Industry News

COLP & COFA: Material Breach

05 September 2012

With the dawn of the age of the Compliance Officer for Legal Practice (COLP) and the Compliance Officer for Finance and Administration (COFA) these questions seem to dominate discussion: When is a failure to comply with the SRA Handbook 2011(a breach) ‘material’? What if the SRA forms a different opinion about whether it was material or not? Should you just report everything immediately? Without a definitive answer from the SRA the below will give some guidance.

Rule 8.5 of the Authorisation Rules 2011 of the SRA Handbook 2011 requires COLPs and COFAs to report all failures to comply with the SRA Handbook 2011 (and, by virtue of Outcome 7.5 of the SRA Code of Conduct 2011, every other applicable legislative and regulatory obligation) as soon as reasonably practicable. However, for non-material failures reporting these to the SRA on an annual basis or on request will be sufficient (Rule 8.7 Authorisation Rules 2011). There is no such caveat for material failures.

So in practice the situation is this: Material breaches need to be reported to the SRA straight away by the COLP or COFA picking up the phone, sending an email or writing a good old fashioned letter explaining the situation and steps taken to deal with the issues. Non-material breaches on the other hand can simply be recorded and logged ready for the day that the SRA requests it (probably as part of the annual renewal process.)

But when is a breach material? In short there is no definitive answer and a Compliance Officer will have to take each situation on its facts and form their own opinion, a dangerous prospect inherent with Outcomes Focused Regulation.

Guidance note X to Rule 8 provides a little guidance on things that a COLP or COFA can consider in making this decision including:

  • the level of detriment or risk of detriment to clients;
  • the impact on the public’s confidence in the firm or the provision of legal services;
  • the scale of the issue (i.e. is it an isolated incident or limited to one individual etc);
  • and the general collective impact on the firm, clients and third parties.

But ultimately, it is a judgement for them as individuals!

This ultimately poses a risk that the SRA suspect that you have deliberately failed to report what they consider to be a material breach. So how can you rebut such a suspicion?

Some things that can help:

  • Get other opinions from:
    • Your Partners;
    • Experts, consultants or even other Compliance Officers;
    • Your local law society may have a regulatory affairs committee that can provide advice;
    • Ask the SRA themselves without formally making a report (even if you don’t get an answer asking the question demonstrates that you have not been reckless in making your judgement);
    • Investigate the circumstances further to consider whether the breach is part of a trend or a series of collective failures, checking previous complaints, claims and file review data;
    • Record all of your thought processes, what steps you have taken to investigate the issue further and what immediate steps you have taken to remedy the situation and prevent its reoccurrence.

All of the above information should be recorded in a comprehensive ‘breaches log’ that lends itself to regular reviews of potential trends.

In doing the above, while the SRA may disagree with your interpretation, they will struggle to evidence that any failure to report was cynical. You will have demonstrated and evidenced a commitment to your responsibilities. As such you should be able to put any SRA ‘advice’ into the bank and use it when considering future breaches.

But given the risks of the SRA disagreeing with your interpretation should you just report everything immediately? Simply: no.

The SRA’s enforcement strategy is to be risk based. If the name of your firm is continually brought to their interest for matters that may otherwise have waited until every other firm in the country submitted an annual report, then the chances are that the SRA will gradually raise your firm’s risk assessment and therefore their involvement with your firm, including the possibility of formal investigations. The detrimental impact of an SRA investigation both on a firm’s local reputation, the morale of the workforce and the debilitating effect on business planning make it a significant risk that must be managed sensibly. Material should therefore be given a conservatory interpretation.

Reporting needlessly not only poses an unnecessary increase in risk to your firm but it also defeats the purposes of the SRA’s enforcement strategy. The SRA has limited resources to investigate misconduct and as such needs to focus those resources where they are required the most. If the SRA is required to wade through a plethora of minor infractions it is going to increasingly struggle to identify and target high risk issues, resulting in a failure in their enforcement strategy and a return to the blanket approach to regulatory enforcement that so many firms resented.

COLPs and COFAs should judge each issue on its facts taking into account any trends or cynical failings. They should record all of their considerations and if in doubt seek a second opinion and record it! The interpretation of material failure should reflect the increased pressure that a higher risk profile may place on them and their firm.

Ian Braithwaite
Client Relationship Manager

T: 0845 056 3949
M: 0743 727 4046
E: ian.braithwaite@lbslegal.co.uk

For General Enquiries: Email enquiries@lbslegal.co.uk
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