Operational Risk Management during the retainer


In this webinar we look at risk management during the retainer, such as compliance considerations, good file management and proper client communication.


About the presenter: Tim Prior, is a director of PNCR Legal and a Quality Assurance Risk Management Consultant. I've been a solicitor since 1986 and am a Certified Fellow of the Institute of Risk Management. Since the late 1980s, he has specialised in Professional Indemnity work and is a regulatory inspector for the Council of Licensed Conveyancers, is contributed to Frances Silverman’s Conveyancing Handbook and wrote the Lexcel risk management toolkit.

The way matters are handled from the outset will often determine how well the matter is handled from then on. But not always. After all, there’s no guarantee that if you start the matter in the right way, that it will remain on track.

Compliance considerations

Let’s consider compliance first as it is an area very likely to keep Partners awake at night. Quite apart from any reputational damage, a regulatory investigation can be a drain on management time over many months and can result in a referral to the Solicitors Disciplinary Tribunal (SDT). Of course, your compliance obligations at the outset are important and should not be overlooked. These are covered at length in other webinars and articles we’ve produced. However, your obligations do not come to an end once you have complied with your matter acceptance and file opening obligations.

One area of particular concern to the SRA is anti-money laundering procedures including how legal firms deal with terrorist financing and the financial sanctions regulations that were announced by the Treasury on 8 August 2017. The European Union Financial Sanctions (Amendment) Regulations 2017, which came into force on that date, list the regulations affecting over 20 countries. Financial sanctions may be flagged up at the outset but equally may arise during the retainer. The existing regulations already placed an obligation on businesses to report to the Treasury if they were acting for anyone subject to financial sanctions, but enforcement action could only be taken against financial services firms. Now, law firms can also face enforcement action.

In a note on the SRA’s website, Crispin Passmore, SRA Executive Director said:

"The new financial sanctions regulations mean legal firms are obliged to comply with the reporting regime. These regulations, and the approaching Financial Action Task Force inspection, are further reminders of the importance the UK and global community places on tackling terrorist financing.”

"Risks exist for every single solicitor and law firm whether conveyancing on the high street or handling global transactions, and each should be thinking about their responsibilities for tackling these issues."

For general guidance on financial sanctions you can visit the Treasury’s website and the Office of Financial Sanctions Implementation offers a free e-alert service to keep you up to date with developments.

Compliance consideration and retainer creep

Another potential area of risk is retainer creep. As a matter develops, the scope of work can change significantly. This can give rise to a compliance issue if it means that the person handling the matter no longer has the resources or skill to carry out the client’s revised instructions. See Outcome 1.4 in the SRA Code of Conduct. If a matter becomes more complicated, it is important to ensure that the fee earner has the right experience. Note also Outcome 1.5 which requires your service to be competent.

Retainer creep can also have a knock-on effect on costs. If your initial costs estimate becomes out of date, perhaps because the matter now requires a more senior lawyer, remember Outcome 1.13. You must give clients the best possible information about costs as matters progress. Note also that Indicative Behaviour 1.3 would expect you to update the client on the name and status of the person taking over conduct of the matter, and any revised supervisor.

In the same vein, don’t overlook the obligations contained in the memorably titled Consumer Contracts (Information, Cancellation and Additional Charges) Regulations from 2013. They apply to any retainers entered into after 13 June 2014. I don’t propose going to go into any detail about those regulations because they are covered in a separate webinar. However, you probably know them as the regulations that define ‘on premises’, ‘off premises’ and ‘distance’ contracts and that impose the cancellation provisions in some circumstances, as set out (one hopes) in your Terms of Business.

If the costs have gone up significantly, you may have inadvertently created a new retainer that must also comply with these regulations.

Client Communication

One of the key areas in which the really good solicitor differentiates him or herself from the average solicitor is in the way they communicate. They may have the same level of knowledge but the way in which that knowledge is imparted can make all the difference. That is so important, both within the firm and externally.

