant to applications for authorisation. The Principles are discussed in this section of the paper;
  • The SRA Code of Conduct ("the Code") – this contains the mandatory outcomes-focused requirements which, when achieved, benefit consumers of legal services and the public at large. This is discussed in more detail in section 5 of this paper;
  • Accounts Rules – this section contains requirements to protect client money. See section 5 of this paper;
  • Authorisation and Practising Requirements – this section contains the key requirements for setting up in practice, whether as a firm or individual, and for different types of practice such as in-house practice. This section also contains training regulations for individuals. See section 6 of this paper;
  • Client Protection – this section contains key elements for the financial protection of clients: the Indemnity Insurance Rules, the Indemnity Rules, the Compensation Fund Rules, and the SRA Intervention Powers (Statutory Trust) Rules. See section 7 of this paper;
  • Disciplinary and Costs Recovery Rules – this section contains provisions relating to the discipline and investigation of firms. See section 6 of this paper;
  • Specialist Services – this section contains provisions which are only applicable when certain services are being provided to clients: the SRA Property Selling Rules, Solicitors' Financial Services (Scope) Rules 2001, the Solicitors' Financial Services (Conduct of Business) Rules 2001 and the SRA European Cross-border Practice Rules. See section 5 of this paper;
  • Guidance – this section contains non-mandatory guidance to aid achievement of the outcomes and Principles.
• 28.

  Many of the requirements in the Handbook will be familiar to firms. A destination table, in Annex B, enables readers to identify where current requirements will be located in the new Handbook. Currently, many of the sets of rules in the Handbook have their own set of definitions (although some, for example the SRA Cross-border Practice Rules, take their definitions from the Code and we have endeavoured to harmonise the definitions where possible). For the future, we are developing definitions to apply across the Handbook so far as is possible, except where differences are justifiable given the particular context. This Handbook glossary will be available as part of the October consultation.

• 29.

  Our intention is to publish the Handbook online but copies of the Code, Accounts Rules, etc. will also be in printed form.

• 30.

  We recognise that the introduction of the new Handbook represents a significant change in regulation and there will be a need for:

  • transitional arrangements to define the dates upon which firms must comply with the new requirements; and
  • grandfathering arrangements – for example where firms are moving from one status (recognised body) to another (ABS).
• 31.

  Further guidance on transitional provisions and grandfathering arrangements will be provided in our October consultation.

  Question:

  2. Do you agree with the new Handbook structure?

Principles

• 32.

  There are ten mandatory Principles which apply to all firms and individuals, including in-house lawyers. They also apply in their entirety to overseas practice. This application mirrors the current application of rule 1 in the 2007 Code of Conduct. We believe that in applying the Principles in this way we are encouraging all individuals to take personal responsibility for complying with the Principles and collective responsibility for the actions of their firms. Firms and individuals should always abide by the Principles and use them as their starting point when faced with an ethical dilemma.

  Principles

  You must:

  1. uphold the rule of law and the proper administration of justice;
  2. act with integrity;
  3. not allow your independence to be compromised;
  4. act in the best interests of each client;
  5. provide a proper standard of service to your clients;
  6. behave in a way that maintains the trust the public places in you and in the provision of legal services;
  7. comply with your legal and regulatory obligations and deal with your regulators and ombudsmen in an open, timely and co-operative manner;
  8. run your business/carry out your role in the business effectively and in accordance with proper governance and sound financial and risk management principles;
  9. run your business/carry out your role in the business in a way that promotes equality and diversity and does not discriminate unlawfully in connection with the provision of legal services;
  10. protect client money and assets.
• 33.

  These Principles:

  • embody the key requirements on firms and individuals involved in the provision of legal services. Because the Principles are so fundamental, failure to comply would be considered extremely serious;
  • apply to individuals and firms we regulate, whether traditional firms of solicitors or ABSs, in-house or overseas;
  • are reproduced throughout the Code where they are particularly relevant;
  • are all-pervasive – all other rules, etc. should be read in conjunction with the Principles – each section of the Handbook contains an introduction, reference to the most relevant Principles and some high-level outcomes to be achieved to comply with the Principles;
  • help with the interpretation of the outcomes and all other provisions.

  Where two or more Principles come into conflict, the Principle which takes precedence is the one which best serves the public interest in the particular circumstances, especially the public interest in the proper administration of justice. Compliance with the Principles is also subject to any overriding legal obligations.

• 34.

  We have added some new Principles because we feel that there are certain issues that need greater emphasis or for which firms should take greater responsibility. These new Principles relate to your relationship with your regulator, the effective management of firms, preventing discrimination and protecting client money and assets.

• 35.

  Given the recent increase in the number of collapses of solicitors' firms, which place clients at risk and strains upon the regulatory system, we have proposed Principle 8, which requires firms to run their businesses effectively and in accordance with proper governance and sound financial and risk management principles. Relevant outcomes for this Principle are contained in Chapter 7 of the Code.

• 36.

  Principle 9 reflects our long-standing position on promoting equality and diversity and preventing discrimination. This is developed further in Chapters 2 and 7 of the Code.

• 37.

  We have given greater prominence to the need to protect client money and assets in the new Principle 10. This underpins the provisions in the Accounts Rules.

• 38.

  Guidance for the Handbook is being prepared, including that for the new Code, and will be the subject of consultation in October.

  Questions:

  3. Do you agree with the new Principles and our approach to applying them across the Handbook?

  4. In what areas do you think explanatory guidance would be particularly helpful?

5 Conduct of legal services

(a) SRA Code

Introduction

• 39.

  The development of the Code has been driven by the need to have a regulatory system which can be flexibly applied by both traditional law firms and ABSs to achieve the right outcomes for consumers.

Format and approach

• 40.

  The new Code is divided into four sections:

  • You and your client
  • You and your business
  • You and your regulator
  • You and others.

Outcomes

• 41.

  Each section is divided into chapters dealing with particular regulatory issues – e.g. "You and your client" covers client care, conflicts, confidentiality, etc. In each chapter the Principles that are of particular relevance to the subject matter are set out. So, for example, the Principles that are particularly relevant to equality and diversity are Principles 1 (upholding the rule of law), 6 (behaving in a way that maintains the trust the public places in you), 7 (compliance with your legal and regulatory obligations) and 9 (promoting equality and diversity and not discriminating unlawfully).

• 42.

  Each chapter then sets out outcomes that describe what firms and individuals are expected to achieve in order to comply with the relevant Principles. The achievement of these outcomes will, we believe, benefit consumers of legal services and the public. All outcomes are mandatory.

Indicative behaviours

• 43.

  The outcomes are supported by "indicative behaviours". Positive indicative behaviours specify the kind of behaviour which tends to establish achievement of the outcomes, and therefore compliance with the Principles. Negative indicative behaviours have the opposite effect. Although indicative behaviours are not mandatory, they will have evidential force in helping us to decide whether an outcome has been achieved in compliance with the Principle(s).

• 44.

  The indicative behaviours are not mandatory because we recognise that there may be other ways of achieving the outcomes. In all cases, you must be able to demonstrate how you have achieved the outcomes.

• 45.

  We would expect that all firms and individuals would review the new Principles and Code to assess the extent to which they may need to make adjustments to comply with them. If you are complying with the spirit of the current Code, you are unlikely to have to make significant changes. However, you should bear in mind the additional Principles and the fact that certain chapters contain new requirements, for example, chapters 7 ("Management of your business") and 10 ("You and your regulator").

• 46.

  As with the Principles, the Code applies to all firms and individuals. There may be instances where an outcome is more appropriately applicable to a firm, rather than to an individual, and we would expect firms and individuals to exercise common sense when considering how the Code applies. The Introduction to the Code and each chapter explain how the Code applies to in-house practice and overseas practice. The SRA will take a similarly pragmatic approach applying principles of public interest and justice when supervising and enforcing aspects of the Code in determining whether to hold individuals or firms (or both) responsible for specific problems.

Specific issues in the Code

• 47.

  We discuss below a number of specific issues related to the Code. These are

  • A

    conflicts of interest,

  • B

    client care,

  • C

    governance and management of firms,

  • D

    in-house and overseas practice.

A Conflicts

• 48.

  The effective regulation of conflicts of interest is critical to client protection and public confidence in the profession. Recent consultations we have held on proposals to relax further the conflicts provisions have persuaded us that we need to take a more holistic approach to this subject than that adopted by the current rule.

• 49.

  Over the years our conflicts rule has developed incrementally to deal with specific situations. Our policy was, until 2006, that firms should not act where there is a conflict, or significant risk of a conflict arising. In addition, there were separate provisions relating to conveyancing transactions (seller/buyer, lender/borrower). These did not permit firms to act in any situation of conflict and in fact restricted firms to a greater extent, because there was an inherent risk of conflict in that area of work. There were, however, exceptions which allowed firms to act for seller and buyer where, for example, they were established clients, but only in circumstances where there was no conflict.

