Worldwide: Lawyers' Risk And Regulatory Briefing - Summer 2018

Welcome to our 2018 Lawyers Risk and Regulatory Briefing, in which we consider emerging trends in the areas of claims, regulation and risk for lawyers. Looking ahead, there are some potential bumps in the road, both profession specific in terms of changes to the Handbook and to professional indemnity insurance, and more generally in relation to the economic uncertainty and technology risks.


In our experience, the incidence of professional negligence claims against law firms remains fairly low, which is likely in part to reflect the reasonably benign current economic conditions, now that the financial crisis is well behind us. However, looking forward, predicting what the future economic and regulatory landscape will look like is difficult, in light of Brexit and other global instabilities. How matters play out politically and economically will have some impact on claims experience for law firms and other professionals, whether for better or worse.

The rising levels of damages being claimed continue to be problematic, with claimants, in some cases fortified by third party funding, tending to seek ever greater recoveries from their lawyers. The cost of defending claims is also on the increase, due in part to the complexity and multi-jurisdictional nature of many of the transactions which become subject to scrutiny; the additional complications of parallel regulatory investigations; and the significant amount of electronic disclosure that requires review in the context of complex transactions (although this can be aided to an extent by use of technology). Having said that, it should be remembered that the most serious claims do not always relate to the labyrinthine multi-million pound corporate deals: straightforward errors in transactions of modest value can still have significant financial consequences.

Clearly, the increased incidence of claims which cross borders is here to stay, reflecting as it does the nature of clients' and law firms' businesses in a global economy. In response to client demand for a global footprint, firms have opened offices in emerging jurisdictions, by means of a number of different structures including as branch offices, vereins, or more informal associations. Claimants alleging negligence by lawyers practising in an outlying jurisdiction may seek to bring claims against the "head office", possibly in the hope of accessing a larger insurance pot. The extent to which they are likely to be successful obviously depends in part on the structure of the firm, as well as its terms of business.

In terms of the areas in which we are commonly seeing claims, the usual hotspots including property, pensions and tax claims remain. We have also recently seen an increase in claims arising from private client and family work, for example in relation to high-net worth divorce, family trusts and administration of estates. Allegations of under-settlement by solicitors of litigation, particularly in personal injury claims, appears to be on the increase. We also continue to see claims arising out of fraud, such as the diversion of completion monies in property transactions via the hijacking of email correspondence, or in some cases there is a fraudster directly involved, such as an imposter seller. The recent Court of Appeal decision in Dreamvar (2018) makes clear that the risk of property fraud still lies with the solicitors involved in the transaction, although the judgment has shifted the position as to whether the buyer or seller's solicitor should bear the loss, where there is an imposter seller. Finally, we have seen some degree of uptick in allegations that solicitors have failed to tailor their advice to achieve more favourable commercial outcomes for their clients, or to tailor advice to their client's particular interests.

Looking to the future, we can expect to see claims arising from emerging technology, for example lawyers advising in relation to cryptocurrencies and initial coin offerings (ICOs). There is concern in some quarters about the lack of regulation of cryptocurrencies, the risks this presents to consumers and the potential it creates for criminal misfeasance. Views generally, and the extent of regulation, varies according to jurisdiction. However, in the US, the Chairman of the SEC warned earlier this year that the spotlight would be on "gatekeepers" such as lawyers who may be providing promoters with equivocal advice that allows them to proceed with ICOs without the protection of securities legislation, and that such advice may go against the spirit both of the securities legislation and professional conduct obligations. Further, uncertainties as to the jurisdiction in which cryptocurrencies operate and their volatility, mean that lawyers who advise investors or others on using cryptocurrencies for transactions might find themselves more likely to be exposed for failing to give proper advice if the deal does not produce the anticipated outcome.


Some recent procedural developments, which have the potential to reduce defence costs, are of relevance for professional negligence claims against law firms.

Radical proposals to shake up the disclosure regime have been announced. The proposed two-year pilot scheme in the Business and Property Courts aims to move away from "standard disclosure" as the default option in all cases and instead to encourage the parties and the courts to give consideration from an early stage to what the appropriate parameters for disclosure ought to be (which could in some cases be quite limited). While the draft rules make clear that parties will still be entitled tosee 'adverse' documents held by the opponent, it is not clear how these will necessarily be discovered if a form of disclosure is ordered that does not require a search for documents.If approved by the Civil Procedure Rule Committee the pilotmay commence towards the end of 2018, or early next year.

Following a pilot, the Professional Negligence Lawyers' Association ("PNLA")'s adjudication scheme has become part of the Professional Negligence Pre-Action Protocol. The scheme allows the parties to appoint an adjudicator to consider and issue a decision on the case. The parties can decide whether or not the decision is to be final. Following the amendment, the claimant in a professional negligence claim should indicate in the letter of claim whether it is proposed that the matter should be referred to the more cost-efficient adjudication process. Our experience is that adjudication has not, so far, frequently been proposed by claimants. It can be difficult to identify claims that are right for adjudication however they might include, for example, those that turn on a particular point of law, where the facts are not in dispute, and the costs of a proceeding to trial are likely to be disproportionate.


