ManagingRisk - Lockton Companies · Graham Wynes. The brave new world ... Calum MacLean - UK Risk...

Winter 2012/13

ManagingRisk

w

ManagingRisk - Winter 2012/13 Winter 2012/13 - ManagingRisk

Table of contents

BRAVE NEW WORLD 01

BEST LAID PLANS 03

ABS AND THE COLP - HOW WE MANAGED IT 05

SOLICITORS REGULATORY RESPONSE LIABILITY INSURANCE 07

PATIENCE IS A VIRTUE: THE LONG ROAD TO BECOMING AN ABS 12

EditorConstantine OkoyeT: 020 7933 2125E: [email protected]

DesignerHector OsholakeT: 020 7933 2731E: [email protected]

PR Chris Don T: 020 7933 2634E: [email protected]

ManagingRisk Winter 2012/13

WelcomeA common theme we hear from law firms are “How does our risk and compliance compare with our peers?” and “How are other firms approaching OFR?”

Our survey in 2011 was the first in-depth survey and benchmarking exercise across the UK Top 100 firms looking at approaches to and resourcing of risk management and compliance. The results of this survey allowed firms to see how they compared with their peers. Some firms were well behind the curve and saw they needed to invest more in risk and compliance, while others had found that they had the right balance between risk and reward.

ABS continues to hit the headlines and we hear what the SRA expect from applicant ABSs as well as the viewpoints of two businesses and their experience in converting to an ABS.

The COLP and COFA positions are now live and we look at the protection that these individuals would be wise to take out, giving them peace of mind should they be at the wrong end of an SRA investigation.

Steve Holland - Senior Vice President

Global Professions

[email protected]

020 7933 2444

Brave New World…

Lockton has recently launched its second Risk and Compliance Index survey (R+CI) – providing top 100 UK law firms with a unique insight into how their risk and compliance

procedures compare with their peers. One year on from Lockton’s first Risk and Compliance Index survey and the legal landscape has already changed significantly: the predicted ‘merger mania’ is in full swing with no sign of abating; the number of applications for ABS status has exceeded initial expectations; and 2013 sees the long trailed COLP and COFA compliance regime finally become reality.

The 2013 R+CI has been updated to take account of the impact of Outcomes Focused Regulation, and has been finessed to provide even more tailored information to assist firms benchmark the effectiveness of their risk and compliance functions and the value-for-money they provide. Using Lockton’s particular knowledge of the solicitors PI market, each report then provides a comparative analysis of the levels of cover and cost of the firm’s Professional Indemnity insurance.

Last year’s survey identified that dedicated risk and compliance teams are seen as an increasingly important part of law firm operations – and the majority of firms anticipated investment in risk and compliance increasing in the near future.

Among the top 100 firms, Risk and Compliance teams tend to be the primary contact point for AML checks & conflict screening and updating and negotiating changes to Terms of Engagement. They were least likely to be involved in business continuity planning, partnership secretarial arrangements, and long-term strategic planning.

Interestingly, risk and compliance teams in the top 21-40 firms had primary responsibility for 28% more key risk management tasks than teams in other firms, and the information they provided on Partner compliance with internal systems and procedures was 45% more likely to be used as part of the appraisal process.

With the increase in merger activity, Risk and Compliance teams can be expected to have more reliance placed on them in regards to managing the due diligence process. Where mergers go ahead, the risk and compliance team is likely to have additional responsibility for managing the integration of compliance systems and implementing necessarily more complex conflict management systems.

As the number of ABSs increases, the variety of structures and altered risk profiles of practices will change the shape and responsibilities of risk and compliance teams. External investment will bring with it increased expectations of an enterprise risk management model – and teams are likely to be expected to take on more of a strategic role. The emergence of multi-disciplinary practices will necessitate an increase in process-risk management and increasingly sophisticated monitoring.

The increasing regulatory burden required to counteract the new free market models, as evidenced in the introduction of COLPS and COFAs this year, means that those charged with the regulatory responsibility will increasingly rely on their risk and compliance teams. These teams will need to deliver the evidence required by the SRA, that the independence of their lawyers remains uncompromised and that they continue to act in their clients’ best interest at all times.

