New dynamics: How changes to in-house legal practice will affect law firms

The UK's Legal Services Act 2007 has had a dramatic effect on private practice and on the relationship between private practitioners and the Solicitors Regulation Authority (SRA). The law firms in which we now practice are very different entities to the businesses of a generation ago. We now operate in an environment in which regulatory compliance is the backbone of business and compliance officers and recordkeeping is a fact of legal life. We also now work in a more competitive marketplace with
new alternative business structures operating alongside more traditional law firms and a growing band of NewLaw firms on the scene.

Another strand of this revolution in the provision of legal services is the focus on in-house practice. Suddenly, in-house practitioners are coming in from the cold and the traditionally remote and long-distance relationship between this form of practice and the SRA is no longer sustainable. This is, of course, relevant to everyone who practices in this way but, just as importantly, the various changes require a response from private practitioners, particularly those who enjoy the patronage of in-house legal teams who instruct them on behalf of their employers.

The cause of this change is one small but highly significant section of the Legal Services Act 2007 which develops the consumer protections created in earlier sections of the Act, with the condition that reserved legal activities (in other words, the hotchpot of legal activities which are reserved by statute to certain categories of individuals) can only be offered to members of the public through authorised entities.

Section 15(4) of the Act makes it clear that an in-house solicitor can provide reserved legal activities as part of their employment and without authorisation as a separate entity where those services are delivered to their employer as part of their employment (i.e. not members of the public). To explain this another way, the Act distinguishes between reserved legal activities which are provided to an employer without the need to obtain authorisation and other circumstances where the same reserved legal activities are offered to members of the public and authorisation is necessary.

This demarcation is far simpler than the long-held regulatory restrictions, which currently distinguish private practitioners from in-house practitioners. Regulatory conditions currently create the situation of increasing the legal restrictions placed on in-house practitioners so that, for example, the SRA administers and supervises the position that an in-house solicitor must not act for work colleagues except in very specific work-related matters and has to consider the relationship of group companies with their employer before being confident that they can act for these related bodies.

The Legal Services Board (LSB) has expressed concerns that these regulatory restrictions go too far beyond the legal position. In a recent policy statement, it voiced its disapproval.¹ "In some cases the regulatory arrangements of approved regulators and the provisions of section 15(4) did not align and in some cases were more restrictive than anticipated by section 15(4). In addition, the existence, or not, of regulatory arrangements in relation to section 15(4) of the Act did not appear to be evidence based," it said.

In other words, the LSB is stating that it considers the SRA and other approved regulators who adopt a similar policy position must be able to justify continuing restrictions on practice where these extend beyond the Section 15 position. The SRA has publicly promised that it will review its regulation of in-house counsel with a consultation in 2015 and changes to the SRA Handbook in 2016.

What could a new style of regulatory regime for in-house practice look like and what would be the impact on both corporate counsel and law firms?

A new regulatory regime

It is clear that some elements of the SRA Handbook are not proportionate when applied to in-house practice if considered in terms of risk-based regulation. This requires a consideration of a very straightforward question: which risks does the in-house profession pose to compliance with the regulatory objectives which the SRA must consider? Also, what behaviours and conditions must the SRA include in its Handbook to ensure any
risks are managed?

We have the precedent of the review of the requirements for solicitors practising overseas and changes to the SRA Handbook to reflect a proportionate response largely based on the observance of modified SRA Principles. Perhaps a more outcomes-based and risk-based approach to required standards could be drafted to take into account the actual risks that in-house practice presents to compliance with the SRA Principles in much the same way.

Equally, a review of regulatory restrictions on the clients to whom in-house solicitors can provide legal services is unlikely to result in the preservation of the status quo. We are told that the LSB feels that unnecessary restrictions has costs implications, stifles innovation and has an effect on access to justice, which implicitly is not therefore compatible with the regulatory objectives.

In addition to the LSB's dissent, criticisms of these restrictions have been commonplace for many years from within the community itself. The conditions on the client base of the in-house solicitor have survived many reviews and do not always reflect the reality of modern in-house practice and external requirements and expectations that legal teams will provide legal services to a wider group of people.

This is evidenced both by the number of waiver applications which the SRA currently considers and also by the significant number of in-house legal teams which have obtained authorised status as an alternative business structure in order to avoid censure and be more competitive.

Running alongside this external oversight and scrutiny of the current position is the growing recognition within the legal profession that the in-house solicitor route is a credible career choice. We are told that the number of in-house lawyers doubled in number between 2000 and 2014 and now almost one in five solicitors choose this career path.