The SRA has continued to consult on changes to the Handbook, its enforcement policy, and proposed amendments to the scheme for compulsory professional indemnity cover for solicitors. The aim of the package of proposals is to increase access to legal services by reducing the regulatory burden by, for example, allowing solicitors to practise outside regulated entities, and reducing the amount of compulsory PI cover that firms require. Whether these proposals will have the desired effect has been the subject of considerable debate, amid concerns that there is a risk of damage to the profession's brand. The SRA has recently indicated that it expects that Handbook reforms will be implemented from 2019 onwards.

Regulatory scrutiny and action remains a key focus for law firms. Tactical use of regulatory complaints by third parties, such as opponents in litigation or counterparties in acommercial transaction, is an unwelcome trend.

The last twelve months or so have also seen some record-breaking disciplinary outcomes, mostly by way of agreement. It is now clear, if it was not already, that the SRA is prepared to pursue the biggest firms in a way that we did not see before the 2011 Handbook changes. This is unlikely to change, although financial constraints will probably dictate that the SRA will be forced to pick its battles, particularly as the larger respondent law firms will be better resourced.

Areas of particular focus for the SRA remain accounts rules breaches, including the improper use of client account as a banking facility, for example where law firms become too closely involved in investment schemes. There have been a number of decisions looking at the issue of want of integrity. What constitutes a lack of integrity was recently considered by the Court of Appeal, which expressed the view that the concept of integrity is "a useful shorthand to express the higher standards which society expects from professional persons and which the professions expect from their own members"1. Integrity is often alleged by the SRA in circumstances where there has been seriously deficient behaviour which falls short of supporting an allegation of dishonesty. However, despite the Court of Appeal's attempts to provide clarification, "integrity" is still not a straightforward concept and we expect a degree of fluidity to remain in the Tribunal's approach to it.

On the tax front, we have seen both the corporate offence of failure to prevent facilitation of tax evasion, and civil penalties for advisers in relation to failed tax avoidance schemes, come into force in the last year, and firms and lawyers should be mindful of them. The SRA has issued warnings about law firms becoming involved in particularly aggressive tax schemes, and has suggested that it will in appropriate circumstances investigate the conduct of lawyers who have advised on them.

The boundaries of privilege in the regulatory process continue to raise practical issues for law firms. A key focus has been on the extent to which privilege attaches to notes of witness interviews conducted when a firm carries out an internal investigation into a matter of potential concern, or reports on the outcome of that investigation. That has been one of the issues revisited by the courts over the last year and we are currently awaiting the upcoming appeal in SFO v ENRC (2017), on these issues, inwhich the Law Society has been granted permission to intervene. The hearing is due to take place in July 2018.

Might we see a lowering of the burden of proof applied by the Solicitors Disciplinary Tribunal (SDT) from the criminal tothe civil standard? Following a change by the Bar Standards Board to the civil standard, the SDT is now an outlier in continuing to require misconduct allegations to be proven beyond reasonable doubt, and the SDT announced in its annual report that it would shortly be consulting on the issue. The Law Society recently sought views from the profession on any potential change, which made it clear, unsurprisingly, that the profession is in favour of retaining the status quo. This comes in addition to the Supreme Court decision in Ivey v Genting (2017) in December 2017, which arguably makes establishing dishonesty before the SDT more straightforward, as it is only now necessary to show that the solicitor is objectively dishonest, and not that they also understood subjectively that he or she was acting dishonestly.

We have reported previously on increased levels of parliamentary scrutiny of professionals generally including lawyers, and a greater tendency for lawyers to be seen as gatekeepers of, or aligned with, their clients' behaviours. This is something that has continued, amid public appetite to find someone to blame when something goes wrong. Parliamentary Select Committees often place professionals in a difficult position, as the evidence is taken summarily, and publicly, but client privilege or confidentiality can constrain the professional from giving full answers to explain his or her position.


  • Sexual misconduct has become a well-publicised area of risk for law firms. A survey conducted by The Lawyer recently reported that harassment had taken place at 55 out of the top 100 law firms in the last year (although the SRA has indicated that it has historically received only a few reports a year). It is also very apparent from recent SDT decisions that the behaviour of lawyers should be measured not simply in the context of their professional life. If one's actions outside the work environment are considered to demonstrate a want of integrity, or undermine public confidence in the profession, regulatory enforcement action may be taken.