These additional requirements on risk and compliance teams come at a time when margins are being further squeezed and there is extraordinary pressure to streamline processes wherever possible.

The R+ CI index will help participants identify how effectively they are using their risk and compliance function, and where participants might seek to drive improvements in their internal processes. Look out for our report on the 2013 survey in the spring, or to register your interest in participating in future Risk + Compliance reports from Lockton, contact Graham Wynes.

The brave new world of legal practice today is jolting law firms into a deep-rooted review of their strategic direction and their modes of operating. Margins are tighter for the majority of firms than they have been for many years, yet evidence (from The Lawyer UK200 Annual Report 2012) suggests that the cost per lawyer as a percentage of revenue has increased rather than decreased over the last 5 years.

Informed decision-making requires insightful management information. The Legal Services Act means that Risk and Compliance is now right at the heart of the boardroom agenda. Firms need to know whether their compliance procedures are fit for purpose, and want to be able to measure the value that their risk and compliance functions are providing to the business. There were only anecdotal answers until now.

Calum MacLean - UK Risk Manager

Lockton Companies LLP

[email protected]

131 3455 561

01 - ManagingRisk - Winter 2012/13 Winter 2012/13 - ManagingRisk - 02

ManagingRiskWinter 2012/13ManagingRisk Winter 2012/13

Graham Wynes - Senior Vice President - ProfessionsLockton Companies LLP

[email protected] 7933 2266

Best laid

The SRA’s online overview of the ABS authorisation process, which was last updated on 29th June 2012, warns that applicant businesses with complex financing structures

and ownership models will need to invest time and effort in assessing the risks associated with their proposed ABS. Based on their experience in managing applications to date, the SRA suggests that this is even more important where these applications are “being led by individuals who are new to legal services and the regulation of those services”.

BUSINESS PLANSA credible and sustainable business plan will need to cover more than just financial projections, if it is to meet with the regulator’s approval. The SRA will expect the applicant ABS to identify the target client base (how will they benefit and be looked after?), the intended service lines (how are the associated risks to be managed?), and the predicted sources of work (are referral arrangements involved and what if they dry-up?). In other words, the applicant must have a “fully articulated business plan and commercial purpose”.

Nonetheless, the SRA has made it clear that it will not be bound by the aspiring ABSs’ stated timescales for implementing the business plan, even where crucial

funding arrangements and conditions precedent are involved. The regulator’s 6 month (or 9 month) statutory stopwatch will also not start to run until the fees are paid at the end of stage 2 – best laid plans and all that.

COMPLIANCE PLANSThere will need to be a thorough compliance plan in order for the SRA to be satisfied that the ABS in- waiting has adequately considered how it will achieve compliance with the SRA Handbook 2011 and relevant legislation. For new players in the legal market, the need for appropriate and effective risk management and compliance oversight, training, policies, systems and controls, is particularly acute.

Those at the candidate business, who are responsible for the application and for contact with the SRA, must demonstrate a good understanding of the SRA’s regulatory framework – not least the separate business outcomes and suitability tests. They will need to be clear on any waivers they require. They will need to have started to line-up appropriate levels of indemnity cover, which necessitates talking to brokers early. The ABS applicant could even view the process of completing their initial PII proposal forms as a test-run for the scrutiny they should face from their regulator in due course.

BUSINESSES WHICH ARE BEYOND THE INITIAL STAGE OF THE ABS APPLICATION PROCESS,

AND NEWLY LICENSED ABSS WHICH HAVE MADE IT THROUGH, ARE OFTEN CRITICAL OF THE

SRA’S ABILITY TO GET TO GRIPS WITH THEIR BUSINESS MODEL AND TO MAKE A DECISION ON

AUTHORISATION WITHIN A TIGHT TIMESCALE. HOWEVER, IT IS EQUALLY TRUE THAT THE SRA

HAS HAD TO REMIND THOSE WHO ARE ASPIRING TO LAUNCH AUTHORISED ABSS THAT THEY

EXPECT TO SEE EVIDENCE OF WATERTIGHT BUSINESS AND COMPLIANCE PLANS, WHICH SHOW

AN APPRECIATION OF THE RISKS ASSOCIATED WITH THE LEGAL SERVICES WHICH ARE TO BE

PROVIDED.

plans

The best prepared ABSs will be forearmed with a detailed compliance plan, including a gap-analysis, to serve as the best possible demonstration of the business’ intention to get to grips with the SRA’s outcomes-focused regime. The plan will also incorporate key legislative compliance, including in areas such as data protection, money laundering and financial services regulation.

