Navigating professional risks and opportunities facing the legal profession in an ever-changing legal and commercial landscape

Previously published by Law360.

The legal profession is undergoing significant changes, driven by a range of challenges and opportunities. In recent years, the legal landscape has experienced a period of transformation, marked by unforeseen challenges and emerging horizons. This transformation has been propelled by factors such as the COVID-19 pandemic, evolving regulations, the increasing prominence of environmental, social, and governance (ESG) issues, and the growing role of artificial intelligence (AI). In this article, we examine the risks that lawyers face due to these factors, including the Solicitors Regulation Authority (SRA) focus on addressing toxic workplaces and sexual misconduct, cultural shifts, and the implications of AI.

Regulation and the expanding reach of the SRA

The SRA has played a pivotal role in shaping the legal profession's response to these changes. Traditionally, it enforced strict rules governing legal professionals' conduct. However, a significant shift occurred with the introduction of the Standards and Regulations in November 2019, replacing the previous SRA Handbook. These new Standards adopt a principles-based and flexible approach, emphasising the importance of solicitors' professional judgment in assessing conduct compliance. This change has introduced an element of uncertainty and potential for disputes compared to the previous rules, which were more detailed and specific.

Additionally, the SRA has focused on areas that were previously less regulated, such as addressing toxic workplace cultures, sexual misconduct, and issues related to solicitors' private lives. This shift signifies a recognition that the legal profession needs to address issues beyond criminal convictions or bankruptcy, extending its purview to conduct outside of legal practice that may impact the delivery of safe services.

The SRA's attention to workplace culture led to a thematic review in February 2022, revealing concerns about negative workplace environments, including long working hours, client pressures, excessive workloads, and mental health issues. This cultural scrutiny has brought about commercial challenges, as law firms strive to balance fostering a positive workplace culture with growing commercial pressures.

The SRA is also considering expanding its fining powers, potentially allowing for unlimited fines in cases of severe misconduct. This follows the implementation of Section 207 of the Economic Crime and Corporate Transparency Act 2023, which grants such powers. The SRA's lobbying for these powers, including undisclosed efforts in the past, underscores its commitment to addressing serious misconduct, even though the definition of "serious misconduct" remains somewhat vague in the regulatory framework.

The dispute over unlimited fining powers has led to a significant division of opinion, with the Legal Services Board supporting the SRA bid while the Solicitors Disciplinary Tribunal (SDT) strongly opposes it. The outcome of this dispute will shape the regulatory landscape, potentially reducing the SDT role to only handling cases warranting a strike-off or severe non-financial penalties.

With the SRA's expanding reach, it is essential for lawyers to ensure that their firms have appropriate insurance coverage for regulatory and disciplinary issues.  The SRA Minimum Terms and Conditions (MTC), which dictate a minimum level of insurance cover and policy terms for solicitors/law firms to have, do not mandate professional indemnity insurance for SRA disciplinary proceedings. Many primary layer professional indemnity policies align with the MTC, but insurers often offer additional coverage to fund defence costs for solicitors accused of misconduct by the SRA.

Economic impact

The legal profession has faced its share of economic challenges, including government instability, the Ukraine invasion, and the cost-of-living crisis. Despite these difficulties, many law firms have demonstrated resilience, investing in staff and expanding their workforce. The increase in fee earner and support staff headcounts indicates the sector's commitment to its people. However, client pressure to reduce fees and the migration of clients to more cost-effective alternatives have placed additional pressure on law firms, leading to a 33% rise in law firm insolvencies. Factors contributing to these insolvencies include increased costs related to energy, staff, and professional indemnity insurance.

Clients delaying bill payments can pose another significant risk, especially when essential payments like VAT, taxes, or insurance renewals are due. To mitigate this risk, law firms can require clients to deposit sufficient funds before commencing work.

The property and conveyancing sector has been particularly affected by market volatility and a surge of claims against firms of solicitors is expected. Lenders or claimants involved in repossessions are also attempting, once again, to try to pursue claims against solicitors for losses assessed as if the underlying transaction/lending in question had taken not taken place, rather than on the more limited scope of losses that only flow from information provided by the Solicitor being allegedly wrong. Economic instability, compounded by COVID-19, has also led to a rise in claims brought by litigants-in-person, often causing delays, increased costs, and added complexity due to their limited financial resources and legal knowledge.

