Comment: Taking the initiative

Feature

posted 27 Aug 2010 in Volume 13 Issue 1

Comment: Taking the initiative

Howard Finger, CEO of VinciWorks, reveals how ready UK law firms are for the authorised internal regulation system.

“At the risk of decrying the emperor’s new clothes, the fundamental problem is that we are burdened by a lot of unnecessary, irrelevant and counterproductive regulations. Whilst our firm complies with the various anti-money laundering guidelines, we do so solely because of the big stick element of compliance... Given that we are moving towards a regulatory regime where dissenting views are discouraged, I would rather not be quoted on this subject,” says a managing partner at a mid-sized international law firm.

Nick Smedley, Lord Hunt of Wirral and The Solicitors Regulation Authority (SRA) are all to be commended on their visionary proposal to “transform regulation” from a prescriptive to an outcomes-focused or principle-based regime.

Lord Hunt’s authorised internal regulation (AIR) system is supposed to be available to all firms who demonstrate their “willingness and ability to set up internal governance standards that are robust enough to secure compliance”.

Sounds good, but the SRA also acknowledges that a “big culture change” will be required if the burden of regulatory responsibility is to dramatically shift from the regulator to law firms. The problem is cultural and behavioural change is usually driven by fear. The smoker gives up smoking after the heart attack from fear of dying. Law firms generally implement anti-money laundering processes, procedures and training because they fear criminal prosecution and the loss of liberty. However, if there is no perceived clear and present danger, cultural change is usually relegated to the ‘too hard basket’.

Collaborating on compliance

In April 2004, the mandatory requirements, criminal sanctions and lack of prescription in the new EU anti-money laundering (AML) regulations drove 14 leading law firms to form the Online Compliance Consortium (OCC) and pioneer a collaborative approach to managing compliance.

Firms including Allen & Overy, Herbert Smith and Mayer Brown pooled intellectual and financial resources, prescribed a mutually agreeable standard and built tools to address the mandatory AML training regulations.

The intended outcome of the OCC online training was to raise awareness of the risks associated with money laundering and terrorist financing, and it worked. All member firms reported immediate and ongoing increases in the number and quality of inquiries made to their money laundering reporting officers and client acceptance teams.

Over 160 firms – including 60% of the top 100 UK firms – have now adopted the OCC AML online training standards and solutions for their fee-earners and support staff.

Nine of the founding firms plus several others have since collaborated to develop a series of risk management courses to raise awareness of the inherent risks associated with client engagement, conflicts, confidentiality, matter management and email. These firms were probably the first clear examples of the SRA’s new philosophy.

However, the risk management courses were not as widely adopted as the AML courses. The response from the majority of law firms was that, unless the training was mandatory and non-compliance severely penalised, it would be “just too hard” to get fee-earners and particularly partners to take the training.

Tackling complacency

Even with the threat of custodial sentences, there are still many firms which fail to get all staff (and particularly partners) to complete the mandatory AML training.

One has to ask, if there had not been criminal liability, how many firms would have made the effort to achieve AML compliance?

There are firms where everyone, from the senior partner to the messenger, just does what they are told when they are asked – this is the culture of the firm. In these firms compliance seems easy.

In other firms, where the culture feels less ‘corporate’, where staff may feel more independent and the maverick rainmaker is admired, the quest for firm-wide compliance simply falls into the ‘too hard basket’.

There are firms that are committed to the “big culture change” and to supporting robust internal governance and a principle-based regime. There are managing partners who have forced the adoption of a culture of compliance by threatening to withhold partner drawings, freeze pay increases or block promotions. No one is surprised that these strategies work but few have the courage or inclination to wave these big sticks.

If the SRA is really going to lay down its big stick, how many firms will voluntarily enforce the necessary cultural shift and make the effort to implement “robust internal governance” and “comprehensive regulatory compliance”, adhering to “the highest professional standards”?

– howard.finger@vinciworks.com