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Compliance-based regulation debate continues

Task force is in very early stage of deliberations
|Written By Julius Melnitzer
Compliance-based regulation debate continues
Joseph Groia says he is ‘far from believing’ that there is any merit in compliance-based regulation at all.

Bencher candidates and voters could be forgiven if they’re somewhat confused about the issues surrounding the work of the Law Society of Ontario’s Compliance-Based Entity Regulation Task Force.

Entity regulation refers to the regulation of the business entity through which lawyers and paralegals practise law or provide legal services. Compliance-based regulation is a proactive approach in which the regulator identifies practice management principles and establishes tools to assist practitioners in adhering to the principles in the most efficient way.

Despite the suggestion in the task force’s title that the two go hand in hand, they don’t: Entity regulation can exist without being compliance based, and compliance-based regulation can exist independently of whether regulation is entity based.

“The problem is that the discussion of entity regulation remains caught up with compliance-based regulation,” says Joe Groia of Toronto’s Groia & Company PC, a bencher running for re-election and a former member of the task force.

Yet the distinction is critical to the way bencher candidates and voters perceive the issue. While all of the candidates interviewed by Law Times for this article favoured entity-based regulation, controversy around compliance-based regulation continues to fester.

To put things in context, Ontario’s late to the party. Nova Scotia already espouses entity regulation, and Quebec has adopted a similar regime, while British Columbia,  Alberta, Saskatchewan and Manitoba seem to be making quicker progress to its adoption.   But it was only in 2015 that the misnamed task force was established in Ontario to make recommendations “for the proactive regulation of entities or organization through which lawyers and paralegals provide legal services.”

By the time the task force reported to Convocation in May 2016, it had figured out that “compliance-based regulation and entity regulation do not have to be implemented together.” Now steeped in that epiphany, the task force recommended that the LSO “seek an amendment to the Law Society Act to permit law society regulation of entities through which lawyers provide legal services.” The attorney general is still considering the request.

Meanwhile, the task force also recommended the continued development “of a regulatory framework for consideration by Convocation based on the principles of compliance-based regulation.”

But Groia, for his part, is “far from believing” that there is any merit in compliance-based regulation at all.

“The compliance-based aspect is motherhood and apple pie and is not more than what we’re doing already,” he says.

As Groia sees it, through a combination of peer pressure, firm culture and back office systems, entities “that amount to more than a bunch of individuals doing their own thing” have a business and professional interest in making sure that “people do what they’re supposed to do” in terms of regulatory compliance.

“Once we engage entity-based regulation, we don’t need the continuing kind of proactive regulation that compliance-based regulation envisions, something that’s counterintuitive in a real firm setting,” he says. “The mere fact that the entity is being regulated will create the environment that fosters compliance.”

In other words, for larger firms, Groia espouses a system of internal compliance, one akin to that which exists among investment advisors, for example, who operate on an internal compliance model.

“My hope is that once we get entity-based regulation, no lawyer in a firm of any size will have contact with the LSO unless there’s a complaint,” he says. “That is the template in the capital markets model where I come from.”

Still, Groia recognizes that the peer pressure and support systems that exist in larger firms don’t necessarily exist among sole practitioners or very small entities.

“What we need there, however, is not a full-blown compliance-based system but rather a stronger continuing practice development program coupled with a process that has the private sector providing back office support that takes away the burden of things like trust accounting and bookkeeping from the lawyers,” he says.

Ross Earnshaw, a chairman of the task force and bencher who is not seeking re-election, says, “When we embarked on this initiative, in retrospect and out of naivete, we had not yet understood that entity regulation and compliance-based regulation were two concepts that were distinct and severable.”

For his part, Earnshaw is careful to point out that the task force is in a very early stage of deliberations on the issue of compliance-based regulation.

“We certainly haven’t come to a landing on that and some live questions remain to be answered,” says Earnshaw, a partner and litigator in the Waterloo Region and Hamilton, Ont.  offices of Gowing WLG. “What makes things more difficult is that there is no uniform application of the concept in those jurisdictions that have dealt with the issue.”

Jon Rosenthal, a Toronto-based criminal defence lawyer and bencher who is seeking re-election, also has his doubts about compliance-based regulation.

“I’m not convinced that it will do what it’s intended to do,” he says. “I’m all for having some proactive programs that ensure lawyers don’t end up before the discipline committee, but I think we should be very careful about imposing new regulations on the profession — whether it’s on entities or on individual lawyers.”

As Rosenthal see it, increasing the regulatory burden eventually becomes an access to justice issue.

“Small law firms will have to spend a lot of money, and that will affect their ability to service certain members of the public,” he says. “So, I’d want to see strong evidence that compliance-based regulation will protect the public interest, and I’m not sure we’re there.”

Andrew Spurgeon, a personal injury lawyer and partner at Ross & McBride LLP in Hamilton, is also a bencher standing for re-election.

He leans to some sort of compliance-based regulation.

“My intuitive sense is that operations that have one or two or three lawyers don’t have the risk management structure that compliance-based regulation would create,” he says. “But it’s important to avoid heavy-handed regulation and concentrate on facilitating better compliance through measures that are less expensive than the system we have now.”


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