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Report of the Review of the Regulatory Framework for Legal Services in England and WalesChapter FAlternative Business StructuresIntroduction 1. In its report published in July 2003 [Endnote 39], the Government expressed its support for the principle of enabling legal services to be provided through alternative business structures. It said “ The Government supports in principle enabling legal services to be provided through alternative business structures. Such new structures would provide an opportunity for increased investment and therefore enhanced development and innovation, for improved efficiency and lower costs.... The Government accepts in principle that new business entities such as multi-disciplinary partnerships and corporate bodies should be allowed to provide legal services.” 2. In its response to the Consultation Paper the Office of Fair Trading identified the most significant restrictions which affect the types of alternative business structures able to offer legal services. These restrictions are contained within the rules of the main professional bodies. They are:-
3. Although not the subject of this Review, it should be noted that selfemployed barristers cannot in general deal direct with the public, but must do so through instructing solicitors. 4. The product of the above rules is that there is little variation in the type of business structure that the consumer can access. As noted, he cannot (except in limited circumstances) access a barrister direct. The most easily recognisable organisational form which dominates the provision of legal services to consumers is the high street solicitors' firm, owned and managed by solicitors. (Throughout this Chapter we use the term ‘Manager' to refer to a partner, principal or director of a firm.) 5. A key exception to the practice rules arises in the not-for-profit sector where, subject to certain conditions, solicitors (and those whom they supervise), barristers and other legally qualified (and unqualified) personnel employed by a Law Centre may work together and are permitted to deal directly with members of the public. 6. At the heart of this Review has been a distinction between Legal Disciplinary Practices (LDPs) and Multi-Disciplinary Practices (MDPs). 7. 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. The concept seeks to sweep away most of the current restrictions on the business forms that lawyers may practise under. 8. MDPs are practices which bring together lawyers and other professionals (e.g. accountants, 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. 9. In the case of both LDPs and MDPs it would be possible to permit a split between those who own the practice and those who manage it. 107 10. Thus under the heading of ‘Alternative Business Structures' there is a matrix of possibilities:-
11. In its response to the Consultation Paper the Law Society favours, subject to conditions, lifting the restriction on solicitors entering partnerships with other lawyers and non-lawyers (rule (b) in paragraph 2 above). It also proposes to remove the rule that prevents solicitors, in the employment of businesses or organisations not owned by solicitors, from providing services to third parties (rule (c) in paragraph 2). As regards rule (a) in paragraph 2, the Bar Council has indicated that it is prepared to permit barristers to enter partnership with other lawyers, subject to regulation by a recognised body other than itself; but continues to argue that it will not permit partnerships among barristers under its direct regulatory auspices. 12. Against this background the Chapter takes the issues in the following order:-
Demand for LDPs 13. Demand for legal service provision through an LDP could come from two sources: the consumer and the provider. The absence of an articulated consumer demand, in the context of a market where restrictive practices operate as a barrier to innovative forms of service delivery, would not in itself be a persuasive argument that other forms of service delivery should not be permitted. 14. The private client, as distinct from the large corporate client, is unlikely to appreciate the differences in training, competencies and regulation between different categories of what they perceive to be ‘lawyers'. This is not surprising given that the purchase of legal services by such consumers is infrequent and that the consumer's prime concern is usually about outcomes - e.g. a successful conveyancing transaction - rather than the means of its delivery. Nonetheless, customers generally are interested in low prices and an efficient service, and where the nature of the services is better understood, as in the conveyancing market, customers do ‘shop around'. Providers react to competitive pressures by quoting competitively for the work. 15. Recent research provides some background to the concerns which consumers have about how traditional legal firms operate. Research carried out by MORI [Endnote 40] shows that lawyers are not universally seen as customer focused, approachable or easy to comprehend. Other work [Endnote 41] shows that inertia, through a feeling that ‘nothing can be done', combined with a lack of knowledge about how civil law could help, act as barriers to people purchasing legal services. The Law Society's submission to the Consultation Paper comments, based on research they have carried out, that whilst cost was important “Consumers were, in fact, more concerned about the perceived unapproachability of solicitors and their apparent attitudes to their customers”. 16. A survey carried out for the Consumers' Association [Endnote 42] shows a perceived lack of client care by lawyers. The main reasons for dissatisfaction were, in descending order: excessive delays, not carrying out services with reasonable skill, making mistakes, failing to return phone calls or to reply to letters and unprofessional behaviour. While the Consumers' Association themselves point out that their survey is not taken from a representative sample of the population (or lawyers' clients), it does provide a useful snapshot of some important concerns consumers have. It is of note that these concerns relate as much to the quality of business service that is provided, as to the quality of the legal advice itself. 17. Moving to the supply side, there are various sources of potential provider interest. 18. Many firms of solicitors rely on people who are not qualified solicitors to take forward the business of providing legal services. People such as IT experts, HR specialists, and accountants play a key role in the success of the business, but solicitor practices cannot reward such key people with partnership and have instead to resort to ‘ways around' the problem. 19. In addition, many Managers wish to work with legal professionals with complementary skills. It is hard to understand why someone who specialises in advocacy, e.g. a lawyer who is a barrister, should not be permitted to work together as an equal principal with someone who is expert at conducting litigation, e.g. a lawyer who is a solicitor, both lawyers acting to provide an integrated service for the client. 