Risk and the in-house lawyer

The traditional role of the lawyer is changing. Against a background of unprecedented levels of new, complex legislation and the increasing gap between innovation and developments in the law which are creating sources of additional legal risk to organisations, lawyers are enhancing their role. Lawyers, and in particular in-house lawyers, are taking on a new, broader role as legal risk managers. This article looks at the nature of this role.

Taking the lead

Lawyers are very conscious of the importance of legal risk management. This is very much in evidence in the financial services arena where the Basel Capital Accord (Basel II) makes it inevitable that in-house lawyers have a key role in, and indeed are taking the lead in, managing legal risk. Basel II requires banks to assess their overall risk, including legal risk as a form of operational risk, to ensure that management is exercising sound judgment and setting aside adequate capital. The intention behind Basel II is to reduce further the probability of consumer loss or market disruption as a result of prudential failure.

Legal risk culture

Legal risk touches on every area of an organisation’s operations, and a successful legal risk culture can be defined as a culture which provides a framework to ensure that legal risk is identified, understood and managed in a consistent manner at all levels. The challenge lies in the lack of guidance available in relation to legal risk. There is no standard definition of legal risk, though the International Bar Association (IBA) working party has offered the following:

“Legal risk is the risk of loss to an institution which is primarily caused by:

•     A defective transaction.
•     A claim (including a defence to a claim or counterclaim) being made or some other event occurring which results in a liability for the institution or other loss (for example as a result of the termination of the contract).
•     Failing to take appropriate measures to protect assets (for example intellectual property) owned by the institution.
•     A change in law.”

Another forum, the Basel II Focus Group, chaired by the Head of Legal, Standard Chartered, with its members drawn from financial institutions, is also taking the lead on the matter of legal risk management.

An organisation must understand that the nature and level of legal risk depends on the business environment in which the organisation operates. What might be a significant risk in one sector could be minimal in another. Equally, the fact that a risk has a legal element to it does not necessarily mean that it should be classified as a legal risk.

The lawyer’s role

Lawyers have a key role to play in developing an effective legal risk culture by offering their expertise, knowledge and independence. It is important to stress that this is a role that requires lawyers to take a wide ranging view; the role is not just about focusing on risks arising from individual issues, cases or transactions, critical though these are. Taking a comprehensive across-the-board overview of an organisation’s legal risk profile will enable lawyers to identify key legal threats or trends across an organisation. However, lawyers cannot act in a vacuum; it is vital there is management and employee buy-in. There may be legal risks which lawyers on their own cannot effectively identify or control. Further, lawyers need to be part of a wider risk management programme. Participation in such a programme will enable lawyers to work with other specialists (such as internal auditors) and also understand the interaction between legal and other forms of risk such as credit and market risk.

There are a number of ways in which lawyers can actively help to manage legal risk. They can provide proactive legal support in the form of expert advice or specialist training, and ensure that legal approval is sought when appropriate. They are in a position constructively to challenge business models and practices. Exchange of information and reporting on key legal risk issues to an organisation’s risk committees will also aid the management of legal risk.

The benefits

Legal risk management will enable an organisation to demonstrate to its regulators, its stakeholders, shareholders and other interested parties that it is showing sound judgment on legal risk management, that it is saving money through retaining risk where it is considered prudent to do so, and that it is reducing the chances of a major surprise causing damage.

A question of resources

External influences are providing the incentive for lawyers to re-evaluate their role and consider how best to add value to their organisation. However, this change in role highlights the issue that organisations will need to dedicate resources to legal risk management in order to achieve a successful outcome.

    Marina Paul, Legal  Director, HBOS plc

A more open judiciary, case management to secure efficient use of the scarce resources of time and money, and a proactive approach to identifying necessary reforms. Such are the hallmarks of the modern judiciary, according to Lord Mackay of Drumadoon in his keynote address to the In-House Lawyers’ Group annual symposium last month.