Finally, it should be noted that the primary contacts for the application will often also be the nominated COLP and COFA (aka HOLP and HOFA) at any authorised ABS. That makes it all the more necessary for the SRA to have confidence that they are dealing with professionals who understand legal regulation. Will these individuals be able to fulfil their responsibilities, by ensuring adherence to professional rules and managing breaches of such rules, if they aren’t yet familiar with them at the point they are committing to abide by them?

VARIETY IN THE ABS PIPELINEKindleworth have been working with a number of new ABS entrants, some of which are new pretenders in the world of legal services. Others are existing ‘traditional firms’ considering external capital for growth or simply looking to bring a non-lawyer into the partnership structure.

There is real ambition and variety out there and many applicants are keeping their best laid plans to themselves. What can be said with certainty is that some of the would-be legal services businesses, which are currently caught in the ABS pipeline, are set to make quite a splash.

Tom Arrowsmith - Partner

Kindleworth

[email protected]

020 7397 2921



Under the Legal Services Act 2007, COLPs are personally responsible for their organisation’s compliance with its licensing terms, its compliance with all regulatory and statutory obligations, and for reporting any breaches as soon as is practicable. In order to do that, COLPs have to put effective systems and controls in place to enable the firm to meet OFR’s requirements as well as to identify, monitor and manage risks to continued compliance. As a firm they built their own computer systems around VisualFiles which automate its risk register compilation and complaints tracking process to help Rebecca in meeting her reporting obligations.

“A key aspect to the process was ensuring we mapped and managed every conceivable risk to achieving and maintaining compliance. We took a highly systematic approach to compiling a risk register that covers the full spectrum from financial, reputational and strategic to regulatory issues. Out of that you gain a deeper insight - not just into what you need to do to ensure compliance - but also what will make you a better business. We discovered a number of areas where improvements could be made - including on data protection and on recording hospitality properly. All of that has benefits far beyond technical compliance.

“In addition, we introduced a register of decisions pertaining to non-compliance. This way, if it’s decided that a breach is not material, there’s a record as to the thinking behind that conclusion,” she says. The firm collaborated with the SRA on the OFR project before it was launched, and is in the process of rolling out training on OFR compliance firmwide.

“Being a COLP is a hugely responsible role - in a sense you are a whistleblower with the ability to shut the whole firm down - but essentially it is all about cultivating openness and transparency. The process works best when you have an open-door positive compliance culture. Yes, it’s about reporting any instances of non-compliance, but it’s just as important that you record discussions on how you have interpreted and implemented a compliance regime internally and documenting the reasons for the decisions you have made.”

In April this year, law firm Russell Jones & Walker (RJW) received approval from the SRA to convert to an alternative business structure (ABS) and shortly thereafter completed its planned acquisition to become part of Australian law firm Slater & Gordon (S&G).

MManaging Risk caught up with Rebecca Bell, Slater & Gordon’s UK General Counsel and Compliance Officer for Legal Practice (COLP), to learn more

about the reality of implementing and securing SRA approval for the formation.

We first asked about the challenge of carrying out a change of business structure and a merger in tandem. “It was a lot to take on at once,” Rebecca agrees, “but once we had identified this opportunity to create a stronger business for the future and an ideal partner in S&G, the timetable began to be put together. I have a background in project management, so perhaps I didn’t find it as daunting as I might have otherwise.”

“With something like this, the devil really is in the detail. We had an extraordinarily detailed project management plan - based on PRINCE2 - that helped us ensure we covered all the detailed work required to get to each milestone. We had a great team in place, with work stream leaders across the business playing a pivotal role. Everyone showed fantastic commitment and put in a phenomenal amount of hours.

