Upheaval in the banking world will make conflicts judgement calls harder than ever

The bank rescues of recent weeks have seen the same firm names crop up time and time again – sometimes with multiple roles on one transaction.

With institutions understandably keen to turn to their most trusted advisers during moments of crisis, seeing City firms take two – or even three – roles in relation to one transaction has become fairly standard, keeping more than a few conflicts partners busy right now.

Some are grabbing attention more than most. Freshfields Bruckhaus Deringer's long-term advisory role to the Bank of England (BoE), for example, means that the firm – no stranger to potential conflicts of interest – has become a familiar presence in the string of recent bailouts and capital injections. Whether on this month's UK bank bailout – where it advised the BoE as well as many of those sponsoring the cash raising destined for some of the UK's best-known High Street names – or in relation to Iceland's troubles – where it advised the BoE on two matters and Ernst & Young as administrator of Landsbanki's Scottish subsidiary Heritable – Freshfields, like Linklaters, appears to be doing pretty well on the deal front as the economy heads towards recession.

Given the circumstances and that the firm is acting for the BoE and not the Treasury, no-one is suggesting that Freshfields is risking any legal conflict. In addition, on the Icelandic administration Denton Wilde Sapte has also been drafted in as conflicts counsel. However, a few eyebrows have still been raised by those concerned that if any problems were to arise, the firm's position may not look quite so secure commercially.

The challenge is that given the number of parties involved – in particular on Lehman's collapse where creditors, shareholders and those with outstanding positions all need separate advice – many firms are having to make some tricky judgment calls. Conflicts checking, already routine, has moved even further up the agenda, with several firms, including Simmons & Simmons, actively changing procedures to look separately at all potential mandates relating to bank troubles before even starting normal conflicts measures.

However, with transactional pipelines running dry and even those outwardly benefiting most from the financial failures worrying where their next deal is going to come from, the temptation is there to try and grab what you can. But how much can law firms risk being seen to benefit from all of this at a time when their long-term clients are suffering so much? And, if the flight to quality cliche remains true and firms find themselves with several requests from equally longstanding clients, how do they decide which role to take on? As one conflicts partner says: "The rule is to be careful with the instructions you take on – you do not want to go for a small one if it would rule you out of a bigger role later on." Hence the latest efforts by some to centralise decision-making to ensure one bad choice does not end up ruling out a bigger mandate for, say, the potential acquirer of some sizeable assets.

One thing is certain though, right now all firms are having to evaluate the genuine strength of their client relationships and what they are likely to generate in terms of deal flow. In particular, those working with regulators may face problems.

As one magic circle partner says: "There is definitely a question about whether Freshfields should keep BoE as a client if it keeps throwing up these issues. Partners are often reluctant to let go of trophy clients but you can often face difficulties acting for regulators and you need to ask if it is worth it."

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