The Post Office Scandal: in-house lawyer regulation and practice in the spotlight
Summary
Failings within the legal community and its regulators have contributed to the devastating consequences of the Post Office and other corporate scandals. These failings need to be acknowledged and addressed at a systemic level and with collective accountability, to ensure the legal profession meets its responsibilities to society and that such harm is not repeated.
Legal services regulators have failed to provide the support and regulatory environment that ensures lawyers meet their professional obligations inside commercial and other organisations. While the problems are broad and extend across private practice and in-house lawyering, the focus of this paper is the in-house environment. This paper calls for these problems to be addressed with urgency.
Introduction
The Post Office Scandal spans over twenty years. It has resulted in catastrophic human consequences. Dozens of innocent people were imprisoned, hundreds criminally convicted, and their reputations, lives and financial standing ruined.
Lawyers both inhouse and in private practice played a significant role throughout, with a range of professional misjudgment and misconduct issues coming to light, including oppressive tactics in contracts and litigation (tactics that are widely used and known about), withholding of evidence, misleading information and cover-ups. Add to this wider corporate governance failings, including ineffectual committees and processes, failings in culture, and buck passing by executives.
The Post Office is a high profile example of how decision making and practice within institutions can go disastrously wrong, where lawyers are either not providing necessary checks and balances, or are directly or indirectly contributing to unacceptable activity. The Post Office Scandal is not, however, unique.
We can look to a raft of corporate scandals worldwide, that have real world and very human consequences, from Enron to Carillion to Rolls Royce to RICS. There are legal professionals involved in all such cases, in some cases pointing to poor judgement and professional misconduct, in all, demonstrating the relevance of lawyers in helping handle and prevent corporate illegality and bad practice.
Specific and deterrent-level accountability for corporate wrongdoing is critical, without exception, but it is also a priority to get to the root cause and prevent such cases occurring. This is the subject of this paper, with a focus on the in-house legal community and the context within which they operate.
In an era where collective and societal responsibility is at the fore, as can be seen through the growing prominence of the ESG (environmental social and governance) agenda, there is a need for renewed commitment to and standards of integrity and leadership - in public life, in business, and in the legal community. On behalf of the victims of corporate misconduct, of society at large, and of those who want to move forward free of these failings, those contributing to this paper call for a collective moment of humble review and a sea change in approach, with a focus on the regulatory weaknesses that enable cases like the Post Office to happen, and the environment necessary to prevent them.
In-house independence - the underlying problem and elephant in the room
Legal obligations
The 2007 Legal Services Act and the regulatory objectives and principles (s 1 of the Act) that flow from it lay out the role of lawyers (of various kinds) and their regulators (of which there are several) in society, including to support the constitutional principle of the rule of law and the proper administration of justice, to uphold public trust and confidence, and act with honesty, integrity and independence. The principles are sound. It is for all legal professionals to apply them, without exception and regardless of circumstance; for legal services regulators diligently to ensure that application; and for boards, shareholders, consultants and others who have the capacity (and responsibility) to contribute and support, to do so in a way that provides meaning to the purpose of the principles for society - the society we want and need, not necessarily the one we have.
The Post Office and array of corporate scandals demonstrate how meaningless the principles become without application. They are not front and centre in in-house legal practice and corporate governance and this leads to abject failure. We have let the principles of legal practice become degraded in the corporate environment, with lawyers in-house and in law firms becoming caught up in corporate interests, compromising in particular the requirement for acting with independence. Legal services regulators are all but absent from the corporate arena. There is a great deal of convenience to this reality and breach of legal obligation. Most in the corporate and corporate legal world have contributed to it in some capacity, whether by exploiting it or simply by accepting and not questioning it. We are all accountable and we all have a part to play in turning it around.
The regulatory requirement to act with independence underpins the in-house role. It is a core legal obligation of all lawyers. This principle is placed under strain by the structure of the client relationship and this manifests in a different way for those in-house compared to private practice: the client is the employer and the in-house counsel is reliant on them for their job and all that goes with it. This tension has been variously acknowledged, but never addressed head on by regulators or by the profession, which it must now be. For example Prof Stephen Mayson describes it as ‘inverse vulnerability’, and Profs Richard Moorhead, Vaughan and Godhino point to in-house lawyers tending to “align themselves with the organisation, rather than employing independent judgement…. [They] recognised themselves as sometimes having, ‘cognitive biases and bias blind spots which can impede’ the lawyer’s independent judgement…. The dominant position for in-housers is to work hard to avoid conflict with the organisation; only to say ‘No’ judiciously [if at all], and to defer to the organisation in the acceptability of risk.”
