It’s Time for Smart Legal Opinions
With automation and smart technology growing increasingly prevalent across the financial sector, is there any reason for legal opinions to be lagging behind?
First coined in 1997 by computer scientist and legal theorist Nick Szabo, smart contracts are now widely accepted within the legal sector. But why stop there? Digital data flows increasingly dominate industries such as the financial services sector (especially with the fintech revolution gathering speed) to automate decision making. Yet legal opinions still run to hundreds of pages of convoluted legalese.
This is particularly high risk for the close-out netting legal opinions required to reduce counterparty credit risk. Global regulators require financial institutions not only to attain many close out netting legal options to justify their actions, but increasingly to provide demonstrable proof that the advice has been applied correctly.
This is an onerous, expensive activity and one that the leading financial institutions are increasingly questioning. Given the growing acceptance of smart contracts, essentially automatable and enforceable contracts, and the maturity of underpinning technologies including distributed ledger technologies such as blockchain, why are legal opinions still so time-consuming to interpret?
The depth of expertise is not in question: lawyers exercise their judgement and interpret the law when providing formal written legal advice in legal opinions. The problem is in utilising the opinion. Once produced, in-house legal teams spend huge amounts of time assessing this advice, often working their way through convoluted, circular logic, with inconsistencies in the treatment of scope, assumptions and qualifications. Only then can they start to map the advice to support the needs of in-house systems.
At a time of increasing regulatory scrutiny, including demands for data transparency and clarity of audit trail to illustrate the critical decisions informed by these opinions, the banking industry is looking for legal services and legal opinions that actually support the business and reduce risk.
This legal opinion and legal advice could and should be provided digitally. It is time for the current legal opinions to be transformed into SLOs which accurately automate the interpretation and application by business of legal opinions.
Digitising the current natural language into a structured data form with associated reasoning engines will enable companies to automate the application of legal opinions to their particular circumstances. The potential benefits are significant – saving time and cost but also reducing risk. Today the manual process and reliance on multiple individual actions has a direct impact on the level of risk. It is costly, inefficient and error prone – creating additional fears within a sector that is enduring a rising number of fines and personal accountability for executives.
The use of SLOs would enable institutions to automate the management of legal risk and rapidly leverage information to make better and more informed business decisions. The time and cost of interpreting legal opinions could be reduced by 30% to 40%, with the added benefit of providing the data transparency and audit trail required for regulatory compliance.
There is a very real opportunity for legal firms to steal a march on the market, recognise the demand from businesses and embrace a fully digital data flow. By digitising the creation of the legal advice – rather than translating the advice – the opinion becomes immediately usable by the business. Key to achieving this shift is an industry-wide standard for producing SLOs that eliminates convoluted and unnecessarily complex reasoning and language and ensuring the successful automation of legal advice.