“We also had the assistance of some very capable external advisors in the shape of Smith & Williamson and MacFarlanes who brought an invaluable external perspective to bear and were particularly helpful on the planning and drawing up action lists and of course Lockton in helping us place our professional indemnity insurance!

“We also had the benefit of working closely with S&G who have been through a lot of these issues previously and also understood how everything works with the Australian Stock Exchange and the Australian Shareholders Association.

Having that experience on tap more than offset the multi-jurisdictional multi-regulatory challenges of providing vast amounts of information to reassure all interested parties about the fitness and properness of our management and investors.

How had Rebecca found the experience of working with the SRA we wondered? “They were actually a real pleasure to work with. RJW was one of the very first UK law firms to convert to ABS - just as our new parent S&G were the first listed law firm in Australia five years ago - and in a sense the people at the SRA were as new to it as we were. We were speaking two or three times a day over the phone and they were really helpful in terms of getting approval forms and issuing them. It was all very collaborative.

Conscious of the “people” risk involved in any merger, Rebecca and RJW’s board went to great lengths to ensure that the process was as transparent as possible. “We obviously had to communicate and consult internally to make sure everyone was comfortable with where we were going,” Rebecca notes. “We carried out 6 staff consultation meetings over a 3-month period and appointed 15 reps across the firm to make sure we addressed any questions and concerns people might have. We have always had an open and consultative approach, which helped lay the ground work, and we recently carried a staff survey that identified career planning and development as key concerns. This is something the new structure clearly addresses; another key attraction of the ABS business structure was the ability it gives us to reward employees more widely than under a partnership and offer attractive career paths to everyone within the firm.”

Rebecca Bell - UK General Counsel

Russell Jones & Walker

[email protected]

020 7657 1721



InsuranceSolicitors Regulatory Response Liability

What is Regulatory Response cover and why do I need it when I already have Professional Indemnity Insurance (PII)?

M ost law firms focus their risk transfer solutions on their PII. While PII will protect you and the firm against claims arising from your professional

services, this will not cover risks associated with the management of the business. Individuals can be held personally liable for their actions resulting from a wide range of legislation. This includes health and safety actions, regulatory proceedings and investigations, employment law, as well as criminal or civil actions recognised as offences under any of the following acts, amongst others:

• Legal Services Act 2007• Companies Act 2006 (as amended)• Financial Services and Markets Act 2000• Insolvency Act 1986

The Lockton Regulatory Response liability insurance for law firms protects not only the law firm but also the individual members from personal liability incurred in their managerial capacity for regulatory actions.

This policy also extends to investigations initiated against your MLRO. It is a well known fact that litigation increases in an economic downturn. With this exposure, coupled with the SRA’s new approach to Outcomes Focused Regulation (OFR) and enforcement, you are at an increased risk of an action being brought an investigation can be triggered by various sources, including:

• Members of the public or the profession

• Whistleblowers – external or internal• Other regulators• Outside shareholders• The Legal Ombudsman• Your clients• The firm itself.

In the following hypothetical scenarios, we discuss the impact of an investigation being brought against the firm or its compliance officers and the potential cost to individuals:

Scenario 1 – maverick rainmaker who ignores compliance procedures:

A firm’s COLP exhibits a breach of duty when observing, but not reporting, the practises of the firm’s new ‘maverick’ litigator who:

• Routinely ignores client due diligence procedures

• Does not complete the internal anti money laundering client vetting requirements

• Does not complete any pre-inception matter risk assessment

• Does nearly all of his/her work either on the road or from home (making him/her difficult to supervise)

• Contrary to the firm’s own best practice requirements, the litigator is not submitting files for file audits and no one knows what’s happening on them.

A visit from the SRA uncovers this lack of control and undertakes a full investigation into the breaches. The Regulatory Response policy would cover the costs of the investigation and potentially any fine imposed where insurable by law.

For information on the SRA’s current limits on financial penalties please see http://www.sra.org.uk/sra/how-we-work/decision-making/criteria/financial-penalty-decision-to-impose.page. The SRA can refer cases of very serious breach to the Solicitors Disciplinary Tribunal, which has the power to raise or lower fines imposed by the SRA.

