Code worthy?

Although the new Code of Conduct has brought few surprises, it should not be dismissed by the profession, say Katherine Rees and Rebecca Armstrong

Jeremy Clarkson infamously refused to review the new Vauxhall Vectra for Top Gear, showing his disdain for what he termed the “boring” new model by walking round the car in silence, rubbing his chin and shaking his head. Will solicitors be similarly underwhelmed upon the launch of the Solicitors’ Code of Conduct on 1 July 2007?

The code, although long in gestation, is short on surprises. The more radical changes to the rules on conflicts of interest and confidentiality contained in the code had already been introduced in April 2006. But is it wise for solicitors to be nonchalant about the introduction of the code? And what impact do the rules on conduct have on the handling of professional negligence claims?

Certainly, the exterior has been revamped. The code streamlines and amalgamates conduct rules for which solicitors have previously had to search across a host of statutory and non-statutory sources, including the Guide to the Professional Conduct of Solicitors (1999) and the Guide Online, as well as 10 other sets of rules and codes. Although the Law Society rules on insurance, accounts, financial services and the compensation fund remain in force, the other conduct rules are swept away to be replaced with a one-stop shop for all conduct queries.

Whereas the guide contained a mixture of mandatory rules and supplemental guidance, the code clearly draws the distinction between the two. It also differentiates between more and less serious breaches and how these will be viewed.

But the changes are not merely cosmetic. Rule 5 demands that each principal (or member or director in the case of LLPs and companies) must “make arrangements for the effective management of the firm as a whole”. While there is nothing new in this, 12 specific areas must now be addressed, covering matters as wideranging as supervision and direction of client matters; regulatory requirements; anti-money laundering provisions; conflicts; client care; undertakings; safekeeping of documents; complying with the code’s equality and diversity requirements; training; financial control; emergency arrangements; and last but certainly not least, risk management.

Risk management
This emphasis on risk management reflects the spirit of the age. Since the advent of open market insurance in 2000, solicitors’ professional indemnity insurers have been increasingly focused on risk management and claims avoidance. Demonstrating an effective risk management policy has always been of central importance to a firm’s relationship with its insurers. Upon policy inception or renewal and, crucially, upon calculating annual premiums, underwriters pay careful attention to a firm’s risk management procedures, as well as individual solicitors’ disciplinary histories.

For example, firms are commonly required to answer questions about whether they have:
•a designated risk management partner and formal strategy;
•a standard risk assessment for new instructions;
•a firmwide diary management system;
•regular file audits;
•administration and organisation procedures, such as for reviewing incoming correspondence; and
•systems for dealing with fee-earners’ work in their absence.

So, in order to secure beneficial insurance arrangements and, most importantly, competitive premiums, it has always been in firms’ interests to be able to point to an effective business and risk management system. There will always be a correlation between the way firms are run, their compliance with regulatory and conduct requirements and their claims records.

The upshot of the code’s risk management requirements is that preventing claims has effectively become part of a firm’s conduct obligations. While some may complain that the requirements of Rule 5 impose an unwelcome administrative burden, it is one with a positive impact for firms that take their regulatory and conduct obligations seriously.

Relevance of the code
So, if a firm already has a robust risk management procedure in place, and a professional negligence claim arrives nevertheless, will the code have any relevance? Although breaches of the conduct rules and professional negligence claims are conceptually separate, there are some areas where they frequently overlap, as risk managers will be well aware.

First of all, the code (under Rule 20.7) sets out the circumstances in which a firm that discovers a potential claim must inform its client and insurers. Firms are warned, under the guidance to Rule 20, to differentiate correctly between complaints that should be dealt with under the firm’s complaints procedure and claims that should be dealt with under Rule 20.7.

Next, a conduct issue that frequently rears its head in this context is conflict of interest. A firm that identifies a potential claim may well wish to attempt to cure the problem, if the client will agree, to maintain the relationship. The firm will need to consult the code to determine whether it can continue to act, or whether its interests now conflict with those of the client, rendering this impossible.

Another conduct dilemma that will have the claims partner rushing to consult the code is the knotty question of ownership of documents, which can arise when a claim is made. Take, for example, a situation where a firm has acted for two business partners in the acquisition of a commercial property. If the partners subsequently fall out and one partner requests the original documents, should the solicitor hand them over? The answer is to be found at Rule 4, which deals with confidentiality and disclosure.

Finally, firms must be careful that, upon compromising a claim, they do not cast their settlement nets too widely and seek to prevent complainants from reporting their conduct to the regulatory authorities.

There is nothing new in the provisions above, or in the need for those dealing with claims to keep a watchful eye on conduct requirements. While Rule 5 requires a least a review of the firm’s management systems, and the way that these are documented, this should not involve a sea change for most firms. The introduction of the code may not have the profession on the edge of its seat, but it would be an unwise solicitor who dismisses it without a second glance.
Katherine Rees is a partner and Rebecca Armstrong an associate at Reynolds Porter Chamberlain