• 50.

  In 2006 the conflicts rule was amended to permit firms to act for clients where there is a conflict in situations where the clients have a "substantially common interest" or where the clients are competing for the same asset. Various conditions applied to these exceptions to the general prohibition on acting, such as client consent and it being reasonable in all the circumstances to act.

• 51.

  The recent changes have all been made on the basis that firms must still be able to comply with their obligations to give independent advice and act in the best interests of each client; if they are not in a position to do so, the firm must not act.

• 52.

  In re-drafting the Code, we are taking the opportunity to review fundamentally our approach on conflicts of interest, since we consider this subject to be essential to client protection and it is vital that clear limits are set for firms. Further, the advent of ABSs brings a new dimension to this subject and we invite views on potential areas of risk which we should deal with in the indicative behaviours.

• 53.

  The issues under consideration are:

  • (a)

    how much flexibility should firms be given in determining when they can act in situations involving or potentially involving a conflict of interests?

  • (b)

    how do we deal with the more detailed provisions which currently govern acting for seller and buyer and lender and borrower, etc.?

  • (c)

    should the requirements relating to conflicts be expressed as outcomes or rules?

(a) Flexibility

• 54.

  With regard to (a), we do not propose to permit firms to act where there is a conflict between a firm's own interests (or those of one of its employees) and a client's interest. This leaves the situation of conflicts of interests between two or more clients. Our starting point is that it is not appropriate to adopt a "drip feed" approach to conflicts of interest, adding exemptions from a main rule; in other words, we prefer to take a more holistic view of this issue and the related risks.

• 55.

  We have identified three potential options:

  Model 1 – firms do not act where there is a conflict of interests;

  Model 2 – firms only act where there is a non-substantive client conflict of interests, and subject to certain conditions;

  Model 3 – firms are permitted to act where there is a client conflict of interests subject to certain conditions.

• 56.

  We define conflicts of interests as follows:

  "Conflict of interests" means any situation where:

  • you owe separate duties to act in the best interests of two or more clients in relation to the same or related matters, and those duties conflict or there is a significant risk that those duties may conflict (a "client conflict of interests"); or
  • your duty to act in the best interests of any client in relation to a matter conflicts, or there is a significant risk that it may conflict, with your own interests in relation to that or a related matter (an "own interest conflict").
• 57.

  These options are set out in Annex F. Our comments on the models are as follows.

Model 1

• 58.

  Our view is that this has no flexibility and is too restrictive.

Model 2

• 59.

  Model 2 was developed in recognition of the fact that there may be cases where a conflict exists but that the risk to clients' interests is insignificant and can be managed through appropriate controls. This view is based on our experience of dealing with firms and by the workings of the current exceptions to rule 3 in the current Code. Whilst we do not believe that this model in any way reduces the protection to clients, it does have many advantages, since it focuses on the extent to which a conflict of interests is substantive, and therefore likely to impinge on the advice given to individual clients. It also provides firms with some flexibility, in cases where the conflict is essentially insignificant.

Model 3

• 60.

  Whilst this model has some merits, we believe that the safeguards are insufficient to protect clients, particularly in cases involving negotiation or some form of dispute.

(b) Detailed provisions

• 61.

  With regard to (b), we believe that it is not necessary to retain separate provisions covering alternative dispute resolution, acting for seller and buyer, etc. as the general principles are the same as for other conflict situations.

• 62.

  The current restriction on acting where an individual or a member of the individual's firm, etc. holds public office which gives rise to a conflict (rule 3.05), is now an indicative behaviour in Chapter 11 of the Code ("Relations with third parties") and restricts an individual or firm from abusing public office by taking advantage of that position for the benefit of their client. There is also an indicative behaviour (G) in Chapter 1 which illustrates the fact that declining to act where there is a conflict of interests would tend to suggest that a firm/individual was complying with outcome 1 ("you provide services to your client(s) in a manner which protects their interests in that matter, subject to the proper administration of justice").

• 63.

  There is also currently a restriction on an individual or anyone within that person's firm acting in circumstances where a person is likely to be a recipient of a lifetime gift or gift on death. Using the approach set out above, we believe that the individuals concerned would have to assess whether such a situation constituted an "own interest conflict".

• 64.

  With regard to the current limitations on acting for both lender and borrower, we intend to consult, and would welcome the views of, interested parties on the continued need or otherwise for the very specific requirements that are currently in rule 3 (see rules 3.16 – 3.22). Since these requirements were introduced, changes to the market have occurred which suggest that they might no longer be needed. These are:

  • the sale of mortgages is now regulated by the Financial Services Authority and therefore, for example, it is clearly the responsibility of the party selling/recommending the mortgage to the borrower to ascertain the borrower's financial situation; and
  • many major lenders, under the auspices of the Council of Mortgage Lenders, have produced standard mortgage instructions, thus reversing the trend at the time the requirements were introduced for lenders to ask solicitors to advise on matters outside the normal scope of the retainer with the lender.

(c) Outcomes or rules

• 65.

  In relation to (c), we would welcome comments on the draft outcomes in Annex D and whether respondents consider these are sufficient to create a clear demarcation on when firms and individuals should and should not act.

• 66.

  The draft chapter of the Code on conflicts of interests will be consulted on in October, with accompanying guidance.

B Client care issues

(a) Vulnerable clients

• 67.

  Greater emphasis has been given in the Code to taking into account any potential vulnerability of a client when providing information to, and advising, that client. The Code has been drafted to provide more flexibility, but this also means that firms need to take greater responsibility for dealing with individual clients in a manner that has regard to their needs. See, for example, in Chapter 1 (Client Care):

  • outcome 1: You provide services to your client(s) in a manner which protects their interests in that matter, subject to the proper administration of justice;
  • indicative behaviour F: having proper regard to your client's mental capacity or other vulnerability.

(b) Client information

• 68.

  With the advent of ABSs, we believe that the risk for client confusion is high, particularly where a regulated firm is providing a range of services, only some of which are legal services (which would be the case with a multi-disciplinary practice). This is because, whilst we will authorise the entity as a whole, our jurisdiction may not extend to all of the firm's activities, where the firm is conducting a combination of legal and other services. We believe that it is vital that clients understand:

  • which activities are regulated and by whom (for example an MDP providing legal and financial services might be regulated by the SRA and the Financial Services Authority);
  • to whom they can ultimately complain about the services provided by a firm, assuming the firm does not resolve the complaint to their satisfaction (there is a risk that clients of MDPs will be confused or misled about the protections available to them and the regulatory roles of the SRA and/or the Legal Ombudsman and other regulators and ombudsmen);
  • the extent to which a firm's professional indemnity insurance covers the services being provided to them (where, for example, there is an element of non-legal work); and
  • whether the firm has any financial interest in a third party from whom they receive referrals or to whom they refer the client.
• 69.

  As stated above (paragraph 23), a working group of regulators has been established to develop an MoU to protect clients against regulatory gaps. That MoU will aim to establish a consistent approach to complaints-handling and the provision of relevant information generally to clients.

• 70.

  We would welcome comments, particularly from consumer groups, on any proposals relating to vulnerable clients or safeguards to protect clients' interests generally.

(c) External influence and the impact on clients

• 71.

  We have identified two main risks to the interests of consumers:

  • External influence – our concern is that a firm's ability to give independent advice is undermined by virtue of external influence or fee arrangements; in particular, contingency fees.

    In addition to conflict restrictions, the Code contains provisions aimed at preventing fee sharing and referral arrangements from influencing the independent provision of services to clients. In addition, firms will be required to ensure that clients are provided with sufficient information concerning external relationships to enable them to make informed decisions as to whether or not to instruct a firm.

    We propose that firms should not be prevented from having arrangements with an introducer or funder who is working on a contingency fee basis, whether or not the introducer is connected, for example, with an ABS, provided the arrangements are not contrary to the general law and the regulatory outcomes and compliance with the Principles are achieved.

  • Non-reserved legal services – our concern is that non-reserved legal services are deliberately provided through a separate business owned by the firm, or an associate of the firm, which is not authorised and regulated by the SRA, and which therefore undermines client protection.

    The SRA currently prohibits (through the separate business rule) firms of solicitors from conducting certain non-reserved legal activities via a separate unregulated business. We permit, however, solicitors to offer certain other services either through their regulated firms or through a separate unregulated business subject to conditions which are designed to protect the public.

