Regulation | Summer 2016
‘There’s a serious danger of a regulator trying to regulate something that it doesn’t understand,’ says Kingfisher group general counsel and company secretary Clare Wardle. Her comment comes as the Solicitors Regulation Authority (SRA) works on another overhaul of its handbook, halfway through a two-year review that will end in 2017, a process that has clear plans to be more inclusive of the in-house profession.
When asked what in-house lawyers would make of its current handbook and code of conduct, SRA chief executive Paul Philip concedes: ‘They would probably say quite a lot of the regulations that we put out are not directly applicable to them and they need clarity. That’s what we’re trying to provide.’
Aiming for ‘simplification, not complication’, the regulator hopes to come up with one clear set of standards for all solicitors.
But with a burgeoning number of solicitors taking up roles in-house – currently over a fifth of the profession, according to Law Society estimates – the revision is long overdue. The lack of focus for in-house lawyers has naturally raised questions around the ethical pressures solicitors working within businesses face and whether SRA regulations address the mounting responsibilities and challenges facing legal teams.
The 2015 report ‘Legal Risk: Definition, Management and Ethics’, written by UCL professor of law and professional ethics, Richard Moorhead, and the University of Birmingham’s Dr Steven Vaughan, interviewed 34 senior in-house lawyers and senior compliance staff in large corporates and similarly complex organisations. Two of its key findings were that there is no defined or established approach to legal risk within businesses and that in-house teams are often more influenced by their employer’s ethical stance than underlying professional obligations.
It’s a question of making sure the regulatory framework is fit for purpose. We’re going to see more and more solicitors moving in-house.
Catherine Dixon, Law Society
The question is whether changes made by the SRA will be enough to build engagement with in-house lawyers. It will be important to demonstrate an understanding of the work they do by amending regulation that is currently overwhelmingly aimed at private practice solicitors.
Holding the line
In-house teams face particular ethical challenges, relying as they do on a single client. Gazprom Marketing & Trading GC Nicholas Ansbro highlights the issues facing in-house lawyers. ‘It could be a director wanting me to give him advice on his director service agreement and I have to say to him: “I’m general counsel to the company. This is really you asking about your position vis-à-vis the company, therefore I can’t advise you in that situation.” This is not always the easiest of conversations to have.’
But Ansbro says there is no debate as to where the in-house legal team sits ethically within the company. ‘In terms of more traditional dilemmas, which would clearly be on the wrong side of the line, including being asked to backdate or tamper with a document, we make it very clear to our business partners that we are a very ethically-driven department. Indeed the company is a very ethically-driven company, so that sort of thing tends not to be raised. I make it clear to my team that any departure from what we regard as good ethical conduct will not be tolerated.’
Similarly, Wardle describes her team as legal and ethical gatekeepers. ‘The company secretary and the GC should be the conscience of the company. Sometimes you get people trying to push things through without necessarily thinking about the ethical or policy issues, so it is part of our job to hold the line and support those who are doing the right thing. Our code of conduct is under my purview, so making sure people understand that if we want to be a truly sustainable business we should act ethically, is absolutely in my daily work.’
The new SRA handbook: ‘shorter and full of basic values’
As part of a two-year project that began in April last year, Solicitors Regulation Authority (SRA) chief executive Paul Philip aims to create a ‘much clearer’ handbook. ‘It will be shorter, it will be more principles-based rather than more rules-based and we will have a new code of conduct… full of basic values and ethical values,’ he says.
There are two parts to the SRA review. A year into the process, the regulator has already spoken with many private practice lawyers, and has also had a number of meetings with representatives from the GC100. It will also be speaking to local government lawyers. Rounds of consultations on the new handbook are expected to begin as early as autumn this year in the second part of the review. New arrangements are expected to come into force ‘no sooner than spring 2017’.
Philip says the current rule 4 of the practice framework rules causes confusion, and stems from a time when solicitors were restricted in where and how they could practise, and ‘the various exceptions to the prohibition on working only in traditional law firms have led to complexity and confusion’.
