Regulatory Compliance

Having worked in several different law firms over the past 10 years, it has been interesting to see how each firm has dealt with conflict checking differently.

Many medium to large law firms have teams running conflict checks for the firm. From my experience however in many of these firms the individuals running these conflict searches are simply looking for a match in data. But…. are they given enough training on the legal concepts surrounding conflicts of interest to really know what to look out for and to identify conflicts and potential conflicts.

Most smaller firms don’t have the resources to have a dedicated team to deal with conflict checking and it is therefore the responsibility of the fee earner to conduct a conflict check themselves. However, as a fee earner, is this “non-chargeable time” spent actually checking all the relevant parties? In some cases I fear not!

When I first started my legal career I worked as a paralegal dealing with debt recovery matters. I worked for a smaller firm so responsibility for conducting conflict checks was on me, which, having never been given any real training, proved quite difficult. Because of the lack of training I ended up opening a file and suing one of our client’s subsidiaries … whoops!

It is important to remember however that a conflict check is only as good as the data stored in a firm’s case management system. Firms need to make sure they have enough controls in place to ensure they are capturing the correct data for a conflict check to be properly carried out and have any value.

It then comes down to how a potential conflict of interest is dealt with. When I was buying my first property, I was informed by the estate agent that the Seller had instructed the same solicitor as me, but that this was “fine” because the Seller’s solicitor was based in a different office. Thinking back to this now with the legal experience I have, it is clear that, this was a conflict of interest and more should have been done by my Solicitor to make me aware of the possible implications and risks (rather than leaving it to the estate agent to tell me). I can’t really complain, they did a great job, however I do wonder what safeguards they actually had in place.

In November 2018, Sleigh Son & Booth solicitors were fined £2k and ordered to pay £20k in costs for acting where a conflict of interest breach may have arisen. The firm had acted for both vendor and purchaser in 9 conveyancing transactions where they had failed to advise either the vendor or purchaser that it was acting for the other and in 8 conveyancing transactions without obtaining either clients’ consent to do so. . The worst part was they had controls and protocols in place, they were just simply breached or forgotten.

This begs the question, should law firms be thinking more about what happens if they get it wrong?

Here are a few points I think Law Firms should consider when looking at conflict checking;

1. Training – Make sure your employees receive the training they require for their role and level of experience in respect of conflicts of interest and that they are aware of any internal systems, policies and procedures. It is always worth doing refresher training, as things do change!

2. Related Parties – Make sure all the relevant parties have been checked (You wouldn’t want to go suing one of your client’s subsidiaries!)

3. Data – It is important that all client and matter related parties are added to the case management system so they can be picked up in future conflict checks.

4. Potential conflict of interest? – Make sure you deal with any actual or potential conflict of interests appropriately. Do you require client consent, information barriers or do you simply have to decline to act? Remember the consequences if you get it wrong!

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As part of the recently launched Teal Compliance Officer Training Programme, I ran a webinar session running through all the requirements in relation to Price Transparency and the impact it is having on firms.

The first thing I would say is that the new rules create a market of opportunity on which you can take stock and look at your pricing structure, how you price and the services you offer to your clients. The stated aim of the new rules is to provide good quality information to potential and existing consumers to enable them to make the best decision for the type of service they require and within their budgets.

A lot of firms are focusing on the perceived negative impact, e.g. that it is “big brother” or that other competitors will undercut their fees and poach clients. But by focusing on that firms risk missing opportunities. The research which was commissioned in 2016 by the Competition & Market’s Authority (“CMA”) concluded that generally speaking there is insufficient information available to consumers and small business, in relation to the price, range and quality of legal services on offer. This was particularly evident in relation to the conveyancing market.

The majority of consumers looking for legal services said that if better information about price, quality and range of legal services was available online that would help them in making a decision as to which firm to approach.

Consumers also said that firms with a “digital badge” displayed on their website, would give them greater confidence about the services on offer and could in fact be the deciding factor on whether or not to use a firm.

To recap on what is required under the new rules:

I have done some of my own research looking at how firms have improved price transparency on their websites. Some firms have absolutely got it spot on, however I have to say I am quite surprised by the number of firms who are not yet publishing transparent information and those whose attempts to be compliant have fallen short of what is required. The CLC and SRA have already started to undertake reviews of firms regulated by them. Whether firms want to accept the rules or not, you still have to comply.

If you are not sure how to ensure you are compliant with the new rules, or you just need a sense check then we are here to help, for example by running pricing workshops to give you the opportunity review and update all the services that you charge for.

The new rules are designed to stop those firms who add on the “hidden” costs at the end of a transaction, leaving the client confused, and uncertain as to how they are going to pay for those additional fees. Introducing transparency, guidance on services offered, what is and isn’t included will assist clients in assessing what is right for them from both a personal and financial perspective.