    Our intention is to apply the provisions of the current separate business rule to all firms, including ABSs, through specified outcomes. We recognise that this imposes a significant restriction on firms' freedom in developing their business model. However, we believe that this is justified in the interests of consumer protection and the broader public interest. Based on our experience to date, where firms already seek to evade regulatory reach, there is a significant risk that in the absence of a separate business rule firms will seek to deliver all but reserved legal activities through a separate unregulated business. There will be a big incentive to do this because it will reduce costs, and avoid the possibility of regulatory scrutiny. It is unlikely that clients will understand the risks of dealing with an unregulated legal services business or indeed fully appreciate that it is unregulated. Thus, the risks to both clients and the reputation of the legal profession, associated with the delivery of legal services through an unregulated firm, are such that the SRA must seek to prevent such activity.

C Governance and management of firms

• 72.

  Principle 8 is intended to underpin the delivery of services through an increasingly wide range of businesses and business models. Chapter 7 details the outcomes that firms must achieve in terms of the systems and controls they need, and also the monitoring of risks that they should undertake. Our approach to authorising and supervising firms will take into account the strengths of firms' systems and controls and the extent to which firms are responsive to risks and address issues that are identified.

D In-house and overseas practice

• 73.

  The Code applies to both in-house solicitors and to those conducting overseas practice. We take the view that the outcomes described in each chapter should be achieved by those practising in-house and overseas. However, in some cases, this is not appropriate and in these cases we have disapplied certain outcomes. We would welcome comments on this approach.

• 74.

  The framework requirements relating to forms of practice are now in the Authorisation and Practising Requirements section of the Handbook.

  Questions:

  5. Do you agree with the new Code structure?

  6. Do you have any overall comments on the new format (Principles, outcomes, indicative behaviours)?

  7. Do you think that the outcomes (together with the indicative behaviours) achieve the right balance in providing sufficient clarity on the SRA's expectations for firms whilst enabling firms to operate flexibly?

  8. Do you have any comments on the Models (Annex D) for regulating conflicts? In particular, do you agree with the definitions of "non-substantive" and "substantive client conflict of interests"? Should consent, when using Models 2 and 3, always be "informed consent"?

  9. Do you have any comments on the removal of the detailed provisions relating to conveyancing, gifts, etc.?

  10. Do you believe that outcomes provide sufficient clarity for regulating conflicts or do you think rules would be more appropriate?

  11. Do you agree with our approach to the provision of services through a separate business?

  12. Do you agree with our proposals concerning the application of the Code to overseas practice, in-house practice, etc.?

(b) SRA Accounts Rules

• 75.

  The SRA Accounts Rules (AR) are based on the current Solicitors' Accounts Rules. The overriding objective of the ARs is to safeguard client money. The ARs are in Annex E and they will apply to firms of all types. A summary of the key changes to the existing rules is set out below.

Overarching objective and the new rule on effective financial management (rule 1)

• 76.

  An introduction has been added to identify those Principles of particular relevance to the ARs and the desired outcomes for compliance. The key Principles listed in the introduction include the new Principle requiring the effective running of the business in accordance with proper governance and sound financial and risk management principles. A specific reference to the overriding objective of the ARs, to keep client money safe, has been added to rule 1, as has a reference to the new financial management rule in the Code.

Outcomes-focused regulation

• 77.

  It is widely accepted that the SRA's regulation of the accounts of legal services providers is an area which requires a detailed set of rules. However, we have sought to remove prescription and give firms greater flexibility by reviewing the current mandatory notes in order to separate the binding from the purely explanatory elements. Mandatory parts of the notes have been incorporated in the rules. The remaining notes are non-mandatory guidance notes (see rule 2(1)).

• 78.

  In addition, two areas were identified where an outcomes-focused approach is appropriate – the persons entitled to authorise a withdrawal from client account (rule 23) and the payment of interest (rules 24 to 27).

  • Signing on client account

    The current prescriptive regime setting out who may sign on client account will be replaced by a requirement for firms to have appropriate systems and controls in place for withdrawals from client account.

  • Interest

    The detailed interest provisions have been replaced by a requirement for the payment of a fair and reasonable amount of interest, when it is fair and reasonable to do so. Firms will need to have a policy on interest, the terms of which must be drawn to the attention of the client. The guidance notes have been expanded to assist firms in setting their interest policies.

Multi-disciplinary practices

• 79.

  The ARs will apply only to the activities for which an MDP is regulated by the SRA (see rule 4). The rules will not apply to any money arising from the activities of an MDP which fall outside the scope of its regulation (rule 13). Our view is that an MDP will have to operate a separate ring-fenced client account for client money arising from its regulated activities, rather than one general client account for the entire business, in order properly to protect client money.

• 80.

  The current duty of principals for compliance with the rules is extended under the draft rules to the Compliance Officer for Finance and Administration (CoFA) (see paragraph 107 to 114 below), whether or not the CoFA is a principal in the practice (rule 6).

• 81.

  The protection afforded by section 85 of the Solicitors Act 1974 to client funds against a claim by a bank or building society (and to banks and building societies against claims by clients) in respect of a traditional solicitors' practice or legal disciplinary practice (LDP) is not replicated in the LSA for ABSs. The SRA is seeking an order under section 69 (see paragraph 17) of the LSA to give equivalent statutory protection to ABS client funds, failing which rule 14 has been amended to try to give protection as close as possible to that afforded by section 85 (see rule 14(6)).

• 82.

  A new rule 14(7) requires an ABS to notify clients if at any time the ABS is owned by a bank at which the client account is held.

Modernisation electronic issues (rules 23 and 32)

• 83.

  The rules have been updated to allow firms to obtain and retain electronic copies of bank statements, rather than having to rely on paper statements. The electronic signing of authorities for withdrawals from client account is to be permitted, and the statutory change allowing for the signing and delivery of bills electronically is referred to in guidance note (xa) to rule 19.

Reducing the risk to client money (rule 15)

• 84.

  The requirement that a solicitor must not use client account to provide banking facilities has been moved from a note to the body of rule 15, to give greater emphasis and prominence to this provision (see rule 15(5)).

• 85.

  The rules have also been amended to put it beyond doubt that a cheque in respect of damages and costs, made payable to the client, may be paid into the client account pursuant to the Law Society's Conditional Fee Agreement, and then becomes client money subject to all the rules (see rule 15(2)(e)).

Reconciliations for certain passbook-operated accounts

• 86.

  The obligation for five weekly reconciliations has been extended to passbook-operated separate designated client accounts of solicitor-trustees, in place of the current 14 weekly requirement (see rule 32(7)).

Residual client account balances

• 87.

  Rule 22(2A) was amended in July 2008 to enable firms to pay small client account balances of £50 or less to charity, without prior SRA authorisation, when the client cannot be traced. There is no proposal to increase this limit. It is felt that the limit is set at a reasonable level, and that firms need to ensure that all client money is accounted for to the rightful owner in accordance with rule 15(3) (also introduced in 2008).

Overseas provisions (new Part G)

• 88.

  The requirements for the keeping of accounts for overseas practice have been moved from rules 15.15 and 15.27 of the Code to the AR, so that all the accounts provisions are kept together.

Legal Aid

• 89.

  Rule 21 has been amended in line with current legal aid provisions.

  Question:

  13. Do you have any comments on the revisions to the Accounts Rules?

(c) Specialist services

• 90.

  European cross-border practice, property selling, and financial services are specific areas of practice which we regulate. By virtue of the fact that these are largely governed by law and other regulations, we have removed the requirements from the existing Code and maintained a rules-based approach. They are now grouped together in the "Specialist Services" section of the Handbook. The Introduction to the Specialist Services section is in Annex F.

European cross-border practice

• 91.

  The Council of Bars and Law Societies of Europe (CCBE) is the representative organisation of European lawyers. The CCBE Code and the CCBE's Explanatory Memorandum form binding regulations upon solicitors in relation to their European cross-border practice. At present, rule 16 of the Code applies the provisions of the CCBE Code to European cross-border practice. This is necessary to continue to provide a system of mutual professional understanding for professional relations between lawyers of different CCBE states. The new SRA European Cross-border Practice Rules in the "Specialist Section" contains those requirements which are not replicated elsewhere in the new Code.

• 92.

  The draft SRA European Cross-border Practice Rules are in Annex F1.

Property selling

• 93.

  The conduct of estate agents, in the course of estate agency work, is regulated by the Estate Agents Act 1979 (EAA). Currently, solicitors can provide estate agency services through their law firms. Section 1(2)(a) of the EAA says that the EAA "does not apply to things done in the course of his profession by a practising solicitor or a person employed by him". This exemption is on the basis that certain standards set out in the EAA are already required of solicitors under the rules of professional conduct and the Accounts Rules.

• 94.

