Key points
- The SRA has proposed various changes to the regulation of overseas practice, including a requirement that the non-UK offices of international firms comply with the SRA’s principles.
- The proposed changes would increase the regulatory burden on firms and individuals with overseas practices.
- The SRA consultation on its plans closes on 14 March 2013, with the intention being that changes will come into effect before the end of 2013.
Introduction
The SRA has put out two consultations on the regulation of international practice, the first in July 2011 and the second in December 2012. The SRA has now reached the point where it is considering specific amendments to the Code of Conduct to deal with international law firms. Current indications are that the final changes are likely to have wide-reaching and significant implications for international firms and solicitors practising overseas.
When the SRA launched its first consultation it suggested that it might be appropriate for firms headquartered, or with a centre of gravity, in England & Wales, and those whose “brand” had a connection to law practice in England & Wales to have their entire economic entity or group subject to SRA regulation. The SRA indicated that it may seek to “look through” a Verein structure and subject other legal entities participating in the Verein to SRA regulation. The good news is that the changes are now unlikely to go as far as first thought, but the SRA’s ambitions in this area remain troubling for international firms.
Which firms and individuals will the changes affect and how?
The proposed changes to the Handbook can be summarised as follows:
- An SRA-regulated firm will need to ensure that it identifies, monitors and manages risks in respect of its compliance with SRA requirements which may arise in connection with the firm’s overseas offices and “connected practices”. It is important to note that a “connected practice” includes parent and subsidiary undertakings of the SRA regulated firm and parts of a firm which are jointly managed or over which it has some management, operational or strategic control, so would capture the many firms which are structured with separate UK entities.
- An SRA-regulated firm should also maintain systems and controls for monitoring the financial stability of overseas offices and connected practices and manage the risks posed by any financial inter-dependence that exists. This may impact on group funding arrangements.
- When practising overseas, the overseas practices of SRA-regulated firms and SRA-regulated individuals will need to comply with a new stand-alone Chapter in the Code of Conduct. The key provisions are as follows:
- firms and individuals will need to comply with the “Principles” set out in the Handbook (for example, to act with integrity and to act in the best interest of each client and not to allow independence to be compromised), save to the extent that compliance with a Principle would involve a breach of local laws or regulations;
- clients will need to be made aware of who regulates the service provided to them, the protections they are entitled to, the insurance in place and how confidentiality will be maintained;
- the overseas practice should not cause, contribute or facilitate a breach of SRA regulatory arrangements by an individual practising from England & Wales; and
- overseas practices will need to co-operate with the SRA to the extent possible without breaching local laws.
What are the possible pitfalls?
For SRA-regulated firms with “overseas practices” (the definition of which is not yet settled), we can foresee implementation and compliance issues. For example, as would typically be the case, where a foreign lawyer is in charge of overseeing the overseas practice’s compliance with regulation, will that foreign lawyer have the necessary skills and experience to interpret correctly and apply the SRA’s Principles?
Furthermore, whilst the “Principles” are often perceived as “high-level guiding principles” (of the type with which every reputable lawyer and firm around the world should naturally comply) this perception significantly underplays the wide reaching effect of the Principles. For example, the requirement to “not allow your independence to be compromised” might prevent an overseas practice from entering into exclusive referral arrangements with a third party, even in circumstances where such arrangements are permitted in the local jurisdiction. The overseas practice of an SRA-regulated firm could therefore find itself at a competitive disadvantage to its local competitors.
Are the changes necessary?
Very few SRA-regulated firms with international offices or solicitors practising overseas will welcome the changes.
The rationale behind the move is that UK firms are exposed to additional risk due to their connection with overseas practices. Although theoretically true, our experience has been that international law firms are among the best managed. Furthermore, international firms tend to represent sophisticated clients, such as multinational corporates and high net worth individuals, rather than the general consumer market. The changes therefore seem to add an additional and unnecessary layer of regulation, which will inevitably divert management time and financial resources away from other activities, while offering little benefit to the general public or the reputation of lawyers in England & Wales. There is a risk that the ever-expanding reach of SRA regulation will act to deter international firms from establishing offices in England & Wales.
What next?
The latest consultation closes on 14 March, so there is still time to respond with any comments. International law firms which already have UK offices should keep a close eye on developments and will need to assess what, if any, changes will need to be implemented in overseas offices to comply with the forthcoming rule changes.
