Move towards entity regulation gathers steam

If the Law Society of Upper Canada starts regulating law firms, one specific area for firm compliance could be trust account management, a new report suggests.

Law societies in Nova Scotia and Alberta have specific compliance rules regarding firm trust accounts, according to the interim report penned by a committee looking into a framework for entity regulation for consideration by Convocation.

“The Nova Scotia Barristers’ Society requires an annual law firm report and a specific trust account report, which must be signed by at least four partners of the firm,” according to the LSUC report. “The Law Society of Alberta requires a number of specific controls on trust accounts.”

Overall, the report touts the benefits of regulating law firms. “Entity regulation would permit a more proactive, compliance-based approach for firms. In other jurisdictions, compliance-based regulation has been found to have a significant positive effect on the number of complaints received about a firm and its licensees. Establishing regulatory objectives for entities may improve practice and therefore better protect clients and the public interest.”

The report comes as the push for entity regulation gathers steam, particularly in Nova Scotia, and is a development some lawyers are welcoming. “Even as a signalizing device, it’s very interesting to see Ontario considering this because I do think this is the regulatory way of the future,” says Jordan Furlong.

“It’s a great approach. It’s a welcome change in how we view the purpose of regulation of lawyers and regulation of legal services,” he adds.

“I like the fact that it’s proactive.”

In light of the current consideration of alternative business structures at the law society, pondering entity regulation is more important than ever, according to Furlong, who notes entity regulation would allow the LSUC to regulate the provision of legal services by entities other than law firms.

In terms of the advantages of moving towards such a change, regulating firms may allow the law society to better respond to complaints, according to the LSUC report, which suggested firms could designate an individual in charge of dealing with compliance matters. This individual — or “a legal director,” according to the report — would also be responsible for trust account matters and ensuring the firm’s record keeping is current.

That process would allow the law society to provide notification to the firm if one of its lawyers is under a misconduct investigation. The law society may also require the designated legal director to address the issue on “a firm level” in areas such as lack of supervision, advertising or conflict of interest issues, the report noted.

“Jurisdictions that have adopted compliance-based regulation have used different tools to build an ethical infrastructure for firms. One area of focus has been to adopt outcomes-focused principles applicable to firms — firms are required to comply but the regulator does not prescribe how to achieve compliance.”

For example, firms would have to avoid conflicts of interest, and one way to comply would be to implement a conflicts-check system. The law society, however, wouldn’t necessarily require such a system. “The key principle is that the responsibility is that of the firm to determine how to achieve compliance,” according to the report.
“The regulator would assist firms to achieve compliance by providing tools and templates and working with firms if they are non-compliant.”

Malcolm Mercer, the chairman of the committee overseeing the issue, says it’s unclear at this point whether staff would present a single framework for entity regulation or several options for consideration by Convocation. And in light of the bencher elections and the potential changes to the committee’s composition, Mercer couldn’t say when the committee would bring a final report to Convocation.

The discussion in Ontario comes as Nova Scotia is making its own moves on the issue. In that province, the current focus on individual lawyers will shift to the firms, government departments, and other organizations they work for.

“We plan to dramatically change how we operate,” said Nova Scotia Barristers’ Society executive director Darrel Pink in a letter to lawyers across the province.

The Nova Scotia regulator already has an entity regulation steering committee up and running to provide hands-on co-ordination of the project and has earmarked $90,000 for the effort in the next fiscal year.
The status quo is no longer acceptable or effective, says Pink. Technological advances, changing demographics, increased mobility, and the arrival of the global marketplace have combined to create a new legal landscape, he notes.

Under entity regulation as envisioned by the Nova Scotia regulator, there will be fewer rules and requirements. In their stead are 10 principles to which it will hold entities accountable. They include developing competent practices to avoid negligence; charging appropriate fees and disbursements; and sustaining effective relationships with clients and others.

The principled approach will give legal entities greater freedom and flexibility in determining how they meet the regulator’s requirements such as mandatory continuing professional development. The flexibility will be good for lawyers, their organizations, and their business, says Tilly Pillay, president of the Nova Scotia regulator.

“We are freeing up lawyers to provide more services to clients by reducing the burden of red tape.”

Pillay believes entity regulation will also enhance access to justice, the regulator’s second strategic priority. In addition to requiring fewer hours for regulatory compliance and related paperwork, the hope is that entity regulation will spark innovation. At present, the Nova Scotia regulator is working with the Canadian Bar Association’s Nova Scotia branch to discuss where its report on the future of the legal profession and its own work on the issue are in alignment.

The factors driving the need for entity regulation are global, says Pink. “There is a level of co-operation and collaboration that is unprecedented.”

The composition of the entity regulation steering committee reflects the interest in and support for the work the Nova Scotia regulator is doing. Sitting around the table with local lawyers are Andrew Garbutt, director for risk with the Solicitors Regulation Authority for England and Wales, and Don Thompson, executive director of the Law Society of Alberta.

The bar council also passed a motion that described at a high level what the regulations would require of each legal entity. Among the five requirements are the need to designate an individual who will be responsible for compliance; establish and maintain a management system that promotes competent and ethical legal practice; and undertake self-assessment and report to the regulator on the management system. “You will see that we are at the early stages of our work, but we have a clear path forward and are very excited by what the future may bring,” said Pillay in her first report to lawyers as chairwoman of the entity regulation steering committee.

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