  At present the exemption is too narrow to include ABSs and we are taking action to see if the exemption can be extended to some/all ABSs. Until this issue has been resolved, the SRA Property Selling Rules will not apply to ABSs, which will have to comply with the EAA if they intend to offer these services in an MDP. The draft SRA Property Selling Rules are in Annex F2.

Financial services

• 95.

  The general prohibition in the Financial Services and Markets Act 2000 (FSMA) states that no one in the United Kingdom can carry on financial services unless they are authorised by the FSA or exempt. Part XX of FSMA contains an exemption that enables solicitors' firms which meet certain conditions to be treated as exempt professional firms and to carry on activities known as exempt regulated activities under the supervision of, and regulation by, the SRA. This is because the SRA, through the Law Society of England and Wales, is a "Designated professional body".

• 96.

  It is a statutory requirement of the Part XX exemption that the designated professional body makes "rules" to govern the carrying on of regulated activities. The SRA has made the Solicitors' Financial Services (Scope) Rules 2001 (the Scope Rules) for this purpose. The FSA must approve any changes to the Scope Rules before they come into force (section 332(3) of FSMA). In addition, the SRA has made the Solicitors' Financial Services (Conduct of Business) Rules 2001 (the COB rules) which set out requirements about how to conduct financial services activities.

• 97.

  The financial services regime does not currently lend itself to an outcomes-focused approach and for this reason these requirements have been retained as rules. We are currently in discussion with the FSA regarding the application of the Part XX exemption to ABSs and our outcomes-focused approach. Pending the outcome of these discussions, the Scope and COB rules (and therefore the exemption) will not apply to ABSs.

  Questions:

  14. Do you have any comments on the structure of the Specialist Services section?

  15. Do you believe that the financial services and property selling exemptions should be extended to ABSs?

6 Engaging with the SRA

Introduction

• 98.

  The SRA's consultation "Outcomes-focused regulation – transforming the SRA's regulation of legal services" explained that, running alongside the development of the new Handbook, we are also developing our risk-based approach to supervising firms and individuals. This risk-based approach will place greater emphasis on the quality of firms' governance and the effectiveness of the systems and controls that firms put in place to achieve compliance with the Principles.

• 99.

  The SRA Authorisation Rules contain key requirements for implementing this risk-based approach, most notably:

  • the requirement to appoint a Compliance Officer for Legal Practice (CoLP) and Compliance Officer for Finance and Administration (CoFA), although we recognise that in very small firms both roles may be held by the same person, provided that person has the necessary experience, etc;
  • the concept of fit and proper;
  • our intention to move away from an annual renewal process for all firms, to be replaced by a requirement for all authorised bodies to pay an annual fee and to provide an annual information report;
  • information requirements at the point of authorisation;
  • our approach to imposing licence conditions.
• 100.

  In the event that firms fail to comply with the Principles and the requirements of the Code and other rules, the Disciplinary Procedure Rules define the process by which firms and individuals will be disciplined.

• 101.

  For individuals, we are introducing changes to the Practising Regulations.

• 102.

  Finally, a new set of rules (the Practice Framework Rules) sets out our requirements for different forms of practice. These rules are based on the current requirements in rules 12, 13, 14, 15 and 20.

• 103.

  All of the above are contained in the Authorisation and Practising Requirements section of the Handbook.

Authorisation Rules

Introduction

• 104.

  The SRA Authorisation Rules cover all matters relating to the authorisation of a firm to practise and include initial and continuing requirements for application and approval of the body itself, its managers, owners and relevant employees. The draft SRA Authorisation Rules are set out in Annex G1.

• 105.

  To facilitate accessibility and ease of use for all interested parties, the rules are drafted as a single set of regulations covering the requirements relating to recognised bodies (currently in the SRA Recognised Bodies Regulations) and new requirements for licensable bodies. The Recognised Bodies Regulations will be repealed.

• 106.

  In line with this approach, the regulatory requirements for recognised bodies and licensable bodies have been harmonised as far as possible to achieve equivalent risk-based consumer protections for clients of firms of solicitors and licensed bodies, and to promote competition in the provision of services. Some areas do not lend themselves to harmonisation because of differences in the legislation relating to the different types of entity (see our earlier comments on a section 69 order). One example of this is the fact that the authorisation of ABSs will be activity based. This is derived from the fact that ABSs need to be intending to conduct one or more reserved legal activities in order to be authorised. This is not the case with recognised bodies (see paragraph 56 of the SRA's consultation on "Transforming the SRA's regulation of legal services", which explains that we will be seeking comments in the future on the merits of moving towards activity-based licensing for all firms.). It is less easy to harmonise requirements between authorised bodies and recognised sole practitioners because they are subject to separate statutory schemes.

Key requirements

CoLP, CoFA and lawyer managers

• 107.

  Under the LSA, an ABS must at all times have an individual who is designated as Head of Legal Practice (HoLP), and whose designation has been approved by the SRA through a "fit and proper" test. Similar provision is made for a Head of Finance and Administration (HoFA).

• 108.

  The HoLP must be a lawyer. There is no professional requirement in respect of a HoFA. One person can perform both roles. Neither must be disqualified from holding the relevant role. The legislation defines each role in terms of their responsibility for compliance with the regulatory regime (HoLP) and compliance with the accounts rules provisions of the licensing rules (HoFA).

• 109.

  We believe there are strong arguments in favour of extending the concept of the HoLP and a HoFA to firms of solicitors which would have benefits for both the firms and the SRA in protecting the interests of clients. These are:

  • having identified (and approved) persons in these roles within firms would focus the firm on achieving and maintaining compliance by placing responsibility on particular individuals and would provide the SRA with points of contact. Also, there is a strong client protection argument for promoting better financial management in firms of solicitors. A requirement for a HoFA is likely to assist in achieving that outcome. It would be compatible with the regulatory objectives and new Principle 8;
  • while the HoLP and HoFA provisions in the LSA are designed to address ABS-specific risks, recent disciplinary cases have shown that certain commercial pressures and external funding arrangements have compromised professional independence and integrity in firms of solicitors, to the detriment of clients;
  • the HoLP and HoFA provide a regulator with key points of contact and therefore assist in building the kind of relationship between firms and the regulator upon which OFR will depend – with advantages for both;
  • it would be possible to design proportionate requirements that did not overburden small firms and sole practitioners.
• 110.

  For all of the above reasons, the SRA Authorisation Rules require all firms to appoint individuals to hold such roles. These roles we have called the Compliance Officer for Legal Practice (CoLP) and Compliance Officer for Finance and Administration (CoFA). The basic requirements for each role are flexible and outcomes-focused so that the status, experience and competence of the person fulfilling the role can be tailored to the risk represented by particular business models.

• 111.

  We strongly believe that the roles of the CoLP and the CoFA should be fulfilled by a manager. However we have drafted the rules with an alternative option to permit an employee to hold either or both roles. We would welcome comments on this issue. It would also be helpful to have comments on the possibility of dispensing with the requirement for firms to have a lawyer qualified to supervise (i.e. one of three years' practising experience) if the CoLP is to be a manager.

• 112.

  Transitional provisions and passporting arrangements will be put in place for firms practising when the new authorisation regime comes into effect, including those switching from one status to another, but have not yet been developed. We will be consulting on our proposals for these arrangements in October.

• 113.

  The SRA Authorisation Rules include the broad LSA requirement that licensed bodies have at least one manager who is an authorised person. This is defined to include any person who is authorised to carry on legal activities by one of the approved regulators, and the rules will therefore permit the SRA to authorise an ABS which does not include a solicitor or REL manager. The requirement in respect of recognised bodies will remain unchanged – they will continue to need at least one solicitor or REL manager.

• 114.

  The LSA permits the lawyer manager role to be fulfilled by a body, such as a lawyer-only recognised body or authorised non-SRA firm. The SRA Authorisation Rules, as drafted for consultation, require that the lawyer manager is an individual on the basis that this is more likely to facilitate direct involvement in licensed bodies and therefore better public and consumer protection.

Fit and Proper

• 115.

  The draft SRA Authorisation Rules require managers, and owners of a material interest, in all authorised bodies, and all CoLPs and CoFAs, to be subject to assessment of fitness and propriety (F&P test). Criteria for the F&P test and associated forms will be part of the October consultation.

• 116.

  The F&P tests will be based on current tests for admission as a solicitor, which are also the basis for assessing eligibility of non-lawyer managers of an LDP. Because the test is based on admission criteria that solicitors have satisfied (and on which they are required to make annual declarations), they will be deemed in the rules to be approved. We will consult on the detail of the F&P test in October. This test will be based on the SRA's current character and suitability criteria for solicitors. It is proposed that registered European lawyers (RELs) and registered foreign lawyers (RFLs) should also be deemed to be approved, subject to amendment of the initial REL/RFL registration process so that they complete a CRB check, as solicitors are required to do on admission.