Demands on in-house counsel

Working in-house opens up business experience and opportunities not available to many private practitioners. The in-house lawyer has the opportunity to deliver many services, including:

• providing counsel and being a trusted adviser to one client;

• providing risk and compliance advice;

• having a role in decision-making;

• providing company secretarial services;

• providing legal services arising in connection with the employer's business;

• supporting brand management;

• providing an in-house alternative
  to external legal services; and

• overseeing and managing the organisation's relationship with
  external law firms.

In addition, the traditional view of a non-solicitor employer of the in-house legal employee appears to be changing. Traditionally, the role was seen largely in terms of cost savings to the business. Increasingly, the value of internal legal expertise is being recognised.

Several factors explain this phenomenon. We are working in a world where the demands of regulatory laws are increasing. The consequences of a business failing to comply with such regulatory legislation relating to data protection, anti-money laundering and counter terrorist financing, international sanctions, financial services legislation and the like exemplify the benefits of employing internal legal resources. Not only can the solicitors in the business advise on the legislation, but they can also offer ancillary services such as the drafting of risk management policies, monitoring for changes in the law and the planning
and delivery of training programmes to other employees.

Many businesses employing lawyers also need to ensure they comply with the requirements of their own regulatory supervisors, for example the Prudential Regulatory Authority and the Financial Conduct Authority, Ofcom and the Charity Commission. Having lawyers in-house to ensure these usually quite onerous regulatory requirements are met is often seen as a sensible resource given the consequences of non-compliance or a breach.

In recent years, many organisations have been increasing the size of their in-house legal departments to reduce their reliance on law firms.² Eighty-four per cent now outsource half or less of their company's legal work to external counsel. In addition, over the past two years, 35 per cent have reduced their reliance on outside counsel for legal work, according to recent research. This has raised concerns of the rise of the in-house law firm.

Future of law firm-client relationships

With all these changes, how much longer can the traditional relationship between law firms and in-house counsel survive? It is not inconceivable that there will be a more level playing field in future. What should the private practice corporate team be doing to evolve and adapt to meet the needs of a relationship where the dynamics will surely change? Some suggestions for maintaining a relationship despite all these changes are below.

Firstly, it is worth bearing in mind the position of the in-house practitioner. Many in-house solicitors are just coming to the party in terms of the relationship which they must have with their regulator. What could they learn from private practice? The need to demonstrate an awareness of the SRA's expectations and the ability to create evidence of compliance is essential for a fuss-free relationship. Assistance with identifying gaps in compliance plans and the experience gained from having to adapt to a regulatory regime based on complying the entity and managing risks is a useful source of knowledge. Providing SRA compliance services may be a much-needed additional or alternative service to in-house legal teams.

Secondly, with in-house lawyers increasingly offering more services directly to their client, what will be left to outsource? Obvious starting points are any services which are not within the expertise of the in-house lawyers and reaching an agreement with in-house counsel as to what it takes to be their preferred supplier. Discussing ethical restrictions on practice, and credible alternatives, is another way of developing that relationship. For example, has the in-house lawyer considered their ethical duties not to act in an own-interest or client conflict and who they can turn to in such a situation who will understand their employer's needs?

Thirdly, what services can private practice offer in terms of the management of legal risk, both for the individual solicitor and for their employer? In some parts of America, in-house counsel negotiate with their employers to have the services of their own legal advisers to advise them on personal liability issues. Is that so farfetched a proposal in the UK? Perhaps on another level (which may be easier to negotiate) is the development of a role to provide external support in terms of managing the business' risks with legal updating and training packages.

Anyone with corporate clients, and relationships with in-house legal teams, is well-advised to keep abreast of regulatory work and the timetable for policy changes. Now is the time to start contemplating the possible changes which are coming. Having conversations about the strategic decisions which the in-house legal department should be making in terms of internal composition and the benefits of adapting to provide services which meet the needs of their clients is a starting point. Negotiating terms of reference for a revised contract with these new-style clients is sensible, as is being prepared for these changes with an analysis of what needs to happen in order to remain attractive to this market. Interesting times are coming!

Tracey Calvert is a regulatory compliance specialist at Oakalls Consultancy
(www.oakallsconsultancy.co.uk) and
author of In-house Ethics in Practice
(Ark Group, June 2015).

References

1. See Statement of policy: section 15(4) of the Act, Legal Services Board, September 2015

2. See 'Corporate legal departments to give law firms less work in 2016', Manju Manglani, Managing Partner, 15 October 2015
   (managingpartner.com/node/8376)