20. Further, as the Law Society point out in their response, there are many in the legal profession who feel excluded from the partnership role in a traditional law practice. This may include people who are unable or unwilling to risk capital to put up their partnership stake; people from ethnic minorities who may feel they do not ‘fit' into the partnership role within a traditional practice; and people who due to family or care commitments feel that they cannot undertake a traditional partnership role in terms of work commitments. Yet others, who are employed lawyers, may wish to play a more client facing role or just have a wider career structure. An LDP model with non-lawyer owners would broaden access to capital and lessen the need for practitioners to put in equity capital, and might enable varied work styles to suit a broader range of people wishing to work in the profession. 21. The flexibility afforded through having a range of legal skills available under one roof can be seen in the not-for-profit (NFP) sector. In the NFP sector, Citizens' Advice Bureaux and Law Centres have lawyers drawn from different branches of the legal profession working together under one roof to provide legal advice and services to their client base. The precise division of labour between the different professionals is a function of the expertise of the practitioners and the most efficient way of meeting the client need. 22. In the commercial sector too, firms such as the RAC have publicly articulated their wish to offer the general public an alternative way of accessing legal services. Unlike most high street solicitors, companies such as these have nationally known brand names to protect, which may be a powerful incentive to operate in a proper manner. Issues which arise in LDPs where Managers and owners are the same 23. As noted, the basic principle of an LDP is that it is a law practice which brings together barristers, solicitors and other lawyers on an equal footing. Such new legal practices should provide advantages; and many respondents, both from the consumer and provider side, expressed themselves in favour in broad principle. It would widen the skills base that the legal firm could offer its clients by having under one roof, as equal principals, lawyers from a range of legal professional disciplines. It would provide greater choice for lawyers in the types of business structures they could work for. It would permit lawyers to invite into Manager status other professionals who were not lawyers. It ought also to provide a further business structure (alongside barristers' chambers and government service) where young barristers could get proper experience, both as regards pupillage and beyond, in order to become fully qualified. 24. The issues to be addressed in connection with such practices arise from:-
Each is considered in turn. 25. Arising from the proposal that lawyers with different professional qualifications should be permitted to work together as equals, the first and most important issue is to ensure that there is a high level of ethical standards within the legal practice. There should be a Code of Professional Practice for the LDP, agreed with the Regulator of LDPs, to which all lawyers in the practice would need to adhere. It is difficult to see why this should be a significant difficulty since, whilst each professional body frames the relevant provisions differently, the responsibilities of lawyers to outside parties is fairly uniform. All lawyers with rights of audience and rights to litigate have a duty to the court which is over-riding. In general all lawyers have a duty to their client, and a duty to put the client's interests ahead of their own. A single entity-wide arrangement to cover matters such as legal professional privilege should also be obtainable through appropriate regulatory arrangements (set out later in paragraphs 62 to 73). Such ethical principles should be at the heart of an LDP. 26. One notable exception to the uniformity of lawyers in ethical matters is the position of notaries, since they have a particular duty to the validity of the transaction itself. However, many notaries presently manage individually to practise as both a notary and a solicitor, so there can be no suggestion that these two branches of the legal profession cannot co-exist. 27. A second set of issues relates to management responsibilities. In the management of an LDP, irrespective of its legal form, it must be expected that there would be some characteristics of a corporate structure. There would need to be a shift in emphasis towards regulation of the economic unit, beyond regulation of the individual practitioner. Thus it is proposed that there should be a ‘Head of Legal Practice' (HOLP), nominated to the regulatory authorities and with overall responsibility for the conduct of the legal business in accordance with the regulatory rules. This person must be a qualified lawyer and able to satisfy the Regulator that he is competent to oversee all of the areas that the LDP will cover. The Regulator would look first to that nominated person to ensure that the standard of care in the legal practice conformed with the relevant rules. In particular, the responsibility for ensuring that legal services are provided only by those qualified to do so would rest with him. By ‘competence' is not necessarily meant specialist expertise. The proposal is that the HOLP should be able to satisfy the Regulator that he has the necessary qualifications and experience to discharge the regulatory responsibilities required of him. In this context I would judge a solicitor to be properly qualified to act as the HOLP in respect of lawyers with higher court rights, even if he himself did not have such rights. 28. It is also proposed that an LDP must have a senior Manager acting as ‘Head of Finance and Administration' (HOFA), nominated to the Regulator. The nominated person would be responsible both for the production of appropriate accounts for the legal practice and for the proper separation and management of client monies. This person might be a lawyer, but would not need to be. Many large and medium sized solicitors' practices are already organised in this fashion, and for others who chose LDP status I do not believe that the changes would be difficult to implement. In a small practice, there should be no reason why one person who was suitably qualified could not act as both HOLP and HOFA. 29. The nomination of one person to be primarily responsible for finance and administration, including client monies, would not obviate the responsibility of all Managers for such issues, any more than the presence of a finance director on the Board of a plc removes responsibility from other directors for the accounts of the company. But it does recognise the business reality that one person among the management team must lead in this important area. 30. A third set of issues arises through the presence among the Managers of an LDP of individuals who are not lawyers. The Bar Council argues in its submission that non-lawyers should not be permitted to become Managers, “that it would be wrong in principle, and would give rise to risks to the public, if individuals were permitted to exercise a significant degree of control over the conduct of a legal practice who are not subject to the professional duties which should underpin the practice of law.” Most other respondents, however, took a different view, agreeing that some liberalisation in this area was sensible. As the