• 117.

  Again there will be transitional provisions to deal with approval of managers/owners of current firms who have not satisfied the current F&P test. This category covers other lawyers of England and Wales who are currently able to rely on written confirmation from their regulator that they are authorised and entitled to practise in an LDP.

• 118.

  Those with a "material interest" in an ABS will be those who hold or who propose to acquire a ten per cent share in an authorised body (including associates who cumulatively acquire a ten per cent share). We will also require an authorised body to disclose ownership details of the firm. This should assist us to identify (and prevent, in the highest risk cases) potential owners who might look to exploit ownership of an ABS in ways that would jeopardise the interests of clients. In our October consultation we will provide further guidance on the authorisation process, including the operation of a de minimis limitation on the F&P test..

Removal of annual renewal of licences

• 119.

  Licensing for firms of solicitors is currently based on:

  • initial application for recognition, accompanied by the relevant forms and a fee;
  • annual renewal of recognition, accompanied by the relevant forms and a fee.
• 120.

  The legal basis for granting of licences to ABSs is expressed differently. Although the LSA permits the SRA to make provision for a limited licence and a renewal application, the LSB has indicated in a recent consultation that it believes ABS licences should be "unlimited in duration, subject to a requirement to report relevant changes, satisfactory performance of regulatory requirements and an annual broadly cost-effective licence fee". We agree with the LSB and we believe that there are the following advantages in moving to licences that are unlimited in duration for both firms of solicitors and ABSs:

  • streamlined processes could carry cost benefits for the SRA, legal services providers, and ultimately clients;
  • the regulatory burden on firms might be reduced if the full renewal process could be restricted essentially to an information and fee-gathering one;
  • renewal at a time when a firm is under investigation can create enforcement complications;
  • it is more risk based to allow a firm to operate unless and until there is a problem;
  • we envisage that firms may move from one status (ABS) to another (firm of solicitors) during their lifetime. It makes no sense, therefore, for one status to carry a licence of unlimited duration and the other an annual one.
• 121.

  For all of the above reasons we have decided to implement licences of unlimited duration for all firms. This will necessitate a change in the AJA and the SA – see our earlier comments on a section 69 order. The only exception to this is recognised sole practitioners. It is our intention to change the recognition of sole practitioners to make this a category of recognised body as a result of which sole practitioners will be subject to the same regime as other forms of solicitors' practice.

Information requirements

• 122.

  In line with our transition to risk-based supervision of firms, the Authorisation Rules require information to be submitted by those applying for authorisation of a new firm. This information will include:

  • a compliance plan, detailing the arrangements that will be put in place within the firm in order to achieve compliance with the Handbook requirements. Guidance on the information to be included in the compliance plan will be consulted on in October;
  • a business plan, detailing the firm's business model, the proposed legal services to be provided by the firm and financial projections for a period of five years.
• 123.

  This information should enable the SRA to identify key risks posed by the prospective new firm, and assess whether or not the new firm should be authorised and licence conditions imposed on the firm.

• 124.

  We will be consulting on the detail of the authorisation process in October.

Licence conditions

• 125.

  If our analysis of the information which we receive about the proposed structure, governance, systems, etc. leads us to the conclusion that there exists a risk to clients' interests deriving from external influence (e.g. relating to the board composition, referral arrangements or proposed fee sharing), that risk could be further mitigated by conditions on a firm's licence which specify the circumstances in which the firm may not act for particular clients. In the case of ABSs, it might, for example, require that, depending on the precise circumstances, an ABS takes particular steps to mitigate risk.

• 126.

  Again, where there is a connection with an introducer of clients who require legal services, we will assess in each case whether it would be proportionate and in the public interest that conditions should be placed on the licence. For example, if a claims management company owned the ABS and owned a separate medical report agency, we may decide that it would be appropriate to prevent the ABS from instructing the agency on behalf of clients because of a risk that the client may not receive independent advice.

Special bodies

• 127.

  The SRA Authorisation Rules do not include provisions for authorising special bodies, such as not for profit organisations, as there will be a transitional period of 18 months from October 2011 before special bodies are required to become licensed. If the Ministry of Justice implement the relevant LSA provisions before special bodies need to be licensed, the Authorisation Rules are likely to contain a provision to the effect that the SRA will not accept applications from such bodies until the transitional period is over.

Employers of in-house solicitors

• 128.

  By virtue of the introduction of ABSs, it will be the case that some organisations that currently employ in-house solicitors to provide services to the public will, from October 2011 onwards, need or want to be authorised as ABSs. The need for authorisation of such entities will depend on the precise circumstances. We will issue further information on this matter in our October consultation.

Practising Regulations

• 129.

  The Practising Regulations came into effect in July 2009, and deal with individual applications for practising certificates, registrations and recognised sole practitioner authorisations and related matters.

• 130.

  It has not been possible at this stage to harmonise the requirements for recognised sole practitioners with the authorisation requirements for recognised and licensed bodies, due to the entirely different statutory framework for these individual applications (see our earlier comments on a section 69 order).

• 131.

  For the present, the intention is to harmonise specific aspects of the Practising Regulations with the SRA Authorisation Rules, to reflect our new requirements for authorisation.

• 132.

  Annex G2 highlights the proposed amendments to the 2009 Practising Regulations. The main changes are:

  • introduction of a requirement for recognised sole practitioners to have a CoLP and a CoFA, although we recognise that both roles may be held by the same person provided that person has the necessary experience, etc. The draft rules provide options:
    • (a)

      restricting these roles to the sole principal;

    • (b)

      permitting employees to fulfil the roles, and alternative provisions for each option are included (see regulation 4.3).

    We would welcome views on these options;
  • approval of proposed sole practitioners. Having satisfied the character and suitability requirements on admission or initial registration as a solicitor or REL, individuals will be deemed fit and proper, subject to confirmation on application for approval that their circumstances have not changed, but authorisation will continue to be subject to assessment of the individual's business proposal.

Practice Framework Rules

• 133.

  The SRA Practice Framework Rules include matters relating to the right to practise in certain ways, structure of firms, and eligibility for authorisation. The rules will include those provisions relating to structure that have been removed in the redrafting of the Code of Conduct but which will continue to be relevant for regulatory purposes, these are rules 12 (Framework of practice), 13 (In-house practice, etc.), 14 (Recognised bodies) and 20 (Rights and obligations of practice). These provisions have been developed and adapted to include the practice framework for ABSs. As with the current Code, they are detailed and technical because many of the provisions need to mirror their statutory source.

• 134.

  The SRA Practice Framework Rules are the first place to look to establish what methods of practising are permitted, and what route to authorisation and individual arrangements are possible. It, therefore, appears as section 1 of the Authorisation and Practising Requirements section of the Handbook.

• 135.

  Of particular note are:

  • the fundamental requirements for all legal services bodies to become recognised bodies, and the eligibility criteria for licensable bodies to become licensed are clearly set out (see rules 13 and 14);
  • the basic requirement continues to be that solicitors and RELs wishing to practise as such, must do so through a regulated structure (see rules 1 and 2). It remains permissible for a solicitor to provide non-reserved legal services with a non-lawyer through an unregulated business, provided he or she does not do so as a solicitor, is not practising in any other way and does not hold him or herself out as a solicitor;
  • the provisions relating to in-house solicitors (rule 6) are retained as far as possible, subject to changes where employers of in-house providers are required to seek a licence for employees providing legal services to the public or a section of the public.

  With the advent of ABSs, the regulatory status of in-house solicitors is under review, since it may be necessary for some forms of practice to convert to ABS (see paragraph 128 above). Given this review, we believe that there is a need to assess whether the exemptions that currently apply to in-house practice, and which are expressed in the SRA Practice Framework Rules (rule 4), should remain or whether we require that they become ABSs. Our primary concern is that where services are being provided to the public, these are brought, so far as possible, within the regulatory regime set up by the LSA. We would welcome views on this issue and will consult on our proposals in the October consultation.

• 136.

  The SRA Practice Framework Rules are in Annex G3.

Disciplinary procedure rules

• 137.

  The current rules were drafted to govern the exercise of certain disciplinary powers within the SRA under the SA and the AJA, namely:

  • to give a person or entity regulated by the SRA a written rebuke;
  • to fine a regulated person up to £2,000;
  • to publish a written rebuke or fine made under the rules.
• 138.

  The rules also deal more generally with the SRA's internal disciplinary procedure, including the grounds for referring a regulated person to the Solicitors Disciplinary Tribunal (SDT).

• 139.

  The LSA gives the SRA further disciplinary powers specifically in respect of ABSs and managers and employees within an ABS. The LSA requires the SRA to make rules which govern the exercise of these new powers.

