Comprehensive Guide to Risk & Compliance in the Legal Sector

5 Min Read
Legal professional reviewing documents on compliance and risk management in law office with gavel and scales of justice.

In this blog, we will explore the world of risk management and compliance in law firms and discuss some of the complex regulations and risks that are prevalent in this industry. We will dive into the unique challenges faced by law firms when managing risk and examine the strategies and best practices that can help them navigate this landscape successfully.

Read on to get valuable insights into the complexities of managing risk and compliance in the legal sector and discover how you can mitigate risk and achieve greater success in this challenging industry.

Risk & Compliance Go Hand in Hand


Risk management & compliance are closely intertwined in the operations of law firms. In fact, many of the top risks on the risk registers at law firms are compliance related.  Let’s explore some of the key drivers behind risk & compliance programmes in law firms and explore how GRC technology can support law firms to manage the requirements more effectively.

Conflicts of Interest in Legal Risk and Compliance


The legal profession is governed by strict ethical guidelines that require solicitors to put their clients’ interests ahead of their own. However, even with the best intentions, conflicts of interest can arise, which can compromise the solicitor’s duty to act in the best interest of their clients. The conflicts may occur in several ways such as representing clients with competing interests, acting for both parties in the same transaction, or having a personal interest in the matter.

To address these challenges, legal regulators have issued codes of conduct for solicitors which set out the rules for legal conflict issues. The Risk & Compliance team in a law firm plays a vital role in ensuring that the solicitors comply with these regulations. Their primary goal is to anticipate conflicts before they arise and propose strategies to work around them. They also oversee the implementation of policies and procedures to minimise the risk of conflicts of interest and other regulatory breaches. This includes monitoring the solicitors’ activities, conducting audits, and providing training and support to ensure that the firm’s staff remain agile and comply with the regulatory guidelines.

Effective risk and compliance management is crucial for law firms to maintain their reputation, avoid legal liabilities, and ensure that they act in the best interest of their clients. The Risk & Compliance team, therefore, plays a crucial role in ensuring that law firms comply with the regulatory guidelines and operate ethically, thus maintaining public trust in the legal profession.

Interested in seeing how this applies in practice? Request a demo of our comprehensive GRC platform today!

Anti-Money Laundering & Client Due Diligence


Knowing who their clients are and where their funds are coming from is critical for law firms to prevent financial crimes and protect the integrity of their services.

Law firms are subject to Anti-Money Laundering (AML) laws and regulations that aim to prevent money laundering activities, such as hiding the origin of illicit funds or financing terrorism. Law firms are required to implement effective AML policies & procedures, which typically involve conducting ongoing risk assessments, establishing internal controls, and providing staff training.

Law firms must also demonstrate client due diligence by identifying and verifying the identity of clients to assess the potential risks of money laundering or other financial crimes. They should have a clear policy that outlines the type and extent of information required from clients, and the procedures for verifying this information. A firm needs to establish exactly who the work is ultimately for, and then consider if there are any risk issues involved with working for them.  Potential client due diligence problems could include – a breach of Sanctions caused by taking on the work or the likelihood of any Politically Exposed Persons involved in the case that could give rise to potential reputational risk issues.

Effective management of AML and client due diligence requires a firm-wide commitment to compliance and a culture of vigilance against financial crimes. This involves appointing a designated compliance officer or team, conducting regular internal audits, and keeping up to date with the latest regulations. It is also important for law firms to stay informed about emerging risks and trends in financial crime, and to adopt a risk-based approach to AML and client due diligence to decide where resources are allocated according to the level of risk posed by clients or transactions.

Compliance with Legislation & Regulations


Law firms have an obligation to know the rules, regulations, and legislation that applies to them (in each of the jurisdictions in which they operate) and to ensure they are being followed.  Some examples of regulations that risk & compliance functions within law firms have had to deal with in recent years include: DAC6, The Modern Slavery Act, The General Data Protection Regulation, The Criminal Finances Act, and the 5th Anti-Money Laundering Directive. 

The Solicitors Regulation Agency also has a directive named ‘Statement of Solicitor Competence’. Essentially, this mandates a law firm to monitor and demonstrate periodically that each of its practicing solicitors are up to date with certification and have clear DBS checks. There are many more regulations depending on the country the law firm operates in, and the type of work undertaken.

Law firms struggle to manage the complexities of working across multiple jurisdictions. They are often using manual processes and creating a standardised framework to report and rate risk is difficult to achieve in Microsoft tools.

To ensure compliance legal firms must build a comprehensive obligations library to understand the applicable laws, regulations, and legislation that applies to them. They must have a process to scan the regulatory horizon for any updates or changes and have a structured change management workflow to ensure changes are implemented on time.

To efficiently manage their compliance obligations, law firms must assign individual responsibility and accountability for their regulatory & legislative obligations, monitor compliance, and track progress against corrective actions for audit purposes. They must also track and monitor compliance with their internal processes, procedures, and company values and will likely monitor compliance with a series of checks, questionnaires, surveys, and online policy attestations.

Regulatory Risk Management


Effective risk management is essential in law firms. The risk team commonly reviews (or at least performs risk assessments on) the contracts the firm enters into. These agreements can have a significant impact on the level of risk the firm is being exposed to, and they will be assessed regarding the level of liability the firm is being expected to take on under the terms of the contract, the scope of the work to be carried out, and more general legal and commercial risks.

