Canadian Underwriter

Regulating professional Virtue

August 1, 1999   by Canadian Underwriter

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Confidentiality of information has mainly revolved around the type of protection afforded to clients including financial services executives and their companies seeking multi-jurisdictional/service firms – namely the “one-stop shop” concept for legal, accounting, management, tax and actuarial advice.

In this regard, The House of Lords recently set out the requirements of established organizational arrangements as they relate to the protection of confidential information. In the recent case of Prince Jefri Bolkiah v. KPMG, the House of Lords extended the lawyers’ duty of confidentiality, i.e. the duty not to communicate confidential information with regard to a former client, to accountants who provide litigation support services. It was held that KPMG was unable to demonstrate it had met the onus of providing the requisite protection for confidential information of a former client such that there was no risk of passage of such information to another client with an adverse interest.

The British case is interesting when seen against existing American and Canadian law. The House of Lords adopted and modified the US concepts of the “Chinese Wall” and the “cone of silence” and held that the implementation of the barrier to prevent the passage of confidential information – i.e. the “ethical wall” must be part of the organizational structure and not created on an ad hoc basis. The “Chinese Wall” is a barrier to prevent the passage of confidential information and “cone of silence” is a formal undertaking by an individual to prevent the passage of confidential information.

Building momentum

The meeting of law and ethics has become an issue of particular significance with the rise in corporate mergers and alliances — both locally and internationally. In Canada, it was previously addressed by the Supreme Court of Canada in 1990 in MacDonald Estate v. Martin. That case dealt with the protection of confidential information in the context of lawyers who change firms. Mr. Justice Sopinka held that “unless satisfied on the basis of clear and convincing evidence that all reasonable measures have been taken to ensure that no disclosure will occur”, the court should prevent a firm for acting for a second client.

The House of Lords extended Mr. Justice Sopinka’s test of “reasonableness” to that of “effectiveness” as it applies to the protection of confidential information. In the Prince Jefri Bolkiah case, the House of Lords referred to the practices of the UK Financial Services Authority and the UK Law Commission as they relate to confidentiality. Specifically, these UK institutions have recognized the use of “Chinese Walls” to restrict the movement of information and manage conflicts of interest which arise when a conglomerate carries on financial business. In 1992, the UK Law Commission released a Consultation Paper on Fiduciary Duties and Regulatory Rules. The UK Law Commission Consultation Paper (Law Commission NO. 124) recognized “Chinese Walls” as having one or other combination of the following organizational elements:

the physical separation of the various departments in order to insulate them from each other;

an educational programme, normally recurring, to emphasize the importance of not improperly or inadvertently divulging confidential information;

strict and carefully defined procedures for dealing with a situation where it is felt that the wall should be crossed and the maintaining of records where this occurs;

monitoring by compliance officers of the effectiveness of the wall, and

disciplinary sanctions where there has been a breach of the wall.

In the financial services industry, institutional arrangements are established to prevent the flow of information in the possession of one part of the business to the other parts of the business. In the context of multi-jurisdictional/service firms, the House of Lords held that “an effective Chinese Wall needs to be an established part of the organizational structure of the firm, not created ad hoc and dependent on the acceptance of evidence sworn for the purpose by members of staff engaged on the relevant work”.

The House of Lords held that the duty to preserve confidentiality is unqualified. Information must be kept confidential and it is not sufficient to take reasonable steps to do so. The lawyer has a duty not to communicate confidential information to a third party. The lawyer also has a duty not to misuse the confidential information. A former client must be protected from exposure to avoidable risk and “this includes the increased risk of the use of the information to his prejudice arising from the acceptance of instructions to act for another client with an adverse interest in a matter to which the information is or may be relevant”.

Separating the business

As a result, a professional firm will be allowed to act for a party whose interests are adverse to a former client’s interests only where the firm has implemented internal structural measures to prevent disclosure of such information.

The Prince Jefri Bolkiah decision will cause accounting firms where conflicts exist to revisit the rules of the workplace with a view to implementing new pre-emptive measures. The decision will also be the heart of a new ethical culture within the accounting profession. Indeed, it is my view that the House of Lords’ decision may be wide enough to apply to accounting firms, law firms and actuarial firms where there may be sharing of expertise in international practice groups.

The Prince Jefri Bolkiah decision is a proactive step in institutionalizing ethics. Formulating codes of ethics will, over time, provide the building blocks for crossing professions and geographic boundaries

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