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COVID-19 Professional Services: Regulatory challenges during the pandemic

  • Market Insight 26 May 2020 26 May 2020
  • Coronavirus

The SRA has declared that it is taking a proportionate approach during the coronavirus outbreak, including in relation to enforcement. This briefing looks at what this means in practice and at key areas of regulatory risk in the current circumstances.

COVID-19 Professional Services: Regulatory challenges during the pandemic

The SRA's approach to compliance

The SRA's coronavirus statement

Following the announcement of a UK-wide lockdown on 23 March 2020, the SRA issued its first public statement on the COVID-19 crisis the next day. This statement set out the SRA's expectations that solicitors and firms will "continue to meet the high standards the public expect", and "do everything they reasonably can to comply with our rules, and follow our Principles".

"We must all remain pragmatic", the SRA stressed, declaring that it will take a "proportionate approach": taking mitigating circumstances into account, and focusing on serious misconduct. As set out in its enforcement strategy, the SRA continues to distinguish between "people who are trying to do the right thing, and those who are not".

The SRA is continuing to update a webpage setting out help with common compliance queries in relation to a limited number of issues, including client confidentiality, what to do if a firm's compliance officers are taken ill, client due diligence checks when working remotely, and the impact of furlough.

There is a sense in which the lack of more detailed guidance with respect to the challenges posed by COVID-19 fits with the general shift in the Standards and Regulations towards firms and individuals being given greater flexibility as to how to comply with the Codes of Conduct. However, it is arguable that clearer and more practical guidance is still needed, given the unprecedented nature of the current situation. 

Business as usual

It is our experience that since lockdown, the SRA has been operating very much on a "business as usual" basis, in continuing to progress existing investigations and open new ones, issue production notices for documents and conduct 'virtual' forensic inspections. The SDT is also continuing to conduct hearings, now taking place via Zoom. Nobody should expect that the SRA will be reducing the vigour which it applies to reports and investigations – perhaps the opposite is the case.

The main piece of general guidance given by the SRA in its coronavirus statement, and one which we would echo, is that firms should clearly document the approach taken in the face of compliance difficulties. This applies in respect of day-to-day operations, but also in responding to any specific requests from the SRA, or any other regulator.

Doing so will enable firms to demonstrate their efforts to maintain compliance, and that they have thought carefully about the decisions being made, in the event that the SRA raises a challenge over technical breaches. It is crucial that these thought processes are documented, given the potential for delay between decisions being made and questions being raised by the regulator.

The SRA Standards and Regulations

The SRA's revised Principles and new Standards and Regulations had been in force for just under four months at the point when our working practices changed dramatically. All seven of the SRA Principles still apply, notwithstanding that so many of us are now working in a completely different way. Firms are being left to determine how best to respond to this new working environment.

Below we consider some key risk areas for firms:

Equality, Diversity and Inclusion (Principle 6): The obligation on firms to act in a way that encourages equality, diversity and inclusion has been thrown into new light. Many firms were already making great strides in introducing and developing agile or flexible working schemes, something which often has particular benefits for improved gender equality. One positive arising from the pandemic has been the boost it has given to so-called smart working practices. Working from home has gained legitimacy. However, firms also need to ensure that current challenges are taken into account. For instance, those with caring responsibilities, or who need to shield for health reasons, must not be placed at a disadvantage when it comes to promotion. With respect to external recruitment, including graduate recruitment, firms must bear in mind that those from disadvantaged backgrounds will be the ones most disadvantaged by the impact of COVID-19, not least when it comes to the interruption of education, the awarding of A level grades and the affordability of a University education. The obligation to encourage equality, diversity and inclusion is ever more important in this environment.

Own interest conflict: The Firm Code paragraph 3.5 provides that firms should be "honest and open with clients if things go wrong". When such problems arise, firms must keep closely in mind the issue of own interest conflict. As paragraph 6.1 in the Code for Firms and the Code for Solicitors makes clear, you must not act if there is an own-interest conflict, or a significant risk of one arising. There are no exceptions to this rule.