Emphasising that his remarks represented a personal view, the judge nevertheless touched on the importance of recent reforms such as those in the High Court in securing the accused’s right to a fair trial while recognising the demands on public funds. A similar approach, he added, applies in civil work where, for example, Lord Reed is reviewing the commercial court to ensure that it operates in an efficient, user friendly manner.

Agreeing with Lord McCluskey’s call for judges to end their “monastic silence” , Lord Mackay, recently appointed by the Lord President to oversee the administration of business in the Supreme Courts, said that judges should find ways of entering the public debate to assist those responsible for devising solutions, substantive or procedural, where change would improve the administration of justice.

The meeting, returning to The Hub in Edinburgh’s Royal Mile after a successful first visit last year, attracted delegates from across the spectrum of in-house practice – central and local government, other public bodies and the private sector. All will have taken note when the Group’s chairman, Janet Hood, expressed her concerns that an unintended consequence of the Legal Profession etc (Scotland) Bill would see employers declining to pay for their in-house lawyers’ practising certificates – and in the process losing the professional ethic that currently underpins their work. In his address the Society’s vice president John MacKinnon said the Society had identified a number of policy issues which Council would require to discuss and develop.

A wide range of CPD input was provided through presentations by David Graham of Shepherd+ Wedderburn on project management, John MacKenzie of Pinsent Masons on brand protection, Joan Cradden of Brodies on age discrimination, Fenella Mason of DLA on construction contracts, and corporate communication consultant Mandy Haeburn-Little on making a positive impact. As always the event was chaired in her inimitable style by Janet Hood, who said she was “absolutely delighted” with the quality of speakers.

“A fantastic day”, she added, though for many the real highlight was the evening dinner dance, with a typically acerbic after-dinner speech by Sheriff Douglas Cusine and a raffle that raised £2,110 for St Columba’s Hospice, before a ceilidh saw the hardy guests into the small hours.A more open judiciary, case management to secure efficient use of the scarce resources of time and money, and a proactive approach to identifying necessary reforms. Such are the hallmarks of the modern judiciary, according to Lord Mackay of Drumadoon in his keynote address to the In-House Lawyers’ Group annual symposium last month.

Emphasising that his remarks represented a personal view, the judge nevertheless touched on the importance of recent reforms such as those in the High Court in securing the accused’s right to a fair trial while recognising the demands on public funds. A similar approach, he added, applies in civil work where, for example, Lord Reed is reviewing the commercial court to ensure that it operates in an efficient, user friendly manner.

Agreeing with Lord McCluskey’s call for judges to end their “monastic silence” , Lord Mackay, recently appointed by the Lord President to oversee the administration of business in the Supreme Courts, said that judges should find ways of entering the public debate to assist those responsible for devising solutions, substantive or procedural, where change would improve the administration of justice.

The meeting, returning to The Hub in Edinburgh’s Royal Mile after a successful first visit last year, attracted delegates from across the spectrum of in-house practice – central and local government, other public bodies and the private sector. All will have taken note when the Group’s chairman, Janet Hood, expressed her concerns that an unintended consequence of the Legal Profession etc (Scotland) Bill would see employers declining to pay for their in-house lawyers’ practising certificates – and in the process losing the professional ethic that currently underpins their work. In his address the Society’s vice president John MacKinnon said the Society had identified a number of policy issues which Council would require to discuss and develop.

A wide range of CPD input was provided through presentations by David Graham of Shepherd+ Wedderburn on project management, John MacKenzie of Pinsent Masons on brand protection, Joan Cradden of Brodies on age discrimination, Fenella Mason of DLA on construction contracts, and corporate communication consultant Mandy Haeburn-Little on making a positive impact. As always the event was chaired in her inimitable style by Janet Hood, who said she was “absolutely delighted” with the quality of speakers.

“A fantastic day”, she added, though for many the real highlight was the evening dinner dance, with a typically acerbic after-dinner speech by Sheriff Douglas Cusine and a raffle that raised £2,110 for St Columba’s Hospice, before a ceilidh saw the hardy guests into the small hours.