Posted by Dave Seager, consulting adviser to Legal Futures Associate SIFA Professional
Seager: Reputational and compliance risk for law firms
It would not be contentious to suggest that solicitors, both as individuals and as firms, are naturally risk averse. Perhaps this is understandable from a profession that is dealing with the very precise matters of law and customarily paying huge attention to detail.
After all, the job is often to find solutions to problems or indeed ensure that there are no unforeseen landmines in the future. Indeed, the role of the solicitor is frequently about taking risk out of the picture for the client so of course the solicitor will be and should be, risk averse.
However, we are in the post-Legal Services Act world, where solicitor firms are competing with new entrepreneurial entrants to the legal services sector. So whilst the individual practitioners should not be encouraged to individually take risky decisions, the business might have to.
The Solicitors Regulation Authority’s Standards and Regulations, which are amazingly, four years old this month insist that firms create or adapt processes to assist individual solicitors to attain the highest professional standards.
To do this, the firm management and, particularly, the compliance officer for legal practice, should be making decisions on firm-wide processes which all employees will have to adhere to. In the past 12-months this has been very evident in the regulator’s approach to individual professional competence, insisting this requires firm-wide processes and supervision.
The area of third-party referral has traditionally been an area where the risk-averse nature of individual solicitors has been evident and understandable.
Whilst undertaking legal work, it will often be obvious to a solicitor that the client could benefit from complementary financial advice. However, the decision to proactively make a recommendation as to where the client should seek that financial advice has often been considered a risk.
The solicitor might reasonably weigh up whether the referral will reflect positively on them or whether there is any real benefit to them in making a strong recommendation.
In the past, it was perhaps easier to just tell the client that they should seek financial advice but not suggest where from, or indeed to give perhaps the ever popular ‘three business cards’ of local financial planners and let the client make the decision themselves, or not, as the case may be.
In my conversations with the regulator since 2019, it is clear that if a solicitor identifies that a client they are advising needs financial planning assistance, related to the matter they are dealing with, they should always make a referral.
In fact, one experienced SRA individual suggested that not to do so might be considered fundamentally at odds with two of the seven principles underpinning the rules: those of acting with integrity and in the client’s best interests.
The SRA is also clear that the firm should look to establish a firm-wide process to govern this, which would remove the unwanted personal risk, perceived or otherwise, from the individual.
If you have not already done so, then please ask the financial advisory firms you have worked with to assist you with the due diligence on their business. Any SIFA Professional member will be more than happy to do so.
Ask them to provide you with a full background on their impartiality, their qualifications, accreditations, local reputation, service standards, approach to vulnerability etc, to ensure they are the right ‘safe pair of hands’ to become part of your firm’s referral process.
The SRA anticipates that, if a law firm is not entering into a partnership with a financial or fee-sharing arrangement, and just referring, that they might have more than one firm in the mix to ensure you are acting with independence.
This being the case, it is likely that you might have a preferred list or panel based on qualifications and expertise in different areas of financial planning that will arise from your legal work. Matching their specialisms with your legal work is therefore an important part of the input to your due diligence.
Undertaking the due diligence exercise and taking it seriously, to develop a recognised process, lessens your firm’s risk across the board. There is less risk for the firm of individuals making referrals to an unsuitable financial planner, who might reflect poorly on your business.
Also, your individual solicitors and employees within the business will feel more confident in making the referral, knowing that it is not an individual risk because the referees have been researched and approved by the firm.
Reputational risk is real and understandable, but I would argue that solicitors not making a referral when a client obviously needs financial planning alongside your legal advice, is the bigger reputational risk and almost certainly a compliance risk as well.
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