Posted by Dan Bindman, Associate Editor, Legal Futures
Taking the rap: do fabulous rewards for transactional lawyers encourage bad behaviour?
It is hard to feel sorry for senior law academics in these difficult economic times, with their secure, publicly-funded jobs and pensions, plus impressive career autonomy. But one had to sympathise a little with professors Richard Moorhead and David Kershaw – respectively of UCL and LSE – when they put forward the notion that transactional lawyers should have to bear responsibility for competent advice they give being used unlawfully. It has the appearance of an idea whose time is perhaps some way off.
Courageously, they argue that giving advice and walking away from the consequences is against the public interest and at least should be the subject of regulatory intervention. Anticipating arguments that trying to regulate such a grey area is unworkable, they insist regulation is appropriate anyway. Even if it is not strictly enforceable, the existence of the rules would draw a line in the sand that careful lawyers would strive to observe – and reassure the public meanwhile.
The professors’ thesis is that in this case the regulators should set aside the light touch of outcomes-focused regulation and that explicit regulation is required to impose ‘consequential responsibility’ on those who assist another’s wrongdoing. The public interest demands that lawyers’ adversarial approach in this area of law be constrained as it has been in others, they argue. “In the transactional context, there are fewer rules and significantly less scrutiny of the tension arising from a lawyer’s zealous pursuit of their clients’ interests.”
The concept of lawyers’ zeal developed from the need to protect the individual from the Leviathan state, they observe, and is not obviously appropriate for advising corporations on how best to meet regulatory standards. Further, the fabulous rewards on offer to transactional lawyers are an inducement to lawyers to engage in “creative compliance” and so make some sort of constraint all the more crucial.
The case study informing their Modern Law Review article exploring this subject is the legal activity surrounding the collapse of Lehman Brothers, in 2008, although the authors suggest no blame whatever. The bank collapse was unusual, they said, because it propelled typically shrouded details of high finance out of the shadows and into the public domain, permitting insights that were normally not possible.
In part because of sensitivities about discussion of the case study, a seminar held in London a few weeks ago to discuss the professors’ work wasn’t similarly exposed to the public gaze; it was held under the Chatham House rule, which meant that the comments of participants – the two authors plus another academic, Professor Joan Loughrey of Leeds University and Clifford Chance partner and general counsel, Chris Perrin – couldn’t be attributed.
Fortunately, views from the City were also put by other solicitor members of the audience, thus mixing Mr Perrin’s contributions with those of other participants and making the perspective reportable – if anonymously. Chairing the debate and maintaining scrupulous neutrality in the ensuing argument was Solicitors Regulation Authority (SRA) chief executive, Antony Townsend.
Despite their efforts to head off suggestions of impracticability, the academics quickly found themselves bogged down in them. The scepticism they faced illustrated well the difficulties of those arguing for fresh regulation of lawyers in this outcomes-focused era – and of those who practise in the City in particular. Whatever ray of light Lehman shone into the darkness, one senses that many in the Square Mile hope it was extinguished along with the bank.
The City position broadly is that sufficient regulation already exists to ensure responsibility is taken where the actions of a lawyer generates a real and foreseeable risk of unlawful client action. Principles of the current regulatory regime demand that lawyers uphold the rule of law and administration of justice; maintain the public’s trust in solicitors; and act in a client’s best interests. These could as easily be applied to transactional work as any other if regulators so desired it, it is argued.
A suggestion that confusion over exactly who is the client in corporate work might lead to lawyers taking their eye off the public interest ball was given short shrift: they know perfectly well that shareholders are the real clients, whatever their close relationships with in-house counsel or other senior corporate figures. Sometimes lawyers have to stand up the client and refuse to act in a certain way – we don’t hear about it, but it happens behind the scenes, goes the argument.
One argument deployed by City lawyers against regulatory interference in their dealings with corporate clients is that it could lead to excessive caution; a fetter on the expression of opinion that is necessary for lawyers to give freely. The academics suggested that any such trepidation would be counter-balanced by the prospect of significant remuneration.
Understandably, City lawyers are none too happy with the proposition that, in effect, the rewards are such that “aggressive lawyering” can be bought at a price. The remuneration structures in Square Mile law firms simply don’t support such direct appeals to individual avarice, even if financial inducements were offered, it is said.
This debate has the potential to be a stalemate between a section of the profession keen to promote a moral high ground for lawyers and demonstrate to consumers that there are no ‘no go areas’ for regulation, and another that sees regulation as a blunt instrument being proposed where the evidence for intervention is scant.
Whether the SRA will consider this a fight worth having is questionable. If in due course it does seek to tackle the subject, the battle lines have been drawn. The City has set a high evidential bar for new regulation on consequential responsibility and unless the issue rises high up the consumerist agenda, it is hard to see much momentum building behind it.
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