Hello and welcome to the Fides Weekly Update. Take a look at this week’s key trends, moves and developments in legal and compliance.
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1. Reputational damage eradicates law firm
It has been announced this week that offshore firm Mossack Fonseca will be shutting down its operations following the backlash from the ‘Panama Papers’ scandal.
In April 2016, Panamanian law firm Mossack Fonseca suffered a major data breach, sparking a number of concerns globally around the lack of sufficient cybersecurity measures in law firms. The breach consisted of around 11.5 million leaked documents that implicated and compromised over 200,000 offshore clients. Several well-known names emerged from the documents, including former British Prime Minister David Cameron, European football body Uefa and the King of Saudi Arabia.
As a brief explanation as to why the upcoming closure will take place, the firm released the following statement:
“The reputational deterioration, the media campaign, the financial siege and the irregular actions of some Panamanian authorities, have caused irreparable damage, [resulting in the] total cessation of operations to the public at the end of this month after 40 years”.
A year after Panama Papers, we witnessed news of further law firm cyber attacks, with fellow offshore firm Appleby’s suffering a data breach that was announced in October 2017, and DLA Piper enduring the infamous WannaCry ransomware attack in June 2017.
As we continue to build on lessons learned from the above cases in the legal sector, and not to mention the soon to be enforced general data protection regulation (GDPR) coming into play on 25th May, cyber security should remain top priority for senior management. If the Panama Papers scandal has proved anything, it is that a lack of understanding around the reputational risk related with cybercrime can be fatal.
Mossack Fonseca has said it will retain a small number of staff to handle the requests from authorities and other public and private groups.
2. Transforming Company Culture Key to Regulatory Success according to FCA Discussion Paper
On Monday the FCA published its discussion paper “Transforming Culture in Financial Services”. This attributes conduct failings since the financial crisis, which have caused harm to both consumers and markets, on poor company culture rather than individual ‘bad apples’.
Given the impact and role culture plays in rebuilding trust in financial services, this is now a priority for the regulator, with the paper presenting views from industry leaders, academics and practitioners on how to transform culture within the sector, and act as a basis for debate on how to drive sustainable culture change.
The paper which comprises a collection of essays has been grouped under four themes, a summary of which can be found below:
1). Is there a ‘right’ culture?
- Culture is about behaviour, and is defined by the norms, values and practices with which people think and behave
- A consumer-focused culture makes firms more attractive to potential customers and talented employees, which, in turn, increases firms’ profits. This is necessary for economic success.
- There is no single ‘right’ culture, but instead a number of factors that healthy cultures have in common, such as adaptability, integrity, an emphasis on quality and supportiveness and risk management
- “A good culture means more than ensuring that good people don’t do bad things – it is about enabling good people to do even better things,” as summarised by Banking Standards Board’s CEO, Alison Cottrell.
2). The role of regulation
- It is in firms’ interests to critically self-assess the impact of the day-to-day management and governance on their culture, rather than to take a narrow legal interpretation of the ‘rules’.
- Regulators should aim to ‘assess’ culture by asking the right questions, in a bid to determine whether members understand their organisation’s mission and values and to elicit how such values are lived day-to-day.
- It is not enough to rely on rule making and enforcement – regulators around the globe are moving away from strictly using rule-based methods and incorporating behavioural science for assessing, understanding and influencing behaviour
3). The role of rewards, capabilities, and environment in driving behaviours
- Many previous attempts to change culture have focused on extrinsic incentives and disincentives such as changes to remuneration, targets and sanctions, but positive psychology and intrinsic motivations (i.e. receiving praise and status, maintaining a moral identity or conforming to a crowd) can be equally strong, yet overlooked motivators.
- The importance of environment is critical; good people do bad things. The tone needs to be set from the top as well as by key influencers such as middle management.
- It is not enough to rely on traditional incentives and levers to create a positive culture. The levers of wider motivation should also be used alongside role models and speak-up arrangements that allow employees to raise concerns in a way that fosters psychological safety
4). Leading culture change
- While senior leaders play a key role in influencing culture – and should be held to account for cultural failings – everyone influences the culture they are in, from middle managers to the most junior employees
- For culture change to take effect, influencers must embody desired behaviours and not pay lip service to them
- Organisations need to set a clear values statement on culture. This involves identifying and collaborating with stakeholders, defining and communicating what the organisation stands for and using this to set expectations and design processes
- Employees need to feel ownership to truly invest in new values, so firms also need to balance culture change from the top with a ‘bottom up’ local approach
- As such, financial institutions must consider a more complex, multi-system approach to influencing culture and behaviour. While there remains an important role for senior leaders, influence happens at all levels of an organisation, with the challenge then to recognise and align all levels of the system.
In short, the discussion paper highlighted three key findings:
- That there has been a shift to a more dynamic, systems-based approach to thinking around culture and conduct which encapsulates the individual, the whole system around them and the interactions and inter-dependencies between each part in the system.
- That it is important for organisations to foster psychological safety and learning as a means for employees to speak up, collaborate, and innovate.
- That regulation in its current form can only go so far in improving culture.
The full discussion paper Transforming Culture in Financial Services (DP18/2) can be found here.
Movers & Shakers of the week
Private equity partner Mike Weir has left Jones Day to join White & Case in London
An 11-lawyer team, including four litigation partners, have left Baker & McKenzie’s Johannesburg office to join Allen & Overy in the region.
Kirkland & Ellis has hired four restructuring lawyers in its London office, joining from Milbank Tweed Hadley & McCloy, Freshfields Bruckhaus Deringer, Norton Rose Fulbright and Orrick Herrington & Sutcliffe. Milbank’s former senior associate Matthew Czyzyk will join the firm as a partner.
Mergers & Alliances
Office Openings & Closings