Feature

posted 4 Apr 2006 in Volume 11 Issue 3

Risk management 2006: Ten steps to a healthy risk profile for ECA practitioners

A successful legal business requires a comprehensive approach to risk management that encompasses all areas of the practice, from external client management to internal supervision. This is as relevant to elder care related services as it is to commercial fields. ANDREW NICKELS examines the situation in context for ECA readers.

Lawyers are familiar with ‘risk’ perhaps more so than many other professionals. But their own businesses need methodologies geared to reducing risk. It boils down to issues of process. That sounds rather bureaucratic but need not be. Ten steps to heaven may be an exaggeration, but ten steps to securing your business may be the next best thing.

As the Budget of 22 March shows, risk can arise from all sorts of sources.

1. Know your client: identity/authority/capacity/conflicts

Who is your client? You need to identify exactly with whom you are contracting under the terms of your engagement letter and to whom you owe a duty of care, and to confirm the authority and capacity of the person/s instructing you.

At the initial stages of taking instructions insist on meeting or at least making independent contact with all persons said to be giving instructions.

This is vital where third or connected parties are the initial point of contact. Does the person instructing you have the authority to do so? Take particular care in cases involving:

Clients with a joint interest in a transaction – for example, the disposal of loan funds or sale proceeds to one client where two or more clients have a claim on those funds;
Children or other family members purporting to instruct you on behalf of an elderly relative – does the person on whose behalf the instructions are being given actually know the full details of what is to be done in their name? Is there any evidence of undue pressure having been brought to bear on them?
Married and unmarried couples – consider potential conflicts of interest at the outset, even where no dispute is apparent;
Repeat instructions – where these are received from just one party, check the extent of his or her continuing authority.

With any client wishing to make a will, but with elderly clients especially, it is vital that you assess whether they have testamentary capacity. To help you make this assessment, why not have a standard set of written questions to go through with clients? You can explain that positively establishing capacity may help to prevent a successful challenge to the validity of the client’s will after their death.

With elderly clients or those with serious illnesses, consider following the ‘golden rule’ set out in Kenward v Adams and get a doctor to witness the will – for example, the client’s general practitioner, consultant or registrar when the client is in hospital. If in doubt…

It is vital that you carry out conflict checks at the start of a matter and keep this under review as the matter progresses (for example, new parties may emerge).

Cases such as Marks & Spencer v Freshfields (2004) and Hilton v Barker Booth & Eastwood (2005) demonstrate that the courts will be unsympathetic to solicitors who place themselves in, or fail to recognise, conflict situations.

Families are the ultimate potential conflict situation.

2. Don’t say ‘yes’ to every potential client – concentrate on the clients you want

It is clear from my experience of solicitor claims that not all firms’ client and matter-selection policies are as robust as they should be. It’s all very well having a policy on which type of clients and work the firm will take on, but this is useless if it’s not universally adhered to. The pressure to meet billing targets shouldn’t mean that you take on every prospective client who walks through the door; their needs may be beyond the firm’s expertise or resources, or the prospective client may not be a good business risk. If you do not understand the recent trust changes, do not engage in that sort of work until you do. It sounds so obvious…

With every prospective client you should be asking yourself the following questions:

Why has the prospective client chosen the firm? Has a third party, such as a financial adviser referred him or her? If so, do you have confidence in the integrity and bona fides of that third party?
Have other firms declined to act? If previous firms have been instructed on the same matter, why the transfer of instructions?
Does the prospective client have realistic expectations about what can be achieved and the time it will take?
Does the firm have the appropriate specialist expertise to deal with the matter? For example, advising on equity-release plans or IHT mitigation schemes are not for the untrained or inexperienced to ‘have a go at’;
Does the firm have the time and resources to deal with the matter?
Is the nature of your engagement to be limited? Does the prospective client wish to deal with part of the matter personally?
Can the client pay your fees and other expenses? (Actions to recover fees are often met with allegations of negligence.);
Do you have any suspicions or actual knowledge of the prospective client’s unlawful objective or conduct? Turning a blind eye may make you a party.

The answers to these questions may provide a good indication as to whether a potential client is a potential problem client. It’s no good saying after difficulties have surfaced, “I knew from the start he would be trouble.” Act on your gut instinct and say ‘no’ at the outset. Better not to accept instructions than to do so, have an argument about costs and face a potential claim or, worse still, a prosecution.

3. Always use an engagement letter

How else can the nature and extent of your retainer be determined? Yet many solicitors still fail to use engagement letters as a matter of routine. Why leave it to a court to second guess the terms of your retainer when you can specify them in clear terms at the start of every engagement, and when the nature of your instructions change? Absolute clarity about what you have agreed to undertake what you have agreed not to do for your client, and the client’s cost liabilities and funding options simply leaves no room for argument.

