It is not a great time for the legal industry’s reputation.
Late last year the Pandora Papers shone a light on Baker McKenzie’s role in helping clients navigate the shadowy world of offshore tax dealings. In March, the war in Ukraine prompted extensive scrutiny of law firms that have advised Russian state-backed entities and also emboldened U.K. politicians to begin naming lawyers who have for years been aggressively helping to keep their oligarch clients’ names out of the press.
Later this year, a book by The New York Times’ David Enrich promises to expose how the industry “has gone from being a bastion of ethics to a leading enabler of corporate and political malfeasance.”
Perhaps it is no surprise that people have started asking whether we need enhanced regulation of the industry.
Take a quick look at some of the data involved in regulation and it’s easy to see why. In the U.K., where the industry is monitored more ruthlessly than in almost any other country, actions against large law firms and their lawyers by the Solicitors Regulation Authority are relatively rare. There have been only 48 cases against individual lawyers involving the top 50 U.K. firms in the last three years, according to searches on the SRA website, which lists most but not all cases that resulted in action being taken.
Bear in mind these firms have more than 60,000 lawyers in total, and in most of these cases an investigation arose only because the firms self-reported the issue. There have also been four actions against firms themselves, two of which amounted to little more than a rebuke.
Are the low numbers evidence of a weak regulator when it comes to monitoring large commercial law firms, or a widespread adherence to the rules at those firms?
Most lawyers at top firms argue the latter, of course. To be fair, the SRA does not appear to be scared of big targets and has brought high-profile cases against several lawyers at top firms, including ex-Freshfields Bruckhaus Deringer partner Ryan Beckwith and ex-Baker McKenzie London head Gary Senior. Then again, it is hard to think of many cases where the SRA has had a convincing win in the last few years.
And its fines are almost trivial—a maximum of £2,000. In January, the SRA fined Mishcon de Reya a record £232,500, an unusually high amount because the firm is an Alternative Business Structure. But Mishcon’s annual net profit is around £60 million. And Mishcon is a relative minnow compared to the largest firms in the world, some of which have a net profit of more than a billion pounds. The highest regulatory disciplinary tribunal penalty for a traditional law firm in the U.K. is a £500,000 fine of Locke Lord in 2018. Even this is only about 0.3% of its annual profit.
And yet, despite the low number of actions and paltry fines, the SRA is taken extremely seriously by top U.K. law firms and lawyers simply because of the impact it can have on their reputation. This is the real driver of behavior.
According to one leader of a very large law firm, the regulator of the industry is effectively the press—and, dear reader, we will do our best to uphold the profession’s standards.
But it is wider than just the press. Social media and the accessibility of information today means lawyers cannot hide from any misdemeanor, however minor. The effect of a rebuke on an individual has actually gone the other way. What might have in previous years amounted to little more than a professional embarrassment can these days be effectively career-ending, even though that is not what the regulator intended.
Clients watch reputations, constantly asking about the policies their advisers have in place. Ahead of shareholder meetings, CEOs know they will be asked about the conduct of their advisers and they want to be prepared accordingly. This forces firms to monitor behavior, especially given that the financial cost of losing a client will be more significant than a regulator’s penalty.
Until any regulator can offer a true financial threat, such as a penalty that relates to a percentage of annual earnings, reputational concerns will remain law firm leaders’ biggest worry.
Finally, there is also another power at work influencing law firms’ ethical decisions—a silent regulator, if you will. Professional indemnity insurers have a power over law firms that can force through change more quickly than any regulator could.
Law firm leaders say some insurers said they would withdraw cover for all Russian matters, effectively forcing firms to quit there.
However, this power also has a dark side. There are also rumors that insurers have suddenly withdrawn cover for law firms that litigate against their interests. One case in point was when some U.K. businesses wanted to launch a claim against insurers for not paying out business interruption insurance in the midst of the COVID-19 lockdown, which caused at least one insurer to pull cover from firms involved.
Such influence involves a serious access to justice issue. If regulators want to ensure the legal industry is working as it should, perhaps they should start there.