Culture matters: a new era for law firm risk management

Jessica Clay, Iain Miller, and Lucinda Soon are delighted to have contributed a chapter in the new title by Globe Law and Business “Risk Management in Law Firms”, published in October 2022. The chapter, republished here with kind permission, discusses the SRA’s increased spotlight on ethical culture in law firms, its origins and evolution through the years, where we are now, and what is on the horizon.

Regulatory risk management in law firms has traditionally focused on ensuring appropriate and adequate systems, processes and controls are in place and that they operate effectively. This requirement was first formulated in the Solicitors Regulation Authority’s (SRA) Code of Conduct 2007 under Rule 5, which placed a duty on firms to evidence such arrangements, encompassing “all systems, procedures, processes, and methods of organisation”[1]. Chapter 7 of the SRA Handbook 2011 positioned these arrangements as mandatory outcomes. Firms were required to “have a clear and effective governance structure and reporting lines”[2] (Outcome 7.1) and “effective systems and controls in place”[3] (Outcome 7.2). These remain core duties, set out as standards, within paragraph 2.1 of the SRA Code of Conduct for Firms (Code for Firms)[4], effective from November 2019, and their importance is emphasised in various places within the current SRA Standards and Regulations, not only in the Code for Firms, but also in the SRA Enforcement Strategy:

“We will usually take action against a firm alone, or in addition to taking action against an individual, where there is a breach of the code of conduct for firms or of our other requirements. For example… when the events demonstrate a failure which relates to the culture, systems, supervision arrangements or processes for which the firm, as a whole, should be held accountable.”[5]

The requirement for firms to have adequate systems and controls in place to identify, monitor and manage risk is therefore well-established. However, it has become increasingly apparent to both the SRA and those involved in law firm risk management that the effective operation of business systems and governance arrangements relies on the collective understanding and behaviours of people within a firm to comply with those arrangements; simply having a gold standard set of processes, policies, and procedures is not enough if they are not followed and understood implicitly. This raises the question of the effectiveness of risk management, and the role that law firm culture has to play within this context.

Several high profile prosecutions brought by the SRA, notably Solicitors Regulation Authority v James and Others [2018] EWHC 3058 (Admin), demonstrate the damaging consequences of poor workplace culture on solicitors’ mental health and the ensuing regulatory risks that can arise.[6] Notably, these cases generated significant criticism towards the SRA for pursuing allegations solely against the individuals concerned, despite their conduct taking place within a law firm culture that was acknowledged to be toxic and unsupportive.[7]  In parallel to rising mental health concerns, the SRA has also received increased reports of bullying and harassment in legal workplaces, sparked by the #metoo movement. Between 2017 and 2018, the SRA received 70 complaints about sexual harassment in the workplace, many of which related to law firm working environments.[8] Reports have continued in subsequent years.[9] Against this backdrop, there have been several developments over recent years that demonstrate not only the SRA’s increased focus on ethical culture, but also its endeavours to extend its gaze in the direction of the firms and entities it regulates.

Ethical culture under the spotlight

A year after the High Court delivered its judgment in the case of Solicitors Regulation Authority v James and others, the SRA published its new Standards and Regulations 2019. While the timing is not remarkable – in that work had been underway for some time to overhaul the SRA Handbook 2011 – the temporal context within which the Standards and Regulations were born is noteworthy. This was a time when issues pertaining to poor workplace culture had not only started to surface, but were also being met with growing disconcertion across the profession. It is therefore unsurprising that several references are made to ethical culture within the Standards and Regulations. The introduction preceding the Code for Firms expresses that the standards contained therein “aim to create and maintain the right culture and environment for the delivery of competent and ethical legal services to clients.”[10] This message is reinforced within the SRA Enforcement Strategy, which stipulates the SRA’s aim to “promote a culture in which ethical values and behaviours are embedded”.[11] The explicit inclusion of culture is significant. While the SRA offered little guidance to firms at the time the Standards and Regulations came into force in November 2019, in respect of what a good culture might comprise, it marked an important starting point.

Then, in the summer of 2021, the SRA launched its thematic review on workplace culture. The review analysed responses to a survey of more than 200 solicitors working in law firms, together with follow up interviews with participants willing to discuss their answers in more detail and in-depth interviews with 12 law firms of varying sizes. The output of the thematic review was a report published in February 2022[12] along with new guidance to firms on the workplace environment and risks of failing to protect and support colleagues.[13]

The purpose of the guidance is made clear; to set out “the main standards that apply to law firms and those responsible for their culture and the systems in place within them”.[14] The guidance also offers clarity in relation to the SRA’s expectations in relation to systems and controls, supervision and competence, and fairness and inclusion. Firms are reminded of their obligation under paragraph 2 of the Code for Firms: “A failure by firms to put in place and effectively implement systems to support and protect staff will increase the risk that individuals or firms breach one or more of our other regulatory requirements.”

