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Meeting regulatory demands

Challenges for the legal function

“The inability or reluctance of a lawyer to use common technologies should not occasion additional costs for other parties”

– Supreme Court of Victoria Practice Note SC GEN 5 Technology in Civil Litigation

The Australian regulatory landscape has shifted.

Our key regulators have increased and new powers; for example, the product intervention powers of the Australian Securities and Investments Commission (ASIC) and its hawkish attitude to enforcement. From February 2018 to August 2019, there was a 24% rise in the number of ASIC enforcement investigations. This trend will continue, with other regulators such as the Australian Prudential Regulation Authority (APRA) adopting this approach.

A corollary is the steady upswing in information requests from regulators keen to fulfil their mandate. It is a growing issue against the hardening enforcement landscape, multiple new implementation projects – for example, design and distribution obligations for financial products and mushrooming of computer data volumes.

The direct results are greater costs and tied-up resources in businesses’ legal and compliance functions. Faced with such challenges, in-house counsel (and their service providers) – particularly those in small and mid-size companies – have the potential to create significant value for their businesses by exploring different approaches, including those which have gathered momentum overseas.

Small innovations, big returns

Understandably, the United States and United Kingdom enforcement landscape hardened before Australia’s did in the wake of the global financial crisis. Faced earlier with the above challenges, I sensed some broad nuances in approach by the legal function in financial services firms responding to increasing regulatory information demands when I was based overseas.

First, a greater use of technology assisted review (TAR) – most litigators will have heard of TAR; it involves a senior reviewer coding a small ‘seed set’ of documents and then using software algorithms to propagate predictive coding over the remaining data set based on their likeness to the seed set.

After that exercise, which can be conducted over many thousands of documents quickly, statistical validation and other testing follows to ensure the accuracy of the data set returned for relevance, privilege, etcetera. Usually, the much-distilled data set that the software algorithms identify as relevant are then human reviewed prior to production. But this doesn’t always happen, as I saw some financial institutions elect to do on a cost/benefit analysis.

In a litigious setting, TAR’s use is increasing and is supported by Australia’s courts1 which are following the international trend. ASIC too is a public proponent of TAR (along with other global regulators), having adopted it itself.2 Former Chairman Greg Medcraft said in March 2017:

“We are tailoring machine learning software for use in investigations…using algorithms for both structured and unstructured data. It allows us to visually map relationships of persons and entities and create time chronologies…We are expanding our capabilities in this area [e-discovery and TAR]…to make the identification of relevant evidentiary materials more efficient.”3

TAR may not always be appropriate, including for smaller, idiosyncratic and/or particularly time-pressured reviews. However, its reliability, official endorsement and, ultimately, its potential to save a great deal of time and associated expense compared with human review – even after the traditional keyword searches and other filters are applied – means that it should always be a consideration when a regulator’s information request is first received.

Second, a proactive focus on data management and e-disclosure strategies – identification and extraction of responsive data is often the first real challenge in responding to an information request, which may cover emails, instant messages, document management systems, portable devices or hardcopy documents.

It is not unusual for responsive data to be located after the initial tranche of data is identified, processed and batched for review, which can complicate tight timeframes. While there is no uniform approach, in an increasingly challenging enforcement environment I observed a drive in the internal legal function to increase efficiencies and balance reliance on external providers through advance consideration of data mapping (for example, where is our data?), storage issues (for example, server locations, who has ‘possession’ in group entities), extraction issues (for example, legacy systems, meta-data considerations) and related issues (for example, privacy obligations, protecting privileges).

Finally, a larger appetite to structure matters and external fee arrangements with external providers in different ways. An example of the former is bifurcating key tasks – for example, less-expensive law firm or legal outsource provider ABC will do all the document review and more-expensive law firm XYZ will do the rest of the tasks.

A simple example of the latter is ‘surge pricing’, whereby a law firm may agree to charge a discounted or further discounted hourly rate for certain phases – for example, a document review. Or ‘risk collars’ which reward efficiency – the law firm receives a bonus when they come in under budget, the client receives a discount if the matter goes over budget. More variety, in short, than discounting or (where possible) fixing fees.

Innovating with fee arrangements can be challenging and is intrinsically bespoke. A willingness by in-house counsel and law firms to experiment can lead to a compelling value proposition, though.

Looking forward

These slight shifts in approach are not radical. However, innovating with particular review technologies or approaches to foreseeable future regulatory demands or exploring alternate service arrangements need not be.

In a profession responding to rapid changes, rising complexity and a relentless need to consistently demonstrate value to core businesses and clients, an openness to innovations being used outside Australia may lead to significant value.

Footnote
1 McConnell Dowell Constructors (Aust.) Pty Ltd v Santam Ltd & Ors (No.1) [2016] VSC 734.
2 Report 476, ASIC enforcement outcomes: July to December 2015 (March 2016), [29].
3 Medcraft G, ‘The Fourth Industrial Revolution: Impact on financial services and markets’ (20 March 2017), ASIC Annual Forum 2017 (Hilton, Sydney).

Explore more resources at qls.com.au/innovation.

Liam Hennessy focuses on financial services disputes, regulatory investigations and compliance matters. He has significant experience with largescale document review projects. Based in Brisbane, his experience spans periods working in London, Sydney and Melbourne. The views expressed in this article are his own.

This story was originally published in Proctor October 2019.

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