Risk Dimensions Newsletter Issue 8: February 2023

In the latest edition of our Risk Dimensions newsletter for solicitors, we focus on ‘Partner oversight and supervision’. Victoria Prescott from Marsh’s Risk and Error Management team discusses the risks of rogue partner conduct and unacceptable behaviour, touching on current case law and red flags of which firms should be aware. Additionally, John Kunzler gives a general view on the recent ‘Effective supervision – guidance’ from the Solicitors Regulation Authority and its impact on law firms. 

Supervision in law firms

Authors: John Kunzler, Marsh

Supervision in law firms has been attracting increasing attention from stakeholders:

• Insurers enquire about it; especially in the hybrid work environment.
• Solicitors Regulation Authority (SRA) has been revising standards, visible in our Risk Alert from March; the SRA also published renewed ‘Effective supervision – Guidance’ in November.
• Clients expect assurance even if they are reluctant to pay for it on a time basis, leading to it potentially having to be built into hourly rates.

Supervision means different things to different people. At its simplest, often most unpopular level, it is defined as overseeing and checking work. The November Guidance requires that there is supervision of  ‘the legal services the firm provides in order to provide assurance to the organisation that all the legal services it delivers are of appropriate quality and are delivered in accordance with our Standards and Regulations.’

What level of supervision does the SRA expect? The November Guidance suggests ‘A supervisor should see enough of the work of those they are supervising to be satisfied that the overall quality of work is satisfactory and the risks relating to the work are being managed appropriately on a day-to-day basis.’

Supervision should be viewed as a relationship to develop people — aimed at maintaining and growing the capability of the person being supervised so that they are enabled to deliver high quality service to clients within the regulated environment.

Supervisory input is very rarely seen on files that end up as claims. It is possible that it is simply not being recorded, but it seems more likely that the matters that end up as claims are those where it does not occur. Our recent online opinion survey ranked various processes for their perceived effectiveness in preventing claims. We hope to publish the full results later this year. In addition to rating perceived effectiveness, the survey also asked how successfully the processes had been integrated at the respondent’s firm. Supervision was one process considered, with the following result (based on the 52 responses so far):

Based on these responses, it seems firms see risk management value in the process of ensuring that supervision is properly monitored and records are created. However, managing to embed such processes across firms is proving to be a struggle — even at large firms.

The November Guidance also highlights that effective supervision has a role to play in preventing negligence risk, and indicates that firms need to develop a supervision plan. This plan should use a risk-based approach that takes into account various factors, including:

‘The nature of the inherent risks involved in the work being supervised  – for example, work involving the use of a high degree of judgement will usually carry more risk of errors or failure than routine or primarily administrative work.’

The SRA expects justification for the risk-based approach adopted and evidence of the arrangements in use. Record-keeping is as important in this area as any other relevant process.

The Guidance also highlights the importance of ‘appropriate’ supervision arrangements being in place for all employees, including partners and consultants:

‘For senior staff, ethical and regulatory competencies and standards of supervision and leadership should also be considered.’

We are developing guidance notes for specific areas of practice, based on claims data collected over many years, to help identify the inherent risks. The main purpose is to help with risk improvement in general. However, we consider that these notes could also assist with design of appropriate supervision. We aim to publish these over the next 12 months.

We have been promoting the value of peer review as an integral part of the supervision process for some time, especially given the change to remote working. Several firms have reportedly highlighted the use of peer review to the SRA and this is subsequently noted in the November Guidance as an aspect of good practice: ‘for senior staff particularly where novel or particularly complex issues are involved.’

We consider it should be encouraged for all levels of experience. In our view, the overall quality of supervision is a key component in the construction and expression of a firm’s tone and risk culture.

Many of the substantial claims relating to the unethical actions of partners reveal limited supervision or oversight. We suggest there are clear parallels between behaviours associated with violating safety procedures and lessons to be drawn from the world of safety design. Research by Jerry Williams into safety violations scenarios aided the development of his Human Error Assessment and Reduction Technique (“HEART”)^[1]. This research established the relative impact of eight identified factors (violation-producing factors) on the likelihood that safe operating procedures would be ignored:

For partners with a low-level of supervision, the violation-producing factors all look highly relevant. The possible negative influence of an unchecked partner on company culture can be inferred through the assumption their behaviour will be replicated by other employees, with no disapproving authority figure present to mitigate. The factors are equally relevant and applicable to junior colleagues.

From a positive perspective, the value of supervision can lie in detecting issues and providing a potentially disapproving authority figure; this can have a significant impact in preventing poor behaviour. Supervision creates opportunities to explore and identify potential issues and give guidance, before situations develop. As the old adage goes, an ounce of prevention is worth a pound of cure.

Partner oversight - supervising the supervisors

Author: Victoria Prescott, Marsh

Historic examples of rogue partner behaviour

The risk of rogue partner conduct has always been an intrinsic problem for law firms. The historic examples of Michael Fielding (who between 1998 and 2001 embezzled £5.8 million from Lawrence Graham’s client account – with the partners having to pay out more than £1.2 million because of his fraud), Nathan Andrew Iyer (who between 1999 and 2010 stole £2.8 million from Ince & Co and clients) and Christopher Grierson (who pleaded guilty in 2012 to stealing £1.3 million from Hogan Lovells in a four-year travel expenses scam) have demonstrated that fraudulent conduct from rogue partners is not a problem limited to a few high street or very small firms. 

