The news that two high-profile Freshfields partners are in hot water for their roles on Philip Green’s M&S bid highlights a whole new culture in the legal profession. It’s all about taking risk management a lot more seriously

Last Monday (30 October) the spectre that had been giving partners at Freshfields Bruckhaus Deringer sleepness nights finally materialised. Two of the firm’s highest-profile corporate partners, Barry O’Brien and Tim Jones, learnt that after two years of investigation they faced a disciplinary tribunal hearing for their roles in Philip Green’s failed £9bn bid for Marks & Spencer (M&S).

O’Brien, formerly Freshfields’ head of corporate, and Jones, currently the firm’s London corporate chief, will go before the tribunal next year accused of acting in a situation where there was a conflict of interest – namely that work Freshfields had done for fashion designer George Davies on his contract with M&S meant the firm should not have been acting against the retailer.

The imminent tribunal hearing, coupled with the recent approval of new conflicts rules by the Government, threw conflicts of interest back into the spotlight. But for those within law firms who are responsible for risk management, it has really never gone away.

“Generally I think there’s a much greater emphasis on recognising and managing risk,” says Norton Rose compliance partner Jonathan Ody. “Insurers ask a lot of questions about what we’re doing in terms of managing risk when policies are renewed. I imagine that insurers are going to look more kindly on active risk management.”

Litigation is also at the forefront of people’s minds following a year in which several large claims against law firms have hit the courts.

“I think people are more litigious than they ever used to be and therefore it’s more likely that there are claims against professional advisers, and hence the need for making sure that you’ve got good risk governance in place,” says Eversheds risk management partner Robert Chapman.

At the very minimum, all the major firms have partners in place charged with overseeing their risk management functions. In some the role is taken by the chief operating officer (COO) or partnership secretary. In others, such as Clifford Chance, there is a dedicated risk management director.

Conflicts of interest have remained high on the agenda during the past few years, as the Law Society has argued through the new rules that set out the parameters within which a firm can work. Many City firms believe that these rules will be restrictive for commercial clients and are fighting for more clarity.

According to Julian Francis, the partner at Freshfields who oversees risk and compliance, the new rules are “goldplating what the common law is”, although he adds that they are a “big step forward”.

Under the guidance, solicitors are prevented from acting for more than one client except where there is a “substantial common interest” and all the clients concerned have given informed, written consent.

Freshfields and other firms have written to the Law Society to raise their concerns. Francis says: “I think it’s helpful to refer them to the issues and to make it clear to them that we’d like some distinction between sophisticated and non-sophisticated clients.”

As far as the post-M&S world at Freshfields is concerned, Francis says that the firm has reviewed its conflict-checking procedures since the deal, but is confident that the system “is basically okay”.

Increasing the defenceThe introduction of the new Law Society rules has caused firms to examine their procedures. For example, Denton Wilde Sapte (DWS) has increased the number of partners checking for conflicts of interest to four and has reviewed its systems to ensure they comply with the new rules.

But conflicts of interest are far from being the only topic crossing the desk of risk managers.

Addleshaw Goddard COO Peter Smith says: “Professional practice risk occupies us on a constant basis with the increasing weight of regulation. Any changes to the rules means that you’ve got to be thoughtful and extremely careful about how you apply them.”

Money laundering is occupying a lot of time at present as firms prepare for the introduction of the third European money laundering directive. This was adopted by the European Commission late last year and must be implemented into UK law by December 2007. It puts more onus on professionals such as lawyers to report suspected money laundering.

“It’s going to be a more invasive set of questions,” says Norton Rose’s Ody.

Clifford Chance’s risk management director Chris Andrews explains that problems arise when a directive is implemented differently in different member states.

“For us as an international law firm that’s very, very hard,” says Andrews. “When you’re trying to have one global set of procedures it’s very difficult.”

Similarly, the introduction of the market abuse directive will pose problems for firms, especially those with large international networks. The way firms cope with international rules on issues such as conflicts or money laundering varies widely, from a wide set of procedures tailored for each jurisdiction to a single, firmwide system.