And while we’re on the subject, get into the habit of using non-engagement letters to ensure that when you decide against taking on a potential client, they are as clear as you are that no solicitor/client relationship has been created.

4. Put it in writing

Every file should tell the whole story. With elderly clients it’s sensible to follow up any oral or telephone advice in writing so that the client has the opportunity to digest that advice without feeling pressure to give instant instructions that they may not fully understand or may later come to regret. In the absence of confirmatory correspondence, record all your communications with clients. When something doesn’t go according to plan, memories can be weak and emotions strong, especially after the client has passed away – complete and accurate notes of meetings, discussions, instructions received and advice given, can defeat allegations of professional negligence.

Protests such as: “I’m sure I would have given that advice, but didn’t have time to write it down”; “It’s my invariable practice”; “I have a clear recollection…”; “The document speaks for itself,” frequently fall on deaf ears in the absence of corroborative evidence. A judge may well prefer a client’s or disappointed beneficiary’s recollection of events, not necessarily because they will be considered more truthful, but because they may be more likely to remember the details. For most clients, making a will, signing up to an equity-release plan, attempting to mitigate their liability for inheritance tax are not everyday activities.

In contrast, you are involved in countless transactions and, in the absence of detailed file notes, will be unlikely to remember the specifics of every one.

Certain clients and transactions may demand special attention – where your client has a tendency to provide inadequate, late or inconsistent instructions, put it all in writing – it’s the most effective method for avoiding disputes.

5. Documentation – check and check again

Care is required whatever you are drafting – a letter, fax or e-mail, will, power of attorney, trust deed. Whatever their business, clients expect your attention to the detail. To avoid embarrassing and potentially costly slip-ups, the trick is to spot any drafting errors before the document leaves the office:

Proof read every document as if you know it contains a mistake, if only you could find it. Better still, have someone else proof read it for you. Fresh eyes may detect ambiguities or sloppy drafting;
Ask yourself ‘will the document achieve the desired objective?’;
Ask your client to check the document or at least the key provisions;
Regularly review all standard documents prepared by or supplied to the firm, and especially when there is a change in the law;
Don’t be a slave to precedents. Ensure that any you use suit your client’s specific requirements;
Never alter a precedent without first ensuring that there are no adverse effects on the remainder of the document;
When your client returns an executed document, particularly a will, check the document to ensure that it has not been altered without your knowledge and that is has been executed correctly.

6. Key dates – research, record, react!

Missing time limits is a common source of negligence claims – not identifying key dates, not recording them, not reacting to reminders to take action.

Some key dates will be prescribed by statute (for example, the deadline for the filing of estate accounts), others won’t be. What about the elderly client who instructs you to draft a will for him or her? A prudent practitioner will endeavour to prepare a will for execution within seven working days and even more quickly than this if there is an obvious risk of the client’s demise.

Missing key dates is not a matter of bad luck. If an individual fee earner operates his or her diary system properly and that system is backed up in an effective way, claims can be easily avoided. Ask yourself:

Does every fee earner in the firm have a system for identifying and observing time limits that works for him or her?
Is that system capable of working if the individual fee earner is absent from the office?
If you cannot be confident in answering ‘yes’ to both, then you need to think about how your current systems can be improved.

Every file will have a key date somewhere, so:

Research and calculate key dates and deadlines carefully;
Record the dates on a prominent place on the file and in the appropriate diary, allowing a countdown period. Take care when entering key dates in the date in the diary and stress the importance of accuracy to support staff if they are responsible for diary entries;
React to reminders promptly – don’t leave it to the last minute.

7. Be SMART with undertakings

The giving of sloppy undertakings and failing to obtain appropriate undertakings remain a major cause of negligence claims. When giving undertakings make sure that they are:

Specific: identify and define the particular task or action. Don’t give general or open-ended undertakings. If undertaking to pay monies out of a fund, qualify this by the proviso that the fund comes into your hands and that it is sufficient;
Measurable: undertakings should include measures or steps agreed by both giver and receiver so there can be no dispute over whether an undertaking has been fully discharged;
Agreed: make sure undertakings are agreed by both giver and receiver. Confirm the terms in writing;
Realistic: before giving an undertaking, consider carefully whether you will be able to comply with it;
Timed: spell out when or on the happening of which event undertakings will be honoured.

Give staff clear guidance on who is permitted to give undertakings on the firm’s behalf and the manner in which they can be given:

Draw up standard undertakings for use by all fee earners, with any deviation to be authorised by a partner;
Make sure that undertakings (given and received) are not overlooked, by copying and attaching them to a prominent place on the file;
Advise your accounts department of undertakings that affect the holding or payment of money. This will ensure, for example, that the proceeds of sale will not be remitted to the client until all undertakings to discharge charges have been complied with;
Beware of ‘standard form’ undertakings required by lending institutions – they sometimes go beyond what is within your control.