definition of an LDP in paragraph 7 above makes clear, the role of the non-lawyer Manager is to enhance the services of the law practice, not to provide other professional services to the public. Non-lawyer Managers might, therefore, be expected to sign a Code of Practice agreed with the Regulator of LDPs, which would include a similar commitment to act in the best interest of clients to that which binds lawyer Managers. The presence of non-lawyer Managers reflects the fact that, whilst legal skills should lie at the heart of a modern practice, they are not sufficient; to provide an effective service other skills are necessary and they include financial expertise, as discussed above, and also HR and IT expertise. As was noted in the Consultation Paper, in many legal practices professionals with these skills already sit on the Executive Committee of their firms, with significant control over the conduct of the practice. Similarly in Law Centres non-lawyers with other skills do exercise a significant degree of control over the practice to the benefit of the public. These examples suggest that different legal professionals are able to work together with non-lawyers, without compromising their professional standards. 31. As noted, the HOLP and HOFA would be nominated individuals and would need to satisfy the LDP Regulator that they had the necessary competence to fulfil these roles. All other Managers, lawyers and non-lawyers, would need to register with the LDP Regulator. It would be expected that the LDP Regulator would focus its regulatory attention upon the competence of the HOLP and HOFA and the management systems that they employed. It is of note that in New South Wales, where the framework permits Incorporated Legal Practices of a form similar to LDPs, the regulatory framework requires practices to be able to demonstrate compliance with ‘appropriate management systems', and the regulatory authority has published a paper which includes a checklist of systems that a practice should have. 32. Whilst I conclude that non-lawyers should be permitted to be Managers of LDPs, the essence of an LDP is to be a legal practice. The proposal, therefore, is that there should be a limit on the level of non-lawyers among the Management group. The limit might be set by the Regulator but the recommendation in this Review is that ‘lawyers should be in a majority by number in the management group'[Endnote 43], signed up to certain regulatory standards by dint of their professional qualification. The hallmark of a legal practice lies not just in the fact that it provides legal services; it also lies in the ethos of the practice fostered by professionals sharing a common set of values. Having lawyers in a majority in the management group is a more certain way of ensuring that the fundamental attributes of the profession are maintained. It would be onerous for a single person such as the HOLP to define the culture of a firm or be expected to bear the entire weight of upholding the legal ethics of the practice. 33. It would be for the Regulator to determine the definition of a lawyer for the purposes of applying the principle in the above paragraph. My starting point would be lawyers authorised to carry out reserved services, as discussed in Chapter E.[Endnote 44] 34. It is recognised that the majority requirement may militate against sole practitioners turning themselves into an LDP in certain circumstances (e.g. taking one non-lawyer into partnership), but it would not be detrimental to their current position. Issues which arise in LDPs where Managers and owners are different 35. There would be considerable benefit in permitting outside owners of legal practices. In general economic terms, new capital from outside the industry would be permitted which should increase capacity and exert a downward pressure on prices. In a business sense, new investors might bring not just new investment but also fresh ideas about how legal services might be provided in consumer friendly ways. Such new businesses might better address some of the consumer concerns referred to in paragraphs 15 and 16 above. 36. There are, however, a number of issues that arise where management and ownership are split. They relate to:-
Each issue is addressed in turn. 37. Opening up ownership brings the risk of inappropriate owners of a legal practice. A few have given short answers as to why only lawyers should be ‘fit to own' a legal practice; this has been to refer to whoever they regard as the villain of the moment or, in default, ‘Robert Maxwell Legal'. There is a point to be addressed on the issue of ‘fit to own'. But the short answer is an insufficient one, just as the words ‘South Sea Bubble' would not have been a sufficient reason for our forefathers to have prevented all new public share offers. 38. In judging these risks, it is important to remember that such risks already exist. As the RAC point out in their response to the Consultation Paper: “This is attested to on a regular basis in the reports of the Solicitors Disciplinary Tribunal which list the names of those who have been struck from the Roll for malpractice and criminal behaviour.” 39. The consequences of widening the net of ownership do not all lead to greater risk. It is probable that many outside shareholders would bring business practices which might provide higher standards than exist in some practitioner owned firms. They might insist on high levels of internal controls with checks and balances, for example in connection with clients' monies, that a small practitioner owned firm would find difficult to replicate. Many will already be familiar with the types of ‘appropriate management systems' that the LDP Regulator is likely to insist upon. 40. Nevertheless the issue of ownership remains one that should be addressed, just as it does with any other business which has, as for example a bank does, an important fiduciary relationship with a client, including handling of his monies. It is, therefore, proposed that for prospective outside owners there should be a ‘fit to own' test.[Endnote 45] The precise provision would rest with the Regulator itself, but it might be expected to have regard to: (a) honesty, integrity and reputation; (b) competence and capability; and (c) financial soundness. The Regulator would be entitled to look at the business plan of the prospective owner and to understand what type of practice it wished to run and why. The Regulator would also have the right in a group context to look beyond the immediate shareholder, for example to the ultimate beneficial owner. 41. The second concern around permitting outside ownership is that outside owners, even if they were to pass the test of ‘fit to own', might bring unreasonable commercial pressures to bear on lawyers which might conflict with their professional duties. It is a point raised at length in the submission of the Solicitor Sole Practitioners Group. It is also a point made by the Bar Council who argue that there is:-
42. It is not clear, however, that the Bar Council's argument is correct. The LDP would have a number of characteristics which provide proper safeguards:-
