Having recently suggested that lawyers would have been contributing authors to Barclays (purportedly) aggressive approach to regulators, and seen Mark Brandon’s claims that lawyers like other professionals tend to close ranks and conceal wrongdoing (see the Lawyer yesterday), I was reminded of these words from the then Secretary to the Financial Markets Law Committee, when talking about derivatives law. He commented on the:
suggestion that the English Courts might not always be the best placed to adjudicate on disputes which arose in the context of the derivatives market. He expressed the view that this was an unfortunate view point not least because he felt that it might reinforce a trend which had seen the emergence of a kind of shadow world of legal wisdom in this area. Much of this specialised work was shared by only a few firms, who had a common interest in not risking challenge to key practices, with the result that knowledge was not widely disseminated and the documentation and practices were never openly tested.
It is an eye-opening comment. It should be stated he was speaking in a personal capacity not on behalf of the Committee. His remarks were made to the International Bar Association’s Symposium on Legal Risk and directed towards lawyers advice on derivatives (See, Journal of International Banking & Financial Law/2004 Volume 19/Issue 4, April/Articles/Report On The International Bar Association Symposium On Legal Risk, for a full report on the Symposium: it is available on LexisNexis). It is worth emphasising what the anxiety was.
Banks looked to lawyers to advice in designing legal instruments designed to affect particular types of transaction (here derivatives) and to provide opinions on the legal risks posed by particular instruments (to secure the Banks against legal risk). The group of firms able to advise on those risks were small. Those opinions were rarely tested by courts; indeed a view was forming that only those lawyers were sufficiently expert to be able to understand whether a transaction had the correct legal impact and was lawful. Judges, so the story goes, did not know enough. It would be interesting to know whether this implies a perceived inability to understand the law or a perceived failure to understand the commercial reality which, it transpires, the Banks too failed to understand. The judiciary might well be highly offended by such an insinuation but it is not a position without any merit: the attitude highlights a significant weakness in an adversarial party driven process that is court-based scrutiny. It depends on knowledgeable, well motivated adversaries.
The implication appears to be, although here I should emphasise this is my interpretation, that a system of banking law was developing for managing ‘risk’ which was both unaccountable and controlled by a narrow group of clients and lawyers. This development was convenient for those parties and founded in the claims of specialisation by those lawyers who, de facto, appear to be claiming to know better than the courts what the commercial and legal impact of (say) derivatives should be. Under this argument, the clients and lawyers were not above the law, they were the law.
It is a chilling thought and, given that this Symposium occurred well before the 2008 crisis, it would be worth knowing what the regulators, Banks and firms did about it, if anything. I am wagering the answer is nothing much, but would be interested in hearing from people who can disabuse me.