Law or regulation? The blurring gets more blurred

I had an interesting experience the other day. I contacted a firm of solicitors asking them to do some work for my company – a bank. They were pleased to be asked, and we started to discuss in more detail what was required. One of the things I wanted was for them to keep my company up to date on changes in law and regulation. I thought this was a fairly straightforward request. I was surprised, therefore, at their reply. “No problem”, they said, “We can provide you with regular updates on developments in the law. But we won’t provide you with updates on developments in regulation.”

The fact that the firm of lawyers made this distinction made me stop and think. I realised that, over time, more and more of the advice I provide to my company relates to the large and ever-increasing volume of regulation produced by my company’s principal regulator – the Financial Services Authority. As an in-house lawyer, this extension of my role has evolved in such a way that I had, until then, barely noticed the blurring of the edges between law and regulation.

Law, regulator style

You know what it’s like – once something is pointed out to you, you start seeing it everywhere. So, once I had focused on this blurring between advice on the law, and advice on regulation, I started to see more and more examples.

When I’m reviewing the terms and conditions of a personal loan contract, it would be negligent for me simply to ensure compliance with the Consumer Credit Act and the Unfair Contract Terms Act. I need to take into account the Financial Services Authority’s Principles. These include the “Treating Customers Fairly” principle, which states: “a firm must pay due regard to the interests of its customers and treat them fairly”. That’s a rather broad statement which requires a completely different mindset when considering the terms of a contract.

It would be negligent for me to advise my company on the merits of its case in relation to a customer complaint on the basis only of the legal merits. I need to take into account the (quasi-judicial) decisions of the Financial Ombudsman Service, as well as the Financial Services Authority principle  - “Treating Customers Fairly”.

Then there’s the interesting question of “enforcement”. As lawyers, we’re trained in a jurisprudence which recognises that the law maker is distinct from the law enforcer, which is distinct from the judge and jury. When a problem arises in a bank, however, it is always important to remember that, insofar as regulation is concerned, the legislature, enforcer and judge may be embodied in the one entity. That creates a completely different dynamic when assessing your client’s position.

The introduction of regulation of mortgages (with the catchy acronym “MCOB” – an English colleague asked whether, north of the Border, we pronounce it “Mac OB”!) has created a whole new dimension to mortgages. When a business wants to borrow money, and the security granted is to be over the family home, watch out for MCOB. When a lender wants to advertise a mortgage and some other form of unsecured loan in the same advert, be careful you understand how MCOB rules interact (or not!) with the Consumer Credit Act advertising regulations.

Some of the principles that we, as lawyers, hold as fundamental do not necessarily hold the same sway with regulators. It is not unknown for a regulator to apply a decision retrospectively. There’s serious food for thought when contemplating the best course of action for handling a difficult issue.

Industry specific advice

Back to the firm of solicitors I wanted to instruct. As we discussed my company’s needs further, it became clear that this particular law firm did not think they had the skills, knowledge or experience to keep track of the huge volume of regulation produced by my company’s principal regulator, the Financial Services Authority.

On reflection, I could understand where they were coming from. However, from my perspective, the distinction being made was artificial. Where does the “law” start and “regulation” end? The short answer is that the start and end are increasingly blurred, especially in regulated businesses like my own.

I have described this blurring in the context of my own industry. But financial services is not alone in being regulated by a body with far-reaching powers. I can immediately think of “the other FSA” (the Food Standards Authority), and those bodies which regulate travel, oil and gas, and fishing – to name just a few.

The key for the client is to find a law firm which specialises in advising in that client’s industry. The key for lawyers is to understand the increasing complexities faced by their regulated clients, including the necessity of working closely with the in-house regulatory compliance team, as well as with the in-house legal team (assuming the client is lucky enough to have such bountiful resource at its disposal). However, rather than this additional complexity being something to fight shy of, it heralds an opportunity for solicitors to acquire an additional area of specialisation.

A line to be drawn?

But, as with all opportunities, there are also risks. And, considering the examples I’ve given of the blurring between “law” and “regulation” in the banking world, the law firm I approached were no doubt highly professional in declining to extend their remit beyond “the law”.

One word of caution, though, in adopting such a “carve-out” approach. The devil is in the detail – this approach assumes you can reach agreement on appropriate definitions of “law” and “regulation”!

Karina McTeague is Head of Legal & Risk, and Company Secretary for Lloyds TSB Scotland plc