A brave new regulatory world
12 March 2014
19 March 2014
9 June 2014
15 May 2014
19 May 2014
27 August 2014
Can international law firm regulation keep up with the seismic legal market changes? It won’t be easy.
Law is a global practice and yet its regulation is mostly domestic. There are international codes of practice such as those promulgated by the International Bar Association, but they say little about international practice and more about the concerns of the individual lawyer and client. Legal regulators rarely look beyond their own boundaries. New York State imposes its rules on its admitted lawyers wherever they are whereas the English bar tends to relax its rules once the barrister steps outside the UK. With lawyers who do international business, whether transactions or arbitration, the problem of ‘double deontology’ is perpetual.
Consider a lawyer appearing before an international arbitration tribunal. The lawyer has witnesses, so how should the witnesses be prepared? For an American attorney witness preparation is vital and he would be negligent if he didn’t. Witness preparation helps witnesses understand the case and their role in it. For English lawyers preparing witnesses can be tantamount to rehearsing and influencing them so it’s prohibited. The two sets of professional rules oppose each other. What then should happen in an international arbitration? At present there are no rules that decide these issues.
The problem with external regulation is that it is crude, post hoc and slow. When Arthur Andersen’s partner was convicted in the Enron debacle, the entire firm imploded. Later KPMG was on tenterhooks in case it was to suffer ‘death by indictment’. Modern regulation depends on internal firm-wide characteristics of culture and compliance. Big law has the capacity to take on the role of regulating global practice because of its international reach. It is unlikely that a large law firm would let one of its senior partners be caught out in conflicts of interest dilemmas as was Freshfields Bruckhaus Deringer’s Barry O’Brien in the 2004 hostile takeover attempt of Marks & Spencer by Philip Green. We still catch occasional glimpses of this in Clifford Chance’s review of RBS with questions raised over the perception of possible conflicts. And of course there are the car crashes like Dewey & LeBoeuf.
The big law firm is now more international than domestic. Some of the Magic Circle firms have more ‘foreign’ lawyers than ‘English’. We still think of them as London firms but they are as much a London firm as Barclays is a London bank. The key centres for big law firms are, however, still New York and London because their particular laws are heavily used in cross border transactions. Moreover, in relation to capital markets the major financial institutions are based there. This is not to say competition from Asia - Singapore, Shanghai and Hong Kong - isn’t happening. Domestic law remains important but in cross-border transactions the ultimate governing law may still be English or New York.
How then are big law firms creating a new global regulation? It’s happening through a number of channels: education, compliance, and financialisation. Law firms are transaction-producing factories these days. Recent American research has shown that the average sovereign wealth contract takes three and a half minutes to produce because of boilerplating. Law firms have huge banks of firm-specific documentation to call on, which all their lawyers are trained in using. This training never stops. The law firms also contribute their expertise—and capture future work—in the creation of documents used by international organisation such as the International Swaps and Derivatives Association. These enormous knowledge banks are constantly updated and modified.
Alongside document construction is outsourcing by big law firms whether to Belfast or Mumbai. Intellectual property renewals and document reviews, for example, are handled by cheaper lawyers without drawing on expensive law firm lawyer time. The professional support and education and training roles in big firms are crucial to their successful operations, creating and adapting the firm’s knowledge to changing circumstances.
Compliance is essential. All big firms have general counsel who combine the roles of mother hen and mistress. They have to ensure that all lawyers (and support staff) throughout the firm understand the firm’s needs and plans. It is they who must instil a common culture in all offices. Some of them have official compliance reporting duties to regulators. But their prime aim is make sure everyone works to minimise the need to report.
Because of their scale and complexity big firms are complicated creatures to manage especially in partnership form. Financialisation has changed the substance if not the form of partnerships. Executive authority lies with management committees who set targets, monitor performance and agree remuneration. And who may be tasked with removing underperforming partners. Large firms have become quasi-industrial complexes.
Outside the firm there lies unexplored territory. The Legal Services Act in the UK has brought in external investment, non-lawyer ownership and alternative business structures (250 at the last count). It’s still early days for the impact of these to be clearly felt. Law firms are now talking to financiers and private equity about going public or accepting external investment, which will put new pressures on regulation, both domestic and international. In the finance sector new banking regulation is being felt in law firms through regulatory overspill.
New models of legal practice such as Axiom, Radiant Law and Lawyers On Demand are evolving that don’t follow traditional ways. They have the potential to challenge the big firms and appeal to corporate counsel because they’ve abdicated hourly billing.
The most undetermined sector is the development of online legal services that doesn’t rely on locality but cyberspace. Many of the most basic transactions - wills, divorce, leases - are available and we have online deal rooms where international transactions occur. As we approach Kurzweil’s point of singularity and true artificial intelligence becomes possible, how will cyberspace be regulated and what will be regulated? The robot, the software? Will it be any different from high-speed trading algorithms used in financial services? Regulation is about to enter new spheres that we are just beginning to imagine.
John Flood, Leverhulme Research Fellow and professor of law and sociology, University of Westminster. Flood’s article is based on a recent lecture given at the Center for Transnational Legal Studies on the complexities of transnational law.