Despite the continuing challenges of the current economic climate, this is not the time to relax risk management systems and procedures

Challenging economic circumstances such as we now face are not the time to relax risk management procedures. On the contrary, it is more important than ever for firms to consider fully the risks of taking on and carrying out work, and to apply appropriate risk management techniques to minimise the risks of claims and complaints.

In more buoyant times, there may be a temptation, or a pressure, for firms to take shortcuts in carrying out client work, as a result of having more work than they can handle comfortably within the relevant timescales – the “too much work, not enough time” syndrome. Workloads and time pressures may have been a contributory factor in some lender claims arising from the alleged failure of the firm to comply with the reporting requirements of the CML Handbook.

But the temptation to take shortcuts may also arise during periods of economic downturn. There may be pressures to keep costs to a minimum and thus maximise the profitability of transactions, particularly where the firm has had to agree a fee which is less than it might otherwise have wished to charge, either to get the work in the first place or because the client is on a tight budget. The concern this raises is if the short term gain is later wiped out by a claim which results in the firm having to pay a policy excess, as well as an increased Master Policy premium for several years.

Cost pressures

From a risk management point of view, firms have to consider as part of their client and transaction vetting procedures whether work that is likely to be only marginally profitable should be taken on at all. In taking that decision, firms should consider the staffing requirements for the work. Don’t be tempted to have the work done by the most junior member of staff, unless it is considered appropriate for the work to be done by a fee earner at that level under appropriate supervision.

Also consider paying particular attention to scoping the work in terms of engagement as tightly as possible, to avoid the possibility that additional work might have to be carried out or, perhaps more importantly, expected by the client, that is beyond the scope of the engagement. Make sure relevant fee-earners are aware of the risks of clients seeking to expand the scope of the work without any increase in remuneration (or timescale).

Firms may, in addition, wish to consider whether there are case management techniques that might be utilised to keep costs to a minimum. For example, it is always wise for firms to agree how and how often they will communicate with or report to clients, and confirm that agreement in their terms of engagement/service standards. However, it might be possible to agree with the client, and set out in the terms of engagement, a level of communication that will keep costs to the minimum, as long as that is consistent with professional practice/standards and provided that communication risks can be minimised. (Note: communication risks were addressed in the article “Communication breakdown – a major risk issue”, Journal, May 2011, 40.)

More than you can chew?

Taking on every piece of work that comes through the door may largely be a thing of the past, but it may be tempting in the current economic climate for firms to take on work which is beyond their current expertise. As mentioned above in relation to shortcuts, firms may live to regret that decision and end up having bought a liability in the event of a claim.

If, however, the firm considers that it must take on the work, it should also consider how the risk of a complaint, claim or other adverse outcome can be minimised. That will depend to a large extent on how the firm intends to manage the work. For example, training a fee earner to the appropriate level of expertise may not often be practical unless a transaction has a long lead-in time. But the firm could consider engaging an appropriately experienced fee-earner on a temporary basis to carry out the work, or subcontracting the work to another firm.

If the firm does decide to subcontract the work, terms of engagement should be agreed with the subcontractor which address, in particular, who is to be responsible to the client for the subcontractor’s work, who is to communicate with and take instructions from the client, who is to be responsible for diarying/complying with critical dates, who is to be responsible for payment of the subcontractor’s fees and outlays, and whether there should be a commitment by the subcontractor to maintain (and provide evidence of) professional indemnity insurance at an appropriate level for an appropriate period.

The firm might also consider seeking to limit its liability, particularly where the piece of work has a higher value than the amount of the firm’s professional indemnity cover, and the purchase of additional cover (possibly for several years, given the “claims made” basis of professional indemnity insurance) would make the transaction unprofitable. (Note: limitation of liability was addressed by Charles Sandison of The Commercial Law Practice LLP in two articles at Journal, October 2011, 35, and Journal, November 2011, 34.)


The Author
Russell Lang is a former solicitor in private practice who works in the FinPro (Financial and Professional Risks) National Practice at Marsh, the world’s leading risk and insurance services practice. To contact Russell, email: The information contained in this article provides only a general overview of subjects covered, is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Insureds should consult their insurance and legal advisers regarding specific coverage issues. Marsh Ltd is authorised and regulated by the Financial Services Authority.
Share this article
Add To Favorites