What is Law Firm Risk & Compliance?
The risk and compliance function is a critical part of a law firm, as its purpose is to mitigate risks the firm may face and maintain compliance with all applicable laws and regulations.
This space is broad, extremely fast-growing and ever-expanding, so there’s always something new to learn. With regulations and legislation being created and amended all the time, a proactive and effective compliance function is essential to the running of law firms everywhere.
Whilst it can be broader and more complicated we like to talk simplify talking about law firm risk and compliance by separating it into 4 categories
- Conflicts of interest
- Anti-money laundering
- General regulatory Risk & Compliance
- Claims, complaints and professional indemnity matters
Conflicts of Interest
As a solicitor, it is your responsibility to always work in the best interests of your client, which gives rise to the need to check for conflicts of interest.
For example, if a new client approaches your firm to represent them when buying a house, the risk and compliance team will check the firm’s records to make sure the seller of the house is not already an existing client. If they are, this creates a potential conflict of interest as you may not be able to act impatially for both sides. There are specific rules laid out to specify under what circumstances you can take on this business, which the risk and compliance professionals will have to use to make a decision.
The SRA (Solicitors Regulation Authority) Code of Conduct explains the rules for legal conflicts of interest for solicitors in England and Wales, and there are other regulatory bodies which govern other jurisdictions around the world. As you can imagine, this can make international matters very, very complex!
The role of a risk and compliance team is to anticipate these conflicts in advance and resolve them if possible, proposing strategies to work around the problem. If this can’t be done, they will have to explain to partners and fee earners why the work cannot be taken on. For this reason, professionals in this space need to have skills in communication and relationship building, as well as confidence, diplomacy, and resilience.
Anti-Money Laundering & Client Due Diligence
It is important to know exactly who your client is and where their money is coming from. This helps prevent the firm from inadvertently facilitating money laundering and supporting organised crime.
While this may be a fairly simple process if your client is an individual, it can become more difficult when working with businesses or entities with complicated structures. The AML (anti-money laundering) professional must find out who is actually benefiting from the services the firm is providing.
If a fee earner is representing a company, you must carry out in-depth research and analysis of the corporate and financial structure of that company to work out who actually owns it to find out who the beneficiaries are.
Once you have this information, it’s time to consider any risks that may be involved with working with this individual. For example, if they are a politically exposed person (PEP) there may be potential reputational risk posed to the firm.
It is as complex as it sounds, but it is vitally important and key to preventing money laundering and fighting organised crime.
General Risk & Compliance
The risk and compliance team is responsible for knowing the rules, regulations, and legislation that applies to the law firm and for making sure that the firm is compliant. This can involve creating and implementing compliance policies and procedures and training fee earners and other staff on best practices to remain compliant.
These rules and regulations are always changing, so it’s important to stay up to date with all amendments and developments. Don’t forget, this applies to every jurisdiction in which the firm operates, so it can be a very complex job!
Some examples of regulations that apply to law firms are:
- The Modern Slavery Act
- The General Data Protection Regulations
- The Criminal Finances Act
- The 6th Anti-Money Laundering Directive
It may also be necessary to carry out internal audits to make sure the firm actually is compliant with all the relevant rules and regulations and to understand where the firm may be falling short.
The risk and compliance team will also be tasked with reviewing all contracts the firm enters into, including client letters of engagement and third-party supplier contracts. The terms of these contracts can impact the level of risk and liability the firm is exposed to and the scope of the work being taken on.
Claims & Complaints
When a mistake is made or something slips through the net, the risk and compliance team will be involved in handling the fallout. Even with the best will in the world, mistakes do happen and it’s difficult to prevent claims and complaints completely. Lawyers are humans too, you know!
When a complaint is made, the risk and compliance team will try to prevent it from escalating into a claim being filed against the firm. They will investigate the complaint and try to resolve it, or if not, outside counsel will be instructed to defend the firm in court.
Sometimes, a firm will need to take action against a client who hasn’t paid their invoice or caused another issue.
It’s vital to resolve claims effectively and learn lessons to prevent the same issue from arising again in the future. A poor claims record impacts the cost of the firm’s Professional Indemnity Insurance, so avoiding claims has real benefits for the firm and demonstrates a tangible impact of the risk and compliance team’s work which can really help secure buy-in from the partnership.
There you have it, an overview of the four aspects of law firm risk and compliance!
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