The COFA’s uncertain future

Richard Hill By Richard Hill
from Stepien Lake and chair, ILFM

This blog post was also featured as a column in Legal Practice Management magazine. Download LPM magazine to read the issue in full here (10MB file).

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To add to the SRA’s growing list of consultations, it started a review of the compliance officer for finance and administration (COFA) role in October 2013, less than a year after officers took up their posts.

Is this a genuine review, or a case of an unconsidered implementation of a role that’s not achieving its objectives? You be the judge. But I think the drivers, as I see them, behind the review give us an insight into the evolution of the role, and what the future may hold for COFA.

Financial instability causing many firms to close down is central. The SRA released its ‘Navigating stormy seas’ report in November 2013, following data collection from 2,000 firms – an exercise that confirmed the SRA’s view that financial difficulty is a widespread current risk.

The SRA wants to be involved before a firm goes to the wall, to minimise the effect on clients. So, despite confirming that management and compliance officers are all responsible, it’s still possible that the SRA will avoid further uncertainty by broadening COFA duties to include monitoring office account and financial stability, and that the COFA become the person responsible for financial governance, therefore becoming the SRA’s main contact (or internal watchdog) for financial affairs. 

How many of the 100 firms the SRA found to be in severe financial difficulty had reported the issue to the SRA? And, if they didn’t, will we see action taken against the compliance officers and firms?

The COFA review could also be used to gather further evidence to support a change to the SRA Accounts Rules. With the move to principle -and risk-based rules in outcomes- focused regulation, it’s plausible that we will see a significant change to a principle-based format for the rules, with an all-encompassing principle of protecting client money. There’s been mounting criticism that the rules are over-prescribed, and I hear that there’s growing momentum within the SRA for a considerable rewrite.

But any change will need to be carefully considered. More than half of breaches relate to the accounts rules. This is not a small firm problem, despite common perception – a PwC survey found that half of material breaches reported to the SRA by the top 100 were accounts rules-related. 

Lastly, there’s the double whammy of the cost of resourcing the COFA role, as well as the annual reporting accountant’s audit fee. The SRA has even confirmed to COFAs that they’re under no obligation to provide their breach register to the accountant. It is not an independent assessment of the COFA duties – but of course, in reality, there’s significant overlap. How much value and attention accountants’ reports are afforded once submitted to the SRA is debatable, especially when you consider that some reports can be up to 18 months old.

I doubt that the accountant’s role will change as it provides a perceived barrier against non-compliance, and the SRA may feel reluctant to remove this safeguard until it’s satisfied that the COFA role alone can ensure compliance.

But whatever the outcome of the review, what I’m sure we will see this year is action against compliance officers. Richard Collins, executive director of policy and standards at the SRA, warned that 2014 will be the “year of enforcement”. Scapegoats will be found so that precedents and guidance can be set for the rest of the profession. Be warned. 

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