UK: Solicitors PI: SRA Consultation On Important Proposed Changes To Conflict Rules

Last Updated: 23 February 2010
Article by Peter Maguire and Richard Curd

The deadline for responses to the Solicitors Regulation Authority's second consultation on changes to Rule 3 (Conflicts of Interest) and Rule 4 (Confidential Information) of the Solicitors' Code of Conduct is 12 February 2010.

The SRA believes that the current Rules are not sufficiently flexible to provide for the needs of sophisticated users of legal services and has invited views on the draft changes and whether they achieve a balance between meeting clients' needs and dealing with the potential risks so that clients and the public are protected. Subject to the outcome of the consultation, the SRA has indicated that it intends to amend the current Rules without "undue delay".

The draft new Rules set out the situations in which it would be possible for firms to act for sophisticated clients notwithstanding a conflict of interest. Firms would need to ensure that proper safeguards were in place and that they had kept adequate records so that they could demonstrate compliance with the Rules.

This article looks in more detail at:

  • what is proposed by the SRA
  • the measures which firms will have to take, including the obtaining of fully informed consent from each client and agreeing in advance what will happen in the event that a firm can no longer act for both clients
  • the areas of risk for law firms under a revised Rule 3, pursuant to which teams of solicitors within the same firm are likely to find themselves negotiating against each other
  • the likely approach of the courts and the SRA, who will doubtless insist upon evidence that an ultimately aggrieved client fully appreciated the possible ramifications when agreeing to retain a firm in a situation of actual or potential conflict

To view the article in full, please see below:



Full Article

The Solicitors Regulation Authority has published draft new rules together with detailed proposed guidance on changes to the Code of Conduct Rule 3 (Conflicts of Interest) and Rule 4 (Confidential Information): http://www.sra.org.uk/sra/consultations/conflict-confidentiality-december-2009.page (http://tinyurl.com/ydhexcc ).

This represents the final stage in a process which began more than a year ago when the SRA first consulted on proposals for the relaxation of these Rules made by the City of London Law Society.

Feedback on that consultation was published in Autumn 2009. There had been 38 responses from, variously, firms of solicitors and representative groups, including the Law Society but only one response has been made by an in-house legal department, as a client potentially affected by the proposed changes.

Whilst a variety of responses were received from solicitors as to the risks posed to clients from the proposed relaxation, most City solicitors believed that those risks could be properly managed. Many, however, wanted to see what the new rules looked like before commenting further, hence this consultation. As this is the culmination of an already lengthy process the consultation period is relatively short and closes on 12 February 2010.

These proposals have to be viewed against the background of regulatory reform in which the profession is currently engaged, particularly so far as large firms of City solicitors are concerned.

One notable element of the debate on the need for change to the conflict rules to date, is that particular account has been taken of the proposals for change in the way in which corporate legal work should be regulated. These proposals were made in the Smedley Report in March 2009 which, in turn, fed into the Hunt Review in October 2009: http://www.law-now.com/law-now/2009/huntreviewnov09.htm (www.law-now.com/law-now/2009/huntreviewnov09.htm).

The important theme here is the express recognition that City legal services are provided to "sophisticated" clients and the publication of the draft conflict rules coincides with the arrival of the new, more City focussed, SRA Board this month.

This article looks at both the impact which the proposed changes will have on clients and the measures which will have to be put in place by law firms in order to comply with the new rules.

Changes to Rule 3 – Conflicts of Interest

The existing Rule 3 contains a prohibition against a firm of solicitors acting when there is a conflict of interest between two or more clients, save for two exceptions, namely:

  • When the clients have a substantially common interest (e.g. acting for various family members in relation to their affairs or individuals on the incorporation of a company)
  • Where clients are competing for the same asset (e.g. competing bidders for a business at auction or competing tenderers for a contract). For this second exception the clients concerned must be sophisticated users of specialised legal services.

In the case of both exceptions, the clients must give informed written consent and it must be reasonable for the firm to act in all the circumstances.

The proposed change to Rule 3 would enable a firm to act for "sophisticated" clients in any situation (with the sole exception of litigation) provided that clients give their written consent and it remains in the best interests of each client concerned for the firm to continue to act throughout the retainer.

The SRA has highlighted three main areas of concern as to the risks that this change represent to clients and the purpose of the consultation exercise is to obtain views as to whether or not those risks are properly addressed in the proposals. The risks are that:

  • the solicitors' firm fails to discharge its duty under Rule 1 (which was identified by Lord Hunt as the "foundation stone" for future legal regulation), namely, to act in the best interests of each client;
  • the clients, albeit that they must be "sophisticated", fail fully to understand what they are agreeing to when giving consent for the firm to act;
  • the firm fails to protect a client's confidential information.

The intention behind the changes is to enable clients to instruct the solicitors of their choice, who may have detailed knowledge of the clients' business, built up over many years, but happen to be members of the same firm, in transactions which could give rise to a conflict of interest, subject to the safeguards described below.

As will be apparent, it will be vitally important for any firm acting for more than one client under the new exception to be able to show that it has complied with the requirements of the new Rule, the most important features of which include:

Sophisticated client

Each client concerned must be "sophisticated" which means it is either a lawyer, or a member of an organisation which has access to an in-house lawyer or which has taken independent legal advice before giving consent to the solicitors to act. Moreover, each client must be an experienced user of the type of legal services required for the proposed transaction and this should be evidenced, ideally, by previous transactions conducted by the firm for the client.