“We have to recognise that local offices have different rules, and by and large if we say that the UK rules represent minimum standards, they’re usually stricter than local rules,” points out DWS partner Robert Finney, who chairs the firm’s risk management committee. “We try not to be prescriptive.”

Francis at Freshfields agrees. “We don’t have an international approach to all risk issues. We think that’s more flexible. There’s no point having a job offered to you in Germany that you could do under German rules, but you can’t do in the UK.”

Clifford Chance and Norton Rose take different approaches, imposing mandatory risk management procedures worldwide. Andrews admits that on occasion this can put a local office at a competitive disadvantage, but adds that the offices rarely make too much of a fuss. “They bleat, but don’t fight,” he says. “I don’t get the impression at all that people are short-cutting the system.”

Fraser Ashman, partnership secretary at CMS Cameron McKenna, says if in doubt, using UK standards is always the best way forward. “We’ve got to come down on one side or another, and we tend to come down with a higher standard,” he says. “We’ve spent a lot of time visiting the offices and trying to deepen the way risk management is thought of. That’s probably the biggest change, the recognition that having got all the good ideas you’ve got to hammer them home.”

Keeping up reputationsThe other hot topic for risk managers is the issue of reputational risk. Freshfields recently hired a manager from Deutsche Bank to focus specifically on reputation, and the increase in IPOs and AIM listings from foreign companies in London has caused firms to sit up and look at the issues.

“I think reputational risk has always been an issue. You’re only as good as the last job you did,” points out Taylor Wessing COO Gordon Jackson.

Ody adds: “You have to know what new clients are coming in and into what areas the firm is pushing. If you take on a client that’s dealing with logging hardwoods illegally, for instance, the firm’s reputation is at risk. I think this has always been important, but the international reach of the major firms is now such that you don’t have ears to the ground as much.”

In order to deal with the issues of risk management many firms are examining the way their departments function. DWS’s conversion to limited-liability partnership (LLP) status last week (1 November) was preceded by a review of the firm’s risk management function, which had operated mainly through a compliance committee.

Finney says that after examining the committee’s function the firm realised that a wider team was needed to look after more aspects of risk, so a new risk management committee was formed. It includes partners and support staff from across the firm.

“We’re trying to coordinate initiatives and set standards that all apply to risk. The important thing is that we know risk is being properly dealt with by management,” says Finney.

Taylor Wessing is another firm using its LLP conversion to look at risk management, while the merger between DLA and Piper Rudnick Gray Cary at the beginning of 2005 prompted a completely new risk management system. DLA Piper managing partner Nigel Knowles brought in risk management professional Julia Graham to oversee the new function, which has expanded to cover the entirety of the firm’s operations.

Graham’s team is split into three to manage different areas of risk, including health and safety and conflicts checks, and she has experts to call on across the world to help implement the firm’s procedures.

“They go out and help to implement, coach and review all the policies which we set centrally,” explains Graham. “I’m very keen on promoting to people that there’s a benefit in managing risk. The better we manage things, the fewer the occasions there are that I have to say to a lawyer that he can’t open a new matter.”

Education is key to risk management, and all the major firms now have e-learning tools in place for partners, associates, trainees and support staff. These have to be kept up to date to take account of new rules, laws and directives. Generally risk managers report that their lawyers are taking notice of procedures.

Smith says that the e-learning programme at Addleshaws garnered a “really good response” from non-fee-earners, who also had to take and pass a course.

Pinsent Masons risk management partner Andrew Paton believes real life experiences are the best way of driving home a lesson about risk management. Confessing to being responsible for a claim against the firm when he was a young lawyer, due to the common error of not filing a defence on time, Paton adds: “There’s no holier than thou. The worst sin you can commit is not seeking help when you’ve made a mistake. Actually, you can strengthen relationships with clients if you act quickly and appropriately.”

But all firms are aware that they need to keep on top of risk management and that it is not a theme that looks like dying away.

As Addleshaws’ Smith says: “We could always do better and I think any professional firm could always do better. It’s a day-to-day, week-to-week exercise. It’s a topic that we’ve got to be on top of all the time.”