A lot of firms are using online calculators, and these are a great way of providing an estimate where the onus is on the client to provide the correct information. Again, if this information changes you can make it clear the fee may change accordingly. There is evidence to suggest that, particularly in conveyancing, the use of online calculators is assisting in winning business. Some firms have platforms which also automatically send the terms of business letter out, so you could arrive in the office in the morning with new clients already committed to working with you. These are fantastic examples of what you can do to be compliant under the new rules and maximise business potential. What’s not to like?

My top tips for making sure you are up to speed with price transparency include:

• Use price transparency as an opportunity to revisit your current fee structure and prices
• Ensure that your website contains all relevant information about the range, quality and price of your services
• Obtain and display your digital badge
• Communicate and provide training in price transparency to all staff
• Remember to update relevant policies and marketing materials

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This may appeal to those of you who like me are a little lost when someone talks to you about the Insurance Distribution Directive. Let’s start from the basics, The Insurance Distribution Directive (IDD) is a new European directive that has replaced the Insurance Mediation Directive (IMD). It applies to Firms who conduct insurance distribution activities and its introduction will change the way relevant firms work. The SRA recently announced the approval by the Financial Conduct Authority and the Legal Services Board of its rules to comply with the directive, reflected in the changes made to the SRA Handbook 2011on 1 October 2018.

In summary the Directive aims to enhance consumer protection when buying insurance – including general insurance, life insurance and insurance-based investment products (IBIPs). It also focuses on supporting competition between insurance distributors by creating a level playing field. Like the IMD, the IDD covers the authorisation, passporting arrangements and regulatory requirements for insurance and reinsurance intermediaries. However, the application of the IDD is wider, covering organisational and conduct of business requirements for insurance and reinsurance undertakings. It’s also important to mention in order the demonstrate firms and employees possess appropriate knowledge to perform their duties, CPD of at least 15 hours are required to complete this.

In practical terms the definition of ‘insurance distribution’ in the new directive has been defined as the activities of advising on, proposing, or carrying out other work preparatory to the conclusion of contracts of insurance, of concluding such contracts, or of assisting in the administration and performance of such contracts, in particular in the event of a claim. That means Law firms involved in personal injury, conveyancing and probate will most likely be carrying on insurance distribution activities e.g. arranging for clients’ after the event insurance in a personal injury matter or insurance for defective title in a conveyancing matter.

Another important reference are the SRA rules particularly regarding the SRA Financial Services (Scope) Rules 2001 (Scope rules) and the SRA Financial Services (Conduct of Business) Rules 2001 (COB rules). The specific requirements which relate to insurance distribution activities are set out in Appendix 1 of the COB rules.

Here are 10 steps you may consider when you deal with IDD compliance:

Step 1

Notify the SRA using a FA8 form if you propose to conduct insurance distribution services. The SRA will inform the FCA on your behalf who maintains a register of firms which includes those that are carrying on insurance mediation activities. Before submitting the completed form be sure to provide some basic information like details of your firm’s insurance distribution officer, the identities of shareholders or members that have a holding in your firm that exceeds 10%, and the amounts of those holdings, the identities of persons who have close links with your firm as per close links definition under Article 13 point 17 of Directive 2009/138/EC and information that those holdings or close links will not prevent you exercising your supervisory or regulatory functions. Failing to register when required to do so is likely to be breaching the general prohibition which is a criminal offence under section 23 of the Financial Services and Market Act 2000 and you may find that the contracts of insurance arranged for clients are invalid.

Step 2

When appointing an insurance distribution officer, you must make sure that they are competent and understand the terms and conditions of policies offered, laws covering the distribution of insurance products, claims and complaints handling requirements, how to assess a customer’s needs.

Step 3

Make sure that you do not carry on any insurance distribution activities unless you have in place a policy of qualifying professional indemnity insurance. More information about the obligations on you can be found in the SRA Indemnity Insurance Rules 2013.

Step 4

Consider Rule 3 of the COB rules setting out the sort of information that you must provide about you, your firm and the services you can provide when arranging insurance e.g. inform the client you are regulated by the Solicitors Regulation Authority for this work and the scope of your services, i.e. that you can only carry on insurance distribution activities limited to those not prohibited by your Scope Rules.

Step 5

Set out information that you will need to give to your clients about any remuneration you receive for arranging the insurance and any fees that might be payable by the client in accordance with Part 8 and 9 of Appendix 1 of the COB rules.

Step 6

If you collect a fee from a client, you must disclose the exact amount of that fee (not an estimate or range). If the exact amount is not known, then the method of calculation must be provided. Any information you give to the client must be in a “durable medium” being fair, transparent and not misleading.