Compliance Officer for Legal Practice (COLP),

Compliance Officer for Finance and

Administration (COFA) and Money Laundering

Reporting Officer (MLRO) Liability

This policy responds not only to a Solicitors Regulation Authority enforcement action for your nominated COLP or COFA but also to actions brought by other regulators including SOCA or the FSA.



Scenario 4 – London based firm with an international client portfolio

A partner of the firm is working with an overseas client on a potential UK acquisition.

Adequate background checks of the client’s financial position and legality were not carried out by the UK law firm. After negative publicity in the press surrounding the origin of funds to be used for the merger transaction, the Serious Organised Crime Agency (SOCA) launches an investigation specifically asking the MLRO to respond.

After review of responses, SOCA confirms that the firm has acted in accordance with compliance procedures and no penalties were imposed.

Even though penalties were not imposed, the Regulatory Response policy would have been triggered and any defence and other costs resulting from the investigation would be indemnified under this cover.

The job of the MLRO is to act as the focal point within the firm for the oversight of all activity relating to anti-money laundering. They need to be informed of any relevant knowledge or suspicion and in turn pass on issues to SOCA as appropriate. They are to liaise with SOCA on any question and whether to proceed with a transaction under the circumstances.

The Lockton Regulatory Response policy will ensure that your COLP, COFA and MLRO are protected for their compliance and managerial duties within the firm. Dependent on the size of your firm, a retention may apply. This retention is only applicable in the event the firm cannot indemnify the individual due to insolvency, legal prohibition or wrongful refusal.

For further information and more specific details of our exclusive Regulatory Response policy please contact Steve Holland.

Scenario 2 – COLP unable to convince board of firm to report a material breach

A COLP has been trying to persuade her management board to adopt the risk management system and mortgage fraud policy she devised, without success. The board, as well as heads of department see both suggestions as bureaucratic business inhibition which the firm’s falling profits cannot accommodate. The firm’s turnover has decreased from £1.7m to £880k over the last 3 years. An instruction worth £500k comes into the firm’s conveyancing practice (which is limited to standard residential work) from a consortium of Spanish buy-to let investors in respect of a new property development outside Milton Keynes. The work falls far outside the scope of the firm’s usual practice but the conveyancing head of department takes a unilateral decision to accept the instruction without reference to the risk assessment or mortgage fraud policy, referring it to the risk committee who rubber stamps it. The instruction proceeds in the absence of enhanced supervision and monitoring measures the COLP has recommended in her proposed mortgage fraud policy.

The COLP tells her board she intends to report the acceptance to the SRA as a material breach. Her board instructs her otherwise as the income it represents is crucial to the firm’s continued solvency and existence.

The consortium commits fraud on its lender, which sues the firm in negligence. The board tells the COLP to report the matter to the SRA as a breach. The SRA investigates and fines the COLP £2k and the firm £20k. In such a scenario, the Regulatory Response policy would cover the costs of investigation and potentially any fine imposed where insurable by law.

Scenario 3 – UK law firm with 3 UK offices, exploring expansion

The firm is exploring the opportunity of forming an Alternative Business Structure (ABS), resulting in potential outside investment. A prospective third party investor raises a complaint with the SRA alleging misrepresentation within the prepared financial statements. In turn the SRA initiates a formal investigation against the firm, with the purpose of investigating the COFA.It is deemed the COFA was in breach of the SRA Accounts Rules for the provision of inaccurate financials and a £2k fine is imposed.

The Regulatory Response policy would cover the costs of investigation and any fine imposed where insurable by law.

As part of the OFR the idea is to focus firms on managing and minimising risks at the right level for their firm. The SRA Accounts Rules require that all principals must ensure compliance by everyone employed in the firm. This duty is extended to the COFA of a firm.



Steve Holland - Senior Vice President

Global Professions

[email protected]

020 7933 2444

The long road to becoming an ABS

Patience is a virtue:

I have been engaged for many months in the process of seeking, on behalf of a company in which I have an interest, a licence to become an Alternative Business Structure. I haven’t yet succeeded in this objective but share my experience of the process so far’.

