Outsource Magazine

(This article was first published in the Law Society’s May 2011 Risk & Compliance newsletter)

As far as the legal process outsourcing world in the UK is concerned, March and April have been busy months as we get closer to the impending October introduction of alternative business structures (ABSs). On Monday, 7 March, The Solicitors Regulation Authority’s (SRA) Standards Committee met and approved an amended draft of the new SRA handbook and on 23 March approval was granted by the Law Society Council for the SRA to become a licensing authority for ABSs. On 6 April the new handbook was released in draft format.

While the new handbook contains the most comprehensive guidance available to date from the profession’s regulatory body pertaining to LPO, it is worth taking a moment to reacquaint ourselves as to how we got to where we are today. The current applicable rules affecting outsourcing are detailed in the Solicitors’ Code of Conduct rules 1-5 and deal with:

• acting in clients’ best interests
• providing a good standard of service
• avoiding conflicts of interest
• keeping client confidences
• supervision

Rule 4: confidentiality and disclosure, 8(f):

"If you outsource services such as word processing, telephone call handling or photocopying you must be satisfied that the provider of those services is able to ensure the confidentiality of any information concerning your clients … it would be prudent to inform clients of any such services you propose to use in your terms of business or client care letters."

Law Society model client care letter and accompanying practice note at s4.1.7 indicate that outsourcing should be disclosed and informed client consent obtained. Recommended wording to include in a client care letter:

"Sometimes we ask other companies or people to do [typing/photocopying/other work] on our files to ensure this is done promptly. We will always seek a confidentiality agreement with these outsourced providers. If you do not want your file to be outsourced, please tell us as soon as possible."

Essentially, the above was the full extent of the guidance available to UK solicitors contemplating engaging in an outsourcing relationship of any kind, be it support services or LPO. Clearly the wording in rule 4 and practice note s4.1.7 is directed to the outsourcing of support services, and guidance pertaining to LPO was conspicuous by its absence.

Over the course of the last year, however, initially the Law Society and subsequently the SRA have turned their attention to LPO. Approximately a year ago the Law Society established an ad hoc LPO investigatory committee. This committee took evidence from key stakeholders from law firms, in-house departments, LPO consultants and, of course, LPO providers. The goal was to obtain as broad a perspective as possible and to attempt to formulate guidelines and make recommendations to the SRA. Then in July 2010, the SRA issued its first statement on the subject, commenting:

"Where law firms are outsourcing … the SRA’s guidance is that this is allowed on the basis that all relevant rules are complied with (Solicitors’ Code of Conduct 2007) and that the arrangement is made transparent and is agreed with the client."

Although the SRA’s new handbook is still subject to approval by the Legal Services Board, the new guidance in relation to LPO is significant. In the introduction to the handbook, on page 3, it states:

"Although firms now have greater freedom in the way they offer services (eg outsourcing certain functions), they may not abrogate responsibility for compliance with regulatory requirements."

Then in 'Chapter 4: Dealing with Confidentiality and Disclosure', at Indicative Behaviour 4.3 the SRA advises solicitors that:

"...you only outsource services when you are satisfied that the provider has taken all appropriate steps to ensure that your clients' confidential information will be protected..."

However, the guidance that has attracted the most press attention is the stipulation in Chapter 7, 'Management of your Business' that states at Outcome (7.10):

"...where you outsource legal activities or any operational functions that are critical to the delivery of any legal activities, you ensure such outsourcing…is subject to contractual arrangements that enable the SRA or its agent to obtain information from, inspect the records (including electronic records) of, or enter the premises of, the third party, in relation to the outsourced activities or functions..."

The perspective from within the LPO industry is that this close attention from the SRA is a long-overdue acknowledgement that outsourcing has become an integral part of the legal services delivery spectrum. Leading LPO providers routinely open their doors to audits of their premises, both by clients and independent auditing bodies. Adding the SRA to the mix is not in any way an onerous requirement on the part of the LPO providers.

I can envisage, however, some practical and logistical difficulties on the part of the SRA in formally performing these referenced record and premises inspections. There are as yet a number of unanswered questions. Is it the intention of the SRA to undertake a 'fact-finding' trip to India, the Philippines and South Africa to inspect the premises of the leading LPO providers? Will this be a one-off visit or do they intend to perform multiple repeat audits?

Furthermore, the Law Society has publically commented that it takes issue with this part of the Code, believing that this will cause unintended difficulties for its members as it is likely that a range of functions will be caught by the term “critical to the delivery of legal activities.”  However, my view is that, taken as a whole, these developments and guidance should ultimately provide clarity and encourage good business practices.