Empirical research by Dr Trevor Clark, Senior Lecturer at The Dickson Poon School of Law, sheds light on the potential for systemic risks to emanate from this sector.
A high priority issue for both regulators and the profession
Why is reducing the risk of ethical misconduct by lawyers so high on the agenda of both legal profession regulators and membership bodies right now? The Legal Services Board, (LSB) empowered to oversee the regulators of solicitors, barristers, and other legal professionals in England & Wales, is, for example, prioritising the development of proposals aimed at ensuring that its regulated communities uphold high standards of professional ethical conduct. The legal profession is at the same time scrambling to confront this challenge, hoping to head off direct regulatory intervention. To this end, the International Bar (IBA), the foremost global membership organisation for international legal practitioners and bar associations, is driving forward its own legal ethics research and promoting ethics initiatives - including ‘soft law’ and/or self-regulation proposals - amongst its members.
Public concern over scandals involving lawyers
These types of initiatives are a response to growing public concern as to the leading role played by lawyers in a series of recent high-profile scandals, which have in some cases led to miscarriages of justice and which collectively serve to undermine public trust in lawyers, and, consequently, in the rule of law. Lawyers, both in-house and in private practice, took the lead in wrongly prosecuting UK postmasters. Before that there was the misuse by lawyers of non-disclosure agreements (NDAs) on a virtually industrial scale, which led the UK government to propose legislation limiting their use in concealing sexual impropriety in the workplace. And UK legal services regulators have taken steps to constrain the use of SLAPPS, litigation aimed at intimidating journalists and others to obstruct the lawful scrutiny of matters which are clearly in the public interest.
Ethical scandals involving lawyers are not, of course, confined to the UK. In the US, for example, lawyers have executed ‘democratic backsliding’ strategies which undermine democratic institutions. Law firms have also found themselves in the firing line over their choice of clients. The Trump administration’s executive orders sought to penalise a series of elite law firms seemingly for acting for its opponents. And across the world there is mounting public pressure on law firms to cease acting for certain causes or categories of clients on moral grounds - fossil fuel companies being a prime example - even where to do so does not breach any law or code of professional conduct.
What about systemic risks posed by international law firms?
On the other hand, the role of international law firms in large scale scandals in the international financial markets has mostly escaped media and policy scrutiny. This is notwithstanding those lawyers, their motivations, and their ways of doing things are central to how markets operate and develop. So called ‘creative compliance’ by lawyers in major law firms was a significant factor in the collapse of Enron where law was seen as a ‘regulatory obstacle’ to be structured around, rather than as a social good where the spirit, and not just the letter, of the law should be observed. And lawyers played a lead role in the structuring and documentation of the complex financial instruments that were a significant causal factor in the global financial crisis.
Yet in the wake of the crisis, while bankers faced unprecedented public opprobrium, leading to bank CEOs being stripped of their knighthoods, and the global banking sector being hit with a wave of fresh regulation requiring them to hold significantly more capital to protect society against the risks flowing from their activities, the role of lawyers failed to attract any meaningful attention from the media or policy makers. This matters since there is the potential for the corporate legal profession to suffer its own ‘Arthur Andersen moment’ – the major accounting firm ceased to exist when clients deserted it in the wake of its subsequently overturned 2002 conviction for obstructing justice in the Enron scandal - with similar systemic effects and belated regulatory responses.
Zooming in on leveraged finance lawyering
It is possible a major scandal in the international law firm sector might be connected to a future financial crisis founded in the global leveraged finance market. In January 2019, Mark Carney, the then Governor of the Bank of England, reported what he considered to be a new threat to global financial stability to a House of Commons committee: an acceleration in the global volume of leveraged debt with weak lender protections.
According to Carney, leveraged loans bore all the hallmarks of the sub-prime mortgages that had caused the global financial crisis a decade before. Around this time, the Financial Stability Board (FSB), an international body established in the wake of the global financial crisis to promote global financial stability, launched an investigation into the sector and concluded that the risks generated by weakness in creditor protections in leveraged loans were mostly not fully priced in by the lenders. In 2022, the European Central Bank issued a warning to the significant institutions it supervises over ‘excessive risk taking’ in the sector.
In late December 2024, it was reported that global leveraged loan defaults had reached their highest level in four years. And Andrew Bailey, the current Governor of the Bank of England, warned in October 2025 that recent events in the US private equity and leveraged finance markets had ‘worrying echoes’ of the 2008 financial crisis.
My research explores the connections between these developments and the activities of lawyers working in international law firms. Concerns about the ethics of leveraged finance lawyers and their connection to the evolution of documentary terms have continued to surface in recent years, mostly centred around the independence of the lawyers which act for the banks arranging leveraged finance loans.
These concerns are associated with a practice known as ‘lawyer designation’ - where the lawyer and firm appointed to advise the banks is chosen (that is, designated), and paid for, by the private equity sponsor; effectively, the borrower of the loan chooses the lenders’ lawyer and pays that lawyer’s fees - which has become the norm in large-scale leveraged finance transactions in both the European and US markets.
In October 2022, it was reported that lenders on the £3.5bn leveraged financing of The Access Group were dissatisfied with the role played by their lawyers, and with the designation model under which they were appointed. And then, towards the end of 2023, the International Organisation of Securities Commissions (IOSCO) - an umbrella body comprising securities regulators from across the world and a global standard setter for financial markets regulation - reported that through its own consultation with market participants it had concluded that lawyer designation in leveraged finance meant that the advice that arranging banks receive from their law firms is not independent.
IOSCO warned that conflicts of interest arise because the lawyers representing the arranging banks can be reluctant to push back against private equity sponsors and their lawyers due to the risk that they could be excluded from further lender-side work. It is striking that IOSCO directly connected financial market conduct risks - specifically, a lack of transparency - to this lack of lawyer independence.
My research, which relies on an empirically based case study of the everyday working practices and ethics of leverage finance lawyers working in international law firms in London, seeks to shed light on the opaque and poorly understood world of international law firms, and their role in shaping the conditions of financial markets.
Drawing on extensive interviews with senior lawyers working in major international law firms and banks, a key finding of my book, illustrated and supported through a series of detailed examples, is that lawyer designation led to bank lawyers seeking to placate the private equity lawyers who effectively appoint them to act for the banks by deliberately providing a less diligent standard of document evaluation than would otherwise be the case. I show how this bank lawyer stance in turn facilitated relentless contractual boundary pushing by private equity lawyers. I highlight how the result is that transaction documents in this market have not only become overwhelmingly one-sided, but also the meaning of key provisions has become obscured by pervasive uncertainty in the language used, to the extent where market participants are unable to clearly evaluate, and hence accurately price, the risks that they face under them.
The adverse consequences of these findings are examined from multiple standpoints: professional ethical standards including independence, integrity, and competence; the implications for the allocation of risk in transaction structures and terms; the reduced range of restructuring options for lenders in the event of borrower financial distress, as well as the potential wider economic effects, including on the transparency of markets and the potential build-up of global systemic risk.
Dr Clark’s book, Financial Markets and the Ethics of Legal Practice (2025), is published by Oxford University Press.