New SRA standards: Guest post from Mills & Reeve

The Solicitors Regulation Authority (SRA) has confirmed a 25 November launch for the new SRA Standards and Regulations. The changes, which relate to notifying your client when things have gone wrong, are likely to be of particular interest to law firms and their insurers.

Under Outcome 1.16 of the 2011 SRA Code of Conduct, firms are required to inform current clients if they discover any act or omission which could give rise to a claim against them. Paragraph 7.9 of the new SRA Standards sets out a similar obligation which requires firms to be open and honest with clients if things go wrong. Not much change you may think, but the new SRA Standards do not refer specifically to current clients and so the obligation (certainly on the face of it) potentially extends to former clients as well.

In addition, if the client suffers loss or harm as a result of a mistake that has been made, there is an obligation under the new SRA Standards to put things right (if possible) and explain fully and promptly what has happened and the likely impact. Under the new Standards, the SRA can also ask firms to: (1) investigate whether anyone may have a claim against them; (2) provide the SRA with a report on the outcome of that investigation; and (3) notify relevant persons that they may have a claim.

The firm’s insurers will understandably want to be consulted before any admissions are made as these could prompt a future claim and prejudice any defence. Care has to be taken though when raising these issues with insurers because of the duty of confidentiality the firm owes to their client.

It is important for firms facing these issues to talk to their broker. This is because, where a mistake has been made which could give rise to a claim, the firm will need to consider if that constitutes a notifiable circumstance under their professional indemnity insurance policy. More often than not, it will be notifiable.

Firms facing these issues also need to be careful not to breach Outcome 3.4 of the 2011 Code (Paragraph 6.1 of the new SRA Standards), which prohibit firms from acting if there is an own interest conflict or a significant risk of such a conflict. The difficulty a firm can face in getting the balance right, so as to ensure compliance with its regulatory obligations, is highlighted by the Solicitors Disciplinary Tribunal Decision (SDT) in Howell Jones LLP, case number 11846-2018.

Howell Jones made a mistake, admitted it to their client, and with the approval of their professional indemnity insurers put two options to their client – instruct new solicitors to try and rectify the problem, or stick with them and they would try to rectify matters. They refunded the client their fees and covered any costs incurred trying to put things right. The client went for option two. Things did not go to plan and whilst Howell Jones covered all the costs, the client complained to the Legal Ombudsman. The SRA investigated and Howell Jones admitted it acted in circumstances where there was an own-interest conflict. The matter was dealt with by way of an agreed outcome between the SRA and the firm, which was approved by the SDT. The firm agreed to pay a £5,000 fine and costs to the SRA of £26,850.

Whilst the Howell Jones case is fact specific and was decided on the basis of agreed facts and an admission, it does demonstrate how difficult a task it can be to put right a mistake whilst not falling foul of an own interest conflict. In Howell Jones the strategy had been carefully thought through and had the approval of the firm’s professional indemnity insurers.

The other potential sting in the tail is that, where the SRA are not happy with the remedial steps taken and the firm finds itself the subject of an investigation and a fine, not all professional indemnity insurers cover regulatory authority awards and the defence costs incurred in responding to an SRA investigation and disciplinary proceedings brought by the SDT (insurers are not required to provide such cover under the SRA minimum terms and conditions). However, cover can be obtained and so it is important to talk to your broker to make sure you are fully aware of any gaps in your cover and how they can be filled.

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