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Dealing with an SRA investigation: we all need to walk the line

The decision to overhaul the SRA handbook with the introduction of the STARs offered the regulator a golden opportunity to redress the balance and ensure equality of arms in regulatory proceedings by reintroducing a requirement of cover for regulatory investigation and defence costs 

The SRA says it wants to place decisions involving the exercise of professional judgement back in the hands of practitioners

Law firms managers and compliance officers face an ethical challenge when it comes to dealing with the ethics of buying their management liability cover.

Should the firm seek to protect just its compliance officers and managers? Or should it also seek to cover the more junior staff who work for the partners’ ultimate benefit – but who would otherwise be ‘on their own’ if they ever have to pay the costs of responding to SRA action against them? 

It is not uncommon for junior lawyers or support staff to be forced into taking considerable personal financial risk to defend allegations. Nor is it uncommon for them to find they have little option but to leave the profession in which they have invested huge amounts of time, effort and money – concluding that they cannot afford to take further financial risks of defending themselves against allegations of misconduct. 

That is nothing short of a travesty, because many do so without even having had the opportunity to explain or defend the allegations made against them with the support of expert advisors.

But it is not only law firm managers and compliance officers for whom these issues raise significant ethical issues: the SRA’s own ethical position is also something of a conundrum. In my experience, it’s a widely held view that the SRA is a regulator anxious to be seen to have an impact, to shake up the profession in the interests of consumers and, where it considers appropriate, to take effective enforcement action. 

These are quite legitimate aims, but it is also a widely held view that the SRA has a tendency to exercise its powers in ways that can, at the very least, appear to be disproportionate and aimed at the wrong target. 

This problem is exacerbated when one considers that the SRA is, companied to many law firms and to virtually all individual practitioners, invariably far better resourced both in terms of finances and expertise to deal with regulatory investigations and prosecutions. 

The SRA has already achieved a success rate in prosecutions that reach the Solicitors Disciplinary Tribunal (SDT) as high as 98 per cent in recent years. While no doubt many of those cases involve serious misconduct deserving significant sanction, there must also be a proportion of that 98 per cent where the inability of a firm or individual to match the SRA’s resources and defend itself properly results in findings which may (or would) have been avoided had they been able to defend themselves properly. 

There must be a significant number of cases where there has been no misconduct but the firm or individual lacks the financial clout to be able to instruct experts to demonstrate to the SRA at the investigation stage, or the SDT in a prosecution, why that’s the case. So in these cases, there are genuine miscarriages of justice with career-damaging or career-ending consequences.

Insuring 

But it has not always been the case that firms and individuals have been left to fend for themselves when faced with regulatory investigation or prosecution. Until 2010, the minimum terms for professional indemnity insurance included a requirement that insurers provide cover for these costs. That requirement was removed by the SRA in 2010. 

It would not be difficult for the cynically-minded observer to note a potential conflict of interest for a regulator that wants to be able to take decisive and effective enforcement action; and also has the powers to change the requirements of those it regulates to insure against the costs of defending regulatory proceedings.

Maybe it is the SRA’s position that the risks of the above types of miscarriages of justice are acceptable when balanced against the need to protect the public from genuine rogues or bad practice. On any view, however, it is an invidious position for those who don’t have the benefit of the necessary insurance to find themselves in – and it can hardly be said to further the proper administration of justice. 

The situation is made more precarious by the SDT’s move from the criminal to the civil standard of proof when the STARs come into effect (but that’s another story for another time).

The decision to overhaul the SRA handbook with the introduction of the STARs offered the regulator a golden opportunity to redress the balance and ensure equality of arms in regulatory proceedings, by reintroducing a requirement of cover for regulatory investigation and defence costs into the minimum terms. The SRA might even have taken the view that doing so would have benefits in reducing the risks posed to clients by firms or solicitors facing such costs, where they might be forced out of business as a result of having to invest considerable sums in defending themselves.

Perhaps the solution lies in the SRA’s stated position in relation to regulating under the new provisions. It says it wants to place decisions involving the exercise of professional judgement back in the hands of practitioners. That sounds like an entirely laudable aim and I believe it will be welcomed by the profession as a whole – so long as the exercise of that professional judgement is accepted as legitimate, even where there may be adverse outcomes for clients. The move away from outcomes-focused regulation may ensure that is the case but whether that’s what transpires remains to be seen.

In the meantime, we can expect to see an increase in the reporting of suspected misconduct to the SRA. The proof will be in watching how the SRA engages with those reports; the degree to which they are progressed to full investigation status by the SRA; and the numbers of sanctions imposed and referrals made to the SDT in the years ahead. 

In a position of such power, the SRA must be careful to consider its ethical position as we enter a new regime of regulation.

If you’re a solicitor faced with an SRA investigation or prosecution, we’ve been there and we know how you may be feeling. We can help you take back the initiative and put your best foot forward. To speak to a member of the team, contact us on 020 3780 0406 or at  RDteam@leighday.co.uk

Gideon is an associate in our regulatory and disciplinary team. A version of Gideon’s article was first published in the Solicitors Journal in October 2019

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