The solicitors code of conduct finally came into force this week. Frank Maher looks at what it means for firms’ risk managers and explains how practices can comply with the new rules


In the run-up to implementation of the Solicitors Code of Conduct on 1 July, much of the risk management focus in articles and seminars has been on rule 5, ‘Business management in England and Wales’.



Significant though that is, it belies the fact that risk of non-compliance runs right through the code: in broad terms, rule 5 requires you to comply with all the other rules – some it identifies, some it does not, but prudent risk management involves compliance with regulators’ requirements.



Because the risk of non-compliance permeates the entire code, firms with a greater culture of risk awareness are undertaking training programmes for staff.



The reasons for doing so are that it may reduce the risk of a breach, and if something goes wrong, there is greater prospect of minimising the consequences if the firm can demonstrate that it has taken steps to maintain high ethical standards by regular staff training.



Ethics training is an area where many firms in England have historically been lax compared with their American counterparts, concentrating instead on legal and skills training.



In the US, it is generally a defence for a subordinate lawyer if they were acting at the direction of a supervising lawyer on a point which is arguable. For the supervising lawyer, however, there is only a defence if they have taken measures to supervise, making it critical that firms implement a documented training programme on rules of professional responsibility. It is a concept we may see develop this side of the Atlantic.



In one recent testing of staff in a well-respected firm using Desktop, a web-based risk management diagnostic tool, nearly half were unaware of the significance of the changes introduced by the code.



If you are not convinced of the need to train your staff, how many of them do you expect to read the code in their spare time at the weekend? There is no ‘one size fits all’. For City firms, conflicts and confidentiality rules (3 and 4 respectively) will have added dimensions, and international and European cross-border aspects (rules 15 and 16) will be important, while those dealing with consumers will need to pay particular attention to rule 9 on referrals.



Web-testing of a provincial practice with significant volumes of referred work revealed widespread non-compliance by the majority of fee-earners, yet this has already been identified as a key area for action by the Solicitors Regulation Authority (SRA). Only 38% were explaining referral arrangements to clients, fewer than 20% were checking that the referrer had complied with the relevant provisions, and 19% did not know whether their choice of experts was restricted by the referral agreement – these are all compliance problem areas.



Most fee-earners were using proper engagement letters, but the testing identified the occasional lapse. Years of experience at the sharp edge of defending professional indemnity claims confirms that the occasional lapse will be on the file which gives rise to a claim.



Client care and costs information will be key areas for attention in all firms. How many fee-earners can honestly say that all their clients know when they will next hear from them, how much the next bill will be, and the total overall cost of a matter? Yet in practical terms, that is what rule 2 demands.



Rule 2 also requires that ‘where instructions are given by someone other than the client, or by only one client on behalf of others in a joint matter, you must not proceed without checking that all clients agree with the instructions given’.



Although this may seem self-evident, consider for example whether it may apply where there are ‘sleeping partners’ in corporate transactions. This goes beyond the provision which it replaces in paragraph 12.05 of The Guide to the Professional Conduct of Solicitors. Client consent obtained in advance to communicate only with one of the parties may not be sufficient.



Compliance is not confined to conflict checking at the start of a retainer: it is a culture, not an event, and it depends on a continuing awareness of a changing factual matrix and issues which emerge during the lifecycle of a matter.



The most difficult conflict issues are those which emerge during a matter. Web-testing of a group of senior staff in a City firm found that a significant number had not appreciated that conflict issues extended beyond the client engagement stage.



Be under no illusions, however, whichever category of conflict is involved – we are not concerned with an issue of mere technicality, but one of the most serious and fundamental breaches of duty which can be committed by a solicitor.



First, we need to appreciate that there is a difference between a breach of professional rules and the law on professional liability.

While the Law Society strove to bring the code into line with the law when in consultation before the conflict and confidentiality rules came into force in April 2006, as experience develops of dealing with issues under the code, we may identify areas where one is stricter than the other (and one example is given later).



