We report on the Solicitors Regulation Authority's imminent consultation on introducing a whistle-blowing policy to the SRA Handbook for the first time.

Whistle-blowing is an aspect of employee relations growing in prominence, with publicised incidents in the civil service, medical profession and banking. In response to this trend, bodies like the FSA, OFT and the European Commission have recently introduced whistle-blowing policies, and the SRA are about to begin consulting on a new code for solicitors. There are few details on the proposals at this time, but we report here on their possible impact on law firms and their insurers.

What are the SRA proposing?

The Public Interest Disclosure Act 1998 provides that whistle-blowing is the making by individuals of certain disclosures of information in the public interest. Such material can include, for example, information showing that a criminal offence has been or will be committed. Under the Act, the whistle-blower has a remedy if they are dismissed or "victimised" as a result of their actions.

The SRA proposals are directed at people who have breached the Solicitors' Code of Conduct and either disclose their own misconduct or the misconduct of others. By doing so, the whistle-blower may enter into a co-operation agreement to receive more lenient sanctions from the SRA.

It is to be hoped that the policy provides guidance on the following matters:

(a) the circumstances and types of information that can be legitimately revealed, having regard to the statutory requirements;

(b) the scale of benefits and/or protections for a whistle-blower;

(c) the obligations on a whistle-blower, including the steps they should take in relation to a firm's internal procedures, the SRA and other regulators, the police and/or the media;

(d) the principles underpinning the relationships between a whistle-blower, their firm and the regulator, in situations where, for example, a person must give evidence against their employer or certain individuals to receive a more lenient penalty;

(e) the protections for firms against information that is wrongly revealed, or when malicious allegations are made (eg, as part of an employment grievance); and

(f) the ramifications for insurers and the SRA's Minimum Terms and Conditions for Professional Indemnity Insurance, given that there may be conflicting interests between whistle-blowers, their firms and their insurers.

Will it work? It is intended that lawyers with concerns about their firm will be encouraged to use the whistle-blowing system in the hope that proper investigation of the firm will ensue. The FSA's dedicated whistle-blowing hotline has demonstrated its potency in the successful prosecutions of Andrew Jeffrey and Barrie Aspden. In both cases, systematic fraud was uncovered as a result of whistleblowing tip-offs, and it is hoped that the SRA system will also have some similar successes.

What impact will this have on insurers?

It is expected that the insurance industry's response to the SRA consultation will be mixed.

On the one hand, if the SRA policy encourages further whistle-blowing, this should reduce fraudulent practice within the legal profession – a good result for insurers. Furthermore, there may be limited cause for concern for insurers as the Minimum Terms and Conditions do not require cover to be provided for inquiries and investigations into disciplinary matters, or related defence costs; potentially, this would cover investigations as a result of whistle-blowing.

On the other hand, however, the SRA policy could lead to more claims against firms, if the SRA notifies clients of investigations instigated by whistle-blowers into firms. If whistle-blowing occurs at a late stage this might also aggravate ongoing civil proceedings. Firms may also be more likely to notify insurers of circumstances which may give rise to claims.

What about law firms?

The timing of the consultation comes during a period when much is changing in solicitors' regulation, particularly in light of the introduction of alternative business structures. Law firms should have implemented some policies for whistleblowing to comply with the new Code of Conduct's brief reference (in chapter 10) and to assist them in complying with the Bribery Act 2010. While risk partners are checking the terms and conditions of their insurance policies, they should also be aware of the uncertainty on premiums that the whistle-blowing guidelines could have.

Management headaches could develop if a partner or employee blows the whistle rather than raising issues internally. The new Code of Conduct steers firms towards reporting matters, and firms are in a tricky position between investigating internally (keeping control of the inquiry, publicity and with the benefit of legal advice) and referring themselves to the SRA.

For these reasons, firms may consider D&O insurance and/or management liability coverage as a way of covering the competing obligations owed to the regulator and insurers, and to protect against an insurer declining indemnity for claims made.

Kick-off time for the consultation It is unlikely that when the SRA's draft policy is released we will see US-styled "bounties" paid to whistle-blowers. Nor will we see mandatory obligations to report like those imposed in some circumstances on accountants under section 34(9) Solicitors Act 1974.

Instead, there is likely to be a system similar to that created by the FSA and OFT which will offer some further comfort to whistleblowers and balance the costs and benefits of whistle-blowing to insurers and firms.

In the meantime, it may be prudent for firms to take the opportunity to put in place greater internal whistle-blowing procedures as soon as possible, and to discuss with their insurers the potential implications of whistleblowing. The insurance industry will want equally to consider the effects of a whistleblowing policy on their products.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.