New Handbook - New Rules

I have been reading with interest the new Handbook recently published by the SRA (available here). A number of areas have been tightened up, but the section most interesting to me (because it is the area in which I specialise) is chapter 7 (in the second section "You and your business").

I'd like to go though the "Outcomes" (which are mandatory) one by one:

7.1 "You have a clear and effective governance structure...". Well - where should I start. Governance is complicated in any partnership structure, but lawyers do seem to enjoy complicating the matter. I go into the area of governance in a recent book (blatant plug - more information here) but this is an area in which very few law firms cover themselves in glory. What exactly is the difference between a Managing Partner and a Senior Partner - and who is more senior? Who is the Risk Partner? Is the structure of the firm - and its connections with service departments - clear? Look at the number of firms with Joint Managing Partners - who is in charge there, and, more importantly, does everyone (including clients) know? There should be a separation between the strategic leadership of the firm (undertaken by a Managing Partner, for example, who should be a lawyer with years of experience in the field) and the leadership of the business (who should be an expert in leadership and management with similar experience in that field - and unlikely to be a lawyer).

7.2 "You have effective systems and controls in place...". Now this section is really about systems to ensure compliance with the principles and outcomes in the Handbook. It will, however, inevitably require a thorough review of all the systems in place in the firm. What is important is that the Firm - and so all of its partners and staff - are sure that their systems work, not that they think they might.  Certainty is assumed by the SRA.

7.3 "You identify, monitor and manage risks to compliance with all the Principles...". Well this is a big one. I see far too many firms with ad-hoc Risk systems. I have seen firms - large firms too - which did not have a formal Risk Register, or who did have one that had not been looked at for a number of years. The Risk Register, and its associated programmes, will save your business one day - and now it is a requirement too. I do not believe it is possible to manage Risk without a formal register.

7.4 "You maintain systems and controls for monitoring the financial stability of your firm and risks to money and assets entrusted to you by clients and others". That word 'stability' is the key. Any regular readers will know that I have problems with the way that so many firms review their financial performance. For far too many partners, turnover is equal to success. Let me say this one again in the context of this new Handbook - turnover does not have anything to do with financial stability (or it has very little to do with it). Financial stability is based on two things. A strong balance sheet is the first - and how many partners really examine their firm's balance sheet? How many that do examine it really understand it? Few firms own their buildings and so their assets are usually mostly Debtors, with funds due from members or partners running second. Net assets will usually be balanced by member or partner equity and debt. Given the importance of the Debtors figure, however, it is surprising that little analysis is usually available about how the Debt is made up - nor is there a thorough understanding, and explanation, of the real likelihood of collection. The second key to financial stability is cashflow. This should be the first thing that partners are concerned about and should be the most important metric published to them. Partners should know how healthy their firm's cashflow is.


7.5 "You comply with legislation applicable...". Well of course. As a partner in your firm, you have checked this, haven't you...?


7.6 "You train individuals working in the firm to maintain a level of competence appropriate to their work and level of responsibility." Of course we do this, you will say. Really? Note that the Outcome specifies 'individuals working in the firm' and not 'fee earners' or 'lawyers'. The implication is that all staff must be properly trained. Not only that, if a partner is going to take over the running of the Marketing department, for example, he or she must be properly trained. I'd argue that proper training to run a marketing department of a £50million law firm will require a degree in marketing and a number of years of experience at a senior level.


7.7 "You comply with the statutory requirements for the direction and supervision of reserved legal activities", which of course you will.


7.8 "You have a system for supervising clients' matters, to include the regular checking of the quality of work by suitably competent and experienced people". Note that your firm needs a system to deal with this - which means that the supervisor will have to record his or her supervision and that this supervisor's work will itself have to be checked - and that there will have to be a system to ensure that a person is suitably competent and experienced, and that your firm has a process to record experience rather than simply years' worked, etc etc...

7.9 "You do not outsource reserved legal activities to a person who is not authorised to conduct such activities". I should hope not, but your firm will need to prove this.

7.10 "You... ensure that Outsourcing... does note affect your ability to comply with... your obligations...". So, just because you have outsourced some work (and note that operational activities are specifically included here), it doesn't mean that you have outsourced your responsibilities. So far as the SRA are concerned, the fact that you have outsourced a function is immaterial to your responsibility to control it.

Finally I should like to mention the 'Indicative Behaviours' for this section. These are not mandatory, however it will, I believe, be difficult to construct a good defence unless these behaviours have been followed. They are:

1. the safekeeping of documents and assets entrusted to the firm; 
2. controlling budgets, expenditure and cash flow;
3. identifying and monitoring financial, operational and business continuity risks including complaints, credit risks and exposure, claims under legislation relating to matters such as data protection, IT failures and abuses, and damage to offices;
4. making arrangements for the continuation of your firm in the event of absences and emergencies, for example holiday or sick leave, with the minimum interruption to clients' business.

Number (1) above should be in hand already. The firm will, however, need to demonstrate its control of budgets, which will be interesting for those firms whose budget is often not agreed until towards the end of the first quarter of that budget year. I don't that demonstrates control at all.

I have mentioned Risk Management above, but points (3) and (4) above are concerned with Contingency Planning - something else that few firms do well. A scenario based approach is necessary and frequent testing required for both fee earning and support functions as well as exercises to show how the whole firm would respond to an incident.

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