In short the LDP is a regulated entity, a number of protections would exist and the outside owner [Endnote 46] would not be “perfectly entitled to pursue his own financial interests, even in circumstances where those conflicted with the best interests of clients of the firm or with other core values of the legal profession.” 43. In order to ensure these safeguards are followed and clearly visible, it would be appropriate, as suggested by the Law Society in their submission, to require that the LDP, registered with the LDP Regulator, be a ring-fenced legal entity. It is also proposed that all owners should covenant with the Regulator to indemnify any loss of client monies incurred by clients of the practice. 44. It should be noted that the safeguards referred to above may change over time, in the light of experience. It would, therefore, be inappropriate for the safeguards to be enshrined in statute; rather the statute should propose that they are set out by the LSB, having regard to the need to protect the consumer interest and other objectives referred to in Chapter A. 45. A further argument made against permitting outside capital into LDPs is that such owners would seek to ‘cherry-pick' the best pieces of business, to the detriment of the existing high street solicitor and possibly access to justice. The argument ignores the fact that it is the right of existing legal practices to determine which areas of the law they wish to practise in; and many have become specialist. It should be recognised, also, that ‘cherries' generally grow where there are restrictions to free trade, either in terms of who may do a certain type of business or ease of access of capital. For many years the most typical piece of legal work, the ‘cherry' for most high street lawyers, was conveyancing. The practice of minimum fixed fees was removed in 1973, and the Law Society monopoly was removed by the setting up of the Council for Licensed Conveyancers, under the Administration of Justice Act 1985. In general it should be expected that the admission of new capital will increase competition and reduce the cost of legal services, to the benefit of the objective of access to justice. 46. An extension of the cherry-picking argument arises in the context of rural practices. Some responses have expressed concerns that the advent of LDPs could jeopardise access to legal services in rural areas by further reducing the numbers of generalist providers in such areas. In respect of the latter, it is felt that this would add to a trend of perceived rural deprivation of services generally as banks, shops, post offices and other service providers decide to withdraw from such areas. 47. The argument is that such small practices, many of which make only a modest profit, are only able to offer legal aid and other low margin work through the cross-subsidy received from general practice work such as conveyancing, probate, personal injury and small litigation. There is a social value in retaining such practices, because they offer a legal aid service to clients in rural areas who might otherwise have to travel long distances to obtain a similar service. 48. Against this are several arguments. The first is that, whilst services such as legal aid are important, their costs should be transparent. There is no clear reason why they should be subsidised by the users of other services. 49. The second is that concerns about new practices often ignore the benefits that new service providers could bring. These benefits are not only that they can bring about lower costs; it is also that through longer opening hours, sophisticated telephony and advanced customer care skills, they may be able to offer consumers better access to certain other types of legal services. As noted in Chapter A, the issue of access to justice is not just an issue of physical proximity; it is arguably even more an issue of cost. In general, measures which reduce cost are to be welcomed. 50. Moreover, a small solicitor practice with a good reputation and loyal following need not necessarily fear losing its customers to new entrants if the service they offer is superior. The research referred to in paragraphs 15 and 16 above, as well as feedback received in the course of the Review, shows that among the factors which put customers off include unapproachability and perceived aloofness. 51. Finally, unlike services such as banks, chemists and post offices, legal services are not ones which consumers use on a frequent basis; and some of the work may not need face to face meetings. 52. The balance of argument does not persuade me that new entrants willing to compete with existing providers on cost and service quality should be permitted, as they currently are, where the new capital is provided by lawyers, but prohibited where the capital might come from non-lawyers. If there is an issue about rural access, I believe:-
53. A further concern relates to possible conflicts of interest. A lawyer in an LDP must be in a position to assure his client that he approaches any instructions with an independent mind and no conflict of interest. He must approach any fresh instructions with ‘clean hands'. The lawyer may well feel that he is able to do this, but where the owner has an interest in the issue there will be a suspicion (where the lawyer follows his professional duty it would be an unwarranted suspicion) that the lawyer may be influenced by this. It is, therefore, proposed that an LDP may not take instructions on a case where the owner has an adverse interest in the matter. Thus, if a bank were to own an LDP, that LDP could not act for a client on any matter in which the bank had an interest, for example advising a client on loan documentation to which the bank was a party. In this context, by ‘interest' is meant a direct interest in the legal outcome of the matter being dealt with, rather than the economic one of an owner wishing to provide a satisfactory, rewarding service. 54. It should not be permissible for the owner, under the terms of the LDP's regulatory conditions, to interfere in any client case or to have access to any individual client files or client information. What the owner does have a right to seek, from the money he invests in the business, is a proper profit. But then lawyers are not uninterested in such matters either. The notion that for lawyers, unlike businessmen, making money is merely a happy by-product of doing their professional duty has limited resonance with the public. Indeed a firm such as the RAC fairly argues that they have a client reputation to protect; and a failure of client care on their part, such as over-charging, would attract far more attention than one by a high street lawyer. 55. Even if it is accepted in broad principle that outside ownership is to be permitted, there remains the question of whether some restrictions should exist, either on the percentage of the capital which might be owned individually or in aggregate by outsiders, or in connection with conditions to be placed over capital rights. 56. With regard to percentage ownership there is a precedent within the accountancy profession. Under EU 8th Company Law Directive outside owners may not own in excess of 49 per cent of the capital of an audit practice. The Bar Council has proposed that outside ownership should be restricted to no more than 30 per cent of the capital. Both of these limits are restrictions on the aggregate level of shareholding to be held by outsiders. 