Firms are equally reminded of the requirement under paragraph 4, to ensure proper systems are in place to supervise clients’ matters and regularly monitor and assess employees’ workloads, capacity, and competence. The SRA also states it expects firms to have in place “systems and culture so that staff can confidently raise concerns and be supported if they are experiencing problems.” This expectation on firms also aligns with subsequent guidance published by the SRA specifically on sexual misconduct, which states that the SRA “expects firms to foster a culture of zero tolerance of sexual misconduct, where staff feel that they can speak up freely and report matters to their firm and to us.”

Finally, the guidance on workplace environment reinforces the fundamental ethical tenets contained within the SRA Principles, notably Principle 6 and the duty on firms to act in a way that encourages equality, diversity, and inclusion, and sets out its expectation on firms “to treat all of their employees fairly and with dignity”. This is stated to include creating an environment that is inclusive and free from discrimination, bullying, harassment or victimisation. Notably, in respect of this expectation, the SRA guidance refers to Principle 6 and paragraph 1.2 of the Code for Firms which imposes an obligation on firms not to abuse their position by taking unfair advantage of clients or others.[15] Indeed, there is currently no more explicit an obligation in the SRA Codes of Conduct than these requirements. This leads us onto the most recent development in the SRA’s endeavours to regulate ethical workplace culture.

Within a month of the SRA publishing its suite of resources and new guidance on workplace culture, it launched a consultation on proposed changes to its rules and Codes of Conduct to address issues relating to wellbeing and unfair treatment at work.[16] Specifically, the addition of a new provision is proposed in respect of both Codes in the following terms:

Code for Individuals: “You treat colleagues fairly and with respect. You do not bully or harass them or discriminate unfairly against them. You challenge behaviour that does not meet this standard.”[17]

Code for Firms: “You treat those who work for and with you fairly and with respect, and do not bully or harass them or discriminate unfairly against them. You require your managers and employees to meet this standard, and you challenge behaviour that does not meet this standard.”[18]

The link to culture was made clear by the SRA’s General Counsel, Juliet Oliver, when the consultation was launched:

‘'A poor workplace culture can not only affect wellbeing, with all the distress and concern that brings, but also ethical behaviour, competence and ultimately the standard of service received by clients. It’s timely that, further to our recent thematic review and guidance, we consult on new rules that explicitly spell out what we expect from the firms and individuals we regulate.”[19]

Despite the underlying intention of the SRA Standards and Regulations to remove rules and increase flexibility on those whom it regulates, the proposed rule change cuts against the grain by placing an additional express obligation on the regulated community. Such a decision is unlikely to have been made lightly, and demonstrates a clear intention by the SRA to regulate the workplace and work-based relationships. Its current approach to do this has been limited to reliance upon the SRA Principles which are wide ranging and cover similar territory at a higher level. These include an obligation to act: “in a way that encourages equality, diversity and inclusion” (Principle 6) and to “act in a way that upholds public trust and confidence in the solicitors' profession and in legal services provided by authorised persons” (Principle 2).[20] However, the dangers of this approach are evident from the Divisional Court’s decision in Beckwith v Solicitors Regulation Authority [2020] EWHC 3231 (Admin).  In that case the Court was of the view that any breach of a Principle had to be anchored in a provision of the Code itself. The proposed new rules will effectively address the lacuna the SRA faced following Beckwith.

The rule change will require the approval of the Legal Services Board, so the changes will not come into force until the end of 2022, at the earliest. However, it seems unlikely that any response will cause the SRA to fundamentally shift its approach. As and when the changes are implemented, they will represent a harder-edged enforcement approach to law firm ethical culture than the SRA is able to adopt within its current regulatory framework. Indeed the SRA acknowledges its current Codes of Conduct “do not include an explicit requirement to treat people fairly at work, requiring us to rely on [the] wider Principles and Standards.”[21] The additional rules will thus strengthen the SRA’s ability to regulate and enforce against poor ethical culture within its regulated community. However, they are also anticipated to raise several challenges, as explored below.