Informed written consent

Each client must confirm in writing:

  • that it wants the firm to act in the knowledge that that firm acts for other identified clients whose interests could give rise to a conflict
  • that it has agreed safeguards with the firm to protect its confidential information, having regard to the guidance on information barriers in Rule 4; these arrangements, and the client's consent to them, must be in place before work is commenced.
  • that arrangements have been agreed as to what will happen in the event that the firm can no longer act for each client. One of the issues raised by the consultation is whether, in obtaining consent from the clients concerned, a firm could, or should, identify the "dominant" client for which it wishes to continue to act in the event that it cannot continue to act for all clients. The approach appears to be that the more that can be spelt out in this context the better. In practice, it remains to be seen whether a client not designated as dominant will be prepared to give consent on that basis or, in fact, will wish to instruct another firm.

Intra-firm arrangements

Any solicitors' firm acting under this new exception must maintain a record of the decisions taken in relation to the retainer, including each client's written consent and the arrangements for protection of each client's confidential information. Evidence should also be recorded which demonstrates the client is "sophisticated" for the purposes of the exception and that each client has obtained, or had access to, independent legal advice.

To ensure that all is in place and functions properly during the course of the retainer, a firm will need to designate a senior individual or team to monitor compliance with the new Rule 3. That individual or team will be responsible for the firm's decision to act and, thereafter, as the matter progresses, the decision to continue to act. He or she must not, of course, have any involvement with the work being done for any of the clients concerned.

In practice, this is likely to be a potentially demanding and difficult role which may become even more onerous as a transaction progresses, particularly if the stage is reached at which the firm concerned cannot continue to act for all the clients and must part company with one or more of them.

Changes to Rule 4 (duties of confidentiality and disclosure)

These proposed changes are concerned with the protection of confidential information by the use of information barriers within solicitors' firms.

Rule 4 provides that the affairs of a client, or former client, must be kept confidential, as a consequence of which solicitors' firms are unable to accept instructions from one client if material confidential information is held for another client, or former client, with an adverse interest.

There are currently two exceptions to this Rule:

  • first, when both clients give informed consent and agree the steps which will be taken by the solicitors' firm concerned to protect their confidential information, and
  • secondly, when it become apparent after accepting instructions from a client that consent to continue to act should be obtained from another existing or former client with an adverse interest whose confidential information is at risk, but it is not possible to obtain such consent. Frequently consent cannot be obtained because even to make an approach for consent would breach the solicitors' duty of confidentiality to the client on behalf of whom the approach was to be made.

The change will extend the second exception to allow solicitors' firms to accept (rather than simply continue with) instructions in circumstances where the consent of existing or former client cannot be obtained. As with the current exception, an information barrier must be erected within the solicitors' firm which satisfies demanding common law requirements.

During the course of the consultation process to date, the substantial majority of the respondents were in favour of this change, not least as they could see no logical basis to distinguish between existing and new clients for the purposes of the Rule. Moreover, amongst City firms, there was concern that the current form of the Rule permits a client with confidential information held by a number of solicitors' firms to withhold consent for tactical reasons in respect of a particular transaction, thereby restricting the pool of specialist expertise available to others.

Interestingly, the only in-house legal team to participate in the consultation process was not in favour of the change.

Comment

  • Given the length of the consultation process to date, the SRA has made clear its intention to change the Rules without "undue delay" on the basis that it does not anticipate much additional debate to follow publication of the draft changes.
  • The fact remains, however, that there appears to have been little participation from clients in the consultation process thus far. Whether clients (who are, after all, the key stakeholders in this issue) decide to take what seems, in all likelihood, to be their final opportunity to have their say during this consultation remains to be seen.
  • The areas of risk are well understood and the methods by which potentially very thorny issues, such as those in relation to obtaining informed written consent from clients, are set out in considerable detail in the new Rules and accompanying guidance: but will they be sufficient? Whilst clients from whom consent is sought may well be "sophisticated" on a number of levels, and also have the benefit of access to legal advice, City firms will have to be satisfied that that consent which is given for them to act is, in truth, fully and properly informed; otherwise they run the risk of non payment of their fees (or worse) when they find that they can no longer act for one or both clients and a deal collapses.
  • Whilst, historically, conflict issues have not been a major cause of claims against City solicitors (unlike the experience in the United States), this could potentially change with teams of solicitors within the same firm negotiating against each other in situations in which the firm's own interests could conceivably come into conflict with those of its clients.
  • As Smith J observed in Saab and Another v Jones Day Reavis & Pogue (a firm) and Another [2002] ALL ER (D) 57 Dec: "Clients are entitled to be informed of the possible conflicts .... lay people whatever their level of sophistication are not necessarily aware of the potential for conflict". Although pre-dating the current proposals, these comments, in our view, hold good and the courts and the SRA will, no doubt, insist upon seeing evidence that an ultimately aggrieved client fully appreciated the possible ramifications when signing the solicitors' retainer on the dotted line in a situation of actual or potential conflict.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 09/02/2010.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.