Law firms law firms often have a substantial risk register and face a wide variety of risks daily – from ethical risks like malpractice claims, conflicts of interest, and bribery & corruption to risks regarding cyber security, business interruptions and loss of talent.

Each risk must be carefully monitored with regular risk  assessments and findings must be actioned. Law firms must define a risk appetite and understand how to operate within it. They must establish a framework to categorise and rate risks according to criticality and likelihood and set Key Risk Indicators (KRIs) to understand when risk is reaching an intolerable level.

Law Claims & Complaints


The risk & compliance team will be involved in managing the impact of any claims or complaints against the firm.  This has become even more important in an increasingly litigious marketplace, where a poor claims record can impact the cost of Professional Indemnity Insurance

Reducing the cost of insurance premiums is a key driver for many risk teams as it highlights the benefits of the risk & compliance function.  It can be hard to define the financial benefits of a risk & compliance function in a law firm, as avoiding fines for non-compliance, for example, can be hard to demonstrate. However, cold, hard financial savings on insurance premiums, can secure vital buy-in for the risk management function.

A formal complaints procedure is an essential component of any well-run law firm. It provides a structured and transparent process for clients to voice their concerns and ensures that complaints are dealt with in a fair and timely manner. By having a formal complaints procedure in place, law firms demonstrate their commitment to client satisfaction and can improve their overall service quality. 

Additionally, a formal complaints procedure can help to identify areas for improvement within the firm and enable management to take action to address underlying issues. By addressing complaints in a timely and effective manner, law firms can also protect their reputation and prevent potential legal action.

See the difference a streamlined GRC platform can make. Request a demo now and transform your risk and compliance management process.

Are Manual Processes Sufficient?


Many law firms start out managing risk & compliance using spreadsheets, while they can be useful for gathering data, they can also cause problems. Spreadsheets lack data governance and privacy settings and are prone to human error. They often contain formulas and formatting which some employees don’t understand – resulting in poor data quality. They don’t integrate with other data sources, meaning risk assessment data and risk monitoring data must be entered manually and there is no capability for automated control monitoring. 

Spreadsheets don’t offer automated workflows or instant reports & dashboards – resulting in copious amounts of admin for risk teams. Finally, spreadsheets are often used in silos, meaning different departments have their own spreadsheet and there is no centralised view.

The use of spreadsheets can result in incorrect risk assessments and compliance reporting, leading to legal and reputational risks for the firm. Spreadsheets create a fragmented view of risk & compliance which can lead to missed deadlines, and poor decision-making which can actually increase risk.

How Can Law Firms Automate & Centralise Risk & Compliance Processes?

To improve their risk management & compliance processes many law firms are turning to GRC software to centralise and automate their processes and get a holistic view of risk.

GRC software enables law firms to build an online risk register, enabling staff at all levels to log and monitor risk. The tool enables employees to perform risk assessments, surveys, and questionnaires online – with all the results feeding directly into the tool. Risk professionals can define a risk appetite, establish a framework to categorise and rate risk, set key risk indicators, and feed data from other data sources into the platform via APIs to monitor risk. Controls can be set to flag problems, triggering automated workflows to escalate risk, perform route cause analysis, and implement mitigating actions. Risk teams can easily get a consolidated view of risk through a series of interactive dashboards & reports, creating a single source of truth.

Many law and insurance firms are using GRC software to formalise their compliance programme. Compliance professionals can build an online ‘obligations register’ to build a comprehensive view of all applicable legislation, regulations, and internal policies & procedures. Many solutions can be linked to regulatory content providers enabling the organisation to receive notifications of upcoming changes, which then triggers a workflow to amend the relevant business processes. Most GRC platforms offer out-of-the-box frameworks to manage common requirements like ISO standards, GDPR, PCI DSS and AIPCA SOC compliance. The solution enables compliance teams to track progress against obligations and view corrective actions through a series of insightful dashboards & reports.

Most GRC platforms also offer policy management capabilities, enabling compliance teams to build a comprehensive library of all their relevant policies & procedures. They can create automated workflows for signoffs and approvals and use them to track expiry dates and generate automated reminders. Staff can easily read and attest to policies online, and the system provides a complete audit trail of who attested to each policy and when, this data can be used as evidence in employee tribunals.

Many GRC platforms also offer best-practice incident management workflows. This is particularly useful for Law firms and Municipal sector as not only can they log & resolve operational issues, but they can use external facing portals for anonymous complaints & whistle blowing. Online forms capture the relevant data, and it feeds directly into the tool so each incident or complaint can be resolved and reported on.

These tools are also ideal for IT risk management and incident reporting, helping law firms to protect confidential client data and adhere to data privacy guidelines.

GRC Software as a Game Changer in Law Risk and Compliance

More advanced GRC platforms enable law firms to plan and execute their long-term strategy by setting a series of top-line goals & objectives and breaking them down into smaller projects, tasks and actions and allocating them out across the business for completion. This helps all staff understand the part they play in achieving the organisational strategy & helps leadership teams understand strategy progression. There is the option to manage strategic risk and link strategy to risk management, enabling avoidance of law firm risks that fall within their risk appetite in pursuit of their strategic goals and objectives.

Incorporating a GRC platform into your law firm’s operations can greatly benefit your organisation by enhancing regulatory compliance, improving risk management, and increasing operational efficiency. Our GRC platform can make sure your law firm is compliant, and we would be happy to provide you with a demo.

Jason Were

Vice President APAC

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