‘Our new handbook will tackle this. Not only will shorter codes of conduct for individuals and firms set appropriate standards that are reflective of the plurality of modern legal practice, but they will be accompanied by new, more flexible rules that allow solicitors to develop their expert and ethical services in new ways,’ he says.
Examples of how the changes might work include local authority lawyers offering non-reserved legal services to local charities, academies or outsourcing companies, without the need for an alternative business structure or complex waivers, or a company with a larger in-house legal team specialising in employment law offering similar services to its suppliers or partners to help share and reduce costs.
‘Solicitors are well-trained professionals and we need to trust them to work more flexibly so that more of the public can benefit from their expertise,’ Philip adds.
In its outline of the handbook review, the SRA states the key to the success of its approach will be ‘ensuring a minimum set of standards and safeguards, making it clear to everyone’. Regulated entities will be provided with ‘one risk-based framework… [it] will be clear to entities what those requirements are and how they apply them. Crucially, the framework will be broad and flexible enough to cover a full range of entities and business models’.
However, Moorhead found in-house lawyers held competing views about what was professionally inappropriate. He also found there was a general lack of understanding of the ethical obligations that bound them as members of the profession. ‘That is not to say in-house lawyers were generally ethically suspect. Indeed, I would say often in-house lawyers are more ethically motivated than their private practice cousins. But our risk research and my many conversations with in-house lawyers tell me the levels of confusion, mismanagement and pressure from above means that some in-house legal teams pose a serious risk and most, if not all, probably need to take the issue more seriously than they do.’
We have in recent years seen very significant problems in banks, newspapers and the automotive industry that can be laid at the feet of in-house lawyers.
Richard Moorhead – UCL
Not everyone is convinced. Vodafone GC Rosemary Martin is sceptical of claims relating to the ethics of in-house teams. There is frustration, she says, that the moral compass of in-house solicitors would be called into question.
‘In-house lawyers have a good understanding of the professional obligations on them and that those professional duties are a large part of the value they bring to the company. Yes, they are dealing with just one client, the business, the whole time and they may be dealing with some ethical issues as well as legal issues – those ethical aspects are not only the purview of lawyers in companies by any means – but if you’re alluding to this suggestion that there’s some ethical difference between in-house lawyers and lawyers in private practice, I don’t agree with that.’
But ethics aside, more GCs concede there is a lack of support and guidance for in-house solicitors. Wardle says her team does not see as much interest or active involvement by the SRA with in-house teams, both historically and, more worryingly, in discussions about its new handbook. ‘The SRA’s regulatory environment is still not well adapted to in-house teams. Equally, [the SRA is] not very engaged with in-house teams, so we don’t hear anything from them from one year’s end to the next.’
Of the SRA’s review of its handbook, Wardle adds: ‘Generally the discussion is all about firms. They are primarily focused on private practice – in-house teams tend to be a bit of an afterthought.’
Philip agrees with Martin, recognising in-house counsel tend to experience the same types of issues ‘just from the other end of the telescope, as it were’. Although the SRA’s primary focus will be to streamline its handbook and make it accessible to individual lawyers, it will also focus on a handful of issues it believes in-house teams have struggled to interpret over the years.
Having spoken to many private practice lawyers and following a series of meetings with representatives from the GC100 and local government lawyers, Philip is confident the official round of consultations that should begin in the autumn will include all solicitors in different positions: ‘Once we get the consultation out, that’s when we will properly engage, so it’s not just bodies that represent certain factions, it’s going out and trying to speak to people who are doing it on a day-to-day basis.’ (See ‘The new SRA handbook’).
Sitting on hands
Scepticism around the extent to which the SRA is prepared to engage with GCs is prompting questions about whether a new handbook is enough to help in-house teams on the ethical issues they face, or whether a new approach to in-house by the SRA would be beneficial, proving its commitment to developing tactics and providing support for growing and emerging in-house teams.
If you’re alluding to this suggestion that there’s some ethical difference between in-house lawyers and lawyers in private practice, I don’t agree with that.