 

Assessments of unfair treatment

The scope of the proposed new rules, to treat colleagues and employees fairly and with respect and not to bully, or harass them, or discriminate unfairly against them, is wide. Not only is it wide, it concerns behaviours that by their nature involve often complex emotional and subjective elements. Feelings of being treated unfairly and without respect may vary widely depending on person and context. While there will be serious and unambiguous circumstances concerning bullying, harassment, and discrimination, where behaviours may easily and objectively be viewed to breach the new rules, there are likely to be more circumstances where, on an objective assessment, the outcome is not so clear-cut. This raises the question of how the SRA will assess reports it receives concerning these behaviours and the evidence it will seek. Its guidance on workplace environments points towards possible factors it will consider, including:

• “A pattern of the abuse of authority by senior staff that has been left unchecked by the firm
• A complaint of discrimination, victimisation or harassment not dealt with by the firm in a prompt and fair manner
• Complaints of bullying raised with the firm over a period of time involving a number of staff and inadequate action taken by the firm as a result; or evidence that the incidents had not been brought to light sooner because of the firm's culture and/or inadequate reporting and disciplinary procedures
• A firm pressurising staff to withdraw their complaints     
• Ineffective systems and controls, including failure to supervise or support staff leading to serious competence or performance issues or delivery failures
• The imposition of wholly unreasonable workloads or targets.”[22]

However, the position is less clear where there is no evidence of abuse of authority or of bullying, discrimination, or harassment, but where an employee considers they have nonetheless been treated unfairly or without respect. This may arise with the imposition of “wholly unreasonable workloads or targets”. However, this situation presents difficulties for law firms where, save for objectively onerous targets being imposed, perception is always subjective. For instance, one employee may consider their workload to be wholly unreasonable while another may perceive the same workload to be reasonable. Whether a person feels unfairly treated or disrespected will depend on their perception of the situation, which will in turn be influenced by their personal situation and circumstances and potentially other factors including contextual ones, such as how they perceive relationships at work and the support they receive, or do not receive.

 

Concurrent employment claims

Another challenge concerns the overlap between the proposed new rules and claims falling within the remit of the Employment Tribunal, including those relating to the Equality Act 2010. Where bullying, harassment, and discrimination at work relates to, or arises because of, a protected characteristic under this Act, an unlawful discrimination claim may be pursued.  Where this is the case, a breach of the Equality Act 2010 will likely be of sufficient seriousness to automatically result in a breach of the SRA’s new rules. Notably, even before these rules come into effect, such a contravention would bring into play a breach of Principle 2, to act in a way that upholds public trust and confidence in the solicitors’ profession and in the provision of legal services. However, the new rules raise several questions in terms of how they will operate alongside employment claims.

First, it is unclear how the SRA will consider situations that involve parallel employment proceedings; for example, whether it would commence an investigation while proceedings are on-going. This would be in line with the SRA’s general approach in relation to parallel investigations: “our work will continue unless there is a real risk of prejudice to the regulated person or to other proceedings… There is no double jeopardy arising from parallel proceedings (Ashraf v General Dental Council [2014] EWHC 2618 (Admin)). This is because the character and purpose of civil, criminal and regulatory proceedings are different.”[23] Thus, where a matter reported to the SRA involves on-going civil or criminal proceedings, the SRA decides whether to stay its proceedings based on a number of factors, including the need to take immediate action to prevent harm to clients or others, and the stage of any parallel proceedings – whether they are only contemplated, on-going or near conclusion. It is probable the SRA will adopt a similar approach in respect of potential breaches of the new rules; however, this is likely to result in a lot more reports being received by the SRA, alleging unfair treatment at work, and this will require greater internal resource and may result in more investigations being undertaken.

Following on from this, a second issue arises which concerns the reporting of such matters to the SRA. Currently, the SRA is less likely to be concerned about proceedings that are being defended before the Employment Tribunal, where the findings are yet to be determined. However, under the proposed new rules, on-going employment claims for unfair treatment and discrimination would require prompt reporting to the SRA under the reporting obligations set out in the Codes of Conduct, regardless of whether such proceedings result in an adverse finding.[24]

Thirdly, the new rules may inadvertently lead to the SRA adopting a quasi-employment claims role, whereby claimants may be able to choose not to pursue claims before the Employment Tribunal (instead seeking to bring the matter to the SRA’s attention) to avoid the costs associated with such action or where they have been unfairly treated but not in relation to a protected characteristic under the Equality Act 2010. The remedies available to claimants will of course differ, and the potential of SRA prosecution will not provide a claimant with damages for their unfair treatment; however, it might be viewed as an easier, no-cost route to right the wrong they have experienced.

Where the SRA draws the line between reports that warrant regulatory intervention and those that may be more appropriately resolved via civil means alone will need to be carefully considered. This will necessarily involve future guidance to the profession setting out the factors the SRA will take into account in making its decision to ensure its actions are proportionate, reasonable, and consistent.

