Legal advice is shaped by a dynamic interplay between regulatory compliance and innovative problem-solving. As businesses become more regulated and the scope of liability expands, legal advisors are increasingly required to ensure that their clients remain on the right side of the law while maintaining the core purpose of business: profitability.
Before delving into this question, it is important to define what the modicum of creativity is in legal advisory. Creativity vis-à-vis legal advisory refers to finding new and creative solutions that go beyond the present understanding of legal principles.
Creativity is not about breaking the law, but rather interpreting and applying it harmoniously to suit the needs of business, to combat present and future challenges. However, is this still possible in a realm where rigid compliances have emerged? This question will be discussed in this blog.
How has Compliance taken a Primary Role in Legal Advisory?
While compliance is undoubtedly essential in today’s risk-averse corporate commercial climate, creativity remains a vital asset when dealing with complex legal landscapes, structuring transactions, and resolving disputes.
Compliance, in its broadest sense, refers to adhering to applicable legal norms, regulations and legislations. Commercial enterprises undertake strict due diligence, appoint compliance officers and conduct compliance and risk audits to stay within the bounds of law.
The rise in corporate failures, commercial scandals, and the rise in sentiments of risk aversion have globally led to an increase in regulations demanding transparency and accountability. Further, there have been other factors such as:
- Corporate Governance: The previous models that championed businesses being profit machines have virtually become non-existent. Legislators, regulators and academicians have recognised that corporations have multiple stakeholders, and the laissez-faire approach cannot be adopted for modern governance. Upon perusal of the Companies Act, 2013 and SEBI LODR, it is apparent that certain obligations of disclosure, compliance, auditing and fair-play have become the norm, rather than the exception.
- Globalisation and Technology: Post-1991, India’s economy opened to foreign players. This led to an increase in market, competition and technology. Today, when information is considered the biggest asset, strict compliance with data protection and retention has compelled legal advisors and in-house councils to draft meticulous policies and agreements, leading in lees scope of creative solutions.
- Litigation and Fines: As a method of deterrence and accountability, the fear of imminent litigation and imposition of heavy fines has led to legal advisors increasing their focus on compliance. Litigation and/or fines can have multifold ramifications on a corporation, including, without limitation, loss of reputation, financial losses, and personal liability of key managerial persons.
Recently, the RBI imposed heavy fines to the tune of INR 1.29 Crores on Kotak Mahindra, IDFC First, and Punjab National Bank(s) on account of non-compliance. This is a sign that the banking industry, which is one of the most regulated, requires strict compliance. Additionally, Kotak Mahindra Bank has faced regulatory scrutiny in the recent past as well, leading to a restriction on onboarding new customers through online and mobile banking channels and on issuing new credit cards.
Balancing Creativity and Compliance
Compliance and creativity often go hand-in-hand. While compliance may be prioritised in some commercial and transactional aspects, it cannot be a replacement for creativity. The inherent issue with the question is that creativity is seen as something dangerous or as opposition to compliance. However, it is through creative and strategic legal solutions and developing novel arguments that compliance is achieved, as the law as a whole develops.
Innovative approaches imbuing creativity can often reduce the costs of compliance and streamline adoption. A very simple illustration of this is the concept of fractional general counsels. Budding startups are unable to keep experienced in-house counsel on their payroll. Further, even if they can afford to do so, it may not be commercially viable or sensible for them to have one full-time, considering the dearth of legal work. Hence, by having a counsel at a fraction of the cost for a specific duration of time, commercial enterprises can ensure legal compliance.
As per a study by LexisNexis Risk Solutions, financial institutions in the U.S. and Canada spend approximately $61 billion annually on financial crime compliance, with costs increasing for 99% of these financial institutions. In light of the growing costs of compliance, creative solutions in legal advisory, backed by cutting-edge technology, may be the primary method to ensure continued compliance, at least short term.
Conclusion
While the prioritisation of compliance in legal advisory is a response to the growing complexity of the regulatory setup, it is essential not to overlook the value of creativity, particularly in fostering and promoting compliance. Balancing compliance with creative problem solving enables legal advisors to provide more effective and efficient services, ultimately benefiting both commercial enterprises and the legal profession as a whole.