Your communications with clients and others should be clear and precise, making them more efficient and cost effective. Rather than dealing with matters piecemeal, to get a file off your desk, address all the issues in one go in a structured way. Try to avoid ‘stream of consciousness’ communications that ramble on. Use language that is appropriate to the client’s knowledge and experience.

A frequent cause of complaints is the failure to keep clients updated with what’s going on. In most cases, in most areas of law, you know far more about what’s going on than the client does. You know when it’s quite normal for nothing to be happening. The client can find silence frustrating. It’s important that you communicate even when there are no developments. Manage your client’s expectations.

How good communication can help fight cyber-crime

When it comes to communication, cyber-crime presents major risks for firms. When I last presented this webinar, the SRA had not long before issued a press release dealing with the very same issue. That was on the 1 June 2015. In the meanwhile, very little has changed. Indeed, in its latest issue of Compliance News, circulated earlier this month, the SRA highlights that it is the fastest growing crime in the country, accounting for 75% of all reports to the police.

Although firms are changing, many are too trusting and are happy to discuss confidential matters by phone and e-mail without verifying that they are dealing with their client. Fraudsters are very good at impersonating others, both using social engineering techniques during telephone conversations and by sending e-mails, with varying degrees of sophistication, that look as though they have come from a reliable source. When funds are being transmitted, e-mail interception is prevalent. The risks in both areas are now very well known, although some firms still maintain the belief that a firm like theirs would not be targeted by fraudsters.

This is to misunderstand the threat. In my opinion, fraudsters rarely target specific firms. Fraudsters rely on technology such as spyware to identify vulnerabilities which can be exploited. In targeting money or data, they are focusing on the vulnerability not the identity of the firm or those likely to be affected by their actions. Even small firms frequently hold significant sums in their client accounts so almost any firm is a potential target, although those with a client account are more at risk. It’s not a question of ‘if’ you will be attacked, but when.

Your COLP should be assiduously keeping up to date with developments. Follow the guidance issued by your bank, your insurers and the SRA. Monitor the Action Fraud and National Cyber Security websites.

Reliance on experts

Apart from communication with clients, it’s important to review how those in your firm communicate with others such as experts. Lexcel accredited firms must adhere to the eight requirements in paragraph 7.5 of the Standard (version 6).

One of the requirements is the giving of clear instructions which should specify the timescales to which you are working. Instructing an expert late in the day can have serious consequences for you, leading to missed time limits.

Remember that you should not rely completely on an expert. I mentioned earlier your regulatory obligations in terms of knowledge and skills. In Bond v Livingstone, a case from 2001, the claim stemmed from a contractual dispute, but the claimant had also suffered personal injuries as a result of some hair treatment for baldness which went wrong. As the claim was pursued in contract, the solicitors thought they had six years in which to issue proceedings, whereas the personal injury element became statute barred after three years. They didn’t appreciate this (and neither did counsel). When they were sued, it was held that going to counsel provided no defence. They should have understood basic matters such as the relevant limitation periods. You can’t abdicate your own responsibility by relying on counsel. You also need to sense check the advice that you receive.

Many of you will have heard of Bond Solon, who train expert witnesses. Every year they carry out an expert survey, the results of which are published on its website. The latest one was published on 19 December 2016.

Even though the Civil Procedure Rules 1999 made it clear that an expert’s duty is to the court and not to the side paying him or her, almost twenty years later, some 48% of experts said that they had come across others acting as hired guns, willing to give an opinion that helps the side paying them - for a fee. Obviously, you have a duty to act in your clients’ best interests but a higher duty to uphold the rule of law and the proper administration of justice. See, for instance, the preamble to the Code of Conduct.

Worryingly, 33% of experts said that they had felt pressured by lawyers to change their reports in a way that damaged their impartiality. Some were told they wouldn’t receive further work or that they wouldn’t be paid if they didn’t.

