Horizon fallout: How the SRA is turning up the heat on City firms

Following the Post Office Horizon scandal, the SRA is turning up the heat on in-house solicitors and their employers. Jenifer Swallow and Omar Salem dig into what it means for City firms

SRA guidance and regulatory focus for solicitors has been orientated towards solicitors in private practice. However, it has recently issued new guidance targeted at in-house solicitors and their employers.

In response to the Post Office Horizon Inquiry and pressure from the general counsel and wider community, this recognises the unique issues and challenges that in-house solicitors face. While the guidance does not change the existing professional duties owed by in-house solicitors, it highlights aspects that are particularly relevant to in-house solicitors, while providing greater focus and specificity in some areas. 

With thousands of legal professionals working in financial services, often in strategic and sensitive roles, the SRA’s guidance is especially relevant for the industry. FCA and PRA authorised firms will need to consider this guidance in light of their obligations under the FCA Principle 3 and the PRA Fundamental Rule 6 regarding system and controls.

The FCA’s new Enforcement Guide also highlights that industry guidance has an important part to play in a principles-based regulatory environment, regardless of past practice. In the case of this new guidance, it is the first time a UK legal services regulator is speaking directly to the boards of employer organisations in the corporate and institutional space.  

While it was initially proposed that general counsels would fall into the senior manager’s regime, after some agonising they were excluded from its scope on the grounds that the the benefits from applying it would be reduced due to so much of a general counsel’s role involving privileged material, which was said to create uncertainty for the FCA/PRA’s supervisory activity.

The SRA’s guidance now sets out the expectations that employers can have of solicitors they employ, as well as what in-house solicitors should expect from their employers, and in each case the boundaries that apply. For example, the guidance underscores that in-house counsel must be able to provide independent advice, must not be asked to facilitate illegality and have a duty to escalate any conflicts or material risks. 

How City firms should respond to the new rules

FCA and PRA authorised firms will want to review and consider the guidance, including potentially by the relevant board committee, and make any appropriate changes, including to policies and procedures. For example, the SRA recommends that employers discuss with their in-house solicitors their regulatory obligations and set mutual expectations and practical governance regarding these. It suggests that these can be outlined in, or alongside, their employment contract. It provides template contract wording and a draft board paper for implementation.   

The SRA also says that it is beneficial for employers to have an early conversation to make sure in-house solicitors understand what insurance arrangements or support employers can provide to them in relation to any liability arising from their role and enabling them to fulfil it. While the SRA does not set mandatory indemnity insurance requirements for solicitors working outside of regulated law firms, it says firms will want to consider including in-house solicitors in D&O insurance or equivalent. 

More broadly, the SRA expects employers to “provide systems and processes to allow solicitors to meet their obligations to provide independent and impartial advice, avoid conflicts of interest and act in the best interest of their client”. The SRA considers this to include things like ensuring in-house solicitors have the information they need to advise, safeguards to protect against performance rewards that create an inherent risk of conflicts with regulatory and legal objectives, and providing appropriate levels of access to organisational decision makers.

While these are relatively high-level requirements, they are likely to require some careful thought to implement as well as being dependent on cultural factors to ensure compliance. The Institute of Directors has also issued a paper regarding improved governance following the Post Office Horizon Inquiry, including increased oversight of legal risks.  

A significant development for in-house solicitors

A key area of the guidance that is of interest to in-house solicitors, their employers and regulators alike is the requirements for in-house solicitors to in some circumstances report wrongdoing externally. Unfortunately, the guidance is somewhat opaque on this, especially as regards to when the SRA considers the duty of confidentiality and privilege trumps the requirement to report wrongdoing. It also does not tackle circumstances where there may not be a duty of confidentiality due to the common law doctrine of iniquity, which provides that communications made in furtherance of a crime or fraud are not protected by confidentiality.

In conclusion, the SRA’s guidance for in-house solicitors represents a significant development for FCA and PRA authorised firms, particularly given the strategic role that legal teams often play within financial services. The SRA has also commenced a programme of outreach and audit, with in-house legal teams in financial services as one area of focus. While the guidance is high-level, it signals a clear expectation that firms and their boards support in-house solicitors in meeting their professional obligations, through both formal structures and a supportive organisational culture.

Boards and senior management should not view the guidance in isolation, but rather as part of their broader governance and compliance frameworks, particularly under FCA Principle 3 and PRA Fundamental Rule 6. Ensuring that policies, contracts and internal procedures reflect the SRA’s expectations will not only help mitigate regulatory and reputational risk but also strengthen the legal function’s independence and integrity, key ingredients for effective risk management and long-term business success.

Jenifer Swallow is a former general counsel at Wise. Omar Salem is a partner in financial regulation at Fox Williams LLP