The challenges regulating in-house lawyers

Following the Solicitors Regulation Authority's (SRA) thematic review on in-house lawyers, Frank Maher of Legal Risk LLP outlines some of the regulations highlighted with real examples, and predicts the regulations that may come next.
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The 2023 SRA in-house solicitors thematic review shows that if in-house lawyers have largely operated below the regulatory radar, that may be changing.

Disciplinary cases involving in-house lawyers in the past have been vanishingly few.

The Solicitors Disciplinary Tribunal (SDT) does not identify them in its annual reports and I have only identified two cases on the firm’s database of approximately 3,500 SDT cases, and four internal SRA decisions.

One of the SDT cases, involving the sale of units in off-plan buy-to-let property developments, led to a striking off.

The other was a litigation case following the Leveson Inquiry, where an in-house lawyer for a newspaper was suspended for six months and ordered to pay £30,000 costs for misleading the court in proceedings.

The regulations and examples

In-house solicitors in England and Wales are bound by the same conduct rules as those in private practice, particularly the SRA Principles and the SRA Code of Conduct for RELs and RFLs.

However, they can face particular, albeit not unique, challenges.

First, there is the risk to independence, a core duty enshrined in Principle 3.

More often than not, in-house lawyers will have only one client, though some will have different group companies.

Following changes introduced in 2019, some may provide services to the public, provided they are not reserved legal activities under the Legal Services Act 2007. (Note there are also restrictions on immigration and claims management and other financial services.)

The SRA’s thematic review reported that 5% of in-house lawyers felt pressured to suppress information that could conflict with their regulatory obligations.

However, the risks associated with having only one client can be overstated: private practice lawyers can face the same challenge and there are examples of in-house lawyers rising to the challenge where their private practice counterparts do not.

For example, in one case, an in-house lawyer who sought our advice on client due diligence for anti-money laundering purposes was willing to tell senior management that a multimillion-pound deal could not proceed.

In contrast, private practice tax lawyers advised a global corporation on its complex and dubious off-balance sheet special purpose vehicles; it was significant that they were dependent on that one client for all their fees.

Supervision and management of in-house lawyers can be challenging.

This is particularly true if the in-house solicitor is the only lawyer in the organisation, which can be tantamount to being a sole practitioner with all the challenges of needing to be expert in many areas of law.

For example, I advised a solicitor working in house for an insurer with a team of lawyers and paralegals.

In this particular case, the solicitor was instructed by the management that a non-lawyer outside his team would be responsible for supervising them and that he should not interfere.

This compromised his independence and his ability to comply with his own obligations in matters conducted in his name, which included litigation where duties to the court were also engaged.

Devise a conflicts policy

The SRA’s thematic review noted that “many in-house teams did not have dedicated policies and controls to record and report legal risks, manage conflicts and confidentiality or instructions. In several cases, there was also an over reliance on ‘common practice’ to manage regulatory issues”.

It is strongly advisable to have a conflicts policy, because from a regulatory perspective, as Connolly v The Law Society shows, it may afford some protection if you have made a wrong judgement call on a conflict issue, rather than not having thought about it at all.

Examples of in-house conflicts might include:

  • transactions between group companies (which in some circumstances could be an asset-stripping exercise which may impact creditors, for instance)
  • advice to the employer’s customers, which may not be in the economic interests of the employer

On a positive note, the SRA found that 98% felt comfortable challenging an unethical course of action, yet 10% felt their regulatory obligations had been compromised.

Less reassuringly, one in 10 respondents felt they did not have enough time to maintain their continuing competence.

Guidance to look out for

Overall, the SRA’s findings are very positive, but there is no room for complacency.

The SRA announced it is hoping to publish guidance for employers to support in-house solicitors to comply with their regulatory duties by the end of the year.

Meanwhile there is extensive guidance on the SRA website of general application to the profession, though not exclusively addressing in-house practice.

One often-overlooked piece of guidance which is of wider use than its title suggests, is the SRA Standards and Regulations guidance for the not-for-profit sector.

In-house solicitors should also keep an eye on the SRA’s Risk Outlook publications. The most recent addresses the use of artificial intelligence (AI).

This may be of practical significance not only to AI deployment within an in-house legal department, but also to a wider understanding of what may be taking place in the employer’s business and in the business’s external law firms.

Finally, the Law Society also offers some guidance.

There is a practice note, in-house practice: regulatory requirements, which outlines what in-house solicitors can and cannot do and issues such as professional indemnity insurance and holding client money.

A further practice note covers solicitors offering legal services to the public from unregulated entities.

So, in conclusion, expect more attention from regulators but use the support which is available.

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