What in-house needs from reform of legal regulation

In-house lawyers were hardly front of mind when the Legal Services Act 2007 ushered in the ‘Clementi reforms’ that resulted in a separation of regulatory and representation functions for the legal sector’s professional bodies, including the Law Society and the Bar Council. 

The reforms were designed backwards from the desired outcome of ‘liberalisation’, the introduction of some law oversight of the professions, and a very particular view of ‘the consumer’ that fans of liberalisation promote, but sometimes fail to locate actual examples of.

What followed when front line regulator the Solicitors Regulation Authority assumed full regulatory powers were a series of exercises to help it understand both in-house legal departments and the City.

This was a little like taking the wheel at dusk, then beginning a process for locating the car’s headlights – don’t worry, it’s a pretty straight road. It’s not like the winding single track affairs and passing places of the hight street and private client.

That is the backdrop to close attention paid by the Post Office Horizon inquiry, where the role of commercial and in-house counsel has been a particular focus.

Calls to review, reform or replace the 2007 regime are growing louder. And if we want any changes to guard, as far as possible, against lawyers being at the centre of future scandals, we cannot afford to ignore in-house lawyers and the commercial and City firms they instruct.

The Horizon prosecutions and the financial crisis, with sub-prime mortgage securitisation products designed by City lawyers a core failing, show that these categories of lawyer aren’t going down a straight road. Even motorways have bends. (I will look at the topic of regulation and City law firms in a future article.)

The pressures on in-house lawyers are very real, but not quite as they are often presented.

The European Commission has been convinced for decades that corporate counsel are simply there to help their clients conceal or mitigate wrongdoing, and that privilege, for example, should not apply to in-house advice and communications.

But faced with a general counsel who advises a course of action would be illegal, it is very unlikely that a board would say, ‘tough – we’re doing it anyway’.

But there is pressure working in a commercial environment. Many in-housers choose the business environment over private practice because of the commercial environment and closeness to client as a ‘trusted adviser’.

To avoid saying ‘no’ at the last moment, when all is ready to go on a deal or a product, many relate that they seek early involvement in deals and products, and that it helps if they are not seen as ‘the department that says no’.

Ideally they say, ‘you can’t do it that way; but have you thought of this?’. The legal function is an overhead that is trying to gain a reputation for adding value to the business. In a sense, making ‘no’ sound like ‘yes’.

These soft skills, best deployed with a marked lack of pomposity, make some in-house counsel among the most impressive lawyers I know. Yet, to complement such skills, their authority needs boosting.

Notably, former general counsel – freed to speak openly by retirement – have taken to LinkedIn to deliver some of the harshest public criticism I’ve read of in-house lawyers whose professionalism and ethics fell short in various scandals.

A reformed regime for legal regulation needs to strengthen the authority and powers of ‘good’ in-house lawyers, alongside any changes that might regulate their conduct more closely.

More support for good in-house lawyers – and further to fall for ‘bad’ ones.

The ‘policing’ duties of in-house lawyers have been increased through multiple laws in recent years.

But their powers have not, and their position has not been enhanced.

The following should be considered – steps that require changes for non-lawyers for regulation of in-house lawyers to be effective.

First, non-lawyers in defined roles across businesses and public sector bodies should have a duty to report ethical and compliance concerns direct to the legal function. This duty has the potential to be more powerful than the still-nebulous ‘failure to prevent’ principle.

Second, organisations should need the permission of a sector regulator to fire in-house lawyers who have ‘policing’ responsibilities above a certain threshold. They should provide their reasons, and the lawyer should have the opportunity to respond. This would raise a flag of concern to sector regulators about the regulated entity.

Third, although the SRA’s March 2024 draft guidance, ‘Understanding in-house solicitor's professional obligations as an employer’, is welcome, what is lacking is a sense of consequences for an employer who fails to respect their in-house lawyers’ professional obligations. Surely something should happen to an employer or board which fails to respect the guidance. Annual reports should detail demonstrable commitment to the guidance.

Last, the scope of legal advice privilege should be clearly defined in statute, rather than be developed by case law and the special interest lobbying of regulators and enforcement bodies.

Whether you agree or not with any of these steps, what we cannot have is an overhaul of legal regulation that is immediately followed by a drawn out listening exercise to help a new or reformed regulator ‘understand’ what it has just taken on.