Having been in private practice in the legal profession for over 40 years, I have for a long time been an interested observer of the process of “liberalising” the legal services apparatus in this country ever since the Clementi Report (after a lot of lobbying by bodies such as The Consumer Council) came up with its proposals. I could see many advantages, both for those who work in law firms and for consumers of legal services.

Many people doubted if the Clementi proposals would see the light of day but legislation did eventually follow and the Legal Services Act finally made its way through Parliament. Even at the last minute there was some doubt as to whether it would fall foul of the legislative timetable and fail to achieve the Royal Assent. As we all know, however, it was indeed passed and became the 2007 Act.

Progress since then has been equally glacial. It was only in 2011 that the prospect of creating the long-awaited Alternative Business Structures became a reality. A date of 6 October 2011 was trumpeted as the start of this brave new world. Overexcited journalists predicted “Big Bang for the legal profession”. Anti-climax followed. The 6 October date was quietly sidelined, to be replaced with a new date of January 2012 - but even this was dependent on the SRA being approved and ready to start receiving applications.



I didn’t expect the ABS process to be an easy one or a rapid one. I remain an optimist that “we will get there in the end” and this has

done nothing to diminish my enthusiasm for the concept of

new structures in the legal sector.

As the months of 2011 ticked by, businesses that were interested in acquiring ABS status naturally wanted to know what the process would involve, what information would be sought by the regulator and what the touchpoints might be before a successful application. The difficulty has been that this has been a novel experience for all concerned, not least the SRA. In mid-2011, I took up the sensible suggestion of the SRA to discuss the sort of ABS that we had in mind, but unfortunately this proved to be less than enlightening as the personnel I encountered had little idea of how the process would be carried out and crucially had no information of the form and content of the all-important application forms. Come 2012, Applicants were able to find out that there were to be two stages: the Stage 1 Application form was generic and did not seem to require information about the type of ABS or the business plans of the proposed ABS. Completion of these outline forms (akin to an “expression of interest”) was then followed by the requirement to complete Stage 2 forms. These forms are a challenge, even to those used to completing Practising Certificate applications - indeed they seem to have been based closely on the sort of information-gathering required from Solicitors practices as part of that exercise. Unfortunately they do not give much scope for explanation of the plans for the particular ABS: there are lots of drop down menus with little scope for individual comment or explanation. A frustration is that the form- filling provides no scope for an applicant to explain how an existing solicitors’ practice could become part of a multi-disciplinary practice, which was my particular interest.

Another problem of a form-based system is that it seems to require the Applicant to make a declaration of its owners and managers at a particular point in time, without providing any indication as to how changes of ownership are to be accommodated (it being fairly obvious that any business is a dynamic entity and will constantly change - look at any law firm partnership!).

Given the history of the legislation and its infrastructure, I did not expect this to be a rapid process. It has not been. Many months on, the SRA are still at the stage of assessing our application. In the meantime, the SRA has introduced a stage 3 into the process, giving an opportunity for the SRA to have discussions with the applicants and allow for modification of the application in the light of such discussions. That is obviously common sense and to be applauded, albeit that it still further delays the point of a decision. It perhaps also indicates that this is a process where both Applicants and regulators are learning on the job and responding to the new challenges as the process rolls on.

David Simon - Managing Partner

Robin Simon LLP

[email protected]

(0) 333 010 2888


ManagingRisk Winter 2012/13

Lockton Companies LLP. Authorised and regulated by the Financial Services Authority. A Lloyds Broker.

You’re unique. So is the service we offer.Solicitors’ Professional Indemnity0845 0501 471 www.lockton.com/solicitors

[email protected]

NOTES

ManagingRiskWinter 2012/13

A division of Lockton Companies LLPAuthorised and regulated by the Financial Services Authority. A Lloyd’s brokerRegistered in England & Wales at The St Botolph Building, 138 Houndsditch,

London, EC3A 7AG, Company No.OC353198

www.lockton.com

Our MissionTo be the worldwide value and service leader in insurance brokerage and

risk management

Our GoalTo be the best place to do business and to work

ManagingRisk - Lockton Companies · Graham Wynes. The brave new world ... Calum MacLean - UK Risk...

Documents

Transcript of ManagingRisk - Lockton Companies · Graham Wynes. The brave new world ... Calum MacLean - UK Risk...