57. One way to permit access of capital, but restrict control, would be a capital structure which permitted Managers to own voting shares, with outside providers of capital restricted to non-voting shares. In general I do not favour such capital arrangements, which place restrictions on free capital access. I do not believe that such restrictions are necessary given the safeguards already referred to in paragraph 42. If the Regulator considered that further safeguards should be introduced to provide assurances that a legal practice operated to a high ethical standard, with proper client care, it would be better to introduce additional checks on how the practice operated, rather than an artificial restriction on capital. As this Chapter makes clear, whilst there would be a ‘fit to own' test for owners, the LDP would be a regulated ring-fenced practice and the regulatory systems would concentrate primarily on who managed the practice and how they managed it. 58. The final issue to be addressed under the heading of LDPs having outside ownership is the suggestion that it should be resisted since such a step is without precedent. Even if correct it would be a poor argument; in fact it is incorrect and there are precedents. The Bar Council notes that it “is not aware of any jurisdiction in which the ownership of legal practices by investors who are not lawyers is permitted”. One jurisdiction in which it is permitted is New South Wales, and the introduction of model federal law provisions in April 2004 has enabled other states to follow suit. Incorporated Legal Practices may be owned by non-lawyers and a number are. The regulatory system concentrates, as already noted, on who manages the practice and the requirement for ‘appropriate management systems'. 59. It should be noted that a further jurisdiction in which outside ownership of certain legal practices is permitted is England and Wales. The Council for Licensed Conveyancers, whose members carry out probably the most common form of regulated legal service, does permit outside investors to own practices within its regulatory area. The practices are regulated by the Council and managed by legal practitioners who are qualified to do the work and who must be in a majority in the management group. Managers and owners must covenant with the Regulator to indemnify losses of client monies by the practice. I have seen no evidence that outside owners have interfered unreasonably. I have seen no evidence that the public has suffered. Indeed it is arguable that, while the market share of licensed conveyancers remains low, they have provided choice and played a useful role in keeping costs down in this important area of the legal services market. 60. The proposal in this Review is that liberalisation measures, similar to those which the Government introduced many years ago in respect of conveyancing, should now be introduced for other areas of the legal services market, subject as noted to appropriate safeguards. 61. The key features of a Legal Disciplinary Practice are summarised in the following box:-
The issues around what body should regulate LDPs 62. Chapter B looked at regulation by front-line recognised bodies in respect of their membership. It proposed a B+ model, with an oversight regulator, the Legal Services Board (LSB), delegating regulatory powers to recognised front-line bodies where the Board was satisfied as to the competence of the underlying body and that appropriate governance arrangements were in place. 63. The issue raised in this section is how that system could be extended to regulation of LDPs, where Managers might come from more than one recognised body, or might not be members of the legal profession itself. 64. In discussing the regulatory body for LDPs it should be recognised that, for certain types of LDPs, the additional work required might not be significant. The Law Society fairly points out in its submission that it does already regulate large solicitor firms where a number of the key management team are not lawyers. In the case of the Council for Licensed Conveyancers (CLC), it does already regulate firms where a minority of Managers need not be lawyers and, as noted, outside ownership is permitted. 65. It is clear that, in the terms of this Review, the CLC is already a regulator of a type of LDP, one which is conveyancer oriented. Other types of LDPs with skills in different areas of the law could exist. Thus the recommendation of this Review is that regulation of LDPs should not be the preserve of any one body. It would be open to recognised front-line bodies to apply to the LSB for authorisation to regulate designated types of LDPs; and the LSB would determine each application against the recognised body's competence in particular legal service areas and the governance and administrative arrangements the recognised body had in place. The authorisation of the recognised body as an LDP regulator would state in which legal service areas an LDP licensed by it could engage. 66. To take an example of the principle set out in the previous paragraph, it is not difficult to envisage that, under a B+ model, the CLC would be judged competent by the LSB to regulate a practice where three conveyancers and a barrister intended to work together in partnership to provide conveyancing services. But where it might be intended that the practice wished to engage in designated legal services beyond conveyancing, it is less obvious that the CLC should be permitted to regulate such an LDP. If the CLC did wish to regulate such a practice (and in discussion with me the CLC has indicated that it believes it does have the infrastructure and skills to regulate practices beyond those involved purely in conveyancing) it would need in its application to the LSB to demonstrate its competence and that it had appropriate governance arrangements; and it would be for the LSB, after proper consultation, to determine the merit of the application. 67. It is clear that there is a distinction between the application by a front-line recognised body to the LSB for authorisation to regulate LDPs in specified areas (‘application A') and the application by a prospective LDP to a recognised body for a licence to practise in nominated legal service areas (‘application B'). 68. Prospective LDPs may face a choice if they elect to practise in a particular area where more than one recognised body has been authorised by the LSB. Prospective LDPs are likely to make their choice of recognised body to act as LDP regulator based on regulatory cost, branding, and the potential to expand their business area. 69. Provided that the services to be offered by the prospective LDP fell within the competency of the recognised body acting as LDP regulator, there are as noted in this Chapter a number of conditions that the LDP would need to meet and they include: (i) satisfaction that the Head of Legal Practice is qualified to oversee the range of services offered by the LDP; and (ii) evidence that lawyers form the majority by number of Managers in the LDP. Condition (i) is competence based and designed to ensure that the key regulatory point of contact has the necessary competence to uphold the legal services standards of the firm; condition (ii) is designed to ensure that a majority are committed through qualification to the ethical standards to be expected of a law practice. 70. The following diagram illustrates the proposals.
