Independence matters: Banking and big law in the news

Lawyers and banks are in the news again.  Lawrence Tomlinson, Entrepreneur in Residence at the Department for Business, Innovation and Skills, has reported various abuses by RBS in particular and has this to say about the way banks instruct lawyers:

Any law firm that does business with the banks will have a clause in their contract, preventing them from taking action against the banks. This means that for businesses the pool of solicitors available to give them advice and take their case is extremely limited. When you consider the size of the banks and the amount of work they undertake with a range of legal professionals, it is clear to see the problems businesses have in finding legal advice. Many of the top law firms will be conflicted so even if the business has the resource to pay them, they are not able to access the same class of legal advice that the banks can. For many businesses, finding a suitable solicitor is thus exceedingly difficult. Often their own solicitor, who has helped them and their business for many years, is even unable to help in this situation.

Not only is it difficult for businesses to find a suitable solicitor, but the costs involved in taking the case are so extortionate that the business is unable to follow their action through to court.

More cases could be settled earlier if the process was transparent and businesses were not taken through this unduly drawn out legal process as a result of the banks PR effort. It is right that cases in dispute should go through the courts, but they should do so on as equal a footing as possible. If the bank is restricting the cases that go through the court, this is limiting the public knowledge of the banks behaviour, removing accountability and impeding businesses ability to take action against the bank.

It is a little opaque, but he seems to be objecting to the bank’s restraining the solicitors they instruct from taking any cases against banks more generally in a way that goes beyond existing conflict of interest rules.

In theory, solicitors’ firms entering into contracts which restrain them from acting against banks which is broader than professional conflict rules might be criticised for compromising their independence (a core principle).  Though I doubt such an argument would succeed with the SRA, it might get more interesting if an existing client was turned down on the basis that the firm did not act against banks.  Even then though I’d expect the SRA (or SDT) to say independence is only in issue when the lawyer gives advice, and is not relevant in deciding whether to give advice.  An effective cab rank rule might help, but of course there is not one for solicitors conducting litigation.

I’d be interested to know whether people think the problem he speaks of is a substantial one.  There is merit in the firms who litigate against banks not being the same firms that advise them.  Things might get a little too cosy otherwise and if there is enough litigation to be brought against banks then firms develop their expertise.  The idea that such firms would not have the ‘class’ of a magic circle firm is one which looks a little shakier in the light of Allen and Overy’s recent travails (reported in the FT and not a banking case) having turned up at a meeting with the client in tow to discuss a case with a prosecution witness when the client was not supposed to contact such witnesses.  The witness complains about what happened at the meeting being an attempt to pressure him.  The full facts have yet to emerge on that, but it is safe to say that one word that would not be associated with such a meeting is classy.  To return to the Tomlinson point, more seasoned observers of litigation firms than I will have to say whether there is a paucity of quality in litigation firms outside those who already act for big banks, but I doubt it.

The idea of cosiness resurfaces with the firm that replaced A&O at the Co-op.  A&O misjudged a potential conflict with the Co-Op on restructuring work in ways which raised eyebrows at the time.  Clifford Chance took their place and has now been appointed by their client to conduct an independent investigation into goings on at the bank.   With their PEP reportedly sliding this can only be described as nice timing.  Such reviews are not uncommon, and appear to be getting more common.  Interestingly, for my purposes, Legal Business raised a note of scepticism in its report when CC declined to explain how a review into a client would be independent.

Some argue (h/t Tim Strong) that such matters are not for public consumption: whether it is a suitably independent investigation is a matter for the regulator.  I’m not sure – if one of the reasons why the Co-Op asked for a review was to assuage public concern then the nature of that review is a matter of some public interest, beyond merely being interesting (though CC would need their client’s permission to release details).  It is also a matter of professional interest.  Independent investigations by lawyers sometimes provoke controversy: there was one into hacking at News Group Newspapers and another into Enron.  In both cases careful management by the client of remit (and in Enron approach) by the lawyers rather scaled back the meaning and independence of the reviews.  Careful management of the review was not matched by the careful communication of its results and meaning afterwards, at least in the case of NGN.  Funny that: a client says we want you to look at X by doing Y and by X we mean [X construed narrowly].  That becomes, “Our lawyers have exhaustively investigated X and given us a clean bill of health.” Funny and convenient until a balloon goes up, when it becomes inconvenient and darkly comic, at best. Still there’s legal privilege to protect the client (and the firm) if they don’t do or say anything too outrageously stupid.

I’m not saying that’s what will happen here, CC will be on their mettle and expecting a good deal of scrutiny, but it does raise the interesting question of what protections lawyers should put in place when asked to conduct independent investigations for their clients.  I’d be genuinely interested to hear what kinds of protections are put in place – what I have seen to date has not reassured me.

Tomlinson would probably be right to worry about the oligopolistic cosiness of firms in the market for banking clients.  The Co-op conflict shows how a highly reputable firm is willing take a risk with potential conflicts of interest to keep an existing client happy and to keep their business.  That risk presumably caused them to write off considerable costs when it manifested unless the Co-op was feeling generous or fully appreciated the risk of continuing to instruct A&O at the time [*insert joke about crystal meth and informed consent of your choice here].  In a similar vein, Linklaters held onto the work of Lehman through insolvency in spite of questions over Repo 105 transactions which they advised on.  Linklaters, unsurprisingly, say there is no conflict to be concerned about.  Anyone with a calculator, google and few minutes to spare can try and work out the impact of that decision on their PEP.

Is a relaxed interpretation of conflict of interest rules a problem begat by an elite that is highly profit oriented and regards its own knowledge and skill as wholly superior to the squeezed middle?  Winner take all markets (the idea that only the best firm is good enough) suit them, because they concentrate more work in the hands of fewer firms and drive up fees. Such markets also reinforce a high opinion of their own abilities, but it may also drive ethical risk.  For example, it may be that A&O’s involvement in the alleged pressuring of a prosecution witness derives from an overconfidence in their ability to manage a difficult situation for the benefit of their client.  Or it may be that they are a victim of a prosecutor’s error.  We shall see, but from the outside a decision to participate in a meeting which it is said breaches the client’s bail conditions is not a reassuring starting point.

It is not simply about clients having the opportunity to access the largest firms.    Professional judgment matters and thinking more carefully about what encourages meaningful independence matters too.  It is also a reminder to all those who consume independent reviews to be a little wary of their purported independence. Even if we assume, which may often be reasonable, that the client seeks a review entirely in good faith, and the lawyers conduct it with zealous thoroughness, there are reasons for doubting the ability of the parties to be entirely independent.  This is not a sinister claim: professionals may not be capable of putting aside subconscious biases in favour of their clients or themselves (see  Objectivity and the Legal Mind for why).  Independence is a relative not an absolute phenomenon and we are entitled to wonder how independent any independent reviewers are really, without it raising existential doubt about the probity of those involved.

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About Richard Moorhead

Director of the Centre for Ethics and Law and Professor of Law and Professional Ethics at the Faculty of Laws, University College London with an interest in teaching and research on the legal ethics, the professions, legal aid, access to justice and the courts.
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