First, a little history. It was in the mid-1980s that Freshfields Bruckhaus Deringer decided to act for banks as well as the Bank of England, the client it was set up to advise more than 200 years ago. The impassioned managing partner at the time, John Grieves, formed a heavy-hitting team of Anthony Salz, Alan Peck and Gavin Darlington to devise and push through the strategy.

By all accounts, the move was successful, but it has – as was debated at the time of the decision – created an unusual legal situation where the main adviser to the regulator happens to be counsel to a good number of the regulated.

The situation is different in the US, where the Securities and Exchange Commission and the Federal Reserve rely almost entirely on in-house counsel. Freshfields partners argue the issue has lessened since the Bank of England gave up its bank supervision role to the Financial Services Authority. Obviously, this limits its role as a regulator, though, as the Northern Rock saga shows, as lender of last resort and regulator of the wholesale money markets, the Bank can never be entirely divorced from its history as markets watchdog.

Step forward to the present day and the fallout generated by Northern Rock has seen Freshfields once more caught up in the debate about conflicts, after advising regular client Northern Rock and the Bank. It goes without saying that the timing is unfortunate, coming in a year dominated by the magic circle firm's restructuring and the disciplinary hearing into conflict allegations regarding a 2004 bid for Marks & Spencer.

However, the widespread assumption – one that should worry Freshfields – that it had pushed the envelope in accepting dual roles on Northern Rock appears wide of the mark. Instead insiders concede that events quickly overcame the firm to take it into territory that did carry the risk of a conflict.

The firm is understood to have been advising Northern Rock for a while on issues that apparently related to a failed takeover (reported to be by Lloyds TSB). When extra liquidity was discussed, the Bank of England was keen to use Freshfields on an issue the firm frequently advises it on.

What Freshfields had not foreseen was that the Northern Rock situation would end up with a run on the bank – no-one could have predicted that, the firm argues – and when it became clear that it was advising parties with adverse interests, new advisers were swiftly brought in for the Bank of England in the form of Clifford Chance. Freshfields was clearly so keen to make sure it made the right decision that it brought in conflicts expert Charles Hollander QC. The firm also flatly refutes claims that the Bank is angry at its traditional legal adviser.

One Freshfields lawyer describes the situation by saying it was like the firm was "out at sea with two boats when the perfect storm broke and caused the vessels to collide".

In contrast, Allen & Overy's (A&O's) position is different, despite some raised eyebrows over its role acting on Virgin's bid for the mortgage lender while a separate banking team advised on emergency funding for Northern Rock. A&O argues that the facts of the mandate show they are entirely separate matters and stands firmly behind its decision to act.

Given the complexity of the conflicts rules which, despite being clearer in their updated version, still leave plenty of room for interpretation, it is understandable how both Freshfields and A&O had reached their current positions. But the reality for City advisers operating in an increasingly public market is that acting in good faith may not be enough to entirely protect reputations anymore.