Under the Legal Services Act, law firms will be exposed to a greater risk of litigation than before. Doug McLachlan says automated workflow technology is the best way to protect your firm

As 2009 ushers in new regulations as part of the Legal Services Act (LSA) 2007 to support multidisciplinary partnerships and firm-based regulations, understandably there is apprehension among some segments of the industry in terms of its implications for law firms. However, regulation is the catalyst for change, which, if dealt with in the right spirit, is usually for the better.

In the current economic climate, the LSA is a positive development for the UK's legal sector. For instance, it will allow law firms to receive inward investment from other sources including national and international businesses.

However, in order to be perceived as attractive businesses for investment, firms will need to demonstrate compliance with UK legislation such as the Money Laundering Regulations 2007, and European legislation such as the Statutory Audit and the Company Reporting Directives – together commonly referred to as the European Union's (EU's) version of the US's Sarbanes-Oxley Act.

In theory, the EU is one single harmonised market, but the reality is far from true. Today, European laws combined with country-specific laws makes compliance even more challenging for law firms. International firms looking to grow their businesses trans-border face the prospect of increasing their exposure to risk manifold – not only from the point of view of the financial investment they make, but also from
non-compliance in an ever-growing and complex regulatory minefield.

To attract international investment and leverage legislation to achieve business targets, it is essential for UK firms to align the practice of regulatory compliance with risk management and broader business strategies. In addition, the firms that are able to master compliance will also benefit from business improvements that will impact positively on their bottom lines.

Compliance can be turned from an onerous expenditure into an operational strength and a competitive advantage using technology as an enabler of proactive risk and compliance management to achieve overall governance. This means that to achieve sustainable compliance, law firms need to automate their key business processes to ensure audit transparency and adherence to international auditing standards, maintain client confidentiality, undertake client identity verification and protect professional integrity.

In fact, increasingly today, law firms face the risk of law suits for professional negligence – a trend that tends to become more pronounced during troubled economic times as enterprises that have lost money look to apportion blame. We are already seeing such events taking place, and they are expected to increase in the near future. As one such example, telecoms company Levicom is claiming damages of £25m from magic circle firm Linklaters for allegedly giving it negligent advice in the company's case against Tele2 AB.

In the current digital business environment, information and data management is critical and using workflow technology that seamlessly integrates with firms' individual working practices can facilitate the due diligence required to ensure the necessary regulatory compliance. In addition, it can reduce firms' business risk often arising from contractual drafting errors, allegations of conflict and breach of duty, unclear scope of engagement, failure to record instructions and advice in correspondence, offering advice outside of areas of expertise, and inadvertently advising third parties.

Using workflow technology to automate business processes can deliver several advantages to firms. For instance, it can identify patterns and similarities across regulatory requirements and reduce duplication effort, delivering cost efficiencies in managing exposure to risk and non-compliance. Because workflow technology is rules-based, it means corporate policy can be enforced, reducing guesswork and personalisation of business practice by employees, particularly firm directors and board members. It allows firms to always maintain a review and audit trail of all transactions, billings and payments.

For example, the Money Laundering Regulations 2007 require law firms to undertake scrupulous client identity verification for new instructions and periodically for existing clients to prevent financial crime. While no doubt this can be done manually by firms, it is immensely time consuming, tedious and ridden with the risk of human error. On the other hand, by automating this due diligence process it can, to a large extent, become fool-proof. It can enable firms to undertake client screening and ongoing monitoring in line with firms' risk-based approach, providing complete audit trails to demonstrate evidence of the process and highlight the details of the results obtained.

Bates Wells & Braithwaite (BWB) has used workflow technology to create a Lexcel-compliant risk assessment module to enable the firm to easily and quickly identify and quantify the risk potential of every new matter that is opened. In the past 18 months since the module has been in operation, the firm's professional indemnity premium has been reduced by £100,000. In addition, BWB is extending the scope of questioning within the module to encompass the anti-money laundering legislation. As a result, the firm is not only reducing its exposure to risk, but also ensuring compliance with the Money Laundering Regulations 2007.

In essence, the overall objective of today's complex regulatory landscape is to facilitate greater transparency in business management and reporting of financial information to stakeholders, especially in light of the corporate fraud and scandals in the recent past. By enforcing compliance as a business discipline, regulating authorities are aiming to encourage social responsibility as an operational mandate.

Firms that actively embrace these self-regulatory practices will position themselves as safe investments and well-managed businesses – prime targets worthy of investment. The devil is in the detail and automation is the answer.

Doug McLachlan is commercial director and product champion mid law at LexisNexis.