Being at risk of dismissal or disadvantage for doing your job is not unique to lawyers, but its implications are critical in the context of corporate responsibility and the legal requirement of lawyer independence. As Mayson puts it “Constant vigilance, and robust independent advice from in-house lawyers, is required. As we have seen in recent years, corporate failures can lead to consumer and societal detriment. In-house lawyers have to be able to sound alarm bells without the chilling effect of potential reprisal. The public interest in effective and fearless legal representation is engaged in much the same way as it is in private practice.” It is worth noting that private practice lawyers also struggle to advise independently of client pressure.
Practicalities
There is no agreed framework for maintaining independence in the in-house legal environment, beyond very general guidance from the SRA and Law Society. In-house lawyers use their judgement and develop their own techniques. The question to be addressed in the wake of the Post Office Scandal and previous scandals is whether it is in fact possible for a lawyer to maintain independence when they are employed by their client and if so with what practices and controls. This includes the regulatory basis and structure, as well as environmental influences including annual performance reviews of in-house lawyers carried out by bosses who are not lawyers, and whether in-house lawyers should be compensated in a way that ties them to the success of their client, for example via bonuses and stock grants. The same questions can be put to the maintenance of independence by private practice lawyers when they are reliant on and very close to their clients, but with a different fact basis, as has been seen in high profile cases such as RICS.
In-house lawyers today have no recourse to support from or protection by their legal services regulator in the event of unwarranted pressure or illegality by their employer - they are on their own. Nor is any legal services regulator proactively checking to ensure compliance. In-house lawyers need to be overseen by their regulator and to be able to raise their concerns with an external party who has the ability to provide actual support in the event of failings, and backing to the in-house lawyer vis-a-vis their client-employer in the independent legal position they are taking. This should be via normal, formalised process, not the subject of whistleblowing, which is necessarily a last resort. The absence of such recourse, oversight and support contributes to cases like the Post Office, where issues and illegality are not surfaced and dealt with when and how they need to be, leading to egregious consequences.
As a result of this systemic failure, organisations that hire lawyers for their utility do not understand or take into account, and are not required explicitly in the in-house employment contracts to take into account, the regulatory and societal responsibilities they carry. Without correct regulatory standing and proactive engagement by regulators, there is no emphasis within businesses that when hiring an in-house lawyer, organisations are hiring an officer of the court, who is legally required to give precedence to their public interest duties if they clash with what their client is doing or wanting to do. Nor is there an acknowledgment that this is the justification for legal professional privilege from which they benefit. A stronger regulatory presence, and consequent business processes and associated culture would have helped avoid the harm caused in the Post Office and other scandals.
In-house lawyers provide significant advantage and resilience to businesses, particularly in the context of the growing imperative of ESG, but not all businesses may want what having in-house lawyers comes with, when the reality is given full understanding and compliance. This is well known in the in-house community, where general counsel are ill treated or fired for not backing or enabling unacceptable business practices, who may be replaced with a more pliant alternative, and who may seek to work with leaders less likely to challenge their integrity, or leave the profession entirely. This contributes to an underlying insecurity and pervasive fear. The ‘chilling reprisals’ are well known, if rarely discussed and they definitively influence behaviour. A narrative has built up around what is normal, and how to handle it and be the most business-acceptable lawyer, and this is internalised into practice. Independence is not often enough part of the narrative. Calling out the reality and failings of this status quo has such wide reaching consequences there is reticence even to consider it. But it needs to be considered - discussed openly and all aspects and implications understood and acknowledged.
The systemic regulatory failure is also a contributing factor in the dysfunctional power dynamic between in-house counsel and their clients, that contributes to failings in governance. It is common for in-house counsel to take a posture of permission-seeking and preoccupation with demonstrating commercial value, rather than focusing on advising with authority and discharging their duty with the expectation and backing of their regulator. This is aggravated where the scope of the in-house lawyer’s role is not clear, for example where the general counsel does not have full remit over legal matters or correct involvement in governance.
The answer is in strengthening the environment, oversight, reporting of and support for the in-house legal function, as follows:
Strengthening oversight and support for in-house lawyers
Introducing clear rules and associated guidance on matters critical to independence of in-house lawyers, such as the following governance steps, where evidence shows such steps have a positive impact on risky behaviour:
specific obligations to issue formal ‘reporting up’ escalations within the client organisation when potential wrongdoing is found or when unlawful action is contemplated,
processes for proper handling of independent investigations,
clear allocation of accountability and responsibility for key legal risks, including awareness at board level.