Client expectations and advice on costs

There has been a notable increase in professional negligence claims related to clients' financial and business affairs, as clients increasingly expect lawyers to provide business advice. This can be particularly challenging when law firms operate as alternative business structures incorporating various services. Lawyers must navigate this terrain carefully, resisting the temptation to offer non-legal advice and maintaining a focus on legal aspects while striving for commercial awareness and understanding of the client's business.

The importance of providing sufficient disclosure to clients, ensuring they can make informed decisions, has been underscored by legal cases such as that of Belsner v CAM Legal Services Ltd. In the High Court of England and Wales.¹ Failure to provide necessary information can lead to potential reimbursement claims for success fees and cost shortfalls, contributing to an increase in solicitor/client costs disputes.

The impact of ESG

ESG concerns are a prominent topic across legal and insurance markets, affecting law firms in two significant ways. Firstly, clients are increasingly demanding ESG expertise, leading to the establishment of ESG practices within many law firms. This reflects a changing client landscape where sustainability and ethical goals drive service preferences.

Secondly, lawyers and law firms are being evaluated based on their sustainability credentials and ESG policies. Clients now require law firms to meet specific criteria for reporting obligations. Protests by organisations like Extinction Rebellion indicate the public's growing concern for sustainability and ethical practices, making it essential for law firms to manage their reputations and address ESG considerations.

The rise of AI

AI is emerging as a powerful tool in the legal field, but it comes with its own unique regulatory risks. While AI has been employed for drafting legal documents, it has shown a propensity for errors and the creation of fictitious precedents. This has resulted in cases where lawyers were fined or sanctioned for referencing fictitious cases. While AI holds great promise in the legal profession, its limitations and pitfalls must be addressed to fully realise its potential. Many law firms are exploring the potential uses of AI and cautiously testing its benefits.

Lawyers must be vigilant in protecting confidential client and business information when using AI tools. Establishing clear policies for staff regarding AI usage is prudent. Additionally, the widespread availability of AI tools like ChatGPT makes it challenging to distinguish between text written by a human and that generated by AI. This underscores the need for policies guiding employees on AI use.

Other developments

The extension of fixed recoverable costs to simpler claims for £100,000 or less represents a significant development in the legal landscape. These changes, effective from October 1, 2023, are expected to lead to lower costs and motivate parties to cooperate. However, the lack of clarity in the rules may result in significant satellite litigation. The complexity of these changes remains a key issue, and the Ministry of Justice has opted not to provide guidance, leaving litigators to adapt to the evolving landscape.

Takeaways for law firms

With the expanding reach of the SRA, firms should be engaging with staff (including non-solicitors) to provide regular training on the Standards and Regulations and to review their workplace culture. Firms must be prepared to explain their findings and strategies to improve areas of concern to the SRA.  It is worth firms checking their professional indemnity insurance policy to ensure cover is provided for SRA disciplinary/regulatory disputes and, if not, purchase disciplinary cover as an 'add on'.

Firms should also ensure that engagement letters and terms and conditions adequately warn clients that they will not be advising on non-legal matters, and when such advice is required, clients must be advised, clearly, in writing.  Fee earners should also be educated about the dangers of mission creep and ensure policies and processes are in place to ensure sufficient cleared funds are on account before work commences and routinely advise clients about costs to avoid solicitor/client disputes.

Law firms should also consider what ESG looks like for them, how efforts will be measured and how credentials can be improved. It's worth considering implementing a policy governing the use of generative AI and ensuring that it is understood by all staff. Finally, firms must consider the impact of the fixed recoverable costs reforms; preparing template advice and ensuring litigation teams properly understand the new rules and their impact is advisable.

Conclusion

The legal profession is undergoing substantial changes. With evolving regulations and an increased focus on addressing toxic workplace cultures, sexual misconduct and issues related to solicitors' private lives, the reach of the SRA is ever-expanding. Firms should ensure that they have appropriate professional indemnity coverage for regulatory and disciplinary issues. 

The rise in AI and ESG represent new opportunities for law firms. It is important that firms have suitable training, as well as robust policies and procedures in place so that they can adapt to these developments and challenges, address new risks and seize the emerging opportunities to successfully navigate this period of transformation.

¹ [2020] EWHC 2755 (QB)