The Growing Risk of Personal Conduct to Law Firms

The leadership team of a company play a crucial role in setting the tone for its daily operations. When the management philosophy is based on ethical practices and behaviour, it creates a positive impact on the entire organisation and allows leaders to guide employees by setting a good example and encouraging them to make decisions that benefit both themselves and the company.

When a business is run ethically from the top down, it fosters stronger bonds between members of the management team, which, in turn, creates greater stability within the company. By prioritising ethical practices, a management team can build a foundation of principled behaviour that has long-lasting positive effects on a company. Such effects can include the ability to attract and retain highly talented individuals, or to establish a positive reputation within the community.

Personal conduct within law firms has become an increasingly important issue in recent years. The actions and behaviour of individuals associated with a firm, including employees, third-party vendors, customers, or agents, can have significant implications for the firm’s reputation, client relationships, and legal liability. In the digital age, personal conduct has extended to behaviours beyond the workplace to include social media posts or individual acts that could be seen as controversial or unethical. To mitigate personal conduct risk, firms are implementing stricter codes of conduct and taking an active role in monitoring and managing employee behaviour both in and outside the workplace.

The Definition and Importance of Conduct Risk

Conduct risk refers to the potential misconduct of individuals associated with a firm, which can include a wide range of actions that have adverse effects on the firm’s operations, clients, or the market as a whole. Examples of conduct risk within law firms may include professional behaviour such as improper trading, the sharing of material non-public information (MNPI), conflicts of interest, or breaches of professional conduct rules. However, there have been several high-profile incidents from the wider business world in recent times where the private behaviours of senior executives have cast a shadow over organisations, illustrating the importance personal conduct has on a firm’s reputation and prosperity.

Conduct risk is of utmost importance to law firms as it can damage their reputation, erode client trust, and result in legal and regulatory consequences. Firms are expected to build a culture of good conduct, where employees understand and adhere to ethical standards, regulatory requirements, and professional obligations.

Regulatory Expectations and Legal Consequences

Regulators, such as the Financial Conduct Authority (FCA) in the UK or the Securities and Exchange Commission (SEC) in the US, have increasingly focused on conduct risk within the legal sector. They expect firms to have robust systems and controls in place to identify, manage, and mitigate conduct risk.

Failure to adequately address conduct risk can result in severe legal and regulatory consequences. Firms may face fines, reputational damage, licence suspensions, or even criminal charges depending on the nature and severity of the misconduct.

Conduct Risk Assessment and Management

Effective governance structures play a crucial role in managing conduct risk, with clear lines of responsibility and accountability and active involvement from senior management. To effectively manage conduct risk, law firms should implement a comprehensive conduct risk assessment and management framework.

Firms need a solid understanding of the specific activities, relationships, and situations that could give rise to misconduct, considering both internal and external factors. Once identified, these risks should be quantified and prioritised using key risk indicators, qualitative assessments, or scenario analyses before appropriate controls are implemented to mitigate any potential impact.

Ongoing monitoring is essential to ensure that controls remain effective and to identify any emerging risks and firms should establish robust reporting mechanisms to encourage the reporting of potential misconduct and create a culture of transparency and accountability.

Best Practices

To effectively mitigate conduct risk, law firms can foster a strong ethical culture, with behavioural standards, values, and expectations communicated to all employees through training programs, regular communications, and senior management leading by example.

Regular education and training programs are essential to keep employees informed about their ethical and professional obligations. Topics such as conflicts of interest, client confidentiality, and the firm’s policies and procedures should all be included. Effective communication and reporting channels should also be established to encourage the reporting of potential misconduct, and employees should feel comfortable raising concerns without fear of retaliation.

Having a robust compliance framework in place is essential to ensure adherence to relevant laws, regulations, and professional standards and this should extend to implementing policies, procedures, and controls to prevent and detect potential misconduct. Firms should conduct regular internal audits and reviews to ensure compliance and to ensure they stay ahead of potential risks and enhance their risk management strategies.

A future priority

It’s well-established that firms must have adequate systems and controls in place to manage risk and safeguard reputations and client trust. However, 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. Having first-class processes, policies, and procedures is not enough if they are not followed and understood implicitly. There is also an obligation on both individuals and firms to challenge behaviour that does not meet standards.

Each law firm is unique and conduct risk management strategies must be tailored to specific needs and circumstances. By prioritising best practices, law firms can navigate the increasingly complex regulatory landscape and minimise the potential consequences of personal conduct risks. However, effective conduct risk management is no longer an option, it is now a necessity for any organisation to operate successfully and ethically.

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Authored by

Andrew Leaitherland
Andrew Leaitherland Founder and CEO
Although Andrew is an employment lawyer by training, over the last fifteen years he has built up extensive experience in leading M&A activity with professional services firms including leading the listing of DWF Group plc on the main market of the London Stock Exchange. Andrew uses these skills to advise strategically on inorganic growth opportunities for all types of professional services businesses, in conjunction with other members of arch who support on the necessary legal work. Andrew is also the Chair of The Legal Director and a NED of Summize which gives him great insight into how the respective businesses can collaborate to further the interests of our clients.

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