A formal pathway for lawyers working in a corporate and institutional context to escalate issues and request support from their regulator in the discharge of their duties. This could include the regulator formally reiterating to the client the independence requirement for lawyers working in house, and the application of consequences that impact the client organisation, despite the regulator not having the legal remit to hold them to account. Such consequences could include loss of legal professional privilege and withdrawal of practising certificates for lawyers whilst working within that organisation, alongside issuing of a public notice to this effect.
Establishing the role of Compliance Officer for Legal Practice (COLP) within the in-house department, as is the requirement in private practice and for ‘alternative business structures’.
Introducing specific authorisation to practice in-house, including qualification, training and ongoing requirements responsive to the unique competencies and requirements of the general counsel and wider in-house environment. These jurisdictional requirements would also be required by non-UK qualified lawyers practising in the UK.
There are also immediate and practical measures available to strengthen in-house independence and the governance that supports it. These measures can be put in place now by the legal community themselves and the boards they work with, supported by recruiters and law firms, establishing best practice:
Immediate practical steps for in-house lawyers and boards
Update in-house lawyer employment contracts to ensure their mandate and regulatory responsibilities are clearly set out and understood.
Ensure there is a reporting line from the general counsel or lead/sole lawyer in-house to the senior non-executive director or chair of the board, not only to CEO or CFO, and with provision mandating communication to the full board in certain circumstances. Reporting lines to the CFO should be eradicated, as placing the general counsel below equal standing and limiting access to organisational leadership.
Ensure the contract of employment of the general counsel or lead/sole lawyer provides that termination of employment is a matter only for the board and not an operational matter e.g. for the CEO, as is the case under the UK Corporate Governance Code for the company secretary.
Implement the UCL best practice guidance for in-house counsel and boards, including close NED engagement and oversight meetings.
Alongside these measures, further steps and methodologies can be explored. These include applying legal services regulation oversight in some capacity to the operating entity itself, rather than only to in-house lawyers as individuals, such as set out below. There are advantages and disadvantages to these options and not all contributors to this paper support them.
Further options for consideration
A model similar to the statutory monitoring officer provisions relevant to lawyers in-house within public authorities, whereby there is a clear and well known external escalation route for in-house counsel to surface concerns, and ensure proper oversight and accountability, including public reporting. The Senior Managers and Certification Regime in financial services businesses, and oversight of the audit function within the Financial Reporting Council and the UK Corporate Governance Code and associated guidance are further methodologies in application. It is important to acknowledge here the role of culture alongside governance in corporate and institutional scandals, and also that, per Mayson’s Independent Review of Legal Services Regulation (IRLSR) “we should not presume that “corporate governance alone is sufficient to address the public interest”.
Authorisation of in-house legal departments as distinct business units, as recommended by Stephen Mayson in the IRLSR. Mayson describes the current position to be ‘akin to client self-representation, which attracts no regulation… [as if] as an officer or employee without any legal qualification, purported to advise or represent the organisation’, despite the fact that “the role of regulation is conceived to protect in some way both the client and the provider” and “once the organisation engages a regulated provider of legal services, whether as an independent contractor or as an employee, it becomes more than arguable that the usual ‘lawyer-client’ obligations should arise”.
Without proper support, oversight and reporting, society is relying on the strength of individual lawyers to stand up to their boards, bosses and clients, to whom they are beholden for their living, in circumstances where there may be confusion and enormous pressure at play. This has been seen time and again through corporate scandals to be a failed model. Legal services regulators and the wider legal and corporate community have watched this repeated cycle without action, taking the posture that no action is needed, and thereby leaving it only for lawyers to whistle blow, as if the problem is occasional and not systemic. The regulatory environment is failing - failing the public, and failing the legal profession, and in breach of the objectives of the legal services legislation. Definitive moves need to be made to address this collectively, at a systemic level, if it is not to roll on to repeat again and again.
Further contributing factors
Symbiosis between law firms and in-house counsel
There exists a symbiosis between legal counsel in house and those in private practice, where their success is entwined through their reliance on one another. Within this is a power dynamic, whereby in-house lawyers have historically leant on private practice to bring them authority. Some of this may stem from lack of confidence on the part of general counsel who see themselves as needing external experts to provide and validate advice, some of it from general counsel needing support to handle vast workloads, and some of it stems from attitudes to privilege, where private practice lawyers are thought to assure the protection of legal privilege more clearly because they are less likely to be seen as giving mixed business and legal advice. Relatedly, in particularly high value, sensitive, or ‘difficult’ matters, being able to say at board level or to a counterparty or regulator - we have taken independent advice, provides a prophylactic against criticism. The symbiosis enables in-house counsel to survive and is lucrative for law firms who rely on their clients for work and are aware of the revenue downsides of being a too critical friend.
