Are principle-based Accounts Rules the future?

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

This blog post was also featured as a column in the November 2014 issue of Legal Practice Management magazine. To read the issue in full, download LPM magazine (11MB file).

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A matter of principles

As you all know, back in October 2011 the SRA transformed its approach to regulation by implementing the principles-based, outcomes-focused regulation. Many solicitors still to this day struggle with the concept and I am sure many practice managers still get asked the question: ‘But where does it say that in the rules?’ 

Many solicitors like the superficial certainty of rules, thinking it can be black and white. Yes, you can do this, or no, you can’t do that. In some of their eyes the move to principles is just the SRA’s inability to provide sufficient guidance.

The evolving change and innovation of legal services delivery that is happening (and will continue to happen) in the legal profession is unlikely to be effectively regulated or flourish with rules-based regulation. 

Professor Stephen Mayson recently said that “it is time for the legal profession to stop expecting a return to rules. They need to accept that the obligation on regulated providers to ‘do the right thing’ has increased, and that they must make both professional and business judgments without the often-illusory certainty of rules or definitive guidance”.

The principle-based system requires solicitors to make a professional judgment, and not just to ask themselves: “Where does it say I can’t do this?” A rules-based system can encourage creativity (and not the good kind – finding loopholes) and fosters a ‘tick-box’ mentality to compliance and ethical obligations. 

It is impractical to attempt to provide rules and guidance that can be applied to the infinite variations in circumstances that arise in practice and the modern business environment.

However, supporters of rules argue that principles are too subjective and open to interpretation, whereas rules are easier to understand as the requirements are  prescriptive and leave little room for misunderstanding.

In reality, there must be internal rules to implement the OFR principles, and let’s not forget that one of the primary obligations – protecting client money – is set out in the Solicitors’ Accounts Rules, which is a set of prescriptive and detailed requirements to ensure protection. 

Nevertheless, some operational flexibility was introduced in the ARs, for example in relation to the payment of interest and signing of withdrawals from client account. These are considered to be areas where firms can exercise appropriate judgment without an unnecessary degree of prescription. 

Many firms continued with their previous policies but at least they had the option. There are growing calls for the ARs to become principle-based, and they could be simplified to two all-encompassing principles: (1) protect client money, and (2) don’t mix client money with the firm’s money. 

There are some people, also, who maintain that rules-based approaches are easier to enforce, but then you only have to look at our friends in the accountancy world who have previously had the same debate when large accounting scandals were partly attributed to rules-based regulation. In particular, with respect to Enron, the audit firm Arthur Andersen was charged with designing financial instruments that met the technical requirements (ie rules) of GAAP while violating the intent or spirit of accounting standards. 

In the words of Franklin D Roosevelt: “Rules are not necessarily sacred. Principles are.”

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