As discussed in our briefing last week, such issues could arise where a firm is advising a client on the effect of a force majeure clause (or the absence of such a clause) in a contract it drafted or is reconsidering settlement terms it advised on which have now been become disadvantageous to a client as a result of the pandemic. We know that this topic is already on the SRA's radar following the Agreed Outcome in the Howell Jones case in late 2018 and the subsequent guidance it has issued. However, this remains tricky territory for firms to navigate. Commercial instincts to try to cure the situation need to be balanced against potential difficulties arising later, in a worst case scenario on both regulatory and liability fronts. Even where a firm considers it is able to continue to act, it will be prudent to document the decision-making process and details of any safeguards being put in place, and to keep the position under close review.

Blurring of professional and private lives: Over recent years, following the #MeToo movement and related media coverage, the SRA has taken a more proactive approach in enforcing its expectations in relation to conduct and behaviour, irrespective of whether the conduct in question took place during the professional or private life of a regulated person. With the mass transition to home working, there is an even greater overlap between professional and private lives. Employees are working in home environments, on personal devices and with access to online and/or social media platforms which might not otherwise be permitted on the firm's systems whilst office-based. Notwithstanding that the immediate working environment has changed, expectations around firm culture, corporate values and regulatory obligations endure. Firms must be mindful of the need to reinforce those expectations during the current period given heightened risks in this area.

The SRA can be expected to continue to take a firm stance on inappropriate behaviour. This can be seen from a recent SRA decision relating to the 2011 Code of Conduct where a solicitor made comments to colleagues during an informal conversation in a courtroom (whilst the Court was not sitting) involving reference to the ethnicity of members of another firm of solicitors in an attempt to express a compliment. In the Regulatory Settlement Agreement, the solicitor accepted that his comments were inappropriate and offensive, that he had failed to act with integrity, failed to behave in a way which maintained public trust and failed to run his business and carry out his role in a way in which encouraged diversity. The solicitor was fined and ordered to pay the SRA's costs.

Supervision: Paragraphs 4.3 and 4.4 of the Code for Firms set out obligations to ensure that managers and employees are competent, and that they keep their "professional knowledge and skills, as well as understanding of their legal, ethical and regulatory obligations, up to date", and have an effective system for supervising clients' matters. Firms are having to ensure that all their lawyers are giving and receiving appropriate supervision in the new, virtual world. The absence of the ready contact which lawyers have when in the office makes this more of a challenge and one which needs to be addressed by means of some very deliberate policies.

This period is particularly challenging for trainees and junior lawyers, who are no longer physically sharing office space with more senior lawyers whom they can observe and assist. The SRA has provided guidance in relation to trainees, and our suggestions as to good practice for supervision in the new era can be found here. It is crucial that the traditional way in which trainees and junior lawyers have absorbed learning through observation should be replicated as much as possible virtually. So, for example, they should be involved in client and team calls and meetings as often as possible.

Equally, with the apparent increase in the number of hours being worked both by partners and others, robust arrangements need to be made for the monitoring of workloads and for pastoral conversations to take place, including encouraging sensible working patterns, regular breaks and using annual leave.

Client confidentiality: Wholesale remote working gives rise to concerns in relation to client confidentiality, and we refer to the obligation under paragraph 6.3 of the Firm Code to keep "the affairs of current and former clients confidential unless disclosure is required or permitted by law or the client consents". The SRA includes suggestions in relation to confidentiality in its FAQs, and we also refer to the practical tips in our briefing note which can be found here.

Compliance culture: It will be important for firms to continue to promote and provide learning and development on compliance as well as regulatory and risk issues during this period. Whilst compliance officers and their teams will often be a visible presence around the office when offices are open, it is important to replicate that visibility whilst people are working from their homes.

The SRA expects firms to continue to self-report and maintain risk registers. To ensure that it is able to do so, the firm needs the continued engagement and cooperation of the workforce to ensure that open dialogue and prompt reporting continues. Compliance teams may need to adapt to reach out on different platforms, whether by phone, email, joining virtual team meetings, employee forums and/or training. It will also be important to engage not only with practice leaders and partners, but also business operations and employees at different levels across the firm.

The pandemic is likely to have long lasting impact on firms in relation to where and how legal services (and support services) are delivered. As well as considering the consequent risk management and regulatory implications, it will be ever more important for firms to consider a restatement of their culture, ethical values and purpose.

Remote working will undoubtedly be with us for some time to come and we anticipate that many people will continue to work from home much more regularly even when the pandemic is over. Good working practices, systems and policies introduced now will stand firms in good stead for the future in managing risk and in meeting their regulatory obligations.

Authors: Sarah Clover, Niya Phiri and Clare Cotterill

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