The deficiencies of the symbiosis are highlighted through the Post Office and other scandals, whereby outside counsel are brought in to advise on specific points of law or where issues are already clearly apparent but have not been called out or called out clearly enough by in-house counsel and they are either looking for strength to do so or a reason not to. Or where outside counsel are brought in to undertake a formal review and inform decision-making and that review fails to result in a correction of poor behaviour.
In-house legal departments need to be expressly and in terms of regulation put on equal footing with private practice lawyers, since the regulator already sees no difference between the two. This would then mean legal professional privilege would attach to communications between the organisation and its in-house counsel, without the murkiness of the current uncertainty - uncertainty that exists because the employee-employer relationship and reliance undermine the ability within the current model to claim with authority that in-house lawyers are factually and absolutely independent. Addressing the position on independence and the associated questions around privilege is key, either to strengthen the regulatory position of in-house lawyers and remove the need for them to instruct external legal advisors to be sure of the protection of privilege, or to acknowledge the employer-employee dynamic as it stands is not viable from the perspective of in-house independence and address that head on.
As Mayson puts it in the IRLSR: “In short, the organisation in these circumstances should not feel compelled to instruct external providers in order to protect its position. Lawyers and others who wished to be part of an in-house team would therefore know that they would be joining a fully regulated legal department where their input as a qualified, independent and regulated individual is likely to be valued and respected as such.” In-house counsel need not wait for regulatory change to adjust their reliance and ways of working with outside counsel.
The importance of standards
At the core of the proper functioning of the legal profession and the regulations that underpin it, is ethical conduct. As the legal profession’s primary duty is to uphold the rule of law and the proper administration of justice, it is imperative for civil society that all lawyers abide by and advance these ethical standards. The role of the legal community in supporting ethical conduct inside organisations needs concerted regulator attention, for which the group contributing to this paper provided recommendations to the Legal Services Board in December 2021.
Academic Donald Palmer presents that organisational wrongdoing can be viewed either as an abnormal phenomenon or a normal phenomenon. The former results in looking for the ‘bad guys,’ those transgressors who look radically different to us - the solution here is simply weeding them out. This is vital for correct accountability, redress for victims, and deterrent to future wrongdoing. Further, viewing organisational wrongdoing as a phenomenon that can be ‘normal’ means that we also see ourselves as being susceptible to the forces that can serve to pull us off our ethical course - with this perspective, there are particular reasons why ‘good’ professionals may do ‘bad’ things and it is this that can then be correctly attended to. As the research evidence shows, well intentioned people will often say they would not do x and y and yet under a set of circumstances that is exactly what they do.
This underscores our shared accountability and the need to ensure the standards we collectively hold are clear and that we have the systems, behaviours and oversight in place to ensure people do not get pulled off course from those standards, as well as seeing correct and uncompromising consequences applied when people do get pulled off course. Situational influences, power, culture, pressure to perform and conform, reputation, struggling on and trying to fix things alone, and the like, are stronger factors in public and corporate life than we might like to admit, and which affect us all.
Some contributors feel it is a case of bad actors, others feel it is a case of systemic issues, others a mix. Whatever the case, the legal profession needs strong standards that address all such elements in the context of legal practice in-house. These standards must be set and assured by the regulator.
Further, a renewed focus on and understanding of leadership is fundamental to the future of the legal profession and the corporate and institutional clients it serves.
Necessary action
A thematic risk review by the legal services regulator is urgently needed, of the regulatory position and framework for the in-house legal community and the support in-house lawyers need from their regulator to perform their duties and meet their responsibilities to society. This is now underway by the Solicitors Regulation Authority. The strength of this review and its outcomes, and the widest contribution to it by in-house counsel are critical, and for it to be repeated within the following three to five years to ensure progress.
Alongside this, general counsel and boards can implement the steps outlined above and report on them to the market. Those in the wider legal, compliance, recruitment, corporate and institutional communities can also raise and address these issues in their work, and provide active support and oversight for in-house counsel and boards.
Widespread acknowledgment of our shared accountability is fundamental to moving forward, and to discussing with humility the reality we have and the one we need in our legal community, corporations and institutions, to arrest the cycles of misconduct that cause such harm in our society.
About this paper
This paper is from a group initially gathered in response to the Post Office Scandal, comprising people who have an interest in the legal profession and how it serves business and society.