Step 7

In addition to providing information about the status of your firm, you must provide your clients with information confirming, that you are an insurance intermediary, as opposed to an insurer and that you cannot manufacture insurance products; whether you provide a personal recommendation in respect of the insurance products offered; whether you act on behalf of the client and/or the insurer. If you act for both you will need to explain in what circumstances you can act for each party, and if you have “10% or more” of the voting rights in an insurer (for example, as a shareholder).

Step 8

You must in comply with chapter 1 SRA Code of Conduct 2011 “honestly, fairly and professionally in the client’s best interests”.

Step 9

Comply with outcomes in Chapter 8 of the SRA Code of Conduct 2011 by making sure that your marketing communications, addressed to clients or potential clients are fair, clear and not misleading. Marketing communications should always be clearly identifiable as such.

Step 10

Ensure you have sent the client a summary document for general insurance products in the form of an Insurance Product Information Document (IPID) before you conclude a contract. The insurer is required to draw up the IPID and must set out the key information a client will need to make an informed decision about the product.

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The FCA has recently launched consultation CP15/18 which sets out their proposed regulatory structure for Claims Management Companies (CMCs).  The announcement also confirmed that jurisdiction for complaints would move from the LeO to the Financial Ombudsman Service (FOS); although one wonders how they will cope with an increased number of complaints when they are already a stretched service.

The Consultation proposes extensive regulation for CMCs, including some of the current CMR rules, but also introducing new rules and making all parts of the current FCA handbook applicable as well.

The FCA will regulate 6 activities by introducing 7 new permissions (1 permission for lead generation activities and 6 sectoral permissions covering the activities of advising a claimant, investigating a claim and representing a claimant).  Scotland will also be included in the proposed regulatory regime and claims made under s75 of the Consumer Credit Act 1974 are also within scope.

So, what are the main proposals?

• Before a CMC agrees a contract with a customer they will be required to give a short summary document containing an illustration or estimate of the fees charged, an overview of the services the CMC will provide, and the tasks the customer will need to do themselves.  Where a statutory ombudsman scheme exists, the summary must confirm that the customer does not need to use a CMC to pursue the claim and may present the claim themselves for free.

• CMCs must offer a mandatory 14 day cooling off period and this must be detailed in the initial documentation.

• Where the customer has been introduced by a third-party, the customer must be given information about any fees the CMC has paid to that third-party.

• CMCs will be required to provide regular claim updates to the customer, even where there has been no progress.  Specifically, where the CMC knows the likely value of a claim then an estimated fee update should be provided.

• The CMR Client Specific Rule 10 will be carried over to the new rules, requiring CMCs to investigate whether there are other ways the customer can make their claim.

• CMR Client Specific Rule 14 will also be carried over with a slight amendment – CMCs will need to take reasonable steps to ensure that the customer understands the contract they are agreeing to (including vulnerable customers).

• CMCs will need to provide customers with a clear explanation of fees and charges whenever a payment is requested.  There will need to be appropriate policies and procedures for dealing with customers in arrears, including specific policies for vulnerable customers.

• ‘No win no fee’ type adverts will have to include details on the fees which will be charged or how fees are calculated and whether there is a statutory free scheme available to the customer.  All calls to customers will need to be recorded and kept for a minimum of 12 months (even those that result in no further contact with the customer).  CMCs will need to keep a record of electronic communications as well.  The financial promotion rules in PERG 8 will apply.

• CMCs who purchase leads from third parties must carry out due diligence to determine whether the lead generator is authorised and has appropriate systems and processes in place to ensure compliance with data protection, privacy and electronic communications legislation.

Other FCA rules which will apply –

• The Senior Managers and Certification Regimes that currently apply to all banks, buildings societies, credit unions and the largest investment firms will be extended to all regulated firms including CMCs.

• The Individual Conduct Rules, the basic standards of behaviour that people working in financial services are expected to meet, will apply to almost all staff in firms and is not limited to those individuals who are subject to the Senior Managers Regime and Certification Regimes.

• PRIN, COND, SYSC, DISP, GEN and the standards on how firms treat whistleblowers will all apply.

• CASS will apply to firms who handle client money.

• CMCs will be subject to the prudential resources requirement and specific wind down procedures.

• The usual FCA enforcement procedures in EG and DEPP will apply equally to CMCs.

The FCA will create a new handbook section called the ‘Claims Management: Conduct of Business Sourcebook’ to sit alongside the existing sections.

Further consultations are expected later in the year, but this document is a clear indication a lot of preparation will be needed over the next 10 months to ensure CMCs are up to speed with the requirements.

Any firms with an existing CMR authorisation in April 2019 will be issued with a temporary FCA permission and a landing slot to submit an application for full authorisation.  There is no news yet on what the application process will look like.

The consultation is open until 3rd August and can be reviewed.

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If you think your firm could be affected by the new rules or if you have any further regulatory questions, contact our experts today.