If so, we have to comply with both: the higher standard will be required to avoid both disciplinary action and professional liability. If the law applies a higher standard than rules 3 or 4, it might however be argued that the core duty in rule 1 to uphold the rule of law effectively modifies rules 3 or 4. The code has the status of secondary legislation, though the guidance notes which accompany it do not.



Against this background, the potential consequences of a breach are:

l Disciplinary action;

l Reputational harm, including adverse publicity;

l Injunctions restraining the firm from acting;

l Damages;

l Inadequate professional service awards (which may be more generous than damages);

l Loss of a client; and

l Written-off costs.



Disciplinary sanctions may include a reprimand, a severe reprimand, a fine, a suspension or striking-off. Costs awards are often substantial.



The £5,000 cap on fines is set to be removed by the Legal Services Bill. Higher fines might be expected where solicitors profit from their breach of the rules, which will generally be easy to prove, if only by being able to charge two clients rather than one.



A particular problem arises from the tendency to judge past conduct by current standards. Conflict problems do not always become apparent immediately – there have been several cases before the Solicitors Disciplinary Tribunal (SDT) involving breaches that occurred even a decade previously.



While the SDT has accepted in a number of cases that the climate in which transactions were conducted was different from those applying at the date of the hearing, that has been of little assistance in the defence.



This emphasises the need to be cautious about relying on exceptions to the rules, and the need to keep a written record of the decision-making process, as there may later be an assumption that the solicitor knew matters which were not in fact known at the time. Where the defence to an allegation of conflict relies on client consent, or on a limited scope of retainer, the clearest of documentary evidence will be required to establish either.



While breaches may often only result in sanctions where clients complain, that is not invariably the case. The SRA may, for example, investigate on its own initiative, or come across a breach on a routine practice standards unit inspection.



The recent case of Connolly v Law Society [2007] EWHC 1175 (Admin) demonstrates the importance of documenting the decision-making process. The solicitor had, among many other disciplinary offences, acted in litigation against a family company in which another client had a substantial interest.



The significant point in the decision is that the SDT accepted that the existence of a conflict of interest is a question of professional judgement. On appeal, the High Court accepted that ‘the honest and genuine decision of a solicitor on a question of professional judgement does not give rise to a disciplinary offence’, though it accepted the SDT’s finding on the facts that there was a significant risk of a conflict of interest and the disciplinary charge was made out.



The possibility of a defence to what might have seemed to be a strict liability charge of acting in a conflict therefore reinforces the need to keep a documented audit trail of decision-making processes.



Firms will also need to consider the business continuity planning requirements of the code – an area where the majority of the profession are unlikely to be compliant.



The guidance to the rule is rather lacking, being more relevant to the outgoing provisions, which required little more than that a sole practitioner should have a will, not that any were known to have been disciplined for failing to do so. A model policy with guidance is expected from the Law Society shortly.



From my experience of advising City firms, it is clear that many are treating the code seriously. By way of example, a group of 16 are engaged in producing an e-learning course in risk management, and many are undertaking extensive reviews of their processes, particularly conflicts and client engagement, with a number undertaking risk audits to assess levels of compliance.



Risk audits need to test not only the procedures, however, but what staff are doing. Law firms have a real problem with file audit but that is a topic for another article.



So what of the enforcement regime? We are told by the SRA that there will be a light touch and it could be said that apart from expressing the rules in a more logical, plain English format, little of substance has changed. However, the SRA will be under pressure to demonstrate that it can deliver as a fully-fledged regulator, and can be expected to do its best to deliver.



What will also make the task of compliance harder is the move to a principles-based approach, similar to that in the financial services sector, where nearly half the respondents to a recent KPMG survey thought the move to principles-based regulation would lead to a greater risk of enforcement action by the Financial Services Authority. We have been warned.



Frank Maher is a partner in Legal Risk Solicitors