71. It will be evident that the proposals in this Chapter shift the balance of regulation significantly towards regulation of the economic unit, beyond regulation of the individual practitioner. The proposed regulatory system focuses principally on who runs the practice and how. This is not intended to lessen the responsibility of each individual lawyer to meet the high standards to be expected of his profession. But it recognises the business reality that, in a practice of any size, the Regulator would be particularly interested in the competence of the senior Managers who ran the firm and the management systems they employed. 72. It follows that the prime focus of each recognised body, authorised to act as the front-line regulator of LDPs, would be upon the practice itself; and that it would be best if each lawyer Manager, irrespective of the branch of the legal profession he came from, were subject to the same recognised body as his lead Regulator. The lawyer Manager would remain a member of the front- Legal Services Board (Recognised body) LDP Regulator LDP Application A. Recognised front-line Body (RB) applies to LSB for authorisation to regulate LDPs in specified legal service areas. Needs to demonstrate to LSB that it has: a) competence in the areas of LDP work to be regulated; and b) satisfactory governance and administrative arrangements. Application B. Prospective LDP applies for licence to be regulated by an RB. RB would need to be satisfied (a) that the specified legal service areas proposed by the applicant fall within the terms of the authorisation granted by the LSB to the RB; and (b) that the applicant meets the relevant safeguard tests. A B authorises licenses line body whose examinations he took; but would submit to lead regulation by reference to the economic unit he worked for. This principle of ‘lead regulation by reference to economic unit, residual regulation by reference to professional qualification' is not a new one. A form of this principle exists in a number of areas: for example, many solicitors work for banks; their lead regulator is the FSA, but they remain members of the Law Society, subject to the general rules of ethical behaviour to be expected of members of that body. 73. The proposals above, outlining a framework for regulation of LDPs, are designed to be facilitative for lawyers wishing to practise in new ways. The issue arises, however, as to whether the principle of ‘lead regulation by reference to economic unit, residual regulation by reference to professional qualification' could at some stage be available to lawyers practising in their current ways. If the new arrangements set out above were operating satisfactorily, this extension of the principle to existing structures could be contemplated. A number of solicitor advocates, operating as sole practitioners, have indicated that they might wish to have as their lead regulator the Bar Council. Adopting the same principle, it is possible that a set of chambers, wishing to operate outside the practice restrictions imposed by the Bar Council, for example in the matter of direct access, might wish to choose a different regulator competent in advocacy. There should be no objection in principle to these arrangements. Lawyers would have to submit to the practice rules of the lead regulator; the LSB would as indicated in Chapter B wish to ensure that minimum acceptable standards were adhered to so that there was no regulatory ‘race to the bottom'; a single complaints system as set out in Chapter C would ensure that dissatisfied clients were not confused by the arrangements. The Bar and the right to practise in partnership 74. Before proceeding from the issue of LDPs to that of MDPs, one further issue arises in connection with liberalisation of the way in which legal services are provided. The historic prohibition at the Bar, noted in paragraph 2, is that barristers may not enter partnerships with other barristers or with solicitors; they may work for firms of solicitors but may not without re-qualification become partners. As noted in paragraph 11, the Bar Council now proposes, in its response to the Consultation Paper, that barristers should be permitted to enter into partnership with other barristers and solicitors in LDPs outside its regulatory net; but it continues to argue that it is against the public interest that partnerships of barristers should be permitted under its regulatory auspices. 75. A consequence of the prohibition of partnership for those who join the Bar is that the first few years can be difficult. Giving evidence [Endnote 47] before the House of Commons' Constitutional Affairs Committee in March 2004, the Chairman of the Bar Council described the position as follows: “The trade-off of a career at the Bar is that you have rotten years at the beginning and maybe do not make it at all and leave. We have a big shakeout around the age of 30 because of competition. The trade-off is that you think that after that you have always historically had the prospect of a good income....” 76. The point at issue on partnerships concerns facilitative measures, not compulsion. The Chairman of the Bar Council, in an article he wrote earlier this year [Endnote 48], set out arguments in favour of prohibition and concluded: “That is why we oppose suggestions that we should be forced into partnerships.” As far as I am aware, nobody has ever suggested that there should be an insistence on partnership; the issue is about the Bar's prohibition. I accept that sole practitioner status, when combined with the chambers system in which most barristers operate, has merit as a way to provide advocacy services. The issue is about whether the Bar should refuse to permit other ways of providing such services under its regulatory net. 77. The Bar's justification of the restriction on partnership was set out in a report prepared by a committee chaired by Sir Sydney Kentridge QC, in response to the OFT's ‘Competition in professions' [Endnote 49] document. The report argued that the rule ensured the widest availability of barristers' services to the public in three ways: it served to minimise costs in the provision of barristers' services; it enabled the Bar to maintain the cab-rank principle; and it promoted competition and choice by maximising the number of competing undertakings. 78. The argument in connection with the minimisation of costs is that “barristers providing services as individuals in general charge less for their services than do solicitors operating in partnerships”.[Endnote 50] Presumably this arises for a number of reasons: solicitors carry out different duties, they need different back office systems to handle client papers; they need different premises to meet clients. It is not obvious that the higher cost arises because they have formed a partnership, which is the point at issue. In any event, even if correct, it is not a reason to ban partnership. That one type of economic unit had higher costs than another would not be a reason to prohibit it; it might be a reason why it would be less successful. 79. The argument in connection with the cab-rank rule is that it would be difficult to apply if barristers were in partnership. Some including the OFT have argued that a limited form of cab-rank rule could be applied to a partnership. But to judge the Bar's argument it is important to understand the manner in which the rule currently operates. 