In your instructions, do not attempt to interfere with the impartiality of your chosen expert. Remember Outcome 5.8 in the Code of Conduct which says that you must not make or offer to make payments to witnesses dependent upon their evidence or the outcome of the case.

Good internal communication is equally important. It’s increasingly common for matters to be handled by more than one lawyer. All sections of the profession are facing cost pressures. Clients wanting more for less is a common theme. As the routine aspects of a matter can often be handled by someone less well qualified - or not qualified at all – it makes sense to allocate tasks to the person best able to deal with it. Whilst doing so can make your practice more effective and profitable, poor communication carries the risk that key messages will not be recorded or shared.

The way in which matters are communicated within the team are key.

  • Does your case management system record all activity in a way that is visible to all those involved on a matter?
  • Are conversations with clients logged or recorded in a file note or e-mail?

Similar risks can occur in transactional work that spans teams in different departments. A corporate matter, for example, may require input from lawyers in real estate, planning, employment, pensions and tax. The way everyone’s role is managed needs care. In effect, the Partner in charge needs to take on a project management role.

A similar matter requiring the same expertise may sometimes be handled by the lawyers in one practice area. The thinking goes, you know, I think we can handle this. Then, just before the deal is done, the Partner has a crisis of confidence and decides that actually specialist input is required. Only to find that the person you really need to speak to is on holiday, and not contactable. The only specialist is a relatively inexperienced lawyer with no specific knowledge of the relevant commercial sector whether it be solar, nuclear or whatever. It is easy to see how this could result in a poor service for the client.

A major trend over the past few years have been the rise of fixed priced work. In these situations, if one department has agreed a fixed fee for a matter and then needs to call on help from other departments, there can be cost tensions between departments which can impact on service delivery.

On the question of fixed fees and the extent of your duty to advise clients, firms should note with some relief the latest decision of the Court of Appeal in September in Thomas v Hugh James Ford Simey (2017) EWCA but I don’t intend to say any more about it, except to say that the firm did interview its client and instructions were clearly recorded. Read the judgment if you offer a fixed fee service.

File Management Risks

It’s probably a truism to say that well managed files give rise to fewer claims. It is so important that files are well managed. But it is becoming harder to identify one place where you can find everything you need to know for a specific matter. Large numbers of firms still run paper files but, more and more, those files do not provide a complete record of the file. A lot of information is held on the case management system. Not all e-mails will be printed out for the file.

Matters are no more straightforward from the other perspective. An increasing number of firms are running electronic files, without any paper file. Except that, if you drill down, you often find significant records kept on paper in notebooks and elsewhere such as paper diaries. Some of the records may be kept in a separate notebook for each client but many will not be. Some notes will be scanned in at file closure, others will just be archived when the notebook is full. What chance of finding a specific note, 6 months down the line, let alone 3 years’ later when the claim comes in?

Any situation where there is no definitive record of the client’s matter presents risk. Do consider whether your file review process addresses this risk.

File notes, or attendance notes, play a crucial role in documenting progress made on a file. However, practice varies considerably across the profession. Many conversations are not properly documented, which is an issue. Some record is better than nothing but it is far better to have a clear record of important conversations. If the conversation only concerns the moving of a meeting from Monday to Wednesday, it is not so crucial (so long as the diary entry is updated).

For those important discussions, adopt a clear structure. Separate the instructions you receive from the advice that you give. Note any impact on costs. Record the next steps to be taken by you and by the client. In appropriate cases, file notes may be communicated to the client. Consider sending them a copy so that they can confirm their agreement. Alternatively summarise the discussion in an e-mail which can take the place of a file note. This gives the client an opportunity to say that an important factual point has been overlooked or mis-recorded.

Delay on files is a significant cause of complaints. Some matters have their own dynamics, with each step driven by a response from the other side. Others are dependent on you to avoid delay. Any matter on which nothing is happening is a potential negligence claim. Each fee earner has a responsibility to check his or her workload on a regular basis to make sure that matters are being handled appropriately. Supervisors need to check too, perhaps with the aid of nil movement reports. These can identify matters on which no time has been recorded recently. Obviously, what is an acceptable period of inactivity will vary from matter to matter.

