There are currently numerous restrictions in the UK on how legal professionals practise, in terms of the permissible business structures which may exist. The situation in England and Wales is currently in a state of flux. In 2004 Sir David Clementi completed his “Review of the Regulatory Framework for Legal Services in England and Wales”. This report noted the following restrictions in this area71;
Rules prohibiting partnership between barristers and between barristers and other professionals;
Rules preventing solicitors entering partnerships with other professionals;
Rules preventing solicitors in employment of businesses or organisations not owned by solicitors from providing services to third parties.
Clementi was particularly adamant about one particular distinction “At the heart of this Review has been a distinction between Legal Disciplinary Practices (LDPs) and Multi-Disciplinary Practices (MDPs)”72. These different firm types are defined as follows; “LDPs are law practices which permit lawyers from different professional bodies, for example solicitors and barristers, to work together on an equal footing to provide legal services to third parties. They may permit others (e.g. HR professionals, accountants) to be Managers, but these others are there to enhance the services of the law practice, not to provide other services to the public”, whereas MDPs are “practices that bring together lawyers and other professionals (e.g. accountants,
69
at p 78.
70
E Shinnick and F Stephen, “Professional Cartels and Scale Fees: Chiselling on the Celtic Fringe?”, International Review of Law and Economics, Vol. 20, No. 4, 407-423.
71
Report by Sir David Clementi, “Review of the Regulatory Framework for Legal Services in England and Wales (2004), at Page 105, Paragraph 2.
72
chartered surveyors) to provide legal and other professional services to third parties. They do not solely provide legal services; indeed legal services might be a small part of their work”73.
The Clementi report has subsequently been ‘implemented’ in the form of draft legislation. However, Clementi’s main recommendation that LDPs with outside ownership74 and non-lawyer owners75 should be permitted as a first step towards MDPs has been ignored, an extraordinary approach given the relatively recent Enron and WorldCom scandals. In the Draft Legal Services Bill, formed to implement the Clementi recommendations, both LDPs and MDPs are permissible, with the exception of the format which was most central to Clementi’s proposals (the LDP firm with the same people as managers and owners of the firm).
Because this is merely speculative, the arguments for and against liberalising the law in this area are largely theoretical and insoluble. Justifications for allowing Alternative Business Structures (ABSs) are numerous and said to be as follows:
Other skills are integral to the running of a law firm (for example, Clementi makes the point that law firms already rely on people who are not lawyers to take their business forward, but currently cannot reward those people with partnership76).
ABSs work in the not-for-profit sector (although it can be doubted whether this can be extended to the commercial sector).
Proposals allow for greater flexibility, greater client choice, greater opportunities for trainees, improved services, greater convenience (one-stop shopping) and reductions in costs (through the realisation of economies of scope and scale).
The separation of management and ownership could actually reduce the financial pressure on lawyers.
Possibilities for innovation and greater access to capital. Could make risk spreading possible.
Assist in the removal of certain entry barriers. May improve access to justice.
However, these benefits, whether supposed or actual, are not achieved without costs. There are substantial fears that ‘one-stop shopping’ could lead to clients being tied to the in-house barristers in the firm they approach, rather than (as is the situation currently) solicitors approaching the best possible barrister, unencumbered by any necessity to choose a particular barrister. There also exists the risk of inappropriate owners, although Clementi’s “fit-to-own” test may, if properly implemented, allay many of these fears. The reforms are also feared to bring unreasonable commercial pressures to bear on lawyers which may conflict with professional duties. Formation of large LDPs or MDPs could also, it is feared, further exacerbate the gulf between the quality of services offered to those at the top and bottom ends of the market. Arguments about such new firms ‘cherry-picking’ the best business are weak, as firms already do this, and there is no evidence to support assertions that reforms could increase price whilst decreasing quality. Arguments that such a step is without
73
Supra N21, at P106, Paragraphs 7 and 8.
74
Subject to a ‘fit-to-own’ test.
75
Subject to the proviso that lawyers be in the majority on the management board.
76
precedent are incorrect, as New South Wales currently permits various business structures, and the Council of Licensed Conveyancers has elements of the suggested reforms.
Because these reforms are for the future, there is no empirical evidence to support or undermine them. However, there exists some theoretical opinion on ABSs. For example, Dow and Lapuerta are in favour of reform, as they argue that “Restricting the type of ownership structure is a blunt instrument for ensuring service quality”77. Brealey and Franks argue that “the dangers of a decline in standards and worsening of conflicts of interest are not sufficiently strong as to outweigh the natural presumption that industries will gravitate towards the most efficient structures”78.
As is the case with the other anti-competitive measures elucidated here, care musty be taken to note the peculiarities, vagaries and unique characteristics of different legal systems. For instance, in Scotland differences such as the size of the profession79, the existence of rules such as the rule against ‘mixed doubles’80, and the economies achieved by the existence of Faculty Services Limited81.
In conclusion, this area is one which is currently regulated very stringently, yet liberalisation is soon to be forthcoming in whatever guise the legislature settles upon. However, the regulatory framework being shaped by the Legal Services Bill is one which will provide for a range of organisational forms in which legal services are provided including some which are likely to be owned by non-lawyers. These different types of organisation will be subject to regulation by different bodies with differing rules governing practise. This will amount to a form of regulatory competition.
77
J Dow and C Lapuerta, “The Benefits of Multiple Ownership Models in Law Services”, Commissioned Report for Department of Constitutional Affairs, (2005).
78
R A Brealey and J R Franks, “The Organisational Structure of Legal Firms; A Discussion of the Recommendations of the 2004 Review of the Regulatory Framework for Legal Services in England and Wales”, Commissioned Report for Department of Constitutional Affairs, (2005). For a more cautious academic approach see H McVea, “Legal Disciplinary Practices - Who Needs Them?”, 31 Journal of Law and Society, (2004), 563-77. See also P A Grout “The Clementi Report: Potential risks of External Ownership and Regulatory Responses”, Commissioned Report for Department of Constitutional Affairs, (2005).
79
The legal profession in Scotland is less than 10% of the size of the English and Welsh counterpart, although the proportion of lawyers per capita population is roughly similar.
80
The rule stating that Scottish solicitor advocates cannot appear in the same case as advocates.
81
Advocates in Scotland have access to a library and other services by virtue of their professional status.