• 140.

  The SRA has therefore revised the existing Disciplinary Rules to incorporate the new LSA regime for ABSs and these form part of the Disciplinary Procedure and Costs Recovery section of the Handbook (see Annex H for the introduction).

• 141.

  The draft revised SRA (Disciplinary Procedure) Rules are in Annex H1 and:

  • harmonise the disciplinary procedure under the SA/AJA and the LSA where possible. For example, the rules set out a procedure for written rebukes and publication of regulatory decisions for ABSs;
  • set out a basic framework for disqualifying an individual from being a manager, employee, HoLP or HoFA of an ABS for misconduct (section 99 and schedule 11(23) of the LSA); and
  • set out when the SRA will impose financial penalties upon ABSs and managers and employees of an ABS (section 95 and schedule 11(22) of the LSA).
• 142.

  There is also provision within the LSA (section 101 and schedule 11 paragraph 24) for suspending or revoking authorisation as a result of misconduct, but the framework in this respect is set out separately in the draft SRA Authorisation Rules.

• 143.

  Guidance will be developed and published, which will sit under the rules, to explain the factors to be taken into account in each decision making process. We will consult on this in October. This will be in line with our overall enforcement strategy, which is to encourage compliance, except where a firm represents a serious or persistent risk.

• 144.

  One constraint on harmonising the requirements for all types of firm is that the SRA's disciplinary procedures and powers under the current SA/AJA regime and the LSA regime are very different. For example, in the future and without further harmonisation, if a traditional solicitors firm and an ABS are involved in a scheme which gives rise to serious misconduct concerns then:

  • in relation to the traditional solicitors firm, the SRA itself could rebuke or fine the regulated persons up to £2,000; or refer the firm and individuals involved to the SDT in order to suspend or strike off the regulated persons or impose an unlimited fine; and
  • in relation to the ABS, the SRA could itself impose an unlimited fine, disqualify the individuals involved from practising within the ABS or suspend or revoke the ABS's authorisation.
• 145.

  Parallel systems for dealing with misconduct would be undesirable in terms of the complexity of the system, inefficiency and possible inconsistency. It also raises the potential for regulatory arbitrage. In view of these facts, it is appropriate to try to harmonise the disciplinary regimes for ABSs and firms of solicitors, probably reflective of the new powers we will gain in due course under the LSA, to provide a single process of fining and appeal to an independent tribunal for all types of firm. We would welcome comments on this.

Training requirements for individuals

• 146.

  The Solicitors' Training Regulations are currently being reviewed. Changes to the Training Regulations are planned to be consulted on as part of the October consultation paper.

  Questions:

  16. Do you agree with our proposals to apply the requirements for a CoLP and a CoFA to all firms (including recognised sole practitioners)?

  17. Do you agree with our contention that more information should be required from applicants to enable the SRA to make the right judgement concerning authorisation?

  18. What in-house services to the public should require authorisation?

  19. Do you believe that the disciplinary frameworks should be further harmonised?

  20. Do you believe that there should be a single system of findings with appeal to an independent tribunal?

7 Protecting the public

Introduction

• 147.

  The Client Protection section of the Handbook will contain:

  • the SRA Indemnity Insurance Rules;
  • the SRA Indemnity Rules;
  • the SRA Compensation Fund Rules; and
  • the SRA Intervention Powers (Statutory Trust) Rules.

  See the Introduction to this section of the Handbook in Annex I.

• 148.

  These rules form an essential part of the public protections available to clients of all firms. The SRA's objective in relation to indemnity is to secure for consumers the same level of protection through an ABS (including an MDP ABS) as they would receive from a traditional firm, and that the level of protection should be proportionate to the risk. The SRA's approach to indemnity requirements is the subject of a fundamental review, which may result in changes to the requirements for all persons covered by the rules. However, our policy on the need to have equivalent protection for consumers of all firms will not change.

SRA Indemnity Insurance Rules (SIIR)

• 149.

  The SIIR require individual solicitors and firms carrying on private practice in England and Wales to take out and maintain professional indemnity insurance with "qualifying insurers". The purpose of the cover is to provide clients with a basic level of protection in the event that a firm is negligent or dishonest which results in the claimant suffering a loss. The requirements are broadly similar to current requirements but have been extended to apply to ABSs. The draft SIIR are set out in Annex I1.

SRA Indemnity Rules (SIR)

• 150.

  The draft SIR are based on the 2009 SIR. As these rules are made annually, we anticipate that they will be subject to further revision, particularly in the light of the review referred to in paragraph 148 above,

• 151.

  The SIR set out the terms and conditions of the cover provided by the Solicitors' Indemnity Fund. Again, the requirements are broadly similar to current requirements but have been extended to apply to ABSs. The draft SIR are set out in Annex I2.

Compensation fund rules

• 152.

  We will be consulting on our compensation fund rules for all firms in October.

SRA Intervention Powers (Statutory Trust) Rules (STR)

• 153.

  The STR govern how the SRA exercises the function of statutory trustee in relation to client money of which the SRA has taken control having had to close a firm. Again, the requirements are broadly similar to current requirements but have been extended to apply to ABSs. The draft SRA Intervention Powers (Statutory Trust) Rules are set out in Annex I3.

  Question:

  21. Do you agree with our overall approach to applying indemnity requirements to ABSs?

8 Fairness, equality and diversity

• 154.

  Fundamental to our new approach will be the confidence of all involved – consumers, solicitors, and others involved in the provisions of legal services – that our new regulatory approach is capable of being applied fairly. We shall publish our enforcement strategy and decision making criteria, and regularly audit our decision-making, publishing the outcomes. In the paper at Annex K we have set out our initial view of the key equality issues raised by the transition to the new Handbook and the changes in our regulatory policy and requirements which it involves.

• 155.

  We will continue with this work and plan to publish the findings of our full equality impact assessment in October. To help us with this work, we will be seeking meetings with equality groups to understand the issues and find solutions.

  Question:

  22. Do you have any comments on our initial equality impact assessment, and are there any additional equality issues that we should consider as we work further on the Handbook?

9 Timetable and next steps

• 156.

  Responses to this consultation paper should be sent to the SRA by 20 August 2010.

OFR Timetable

• 157.

  This consultation forms part of a major transformation of the SRA's approach to regulating and supervising firms, set against the opening-up of the legal services market. The overall timetable is set out below:

  Date	Action
  27 July 2010	Closing date for written responses to "OFR: Transforming the SRA's Regulation of Legal Services"
  20 August 2010	Closing date for written responses to this consultation
  October 2010	Policy statement and second Handbook (and regulatory processes) consultation published
  January 2011	Closing date for written responses on second Handbook (and regulatory processes) consultation
  March / April 2011	Publication of final Handbook
  June / July 2011	Anticipated designation of SRA as a Licensing Authority for ABSs
  6 October 2011	First ABS licensed and implementation of new Handbook
  April 2013	Special bodies able to apply to be licensed

  Question:

  23. Do you have any comments on the timetable?

Annexes - overview

• A.

  Structure of SRA Handbook

• B.

  Destination table

• C.

  SRA Code of Conduct

• D.

  Conflicts of interests models

• E.

  SRA Accounts Rules

• F.

  Introduction to Specialist Services

  • 1.

    SRA European Cross-Border Practice Rules

  • 2.

    SRA Property Selling Rules

• G.

  Introduction to Authorisation and Practising Requirements

  • 1.

    SRA Authorisation Rules

  • 2.

    SRA Practising Regulations

  • 3.

    SRA Practice Framework Rules

• H.

  Introduction to Disciplinary and Costs Recovery Rules

  • 1.

    SRA (Disciplinary Procedure) Rules

• I.

  Introduction to Client Protection

  • 1.

    SRA Indemnity Insurance Rules

  • 2.

    SRA Indemnity Rules

  • 3.

    SRA Intervention Powers (Statutory Trust) Rules

• J.

  2010 Consultation process

• K.

  Equality and Diversity Initial Impact Assessment

• L.

  List of questions for consultation

Annex A: Structure of SRA Handbook

Section	Content
Principles	10 Principles applying to all sections of the Handbook
The SRA Code of Conduct	Professional conduct requirements
Accounts Rules	The SRA Accounts Rules (including provisions in relation to overseas practice)
Authorisation and Practising Requirements	The SRA Practice Framework Rules The SRA Authorisation Rules for Legal Services Bodies and Licensable Bodies The SRA Practising Regulations The SRA Training Regulations
Client Protection	The SRA Indemnity Insurance Rules The SRA Indemnity Rules The SRA Compensation Fund Rules The SRA Intervention Powers (Statutory Trust ) Rules
Disciplinary and Costs Recovery Rules	The SRA (Disciplinary Procedure) Rules The SRA (Cost of Investigations) Regulations 2009
Specialist Services	The SRA Property Selling Rules The Solicitors' Financial Services (Scope) Rules The Solicitors' Financial Services (Conduct of Business) Rules The SRA European Cross-border Practice Rules
Guidance	Non-mandatory guidance

Annex B: Destination table

Introduction

This table summarises where existing provisions in the Solicitors' Code of Conduct can be located in the new SRA Code of Conduct.

