Progress, not perfection — Five steps for smooth sailing in Law Society of Scotland inspections

Regulatory expert Michael Ross shares five key steps for smooth-sailing compliance inspections.

During my almost two decades in regulatory compliance for financial and professional services, I have witnessed the effects that regulatory intervention and supervisory inspections can have on individuals within an organisation. That impact amplifies exponentially when you are the only person in your business accountable for compliance success.

It is a looming spectre – instilling fear of being ‘caught out’, jeopardising your livelihood and leaving you feeling isolated, when you simply want to do your job well. The default response is to be adversarial and defensive, when in reality the solution is candour, transparency and collaboration.

There are five key steps to keep in mind when you’re facing an inspection – but if you take only one thing from this article, let it be the knowledge that you are not alone in the challenge of battling professional regulation.

1. Treat the Law Society of Scotland as an extension of your compliance team

The Law Society of Scotland performs a regulatory function, but at its core it is a membership body tasked with supporting the profession. The bedrock of a successful inspection is how you view that relationship. If you treat the Society as an opponent, there will be winners and losers; if you treat it as an ally, there are only degrees of success.

Establishing the team mindset promotes trust, a crucial component in all relationships. The Law Society of Scotland plays ‘devil’s advocate’, free of conflicting priorities. Law firms, on the other hand, must balance commercial strategy, service delivery and operational resilience. This means you will often disagree. Being able to trust and accept each other’s perspectives, acknowledging that neither side is always entirely right, leads to healthier discussions and inevitably better outcomes.

2. Ensure all key phases of the inspection come with a call or meeting

I have been told, potentially in jest, that I hold the record for the most calls during an inspection, and also one of the shortest anti-money laundering (AML) inspections. That is not a coincidence.

Too much of a regulatory inspection takes place via formal, non-verbal communications like emails, reports, findings and responses. In such an important context, why would we limit our ability to accurately communicate? Tone and nuance are easily lost in written correspondence, so it’s essential that a regulatory inspection starts, progresses and ends with good communication.

We all know that a referral is better than a cold call, as its success is based on expectation, not surprise. Similarly, if the first time the inspector receives a material fact about your firm is in an email or report, you put yourself on the back foot.

Phone calls and meetings are also ‘real time’, so as well as being better for communication, they allow for discussion, clarification and expectation setting. This will not only help with relationship building but will also short-circuit the back and forth.

3. Dedicate as much time as you can to developing a solid strategy

Your time is the costliest commodity. If allowed, an inspection is a time vacuum, and while there is never a good time for an inspection, it always feels like they land at the worst time.

The best way to navigate an inspection is with a strategy. I like my own personal approach, and while it works for me, it probably won’t work for you. The point is: there is no single perfect way – but anything is better than nothing.

The crucial part is having a ‘strategy’ not just a ‘plan’. A plan is the mechanics of getting through it, whereas a strategy is about the outcome, and it should reflect what is important for you. How do I get through this as efficiently as possible? How do I show the Society I am in control? How do I get the help that I need to improve?

Two key components of a successful strategy are:

• Time – Be realistic about the time that you can and need to commit, then fit the steps into that. This allows you to balance what is important to you and understand if you can meet the inspection deadlines. If you can’t, speak to your inspector.
• Roles – Understand who needs to be involved. With a lot of information to gather and review, having checks and balances increases the chance that you’ll produce high-quality evidence.

4. Spell things out clearly

Don’t simply extract the full file. Sending more than you need prolongs the process as it must be checked. Gathering exactly what’s asked for takes a little longer, but the follow up will be more specific and your responses more targeted.

Offer clarifications. The inspector expects contemporaneous and comprehensive evidence but understands that a file is unlikely to exactly reflect proceedings. If you look at an explanation or piece of evidence, consider whether it tells the whole story. If it doesn’t, provide an explanation. Providing context demonstrates you understand how to be in control, and, given the complexity of legal work, you are potentially drawing from a broad range of sources, like other files, relationships or history.

Remember that the inspector does not have your institutional knowledge.

5. Chase progress, not perfection

The success of any inspection starts with the culture, mindset and behaviours leading up to it. I see firms try to do the right thing but still struggle. Here are some things you can do long before your inspection:

• Demonstrate control, not perfection. Don’t shy away from purposefully addressing shortcomings. This shows a confidence and desire to get it right.
• Don’t gold-plate your policy. The biggest issue for small firms is the fear of compliance, which leads to committing to more than you need to in your policy. The Money Laundering Regulations (MLRs) allow for discretion, so use it. If you don’t know how to, then ask for help. An investment in getting your policy right will pay dividends longer term in billable hours saved.
• Allocate time for key governance requirements: practice risk assessment, policy review, training and BOOM (beneficial owner, officer and manager) registration. Your time is valuable, so don’t create unrealistic, unmanageable expectations for yourself and others. Decide what time you can practically commit, ensuring it’s sufficient to meet the minimum requirements, and go from there. A good inspection outcome starts by demonstrating you’re self-motivated and self-policed.

At the end of the day, inspectors will more closely scrutinise perceived perfection than a more fallible system with mechanisms for getting back on track. It’s about showing you understand what needs to be done, rather than chasing perfection, and putting the right plan in place to achieve it.

Michael Ross is a director at Anderson Strathern LLP