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How free are you to act where a potential conflict of interests has arisen under outcomes-focused regulation (OFR)? It can be argued that the reigns have been loosened, as there are no longer lists of rules that must be followed and instead, lawyers only have to satisfy a number of mandatory Outcomes and Principles. Yet it may be unwise to take this change of focus as an invitation to relax the way in which conflicts of interests are approached.
Prior to the Solicitors Code of Conduct 2007, the ‘Guide to the Professional Conduct of Solicitors’ gave lawyers an understanding of what was covered under the umbrella of conflicts of interests. The 2007 Code then introduced 23 rules, within which lawyers were bound to act in conflict (and potential conflict) situations, making very clear the conduct which was, and was not, acceptable. This ‘black-letter law’ approach was generally favoured by the legal profession, whose members are obviously within their comfort zone with written regulation and because its tangible provisions provided both a shield and a sword, when allegations were brought against them.
In 2011, the SRA Code of Conduct introduced OFR, abolishing the rules-based approach and in relation to conflicts, replacing it with 7 mandatory Outcomes, which gave detail to the over-arching Principles. These were supported by 14 non-mandatory ‘Indicative Behaviours’, which purportedly allowed flexibility, but which created a heavy presumption of compliance or non-compliance in given situations.
The basic premises from the previous regime remain and only where clients have a substantially common interest or where they are competing for the same objective, is it permitted to act if there is a client conflict (or a significant risk of one) in the same or a related matter. Such exceptions are subject to certain conditions being met, including that the issues and risks must be explained to clients, whose consent must be obtained, for which the use of template letters and tick-boxes is possible, if not desirable. However, the requirements to be satisfied that it is reasonable to act, that the benefits to the clients of doing so outweigh the risks, and that the clients actually understand the risks, present more difficulty, due to their subjectivity. The ‘know your client’ mantra in relation to anti-money laundering legislation seems apt also in conflicts situations, but who actually is capable of making such a judgment?
Certainly, the Compliance Officer for Legal Practice (COLP) should be involved, with an overview of the clients’ history and current matters firm-wide, possibly supported in larger firms on a day to day basis by departmental compliance officers. Protocols about acceptable work types and financial thresholds in conflict situations should be agreed and implemented firm-wide. And with pressure on fee-earning targets, structures should be put in place to ensure that decisions overstepping such agreed boundaries are not taken unilaterally by a partner, individual, department or branch, which could expose the firm to unacceptable levels of risk.
Another potential concern under OFR is the requirement to have effective systems and controls in place, to enable potential conflicts of interests to be identified and assessed. Outcomes (3.2) and (3.3) then specify a number of factors, which such systems and controls must identify, in order to make this assessment, but the factors are expressed to include those set out and are not an exhaustive list. Firstly can firms ever achieve full compliance with this obligation to have ‘effective’ (Oxford Dictionary definition: successful) systems, if a conflict subsequently arises, which they had not anticipated? Secondly, while firms need to anticipate every possible scenario, the SRA, with the benefit of an overview of the issues and non-compliances affecting the legal profession, demands assessment of ‘all relevant factors’ and compliance with risks it cannot, or will not, specify. Which begs the question, whose flexibility is OFR really?
Conveyancing is a notable omission from the mandatory OFR provisions, despite being regarded by the SRA as a high-risk area. Instead, it is dealt with by non-mandatory Indicative Behaviours. These create presumptions of compliance if instructions are declined where matters of substance require negotiation, (e.g. price between a buyer and seller); where clients are not sophisticated users of legal services (if competing for the same objective); where the client’s interests in the end result are not the same (e.g. a transfer of a property from a seller to a buyer) and of non-compliance if acting for both parties in a transfer for value, grant or assignment of a lease. The SRA clearly does not anticipate that it will be acceptable to act in many situations, but many firms may have acted in similar situations for years.
The reality is that if firms are to depart from the presumptions set out in the Indicative Behaviours on more than an irregular basis, they will need to be able to demonstrate compelling reasons for doing so and be confident about their own internal organisation, systems and levels of compliance, as a relaxed attitude in this area is very likely to result in increased scrutiny by the SRA. Detailed policies will have to introduced and record keeping stepped up, which in itself will add to the costs in a matter and will need to be factored into the ‘best interests’ assessment of acting in a conflict situation. Furthermore, even if a firm can demonstrate compliance with an Outcome, the introduction to the 2011 Code reminds that firms and individuals must ‘strive to uphold the intention of the Code as well as the letter’. SRA sanction is therefore possible even if there is only a hypothetical risk of a situation occurring. So while initially, lawyers may have welcomed the perceived freedom to manage their clients and practice areas, unshackled, the shackles appear to remain, at least for the foreseeable future.
Client Relationship Manager
T: 0845 056 3949
M: 0743 727 4046
The Law Society has issued a practice note about the risks to solicitors posed by this new legislation, which came into force on 30 September.
The SRA has urged all practices to check HM Treasury’s consolidated list of asset freeze targets, which lists designated persons subject to financial sanction under EU or UK legislation.
The practising certificate renewal period opened on Monday 2 October.
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