Where is it now?

	Location in Solicitors' Code of Conduct	Location in Draft SRA Code of Conduct
Rule 1 – Core duties	1.01 – Justice and the rule of law 1.02 – Integrity 1.03 – Independence 1.04 – Best interests of clients 1.05 – Standard of service 1.06 – Public confidence	These rules are reproduced in the ten "Principles" which are set out in full in the SRA Handbook ("the Handbook")and in the Introduction to the SRA Code of Conduct ("the Code"). Relevant Principles are also reproduced throughout the Code at the start of each chapter, and throughout the Handbook at the start of relevant sections.
Rule 2 – Client relations	2.01 – Taking on clients 2.02 – Client care 2.03 – Information about the cost 2.04 – Contingency fees 2.05 – Complaints handling 2.06 - Commissions 2.07 – Limitation of civil liability by contract	Chapter 1 – Client care - all
Rule 3 – Conflict of interests	3.01 – Duty not to act 3.02 – Exceptions to duty not to act 3.03 – Conflict when already acting 3.04 – Accepting gifts from clients 3.05 – Public office or appointment leading to conflict 3.06 – Alternative dispute resolution (ADR) 3.07 – Acting for seller and buyer in conveyancing, property selling and mortgage related services 3.08 – Conveyancing transactions not at arm's length 3.09 – Conveyancing transactions at arm's length 3.10 – Conditions for acting under 3.09 3.11 – Property selling and mortgage related services 3.12 – SEALs and participating firms 3.13 – Conditions for acting under 3.11 3.14 – Special circumstances in property selling and conveyancing 3.15 – Conflict arising when acting for seller and buyer 3.16 – Acting for lender and borrower in conveyancing transactions 3.17 – Standard and individual mortgages 3.18 – Notification of certain circumstances to lender 3.19 – Types of instruction which may be accepted 3.20 – Using the approved certificate of title 3.21 – Terms of rule to prevail 3.22 – Anti-avoidance 3.23 – Waivers Annex – Certificate of title	Chapter 3 – Conflicts - all
Rule 4 – Confidentiality and disclosure	4.01 – Duty of confidentiality 4.02 – Duty of disclosure 4.03 – Duty not to put confidentiality at risk by acting 4.04 – Exception to duty not to put confidentiality at risk by acting – with the clients' consent 4.05 – Exception to duty not to put confidentiality at risk by acting – without clients' consent 4.06 - Waivers	Chapter 4 – Confidentiality and disclosure –all
Rule 5 – Business management in England and Wales	5.01 – Supervision and management responsibilities 5.02 – Persons who must be "qualified to supervise" 5.03 – Supervision of work for clients and members of the public	Chapter 1 – Client care – in part (particularly 5.01(1)(a)(d)(e)(f)(g)(h)(i), 5.03) Chapter 7 – Management of your business – in part (5.01(c)(j)(k)(l)) For 5.02 see Authorisation and Practising Requirements section of the Handbook
Rule 6 – Equality and diversity	6.01 – Duty not to discriminate 6.02 – Evidence of breach 6.03 – Equality and diversity policy 6.04 – In-house practice 6.05 – Waivers 6.06 – Meaning of terms	Chapter 2 – Your clients and equality and diversity - except 6.05 and 6.06
Rule 7 - Publicity	7.01 – Misleading or inaccurate publicity 7.02 – Clarity as to charges 7.03 – Unsolicited approaches in person or by telephone 7.04 – International aspects of publicity 7.05 – Responsibility for publicity 7.06 – Application 7.07 – Letterhead, website and e-mails	Chapter 8 – Publicity - all
Rule 8 – Fee sharing	8.01 - Fee sharing with lawyers and colleagues 8.02 – Fee sharing with other non-lawyers	Chapter 9 – Fee sharing and referrals - all
Rule 9 – Referrals of business	9.01 – General 9.02 – Financial arrangements with introducers 9.03 – Referrals to third parties	Chapter 6 – Your client and introductions to third parties – 9.03 only Chapter 9 – Fee sharing and referrals - 9.01 and 9.02
Rule 10 – Relations with third parties	10.01 – Not taking unfair advantage 10.02 – Agreeing costs with another party 10.03 – Administering oaths 10.04 – Contacting other party to a matter 10.05 – Undertakings 10.06 – Dealing with more than one prospective buyer in a conveyancing transaction 10.07 – Fees of lawyers of other jurisdictions	Chapter 11 – Relations with third parties - all See European Cross-Border Practice Rules in Specialist Services section of the Handbook – 10.07
Rule 11 – Litigation and advocacy	11.01 – Deceiving or misleading the court 11.02 – Obeying court orders 11.03 – Contempt of court 11.04 – Refusing instructions to act as advocate 11.05 – Appearing as an advocate 11.06 – Appearing as a witness 11.07 – Payments to witnesses 11.08 – Recordings of child witnesses' evidence	Chapter 5 – Your client and the court – all
Rule 12 – Framework of practice	12.01 – Solicitors 12.02 – RELs 12.03 – RFLs 12.04 – Recognised bodies 12.05 – Managers and employees authorised by another approved regulator 12.06 – Managers and employees who are not lawyers	See Authorisation and Practising Requirements
Rule 13 – In-house practice, etc.	13.01 – Conditions applying at all times 13.02 – Work colleagues 13.03 – Related bodies 13.04 – Pro bono work 13.05 – Associations 13.06 – Insurers 13.07 – Commercial legal advice services 13.08 – Local government 13.09 – Law centres, charities and other non-commercial advice services 13.10 – The Crown, non-departmental public bodies, and the Legal Services Commission 13.11 – Foreign law firms 13.12 – Regulatory bodies	See Authorisation and Practising Requirements section of the Handbook
Rule 14 – Recognised bodies	14.01 – Fundamental requirements for all recognised bodies 14.02 – Duties in relation to compliance 14.03 – Formation, office in England and Wales and registered office 14.04 – Recognised bodies which are partnerships 14.05 – Recognised bodies which are LLPs 14.06 – Recognised bodies which are companies 14.07 – Information and documentation 14.08 – Mental Health Act equivalents	Chapter 10 – You and your regulator - 14.07 only See Authorisation and Practising Requirements section of the Handbook
Rule 15 – Overseas practice	15.01 – Core duties (rule 1) application, and conflicts of rules 15.02 – Client relations (rule 2) 15.03 – Conflict of interests (rule 3) 15.04 – Confidentiality (rule 4) 15.05 – Business management (rule 5) 15.06 – Equality and diversity (rule 6) 15.07 – Publicity (rule 7) 15.08 – Fee sharing (rule 8) 15.09 – Referrals of business (rule 9) 15.10 – Relations with third parties (rule 10) 15.11 – Litigation and advocacy (rule 11) 15.12 – Framework of practice (rule 12) 15.13 – In-house practice overseas (rule 13) 15.14 – Recognised bodies (rule 14) 15.15 – Deposit interest 15.16 – European cross-border practice (rule 16) 15.17 – Insolvency practice (rule 17) 15.18 – Property selling (rule 18) 15.19 – Financial services (rule 19) 15.20 – Rights and obligations of practice (rule 20) 15.21 – Separate businesses (rule 21) 15.22 – Waivers (rule 22) 15.23 – Application of these rules (rule 23) 15.24 – Interpretation (rule 24) 15.25 – Commencement and repeals (rule 25) 15.26 – Professional indemnity 15.27 - Accounts	Throughout the Code For 15.15 and 15.27 – see the SRA Accounts Rules
Rule 16 – European cross-border practice	16.01 – Definition and application 16.02 – Occupations considered incompatible with legal practice 16.03 – Fee sharing with non-lawyers 16.04 – Co-operation between lawyers of different CCBE states 16.05 – Correspondence between lawyers in different CCBE states 16.06 – Paying referral fees to non-lawyers 16.07 – Disputes between lawyers in different member states	See European Cross-Border Practice Rules in Specialist Services section of the Handbook
Rule 17 – Insolvency practice	17.01 – [no title]	Chapter 3 – Conflicts
Rule 18 – Property selling	18.01 – Standards of property selling services 18.02 – Statement on the cost 18.03 – Conflict of interests 18.04 - Waivers	Chapter 3 – Conflicts - aspects of 18.03. See SRA Property Selling Rules in Specialist Services section of the Handbook
Rule 19 – Financial services	19.01 – Independence	Chapter 6 – Your client and introductions to third parties Chapter 9 – Fee sharing and referrals
Rule 20 – Rights and obligations of practice	20.01 – Reserved work and immigration work 20.02 – Practising certificates 20.03 – Sole practitioners 20.04 – Participation in legal practice 20.05 – Duty to co-operate with the SRA and the LCS 20.06 – Reporting serious misconduct and serious financial difficulty 20.07 – Obstructing complaints 20.08 – Production of documents, information and explanations 20.09 – Dealing with claims 20.10 – Compliance with conditions	Chapter 10 – You and your regulator - 20.05, 20.06, 20.07, 20.08, 20.09 and 20.10 only For 20.01, 20.02, 20.03 and 20.04, see Authorisation and Practising Requirements section of the Handbook
Rule 21 – Separate businesses	21.01 – General 21.02 – Services which may not be provided through a separate business 21.03 – Services which may be provided in conjunction with a firm or in-house practice 21.04 – Services which may be provided (subject to these rules) either through a firm or in-house practice, or through a separate business 21.05 – Safeguards in relation to a separate business	Chapter 12 – Separate businesses - all
Rule 22 - Waivers	22.01 - [no title]	Chapter 13 – Application and waivers
Rule 23 – Application of these rules	23.01 – [no title]	Chapter 13 – Application and waivers
Rule 24 - Interpretation	24.01 – [no title]	Chapter 14 - Interpretation
Rule 25 – Commencement and repeals	25.01 – [no title]	To be inserted – Chapter 15 - Commencement and repeals

