How To: handle OFR in-house

The focus on ‘outcomes’ and the ‘consumer’ is core to the principles-based regulation which the Solicitors Regulation Authority and overarching regulator the Legal Services Board superintend. The intention is to protect the public and to give them greater choice by ensuring that open competition for the provision of legal services is possible.

So far, so good. But as the requirements of outcomes-focused regulation (OFR) and the code of conduct were designed with the ‘B2C’ parts of the profession in mind, the task of building rules and guidance which suit in-house lawyers – who number around 36,000 – is less than straightforward. Many work in a B2B environment, or for unions and charities, or are public servants. And as Law Society risk and compliance specialist Pearl Moses points out, ‘there was a low level of in-house responses to consultations’ which the regulatory regime depended on.

Solicitors may, at first, have despaired at the number of iterations the Handbook went through. The first edition, superceded within weeks, was published in 2011, and the current edition is number eight. Such a fast-changing set of guidelines may be to the advantage of the in-house lawyer, Moses says, as ‘the handbook itself is now a dynamic document’, and the SRA is in the process of establishing a regular dialogue with legal communities about whose work the SRA has information.

It is perhaps for these reasons that the 17 risk and compliance forums organised for in-house lawyers this year by the Law Society have all been fully booked.

Adult regulation

The risk-based approach that is intended to be at the heart of OFR means, Moses notes, that the SRA is looking for ‘wilfully deviant’ lawyers. ‘The SRA talks a lot about “adult regulation” and “constructive engagement”,’ she notes.

The idea of ‘entity regulation’ is part of such an approach; the regulator wants to know how ‘safe’ an entity or firm is. An entity that, by dint of its work, is less likely to interact with ‘consumers’ or engage in areas of work where there is a possibility of fraud or claims against the entity, or financial failure of the entity, should be a much smaller dot on the SRA’s radar.

But whereas in-house legal departments were formerly assumed to be low-risk, they will now have to work a little harder to prove that they are so.

Consultant Tracey Calvert, co-author with Bronwen Still of Law Society Publishing’s book Regulation and In-House Lawyers explains: ‘In the past, in-house lawyers were to the regulator like the distant relative who just gets a Christmas card once a year. Now, though it won’t happen overnight, you will be invited to Christmas lunch, and have to explain to them what you’ve been doing all year.’

In the absence of a ‘consumer’ to protect, the SRA wants to see evidence ‘of a support network that makes it an ethical environment’, Calvert adds.

In-house legal departments are unlikely to be holding client money, though the head of legal should make sure they are certain on this point, as it would mean the department was subject to much closer scrutiny by the regulator.

Of greater relevance is checking that all lawyers who need practising certificates for the work they do have practising certificates. Also relevant are the training regulations for any legal department that has trainee solicitors in the team.

Principles

How do you explain to an employer that these are your guiding regulations? Finding a satisfactory answer to this question is of central importance, as the scenario where an employer is also the client was not centre stage in the design of the regulations. As Calvert notes, the requirement to ‘uphold the rule of law and the administration of justice’ is paramount. ‘There is no defence for failing it,’ she adds.

In the light of any contact from the SRA, one of the worst errors in-house counsel unused to the regulators can make is to fail to respond in an ‘open, timely and co-operative manner’ – a phrase with which regular readers of the Gazette’s SDT pages will be familiar.

In a corporate environment in particular, Moses says, there is often an assumption that ‘good governance can be taken for granted’. But her experience of advising legal departments has convinced her that this is not necessarily the case: ‘Some structures are quite dated. A common error is that there is, for example, no access to key decision-makers.’ She cites mid-sized technology-focused businesses as one type of company where there is a ‘lack of structure’.

Moses notes that in-house departments have a window of opportunity to address governance structures, not least because the SRA recognises that it is in the process of finessing an optimal regulatory approach. But, she cautions, that period will come to an end.

Code of conduct

The SRA Code of Conduct for solicitors (‘the code’) relies on some key ‘indicative behaviours’. ‘These are very basic, and purposefully so, as only you know your clients and employer well enough to make certain judgements,’ Calvert says.

The code includes an in-house modification at the end of each chapter. As Calvert notes: ‘These are not perfect, but they are a work in progress.’ Some of the outcomes listed apply to a solicitor who manages a team, others to lawyers in relation to their individual practice. She adds: ‘You have to think about how to demonstrate adherence to the code.’

For corporate counsel working in international environments, one requirement was originally set to cause some headaches – the need to create an atmosphere that met certain standards on diversity and equal opportunities. It is not suggested that the problem would have come from direct discrimination, but from the inability of international businesses to control their operating environment, and discriminatory laws, in some jurisdictions in which they engaged.

This is, though, an example of where the regulator demonstrated the ‘dynamic’ quality of the regime, making clear that steps to achieve this aim were to be ‘reasonable’ rather than absolute.

Conflicts

Regulation has a harder edge when it comes to what constitutes a ‘conflict of interest’ in-house. Achieving Lexcel or the relevant ISO standards are deemed to help here, though the former is more commonly achieved in local government than in companies. However compliance with conflict rules is achieved, Calvert notes, in-house lawyers ‘do need to be getting proportionate structures in place’. That is especially true where company structures are complex, including subsidiaries and advice to joint ventures.

Practising certificates are another area requiring close attention, Calvert notes. If an in-house lawyer requires a practising certificate, then the obligation to hold one is personal, ‘whether the employer is willing to cover the cost or not’.

She points out that one of the extremely rare examples of an SDT judgment concerning an in-house legal department centred on a locum who did not hold a practising certificate. It is both a criminal and a disciplinary offence to conduct certain work without holding a practising certificate. ‘The SRA will leave it to you to make a decision,’ Calvert adds. ‘But if you do not hold a practising certificate, you will need to have your justification ready.’

Adding extra uncertainty is the fact that when it comes to legal advice the Legal Services Act 2007 does not define ‘members of the public’ – one of the conditions that, if met, may require an individual to hold a practising certificate. For in-house lawyers in trade unions, mutuals and certain types of association that ambiguity is a worry.

Trade union members are not, it has been clarified, ‘members of the public’. But in all cases, careful consideration is needed, not least because an employer who has erred here can be prosecuted under the act.

In conclusion, then, there are ways in which in-house lawyers can shape some of the regulations that will govern their professional lives – the ‘dynamic’ state of regulation working as an admission that the regulator is playing catch-up when it comes to the different risks an in-house legal role carries. But that period is finite. As Calvert concludes: ‘The SRA will have, in time, to show that it effectively regulates the entire profession.’

• Recognising the challenges and uncertainties brought by the rapidly evolving regulatory landscape, the Law Society has developed a comprehensive risk and compliance solution for organisations. The new offering is flexible and comprehensive, and helps clients to establish your risk status and put you in control of it. The solution combines expert advice, supporting services and technology to give tailored advice and assistance.
• Regulation and In-House Lawyers, by Tracey Calvert and Bronwen Still, is available from the Law Society Bookshop.

Eduardo Reyes is Gazette features editor