The 2021 case of Dixon Coles & Gill (a former firm) v The Rt Rev. Nicholas Baines, Bishop of Leeds, Leeds Diocesan Board of Finance, regarding the misappropriation of over £2 million from the firm’s client account, demonstrates the continuation of rogue partnership problems. However, the Court of Appeal held here that innocent partners will not always be liable for losses suffered by former clients that are caused by a fraudulent partner. Ostensibly, this has led to some relief in the profession — even though the partners in this case made a very specific argument under the Limitation Act that they were innocent trustees.

The inherent trust in partnerships has historically allowed for the opportunity of significant abuse in law firms; no matter the size or turnover of the firm. In 2014, the Solicitors Regulation Authority, in its Risk Outlook, emphasised the risk of rogue partner conduct. It stated that typically 30% of interventions involved suspected dishonesty, with the issue arising ‘as a result of systems and controls failing to detect a rogue individual or group of individuals misusing money’.  In November 2019, the regulator again identified the need to recognise problems with solicitors and provided guidance in relation to various solicitor fraud, dishonesty, and serious misconduct risks.

Most firms are fully aware of the red flags that can indicate possible fraudulent behaviours by partners. These include lavish entertainment, changes to lifestyle, and unusual requests relating to funds and payments. Additionally, the majority of firms have put in place procedures and controls to decrease the opportunity for staff and partners to commit fraudulent acts so easily. A key example is monitoring measures imposed to detect nefarious acts at an earlier stage. Further, publications and advice concerning identifying and controlling fraudulent behaviour are freely available to the profession. A gap in advice, however, still appears to exist in relation to other types of unacceptable conduct, identifiable in senior positions, which may fall short of explicit fraudulent behaviour, but still requires prompt management intervention.

Oversight of unacceptable conduct 

The recent case of ENRC v Dechert LLP & Others, exemplified unacceptable behaviour and highlighted the requirement for higher sophistication in partner oversight — especially the ‘rainmakers’ who tend to be given elevated autonomy and authority within firms. These individuals can exploit their positions when making bad decisions. Although not having the severity to attract criminal prosecution, there is still the possibility of costly notifications and, commonly, consequential regulatory proceedings.

In ENRC, Mr Gerrard, a senior partner at DLA Piper, was retained to lead an investigation into the activities of mining giant ENRC’s subsidiary ‘SSPGO’ in 2010. In 2011, Gerrard made the controversial move to become head of white-collar crime at Dechert, taking the ENRC case with him. While attempting to “kick-start” more substantial work, Gerrard leaked privileged documents to the press, which were highly damaging to ENRC. In addition, Gerrard also made at least 22 statements to the Serious Fraud Office (SFO) contrary to his client’s interests. When ENRC terminated its retainer, Gerrard retaliated by sending the SFO a collection of papers; including confidential and privileged information. In 2022, ENRC was successful in a negligence claim against Dechert and Gerrard. The court found that Gerrard was negligent in relation to his advice (including a failure to record), expansion of the investigation, failure to protect ENRC’s privilege, and sending material to the SFO.

Dechert have already agreed to pay £20 million in interim costs to ENRC, with the full extent of loss yet to be determined. Such cases can result in reputational damage, and the regulator has indicated it will await the full conclusion of the High Court proceedings before moving ahead with its investigation.

Although the exact issues seen in ENRC are specific, the case highlights the potential vacuum that can exist in firms when considering the oversight of partner work and conduct. Many firms will have detailed evidence of policies and procedures to govern the risks in delivering legal services and advice; including supervision with regular independent file reviews. Still, it appears that these systems have vulnerabilities when it comes to the active management of partners. This is possibly due to various factors including culture surrounding company rules or lack of resourcing to combat this issue. Ultimately, the events amounting to unacceptable conduct are able to penetrate the defences, barriers and safeguards firms have implemented.^[2] One could conclude that, particularly for partners, design of these breached defences, barriers, and safeguards are therefore either inadequate or more easily circumvented.

Be vigilant for warning signs

Firms need to be alert to the possibility of partner conduct falling short of the required standards, possibly deploying a higher level of scrutiny when one or all of the following red flags are identified:

• Rudeness or bullying behaviour directed towards junior/support staff.
• Barriers raised to sharing clients.
• Resistance to delegation.
• Desire to have a ‘sole expert’ status, often being derogatory of the expertise of others.
• Avoidance of case explanation e.g. ‘it is all very complicated.’
• Aggressive credit claiming on billing.
• Resistance to procedural/administrative controls.
• Disregard for rules or authority.
• Threats to leave if autonomy is challenged.

Reducing the likelihood of potential problem

We have set out in the table below a number of risk management recommendations intended to limit the possibility of a claim stemming from failures concerning unacceptable partner conduct:

Final thoughts

It is imperative that firms identify and prevent inadequate or inappropriate work practices. As well as ensuring talented individuals feel connected to and confident about their firm’s culture, this also mitigates the potential for a claim or regulatory investigation and resulting consequential reputational damage. Ensuring retention of the best talent is essential for firms seeking to maintain a successful and profitable environment in the years to come.

Firms must decisively strive for excellence in all elements of practice. Conduct that falls below the required standards must be swiftly challenged and a zero-tolerance approach to unacceptable behaviour enforced. A casual, or negligent, approach to conduct can gradually become habitual, potentially resulting in a deliberate disregard for internal procedure; or even the rule of law.

_{[1] *Williams, J.C. (1985). HEART- A proposed method for achieving high reliability in process operation by means of human factors engineering technology. In Proceedings of a Symposium on the Achievement of Reliability in Operating Plant, Safety and Reliability Society (Vol. 16), pp.5/1-5/15.}

_{[2] James Reason ‘Swiss Cheese’ model: Reason J. Managing the Risks of Organizational Accidents (Routledge, 2016)}