For example, standard form solicitors’ certificates required by equity-release providers often require you to endorse the judgement of a third-party adviser as to the suitability of a complex product for your client. Consider very carefully the terms of any certificate you are asked to sign and amend/delete where necessary.

8. Know your staff – supervise them

Supervision is a crucial element in claims prevention. Those to whom work is delegated may not be aware that they have a problem or that the delegated task involves a pitfall.

Regular monitoring and analysis of work-in-progress reports can help identify circumstances that might otherwise lead to a professional-negligence claim. You should consider:

Allocating a supervising partner to each case (and not in name only);
Holding regular meetings (individual or departmental) with staff to discuss work in progress and any problems they may have;
Monitoring incoming and outgoing correspondence to identify potential problems at an early stage;
Monitoring the caseloads of individual staff, whether by a specifically designed system or by making use of existing systems such as accounting reports on chargeable hours/fee income;
Regularly reviewing the level of competence and training requirements of each fee earner;
Reviewing the supervisors’ skills.

Professional training on how to supervise may be just as necessary for an experienced supervisor as it is for those who are new to the role.

In my experience, inadequate supervision is a major cause of claims across all areas of practice. Often trainees are thrown in at the deep end without sufficient direction and guidance – trainees don’t know it all, they’re in the firm to learn. In other instances, unsupervised, experienced fee earners can be overwhelmed by, for example, heavy caseloads, demanding clients or personal problems, and make mistakes. All too often, the problems are either not recognised or responded to until it’s too late – when the claims come in.

In the worst case scenario, a lack of supervision, and adequate checks and balances presents an opportunity for fraud, which often emerges from the least expected quarter. The heaviest damage to firms is commonly wreaked by the most trusted individuals and, in the aftermath of fraud, what is frequently attributed to ‘misplaced trust’ often goes deeper (in our experience) to a systematic failure to supervise financial transactions – for example, the day-to-day operation of powers of attorney. Even ‘routine’ probate work often involves large sums, and procedures for the operation of client accounts and for the signing off of estate accounts should be clear and rigorous.

9. Conduct file audits/reviews

Any partner with even a modicum of commercial nous will want to know what is being done in the firm’s name. It’s not only what you earn – it’s how you earn it.

Conducting reviews/audits of all files (including those of the partners) is an effective means of monitoring the nature, quality and consistency of the service provided to clients. What files you look at, how often and what you do with the results is up to you – the quest for quality assurance should be the driver. Whatever approach you do adopt, it is crucial that regular, random file reviews of a representative sample of the firm’s work are undertaken by someone in the firm who has not been involved in the day-to-day conduct of those files.

Issues for the audit should include:

Have client screening/risk-assessment procedures been observed?
Have the firm’s anti-money laundering procedures been complied with?
Has a conflicts check been carried out?
Is there an engagement letter?
Have all the relevant legal issues been identified and addressed correctly?
Has the fee earner kept within his or her area of expertise?
Has the client been kept up-to-date with the progress of the matter, including costs?
Are there clear, contemporaneous attendance notes of meetings, discussions and telephone calls?
Have instructions and advice been confirmed in writing?
Have all critical dates been identified, recorded and acted upon in a timely manner?
Have any undertakings been given or received? Are they in appropriate terms? Are they clearly marked on the file? Is there a note as to whether they have been discharged?
Is it easy to identify time worked on the matter, costs, disbursements, accounts sent and paid?
What were the client’s expectations?
Have they been met?
Does the work undertaken comply with the engagement letter?

10. Keep up-to-date

You know there’s plenty to keep on top of: new legislation, amendments to existing laws, significant court judgements and procedural changes. On the positive side, such can provide an excellent opportunity to practice good client care – for example, by inviting clients to reassess their tax-planning strategies in response to legislative changes.

Clients quite rightly expect you to be up-to-date. If you’re a partner, are you leading by example? To increase learning opportunities and to give you the confidence that everyone who needs to be, is aware of the latest developments:

Hold in-house seminars – use your in-house specialist expertise;
Arrange feedback sessions to be conducted by fee earners who have attended external courses;
Circulate journals and articles within the firm or individual departments, highlighting matters of importance;
Make the most of your regular departmental meetings to discuss and consider changes in the law, how they affect your clients and to agree the firm’s response to such changes;
Be proactive – encourage your staff to research and report back on important new developments. Consider making this an objective to be met as part of annual appraisals;
Appoint someone to co-ordinate and monitor the continuing education of all partners and staff.

Individual responsibility

This is all good food for thought, but it must be down to the individual to think matters through properly in all the circumstances. There is no replacement for good technical knowledge, listening to clients and securing ‘due’ process with risk always borne in mind.

Andrew Nickels is risk manager at Zurich Professional. He can be contacted at 020 7264 3912.