Accountability and the Regulation of the Large Law Firm Lawyer

Publication Date01 Sep 2014
DOIhttp://doi.org/10.1111/1468-2230.12088
AuthorJoan Loughrey
Accountability and the Regulation of the Large Law
Firm Lawyer
Joan Loughrey*
The regulation of solicitors in England and Wales has undergone great change in the wake of the
Legal Services Act 2007. This article considers these regulatory developments through the lens of
accountability, focussing on the regulation of transactional lawyers and the large commercial
firms. It examines to what extent the Solicitors Regulation Authority’s regulatory framework
promotes accountability, examining entity regulation, outcomes-focussed and principles-based
regulation, reporting and disclosure obligations, the Compliance Officer for Legal Practice and
the sanctions system. It argues that although transactional lawyers cannot claim the benefit of the
ethical principle of non-accountability, as far as they and their firms are concerned, the regulatory
framework is both unnecessary and insufficient. It duplicates the function of accountability to the
client and fails to hold transactional lawyers to account for significant regulatory risks that they
present, such as the practice of creative compliance.
INTRODUCTION
The legal services market in England and Wales and the legal profession’s
regulatory framework has undergone immense change in response to the Legal
Services Act 2007. This article considers the significance of regulatory develop-
ments through the lens of accountability, an under-explored concept in the
literature on legal professional regulation, focussing on the regulation of corpo-
rate lawyers carrying out transactional work and large commercial firms. This
specific focus is warranted as it has long been recognised that there are significant
differences between the various sectors of the profession, such that changes in the
legal services market and in regulation may have very different implications
depending on the sector concerned.1It will be argued that as far as the large
commercial firms and their lawyers are concerned, the regulatory framework is
both unnecessary and insufficient. It duplicates the function of accountability to
the client and fails to hold transactional lawyers to account for significant
regulatory risks that they present, such as the practice of creative compliance.
This term, coined by McBarnett and Whelan,2refers to:
the use of technical legal work to manage the legal packaging, structuring and
definition of practices and transactions, such that they can claim to fall on the right
*Professor of Law, Centre for Business Law and Practice, School of Law, University of Leeds. A
version of this paper was given at the International Legal Ethics Conference, Banff, Canada July 2012.
1 J. P. Heinz and E. O. Laumann, Chicago Lawyers: The Social Structure of the Bar (Chicago, Il:
Northwestern University Law Press, 1982) 319; A. Francis, ‘Legal Ethics, the Marketplace and the
Fragmentation of Legal Professionalism’ (2005) 12 International Journal of the Legal Profession 173.
2 D. McBarnet and C. Whelan, ‘The Elusive Spirit of the Law: Formalism and the Struggle for
Legal Control’ (1991) 54 MLR 848, 848.
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© 2014 The Author. The Modern Law Review © 2014 The Modern Law Review Limited. (2014) 77(5) MLR 732–762
Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA
side of the boundary between lawfulness and illegality. It is essentially the practice of
using the letter of the law to defeat its spirit, and to do so with impunity.3
The accountability, or lack thereof, of transactional lawyers is a matter of
considerable societal importance, not least because of creative compliance, which
is a feature of tax avoidance activities4as well as the financial engineering that
caused so much harm during the financial crisis.5For example, lawyers acting for
banks and financial institutions assisted their clients in designing off balance sheet
and structured finance products that technically met regulatory requirements but
were deliberately designed to circumvent risk based capital adequacy regulation
and evade regulatory controls.6The purpose of the regulatory controls was to
ensure that banks had sufficient capital to absorb unexpected losses and declines
in asset values. However the use of off balance sheet finance and structured credit
allowed banks to increase their level of risk exposure whilst disguising the true
level of risk they were exposed to, which in turn left them ‘hugely vulnerable to
shifts in confidence and liquidity’.7The result was that many banks were
inadequately capitalised when the crisis began and unable to absorb the losses that
materialised. While structured finance can be used for beneficial and legitimate
ends, designing products that enable clients to evade the controls aimed at by the
regulatory framework in the public interest and that defeat the protective
purposes of that regulation raises profound problems of accountability. A lawyer
who is answerable only to the client may have little incentive to resist client
demands to devise such products. Nor is it a sufficient response that it is up to
regulators to police such behaviour: as McBarnet has argued, the financial
products were designed by lawyers to be opaque, making it extremely difficult
for regulators to see ‘through the fog of complexity’.8Such designed opacity
allows ‘the culture of circumvention’9to go unchallenged, and impedes the
ability of regulators to hold those responsible to account. It also obstructs debate
over the legitimacy of such activity and the degree to which lawyers should be
accountable for it.
The article is structured as follows. It first considers what is meant by
accountability, a concept that has been termed a ‘chameleon’.10 It then argues
3 D. McBarnet, ‘After Enron Will “Whiter than White Collar Crime” Still Wash?’ (2006) 46 British
Journal of Criminology 1091, 1091.
4 HC Committee on Public Accounts, Tax Avoidance: The Role of Large Accountancy Firms HC 870
(2013) 8–9. While this report highlights accountancy firms, it is likely that tax lawyers, who
compete with these firms, also engage in this practice.
5 D. McBarnet, ‘Financial Engineering or Legal Engineering? Legal Work, Legal Integrity and the
Banking Crisis’ in I. MacNeil and J. O’Brien (eds), The Future of Financial Regulation (Oxford: Hart
Publishing, 2010); S. Ashby, ‘The Turner Review on the Global Banking Crisis: A Response
from the Financial Services Research Forum’ 17 at http://www.nottingham.ac.uk/business/
forum/documents/researchreports/papers.pdf (last accessed 30 October 2013).
6 McBarnet, ibid, 69–74.
7 FSA, The Turner Review: A Regulatory Response to the Global Banking Crisis March 2009 (London:
FSA, 2009) 20.
8 McBarnet, n 5 above, 80.
9ibid.
10 A. Sinclair, ‘The Chameleon of Accountability: Forms and Discourses’ (1995) 20 Accounting,
Organizations and Society 219.
Joan Loughrey
© 2014 The Author. The Modern Law Review © 2014 The Modern Law Review Limited. 733(2014) 77(5) MLR 732–762

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