In January this year, Linklaters – one of the leading capital-markets law firms headquartered in London – turned its Blue Flag database into a global product. Originally launched in August 1996 as a database of European securities and banking regulations, Blue Flag now extends to Asia-Pacific, with Latin America and eastern Europe due to follow later this year.
Described as a database, Blue Flag sounds uninteresting. In fact, it represents the future of legal practice. Recently, Richard Susskind, a lawyer noted for his grasp of the impact of technology on law, prophesied that law firms of the future would be publishers of legal information. With Blue Flag, Linklaters is on the brink of achieving that goal. Blue Flag is a powerful disseminator of legal advice in a form which investment banks can understand and use. Linklaters’ competitors have every reason to be alarmed.
“It was clear to us many years ago that you can’t just provide a service in English law, even though it’s the law you practise,” explains Paul Nelson, a Linklaters partner and one of the architects of Blue Flag. With the advent of the Investment Services Directive and the Second Banking Directive, investment banks needed to be in a position to do business across Europe. While these directives promote the idea of a Europe without frontiers, they simply mean that you have the right to do business locally without getting a licence (the “passport” principle). However, they do not remove the need to comply with local rules, for instance on solicitation (how and to whom you can distribute securities) and conduct of business.
In fact, the Investment Services Directive encouraged member states to introduce local rules to protect retail and institutional investors. Civil jurisdictions such as France and Germany tend to be consumerist, to uphold the inalienable right of the individual to be protected, to legislate against freedom of contract and to ignore the distinction between retail and wholesale clients. This means that common mechanisms used in the UK – for instance a letter agreeing to waive possible conflicts of interest – may not work in Europe. These subtleties of local law can trip the unwary investment bank. Worse, the introduction of the passport necessarily imports a prohibition against banks outside the European Union, for instance from the US, Japan and Switzerland.
Working with leading local firms in Europe, Linklaters devised Blue Flag. “We realized that, to be useful, a database can’t just reproduce the regulations verbatim,” says Nelson. Instead, Linklaters developed an architecture which reflects the way banks do business, charting the type of institution (regulated by the Bank of England, Imro or SIB, for example) against the proposed activity (buying and selling securities or derivatives, portfolio management, deposit taking or M&A, say). Essentially, the three questions to be answered in any situation are: do you need a licence; what are the solicitation rules; and what are the conduct rules?
These are then packaged in such a way that a compliance officer or in-house counsel can sit in front of the screen and make a comparative analysis between regulations in different jurisdictions just by clicking on the relevant country’s flag icon (Blue Flag is named after a combination of “blue skies” in US parlance and the colour of the EU flag). “A bank which wants to sell a new derivative to a German mutual fund, a French pension fund and a Spanish insurer can use Blue Flag to determine whether it can or not,” says Nelson. Hypertext links with concealed definitions are much clearer than poring over the regulations and flicking backwards and forwards to the definitions section in a piece of legislation.
Blue Flag goes further. Linklaters has developed over 100 decision trees, flow diagrams posing questions in boxes with arrows leading to other boxes depending on whether the answer is yes or no. These enable the user to pursue a line of questioning to a very detailed level.
At this level, legal advice is not so much a matter of marshalling the applicable regulations as taking a view on whether a proposed activity is covered or not. Here Linklaters imports its own opinion, flagging where its view differs from that of the regulatory authority. Many lawyers would balk at this level of advice, but because the screen format compacts a great deal of information in a useable format, Linklaters is able to “show its working” so that even if a particular view turned out to be incorrect, it would not be negligent.
“By using a rigid architecture, we’re fitting the rules to that architecture and so were drawing out common themes,” Nelson explains. From a user’s perspective, Blue Flag does the hard work of providing answers where, in normal circumstances, a lawyer would simply point to the deficiencies of the wording of the particular regulation and leave it to the client to work out.
Blue Flag’s development team remains small – no more than half-a-dozen lawyers worldwide – and very specialist. “With only one exception, all of those who have worked on it have been at least eight years qualified and specialists in capital markets,” says Nelson.
Blue Flag currently numbers over 10,000 screen pages with 400 to 500 for each country. The UK, exceptionally, numbers 1,100 to 1,200 screen pages. Updating is quarterly with news flashes covering developments in between. In the , updating is daily. Subscription is by country – £3,000 ($4,900) to £5,000 for each country – with an updating service of £600 to £2,000 a country a year. Everything is delivered over the internet.
Blue Flag is also helping Linklaters internally. All major law firms face the problem of know-how development. Know-how resides in the development of standard forms and collective views on new legal developments. These are very hard to capture. Updating a standard syndicated loan or underwriting agreement becomes a subsidiary priority to getting the deals done. But because Blue Flag is a live client product, the impetus to maintain it becomes, of necessity, a high priority. It becomes a natural focus, firm-wide, for know-how development and a way of capturing the latest thinking. “It is also used as a training tool for clients, but we use it to train up our lawyers too,” Nelson explains.
There is no reason why the principles underpinning Blue Flag could not be rolled out to each area of practice and its respective clients. The law firm which does that will find itself accelerating away from the competition.