Delay can result in key dates being missed. These are not dates for routine meetings with the client that can be rearranged without any adverse consequences. These are the dates which, if missed, will have adverse consequences. They need to be recorded on the file and on your case management system or shared calendars.

If you run paper files and you are handed the file run by someone who is on holiday, for instance, just as the call is put through, it can be really helpful if key dates are obvious from the file. On a checklist or core information printout. These dates should be immediately obvious to anyone picking up the file. As you are likely to be busy with your own work, the quicker you can establish the position on someone else’s file the better. You want to spend the minimum amount of time getting up to speed on it.

Of course, if it’s your file, verify information that your client has told you about key dates. This is particularly relevant to litigious matters. Often clients will tell you the relevant date from memory at the outset and this is the date that gets entered in your key date diary. No matter what information subsequently comes to light, the original date is not reviewed. That’s risky. As soon as you get hard information, check whether it tallies with the date you were given at the outset. If it doesn’t, update your key date entry.

Another essential check is to have a member of staff monitoring the key date diary. If you have a case management system, it is likely that key dates will change from green to amber and then red as the date approaches. Do you know how many cases go to amber? And red? Hopefully none but the performance of all your teams should be monitored.

My final point on file management concerns undertakings which generate a significant number of claims. Some of them involve arguments over whether what was said was an undertaking or not. Any unequivocal statement of intent, whether or not it contains the word undertaking, is binding and will be construed against the giver.

Most firms tend to differentiate the routine undertaking from others on the basis that it is somehow less onerous. This is particularly so in property work, both residential and commercial. Undertakings in the latter tend to be in relation to costs payable by the other side. Routine undertakings in residential work are the ones that tend to involve very significant sums of money. Arguably then, these carry far more risk than the bespoke undertaking in unusual cases and yet tend to be treated more casually. Is that wise? It really does make sense to monitor routine undertakings, to ensure they are recorded on the file. An extra safeguard would see undertakings flagged with Accounts so that they can check an undertaking has been taken into account before processing payments from client account.

On conveyancing, it is usual to see an undertaking to discharge a first charge. The ones that can sometimes be overlooked are those given in relation to second or third charges. Like key dates, undertakings should be marked on the file.

In the last few minutes, I’d like to just touch on two other areas of risk. The first is the risk assessment. Most firms undertake a risk assessment at the outset. Where they judge what level of risk they would attach to the file. That is a good exercise. Unfortunately, in many cases it turns out to be little more than window dressing as the vast majority of fee earners see every matter they deal with as low risk. This is not very helpful for the firm that wants to identify how many high-risk matters it is handling. It often arises because the firm has not communicated effectively how fee earners should view risk. If matters that subsequently give rise to complaints, claims or even time written off were not flagged up as being medium to high risk, review whether they should have been. This may identify a training need for your staff.

The second point is to consider the risk that could arise from dealing with parties who are unrepresented. Outcome 11.1 in the Code of Conduct says that you must not take unfair advantage of third parties in either your professional or personal capacity. The SRA is logging complaints that it receives as a result of taking unfair advantage of a non-client. On a scale of 1 to 10, it scores 6. That indicates that it is taken very seriously by your regulator.

This webinar forms one of a series of webinars available on our Quality Assurance and Risk Management portal for client.  Topics range from operational risk management to matter opening procedures and anti-money laundering. To learn more visit our solicitors webpage

Whilst care has been taken in the production of this article and the information contained within it has been obtained from sources that Aon UK Limited believes to be reliable, Aon UK Limited does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the article or any part of it and can accept no liability for any loss incurred in any way whatsoever by any person who may rely on it. In any case any recipient shall be entirely responsible for the use to which it puts this article.

This article has been compiled using information available to us up to 16/06/22.

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