Many firms are taking pre-emptive steps to address cultural issues, and to ensure that both their policies on harassment and whistleblowing, and the application of those policies in practice, are fit for purpose in the prevailing environment. Where complaints are compromised, it has been common to make use of non-disclosure agreements (NDAs) but in light of increased scrutiny of the ethics of such agreements, firms will want to consider carefully whether they are reasonable in scope. The SRA has recently issued a warning notice on the use of NDAs, making it clear that such agreements must not be used improperly to try to prevent or discourage the reporting of harassment to it, or to other regulators or criminal authorities.

Firms and individual lawyers will have to carefully consider their reporting obligations. A COLP might be required to report misconduct by a particular individual and, if there is evidence that systems and processes have failed in some way, to make a report on behalf of the firm.

  • Cyber issues remain high on the agenda, amid continued reports of businesses experiencing ransomware attacks, hacking of confidential details, and interception of funds, to name a few. State sponsored and other hacks have become common, and law firms often hold the keys to the kingdom in terms of sensitive information about clients, including government organisations, key infrastructure, and major corporations. While many firms recognise the scale of the potential threat, staying ahead of the game is a never-ending challenge. Training of staff is particularly key, as is ensuring that the firm's IT systems are fit for purpose and up to date. In the modern world, where lawyers might be using devices which sync to the cloud, and communicating with clients using apps such as WhatsApp it is also a case of knowing where your data is located, and what it is you need to protect.
  • Data breach in general is a key focus in light of the General Data Protection Regulation (GDPR), which came into force on 25 May 2018 (The Data Protection Act also received Royal Assent on 23 May 2018). The stricter reporting regime and the prospect of significant penalties has led to firms working against the clock to implement GDPR-compliant systems. The GDPR is far reaching, and has required firms to consider data being held from numerous angles, such as in relation to clients, employees, marketing and knowhow, both digital and in hard copy. The prevalence of agile working, with staff commonly transporting information between locations(either as physical files or on a device), and the use of technology to fire off a rapid response to a demandingclient, have significantly increased the chances of an inadvertent data breach.
  • Mental health issues have recently come to the fore. This is against a background of a number of SDT decisions in which individuals have been found to have covered up mistakes. In some cases those individuals have given the reason as mental health problems caused by the culture of the firm, for example placing excess pressure on them to generate fees. If lawyers are placed under too much pressure, then not only are there obvious ethical implications for the firm, but claims against the firm will eventually and inevitably follow (both potentially from the employee themselves, but also negligence claims from clients). The firm is also likely to be in breach of regulatory obligations if it conducts its business in a manner that means lawyers struggle to comply with their duties and conduct obligations properly.
  • Finally, no discussion of law firm risk would be complete without mentioning the implications of Brexit. Many firms will be seeing work come in on the back of Brexit, as clients seek help in understanding its potential implications and lay the ground for commercial decisions which lie ahead. Ultimately, the decoupling of EU and UK legislation and regulation will undoubtedly leave some gaps, uncertainties and unanticipated consequences, given the extent of the project, and experience shows us that where there is legalor economic uncertainty, professional liability claims tendto follow.

Predictions for the future

Law firms continue to consolidate and evolve in terms of their structure and reach. Technological development will also continue apace, with exponential progress anticipated in the use and efficacy of artificial intelligence. The use of technology and specifically AI has the potential to affect the approach to risk and ethics in many ways, and we have discussed in previous briefings how traditional liability principles are likely to be challenged and shaped by new methods of delivering legal services. AI will also offer many positives for law firm risk. Regulators such as the Financial Conduct Authority have already described projects being undertaken using AI and we can expect the SRA to be looking at this area too. We might see greater use by firms of predictive analytics of its own data as a risk management tool and certainly technological developments such as the use of smart contracts and blockchain have the potential to assist in preventing fraud.

As research makes clear, and in light of the results of recent gender pay gap reporting, most firms still have some way to go to address diversity issues, which is a longstanding concern for almost all firms. Our view is that greater diversity is obviously a positive in terms of the risk that a firm faces, as the greater the experience and the variety of ways of thinking are brought to the table, the more likely a firm is to be able to think creatively about its goals. Drivers to continue addressing diversity issues include regulatory focus, as well as client pressures and wider changes in society. Firms must be careful however, to address diversity issues by taking lawful positive action, such as considering the root cause of the issues and introducing appropriate attempts at a solution for example, mentoring schemes or training. Unlawful discrimination, such as requiring that positions must be filled by women, is clearly to be avoided.


Looking to the future, the successful law firm will have to be prepared to adapt and innovate in order to stay relevant. The challenge for the 'solicitor brand' will be to ensure that legal services, in whatever form, continue to be delivered to the highest ethical and professional standards. That will require insight and agility. This will be set against the background of rising client expectations, ongoing advances in technology and the changing nature of the workforce, as a generation of millennials (including increasingly those with non-traditional backgrounds and skill-sets such as in coding or project management rather than law) begin to approach management level.

Lawyers' Risk And Regulatory Briefing - Summer 2018

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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