80. It should be recognised that the badge ‘cab-rank rule' can mislead. The price of taking taxis is regulated; their availability or not is clearly shown. Neither of these conditions applies to barristers. For some years the fee rates in publicly funded areas such as crime and family law were ‘deemed' as proper following negotiation between the Bar and those responsible for the legal aid services. This had the effect of requiring barristers to accept work at such fee rates. But recently the rate has become ‘undeemed', leaving the issue of rates in those areas as well as others to the individual barrister. With regard to the availability of a barrister, as noted, this is often not clear. As was commented in a barrister's response, being busy is “often a flexible concept and any reasonably successful barrister will be able credibly to assert that his current professional and private commitments preclude him or her taking on a case that is unattractive to him or her - until the next interesting case comes along which they would rather do.” [Endnote 51] 81. Even if there were no issues about fee levels or availability, the rule does not ensure the right to representation often claimed. The barrister is required to accept a brief from a solicitor. In the restricted cases where the client can approach the barrister direct, the Kentridge Report states that the rule is not to apply. Thus for the public the rule would amount to: ‘if you can hail a solicitor, you can hail a barrister'. The rule would be stronger if it were allied to wide direct access to barristers by clients. 82. The further argument against partnership in the Kentridge Report related to the importance of competition; and the claim by the Bar that permitting partnerships would restrict choice. It is not obvious that many barristers, operating as specialist referral advocates, would wish to form partnerships. In particular it seems unlikely that barristers in highly specialised areas (where the reduction in choice might be important) would form partnerships, given that conflict of interest issues would likely cut their work flow. The Office of Fair Trading comments:-
In general competition and consumer choice is advanced by removing restraints on trade and by encouraging the maximum latitude in the types of economic units in which those with rights of audience can operate. As the OFT points out, competition rules exist to prevent concentration where it works against the public interest. 83. The burden of proof rests with those who seek to justify the restrictive practice. My conclusion is that the arguments made in the Kentridge Report have force, but rather less force than is claimed; and I am not convinced that they amount to a conclusive case for preventing under the Bar's regulatory auspices other types of business structures. The issue set out in this section rests with the OFT and I encourage them to continue their review of this area, begun in their report ‘Competition in professions'[Endnote 52]. In due course it would become an area of interest for the LSB, since its proposed objectives include promotion of competition. It is true that the development of Legal Disciplinary Practices can work its way round the refusal of the Bar Council to permit partnerships within its regulatory net. But, given the significance of the Bar, its continuing dominant position in High Court advocacy and its attitude to those barristers who pursue legal careers outside the self-employed Bar, a greater choice of business structures would be easier to achieve if the restrictive practice were removed. Demand for MDPs 84. MDPs are practices which bring together lawyers and other professionals to provide legal and other services to third parties. Thus, for example, a lawyer and an accountant could be in practice together to provide legal and accounting services to their clients. Interest in MDPs could come from two sources: consumers and providers. The not-for-profit sector demonstrates that many consumers have a set of related legal and non-legal needs which require a holistic solution. Academic studies such as Professor Hazel Genn's ‘Paths to Justice'[Endnote 53]also support this. Some voluntary sector agencies combine legal and non-legal services for the benefit of their clients. For example the charity, Shelter, offers legal advice as well as advice on housing options and support services for people in housing need. [Endnote 54] Others in the commercial sector have also pointed out that, for example, in the context of claims arising out of motor accidents, MDPs could offer an integrated service which dealt with all the related issues, such as property damage (to the car), mobility (courtesy car), health, rehabilitation and compensation. Affinity groups, such as trade unions, also provide a range of services to their members, of which legal advice is one, but one that is sometimes closely connected with other needs such as employment and welfare issues. 85. Unlike the case with LDPs, the consumer could reasonably be expected to make a distinction between different professionals such as, say, ‘a lawyer' and ‘an accountant'. Although, as discussed earlier at paragraph 13, consumer demand may not have been articulated, one can readily see, for example in the areas of consumer debt, inheritance planning or personal taxation, that a combination of both legal and accounting skills could be a valuable asset for the client. Research carried out by MORI [Endnote 55] suggests that there is some consumer interest in the convenience and accessibility of ‘one stop shopping', provided that appropriate regulatory safeguards are in place. As noted already, the issue is not about whether such combinations ought to be mandatory, merely why they should not be permitted. 86. Turning to providers, the fact that the aftermath of ‘Enron' and ‘WorldCom' has dampened corporate sentiment for large-scale MDPs, involving global networks of large accounting firms and linked legal practices, should not obscure the fact that small to medium sized professional service providers are well placed to cater to individuals, or small businesses, with a set of inter-related needs. Many such service providers (e.g. accountants, solicitors, estate agents) might benefit from sharing the overheads of high street premises and IT systems to make their business more viable. Issues for MDPs 87. The Consultation Paper, and the responses to it, identified a number of issues with MDPs. These are:-
Each is addressed in turn. 88. Of these issues the most fundamental is that of regulatory reach. This Review proposes a regulatory framework for legal services in England and Wales; and in Chapter B there are set out proposals for a Legal Services Board. But such Board would have no jurisdiction over services provided outside the legal sector. The Regulator would, therefore, have to enter into collaborative arrangements with other regulators where this was deemed appropriate. Such arrangements might well include determining who was to have the ‘lead' regulatory role and how the regulator of the ‘minority' profession was to operate. 89. There would be an extra layer of complexity if there were two or more professions represented in an MDP, and none had a majority. There could still be the concept of a lead regulator, but it would have limited force if the direct control was over a minority of the business. There could of course be separate Heads of Practice (HOPs) for each service stream within an MDP, perhaps under an overarching HOP to ensure the integrity of the whole entity. But it should be recognised that there would be few individuals with the ability to demonstrate competence across a wide range of services. Furthermore, the influence of the HOLP is likely to be somewhat more diffuse in a multiservice business, such as an MDP, the more so if legal services were not the dominant business. 90. A related inhibitor to the development of MDPs is the issue of legal professional privilege (LPP). In essence, LPP means that certain communications between a client and legal adviser in the context of obtaining legal advice or assistance are protected from disclosure, even in legal proceedings. This feature is virtually unique to the legal profession and is regarded as a cornerstone of the lawyer-client relationship, to a degree that is greater than in comparable professions. As the recent Three Rivers case [Endnote 56] highlighted, and as the money laundering regulations illustrate, the boundaries of privilege do get reviewed from time to time in the light of changed circumstances. 