Annex C: SRA Code of Conduct

This annex is featured in our Freedom in Practice section.

Annex D: Conflicts of interests models

Definition

Conflict of interests means any situation where

• you owe separate duties to act in the best interests of two or more clients in relation to the same or related matters, and those duties conflict or there is a significant risk that those duties may conflict (a "client conflict of interests"); or
• your duty to act in the best interests of any client in relation to a matter conflicts, or there is a significant risk that it may conflict, with your own interests in relation to that or a related matter (an "own interest conflict").

1 Models of outcomes-focused requirements

These models can be drafted in the form of outcomes as follows:

Model 1

Outcomes

You must achieve these outcomes:

1. you do not act where there is a conflict of interests;

2. all advice given, and action taken, on each client's behalf, is unconstrained by any conflict of interests.

Indicative behaviours

Acting in the following ways tends to show that you have achieved these outcomes and therefore complied with the Principles:

A having systems in place to identify all conflicts of interests;

B refusing to act/ceasing to act if a conflict of interests is identified.

Model 2

In this Chapter:

Non-substantive client conflict of interests means – any situation where there is no substantive client conflict of interests in relation to two or more clients.

Substantive client conflict of interests means – any situation where there is a client conflict of interests in relation to two or more clients and:

• the matter involves negotiation conducted by you between the clients; or
• they are involved in some form of dispute with each other; or
• they are involved in litigation against each other.

Outcomes

You must achieve these outcomes:

1 in cases where is there a non-substantive client conflict of interests, you only act if:

• you have obtained each client's informed consent to act; and
• you can act at all times in the best interests of each client; and
• it is reasonable in all the circumstances to act for the client; and
• you comply with your duties of confidentiality in chapter [4] of the SRA Code;

2 in cases where there is a non-substantive client conflict of interests and you cannot meet the conditions in 1 at any time, you do not accept instructions or you cease to act;

3 in cases where there is a substantive client conflict of interests, you do not act;

4 no clients are prejudiced because you have acted where there is a non-substantive conflict of interests;

5 you do not act where there is an own interest conflict.

Indicative behaviours:

Acting in the following ways tends to show that you have achieved these outcomes and therefore complied with the Principles:

• A

  having systems in place to identify all conflicts of interests;

• B

  refusing to act/ceasing to act if you identify a substantive client conflict of interests;

• C

  in cases involving a non-substantive client conflict of interests, explaining the implications of your firm acting for the clients, prior to obtaining their consent.

Model 3

Outcomes

You must achieve these outcomes:

1 where there is a client conflict of interests you only act if:

• you have obtained the clients' consent to act;
• you can act in the best interests of each client;
• it is reasonable in all the circumstances to act for the client;
• you comply with your duties of confidentiality in chapter 4 of the SRA Code;

2 no clients are prejudiced because you have acted where there is a client conflict of interests;

3 you comply with the law governing conflicts of interests;

4 you do not act where there is an own interest conflict.

Indicative behaviours:

Acting in the following ways tends to show that you have achieved these outcomes and therefore complied with the Principles:

A having systems in place to identify all conflicts of interests;

B explaining the implications of your firm acting for the clients, prior to obtaining their consent.

Annex E: SRA Accounts Rules

This annex is featured in our Freedom in Practice section.

Annex F: Introduction to Specialist Services

This annex is featured in our Freedom in Practice section and contains the SRA European Cross-Border Practice Rules (F1) and SRA Property Selling Rules (F2).

Annex G: Introduction to Authorisation and Practising Requirements

This annex is featured in our Freedom in Practice section and contains the SRA Authorisation Rules for Legal Services Bodies and Licensable Bodies (G1) , SRA Practising Regulations (G2) and SRA Practice Framework Rules (G3) .

Annex H: Introduction to Disciplinary and Costs Recovery Rules

This annex is featured in our Freedom in Practice section and contains the SRA Disciplinary Procedure Rules (H1).

Annex I: Introduction to Client Protection

This annex is featured in our Freedom in Practice section and contains the SRA Indemnity Insurance Rules (I1), SRA Indemnity Rules (I2) and SRA Intervention Powers (Statutory Trust) Rules (I3).

Annex J: Consultation process

May	October
Consultation	Consultation	Final Rules
Principles	Code (Conflicts, notification and reporting requirements)	Principles
Code	Authorisation and Practising Requirements AR (fit and proper and authorisation process) PFR (in-house solicitors)	SRA Accounts Rules
SRA Accounts Rules	Client Protection (Compensation Fund Rules)	Authorisation and Practising Requirements (PR)
Authorisation and Practising Requirements (SRA AR, PR and PFR)	Disciplinary and Cost Recovery (Cost of Investigation (Recovery) Rules, Annex to DPR on Financial penalties )	Client Protection (STR, SIR)
Client Protection (SIIR, SIR and STR)	Guidance	Disciplinary and Cost Recovery (DPR)
Disciplinary and Cost Recovery (DPR)		Specialist Services (CBR, PSR)
Specialist Services (CBR, PSR)

Annex K: Equality and Diversity Initial Impact Assessment

This report sets out our early findings on where the new Handbook may have the most impact on equality.

Annex L: List of questions for consultation

1. Do you agree with our overall approach to implementing ABSs?
2. Do you agree with the new Handbook structure?
3. Do you agree with the new Principles and our approach to applying them across the Handbook?
4. In what areas do you think explanatory guidance would be particularly helpful?
5. Do you agree with the new Code structure?
6. Do you have any overall comments on the new format (Principles, outcomes, indicative behaviours)?
7. Do you think that the outcomes (together with the indicative behaviours) achieve the right balance in providing sufficient clarity on the SRA's expectations for firms whilst enabling firms to operate flexibly?
8. Do you have any comments on the Models (Annex D) for regulating conflicts? In particular, do you agree with the definitions of "non-substantive" and "substantive client conflict of interests"? Should consent, when using Models 2 and 3, always be "informed consent"?
9. Do you have any comments on the removal of the detailed provisions relating to conveyancing, gifts, etc?
10. Do you believe that outcomes provide sufficient clarity for regulating conflicts or do you think rules would be more appropriate?
11. Do you agree with our approach to the provision of services through a separate business?
12. Do you agree with our proposals concerning the application of the Code to overseas practice, in-house practice, etc?
13. Do you have any comments on the revisions to the Accounts Rules?
14. Do you have any comments on the structure of the Specialist Services section?
15. Do you believe that the financial services and property selling exemptions should be extended to ABSs?
16. Do you agree with our proposals to apply the requirements for a CoLP and a CoFA to all firms (including recognised sole practitioners)?
17. Do you agree with our contention that more information should be required from applicants to enable the SRA to make the right judgement concerning authorisation?
18. What in-house services to the public should require authorisation?
19. Do you believe that the disciplinary frameworks should be further harmonised?
20. Do you believe that there should be a single system of findings with appeal to an independent tribunal?
21. Do you agree with our overall approach to applying indemnity requirements to ABSs?
22. Do you have any comments on our initial equality impact assessment, and are there any additional equality issues that we should consider as we work further on the Handbook?
23. Do you have any comments on the timetable?