Overseas rules: risk of creating potential for regulatory avoidance
The Solicitors Regulation Authority (SRA) has abandoned plans to impose a group-wide approach to the regulation of firms which engage in activities overseas.
Launching a second consultation on amending the SRA Handbook in relation to international practice in Birmingham last month, executive director Samantha Barrass confirmed the proposal to apply the authority’s 10 regulatory principles to separate legal businesses connected to an SRA-regulated entity with multi-jurisdictional operations had been dropped.
The notion of creating ‘group-wide recognition’ of an international practice was floated in an SRA green paper in November 2011. Responses to the green paper that questioned the practicality of this approach – for example in view of a growth in the use of Swiss Verein structures designed to prevent cross-jurisdictional regulation – had “caused us to change the approach in terms of substantive delivery”, said Ms Barrass.
She continued: “When we looked at the legal implications of trying to gain that grip on a practice, it was impractical.”
Instead, the SRA is proposing that firms will be obliged to “identify, monitor and manage risks” to their compliance with the requirements of the SRA Handbook arising from overseas offices and connected practices. It is likely to require an annual return on the overseas operations with a focus on the risks they might pose to the business of the firm in England and Wales, rather than the minutiae of how they are run.
Two further issues that emerged from responses to the green paper were, first, how the new rules would apply to SRA-regulated individuals in overseas practices. Secondly, it was vital that “in moving to a principles approach to the regulation of overseas practice, we didn’t inadvertently create the potential for regulatory avoidance of firms who are basing themselves overseas but actually providing a big chunk of services into English and Welsh consumers”, Ms Barrass added.
The consultation, which ends on 14 March, will be followed by workshops in April and May “with a view to further refining the approach with the aim to implement by the end of [2013]”.
It seeks views on a new Handbook chapter on conduct provisions which apply when practising overseas and a new outcome in chapter 7 of the Code which will apply to individuals and firms practising in England and Wales but who are involved in overseas practice.
The purpose of the new outcome is to “mitigate the regulatory risks posed by the managerial and financial interdependencies which an SRA-regulated law firm in England and Wales might have with connected overseas offices and practices”.
Explaining the new chapter, Ms Barrass said: “The key point is that compliance is required with the 10 SRA principles. We accept in the proposal that local law and regulation may qualify this so we will not expect you to apply the principles where in doing so that is going to put you in direct conflict with local law and regulation. However – and we hope this remains a theoretical possibility – there will be a bottom line, an overriding requirement to behave in a proper and appropriate way.”
She accepted that in relation to the two areas of greatest SRA concern, confidentiality and conflicts of interest, “the vast majority of jurisdictions may already have their own completely satisfactory requirements”. Where appropriate, clients should be “informed of the regulatory framework” so that “the client has an understanding of the regulatory provisions that apply”. But the SRA was aware that “sophisticated clients” can “just get irritated if they are given the same information over and over again”.
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