 

Challenging behaviour that does not meet the standard

The new rules will also impose a positive obligation on both individuals and firms to “challenge behaviour that does not meet this standard”.  In theory, this requirement makes good sense. However, difficulties arise in the interpretation of this obligation and how it would apply in real life scenarios. For example, if a junior solicitor witnesses what they perceive to be inappropriate behaviour by a partner towards a junior colleague during an after-work event, they would be obligated under the proposed new rule to challenge that behaviour. This raises questions as to what challenging the behaviour would necessarily entail and if in such a situation, a junior solicitor would have the confidence to do so. What if the situation, as the solicitor perceives it from afar, is not as it appears, is mistaken, or is consensual between the relevant individuals? What steps should the solicitor take to satisfy themselves that this is behaviour that requires challenging? If the behaviour is indeed inappropriate, a solicitor who witnesses it and does nothing to challenge it would, under the new rules, be breaching their obligations under the Code.

From a firm’s perspective, the new rules will place a heavier burden to not only have relevant policies, processes and controls in place to prevent unethical behaviours, but to also challenge the behaviours of managers and employees that do not meet the expected standards. This may involve taking a harder line against certain individuals or groups of individuals, who have previously been able to bypass processes because of their seniority or level of profitability. Ensuring ethical values are demonstrated, and unethical ones are challenged, across the board may require a deep cultural shift, one which must be supported and rigorously upheld and followed by the senior leaders.

 

Personal and professional boundaries

Finally, the proposed new rules raise prevailing issues in respect of the SRA’s regulatory reach into matters within an individual’s private life. Indeed, the SRA’s consultation document makes specific reference to the new rules having a wide remit:

“Our proposal is that the obligation should go beyond staff in a formal employment relationship, to include others with whom solicitors and firms regularly work closely, such as contractors, consultants, barristers and experts who may be instructed by the firm. This is reflected in the use of the term 'colleagues' in the draft standard.

Although the obligation is principally intended to cover behaviour at work (whether in an office or remotely), in our view it would also cover behaviour outside the workplace or direct delivery of legal services as well. This is where behaviour is in the context of a relationship between colleagues rather than a purely personal relationship.”[25]

The SRA is not covert in its rationale behind these paragraphs, referencing the case of Beckwith v Solicitors Regulation Authority [2020] EWHC 3231 (Admin) in which the Divisional Court confirmed that the public would expect members of the profession to treat junior colleagues with respect. While in that case, allegations could not be proved absent a breach of a specific rule in the Code, the proposed new rules would provide the SRA with the hook it would need if such a case arises in the future. What remains less clear is how wide the impact will be in relation to other situations where, for example, inappropriate communications and social media use in one’s personal life are alleged to constitute unfair and disrespectful treatment to colleagues, being all persons employed or instructed by the firm. The new rules therefore significantly extend the SRA’s reach into the private lives of its regulated community.

 

Conclusion

It seems unlikely that responses to the consultation will fundamentally shift the SRA’s intention to introduce greater requirements on individuals and firms to treat colleagues fairly and with respect. While these ethical tenets of behaviour are enshrined within the overarching SRA Principles, the new rules will emphasise further that such behaviours will not be tolerated. Clearly, little disagreement to the new requirements can be made substantively; there can never be any justification for treating colleagues unfairly or disrespectfully nor should anyone be subjected to bullying, harassment, or discrimination at work. The change that awaits lies in the practical shift that law firms and those involved in law firm risk management must now make towards ensuring culture is managed effectively, alongside systems, processes, and controls.

As a bare minimum, firms should ensure policies are in place, which are reviewed and updated periodically, to guide employees on expected behaviours at work and the reporting mechanisms to challenge inappropriate and unethical behaviours they witness. Monitoring compliance with these policies and procedures will be the greater challenge and will likely require an assessment of the culture of the firm to remove any barriers that exist which might prevent open and honest communications. Encouraging an openness to challenge unethical behaviours at work has certainly taken on a new imperative and this will require a systemic shift in approach. A firm’s culture is often reflected in the behaviours of senior people, and it is the senior members of firms who will need to not only talk the talk but also walk the walk for cultural change to take place and to remain effective. In addition to investing in firm-wide training on the obligations under the new standards and the reporting requirements that apply alongside it, reviewing key performance indicators and seeking to reward those who display ethical behaviours will also help to create a culture where the new standards are more likely to be met.

This article was first published in October 2022 as a chapter in the title “Risk Management in Law Firms” by Globe Law and Business Ltd. It is republished here with kind permission.