91. The difficulty facing an MDP would be a lack of clarity for its clients as to whether LPP applied only in respect of legal matters discussed with a legal professional (who was bound by the rules regarding LPP), or whether it applied equally to all matters dealt with by the MDP. Non-legal professionals may not be covered by these same rules; and in certain cases have quite different codes: for example auditors in the accountancy profession have a duty to prepare an objective report on the accounts of a business. In certain areas they have an obligation to look for independent verification of representations made by their client. Such objectivity could be compromised were it to be fettered by considerations of having to treat information as privileged. 92. One way around these problems, suggested by the Law Society, would be to place a ring-fence around the legal practice, separating it from that part of the practice dealing with non-legal affairs. The easiest way to give effect to this ring-fence would be to place the legal services business into a separate legal entity. It will be recognised, however, that the effect of this is to return to the concept of an LDP, albeit one that might have common ownership with a non-legal practice. 93. This reasoning underlines the point, made by the Law Society, that it would be possible to get close to a de facto MDP through the existence of different practices (one of which could be an LDP) with common ownership and common branding. 94. It should be noted that a form of MDP already exists within the current framework for legal services. A number of legal practices currently offer financial services as part of an all-round service to their customers. Where such financial services form part of the mainstream work of the law firm, the firm must be authorised by the FSA, and anyone who performs controlled functions (such as investment advice) must be an approved person (on the FSA's register). Where these financial services are incidental or supplemental to the main legal work these firms are not authorised by the FSA. Instead they follow rules set out by the appropriate professional body (called a Designated Professional Body), such as the Law Society. 95. These arrangements would need to be considered by the LSB and the FSA in the context of the proposals contained in this Review, but in general they appear to work in a satisfactory manner and should be ‘passported' into the new regulatory regime. 96. As with LDPs, the opportunity for outside owners to participate in MDPs brings the opportunity of attracting capital investment as well as fresh business expertise. In connection with the ‘fit to own' test, the criteria for financial soundness would need to take into account the activities to be undertaken by an MDP, and would be very different from that for a legal practice, if the MDP intended to engage in transactions across the service range as a principal. 97. It may be possible for some sort of criteria to be agreed by collaboration between the different professions. But this presupposes that each profession has a ‘lead regulator' that can bind that profession in its entirety; and that the rules of the other professions would allow outside owners to invest in the MDP business - which may or may not be the case. 98. The overwhelming sentiment expressed to me, by those wishing to contemplate alternative business structures, was that it would be a good start to get lawyers working together in LDPs, and to assess the regulatory consequences of that, before proceeding with full-blooded MDPs. I concur with that sentiment but would encourage the efforts of the Law Society, who are doing further research to assess the demand for MDPs. 99. The Review, therefore, proposes that the necessary first step (which would facilitate the emergence of MDPs at a subsequent date) is the setting up of an appropriate regulatory framework for LDPs, including a regulatory lead body for the legal services industry, such as that which would exist with the Legal Services Board. It would be for that Board to determine whether satisfactory arrangements could be worked out with other regulators as to how different practices with common ownership might operate between themselves (as outlined in paragraph 88 above), or indeed how they might be permitted to operate together within the same legal entity, in both cases in a manner which properly protected the interests of the consumers. 100. None of these concerns should be taken to mean that they are not capable of resolution or that MDPs are an unviable proposition. But for MDPs to be a reality there would have to be a real movement in co-operation between the different professions. As has been commented, the first steps must be to find a way in which lawyers from different front-line bodies can work together in one consistent regulatory framework. The Review has concentrated on that goal. It would represent an important step towards MDPs, if at some subsequent juncture the regulatory authorities considered that sufficient safeguards could be put in place. Conclusion 101. Legal Disciplinary Practices are law practices which permit lawyers from different professional bodies to practice together as equals. I conclude that non-lawyers should be permitted to be Managers of such practices, subject to the principle that lawyers should be in a majority by number in the management group. The non-lawyers would be there to enhance the services of the law practice, not to provide other services to the public. 102. Outside ownership of LDPs should be permitted. Such ownership should be subject to a ‘fit to own' test; but the main focus of the regulatory authorities should be upon the identity of the management team, in particular the Head of Legal Practice and the Head of Finance and Administration, and the management systems that they employ, in short on who manages the practice and how. Within England and Wales outside ownership is already permitted in respect of certain types of legal practices which provide conveyancing services; it is proposed that, subject to proper safeguards to be set by the LSB, it should now be permitted in other areas of the legal services market. 103. In the regulation of LDPs it is proposed that the focus of the regulatory system should be upon the economic unit, rather than the individual lawyer. The principle to be applied is that of ‘lead regulation by reference to economic unit, residual regulation by reference to professional qualification'. Recognised front-line bodies would apply to the LSB for authorisation to regulate designated types of LDPs; and the LSB would determine each application against the recognised body's competence in particular legal service areas and the governance and administrative arrangements that the recognised body had in place. 104. Multi-Disciplinary Practices are practices which bring together lawyers and other professionals to provide legal and other services to third parties. Legal work might be only a minority of the work done by the practice. There are considerable issues around such practices, in particular that of regulatory reach; and the fact that a regulator, such as the Legal Services Board, would have no jurisdiction over activities outside the legal sector. The proposal of this Review is that attention should focus on the setting up of a new regulatory system for lawyers with the LSB at its centre, and the authorisation of LDPs. This would represent a major step towards MDPs, if at some subsequent juncture the regulatory authorities considered that sufficient safeguards could be put in place. Endnotes
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