Rosemary Martin, Vodafone
After stepping up its own attempts to engage with in-house lawyers, through initiatives such as its in-house division and committee, the Law Society, says chief executive Catherine Dixon, believes stronger ongoing dialogue with in-house lawyers is needed. ‘It’s really a question of making sure that the regulatory framework is fit for purpose for in-house and regular review of that is appropriate, especially as the role of in-house counsel changes and evolves,’ she says. ‘What we’re going to see is more and more solicitors moving in-house. We’ve seen that over the course of the last few years. We did a piece of research looking at the future of legal services and that again shows that we’re going to see more people – we’re estimating about 35% – working in-house by 2020.’
But beyond regulating solicitors, Moorhead believes training for in-house lawyers is key to ensuring there is clarity around where they stand professionally within a business. ‘Training, support and discussion on professional ethics is rather muted. When I talk to in-house lawyers, they say this is the sort of stuff they have not really thought about and it has never really been contextualised within in-house practice. All their training on ethics dates back to a legal practice course or the Law Society finals and that was very much aimed at a private practice firm.’
Wardle believes there is plenty more GCs and regulators can do to ensure in-house teams are better prepared. ‘One of the things I have been engaging with recently is training, and the potential options that are being discussed for alternative qualification routes and/or the introduction of exams and post-vocational training on the job. We should support the SRA in thinking about this in an in-house context.’
The Senior Managers Regime: GCs in the clutches of the City watchdogs?
The Financial Conduct Authority (FCA) announced in January this year that it had launched a consultation on whether general counsel working for businesses within the financial sector should come under its Senior Managers Regime (SMR). The FCA found that there was some confusion within businesses as to whether GCs fell under the senior management criteria, as someone who has ‘ultimate responsibility, for managing or supervising a function; with direct responsibility for reporting to the governing body, and putting matters for decision to it’. Financial services GCs are waiting to see whether the FCA will decide if their role should fall under its remit.
Vodafone GC and company secretary and chair of the GC100, Rosemary Martin, suggests the discussions are in a slightly better place than when the FCA first proposed the extension of the regime, but believes the situation is still problematic.
She says: ‘The early versions of the SMR put the senior managers in the position of being guilty until proven innocent, and it is practically impossible to prove innocence. There is a question there – do you regulate a general counsel under the legal professional regulation? Or do you regulate them as a senior manager in the SMR?’
Herbert Smith Freehills financial services regulation partner and chair of the Law Society regulatory law committee, Karen Anderson, is hopeful that the FCA is alive to the importance of privilege for a GC. ‘My understanding is that the regulator believes that what it is considering is more a senior management role around the function of managing the lawyers, if you like, or the function of managing legal risk, rather than looking at the way in which lawyers advise the business. You can see that pushed to the nth degree that could take you into privileged material but the regulator is alive to that and it is seeking to think about how to frame its proposals to make sure it is workable.’
To many GCs, the vacuum of regulation does not seem like such a pressing issue. Moorhead and Vaughan’s research, however, raises concerns as to how well equipped in-house lawyers are to deal with difficult decisions under pressure.
‘We have in recent years seen very significant and costly problems in banks, newspapers and the automotive industry that can be laid in substantial part at the feet of in-house lawyers,’ Moorhead warns. ‘There will be more corporate scandals, government legal service scandals. Part of the finger of blame is pointed at the lawyers and some of them may be investigated or they may be prosecuted, that’s the risk for them.’
While in-house counsel bristle at the suggestion their ethics could be found wanting against private practice, the research of Moorhead and Vaughan primarily warns that it is professionals as a whole that are vulnerable to bending the rules, thanks to overconfidence in their probity. But while there are established procedures to manage these tensions in private practice, there is no equivalent for in-house counsel.Indeed, Moorhead’s core point remains persuasive: there has so far been remarkably little serious debate of what in a broader context is expected of GCs on any level, even as the pressures and responsibilities mount.
Given the SRA’s lack of in-house experience, the hope should be that GCs engage with the regulator, and help lead a dialogue and process that reflects the realities of being increasingly expected to operate at the sharp end of business life, with all the risks that entails.