MDPs - pressure for change

Modern commercial life seems to demand that lawyers should be permitted in future to carry on their practice as lawyers whilst sharing fees and profits with those who are not lawyers.

So far this is forbidden.  That fact allows the lawyers’ profession to apply its own professional rules to its own members.  The business affairs of a lawyer cannot be even partly under the financial control of others.  The lawyer is directly accountable to his own profession for his or her actions.

Information given to a lawyer is confidential and the courts will not normally require the lawyer to disclose it.  Without this rule the courts cannot function as they should.  If others have access to that information for a purpose different from that for which the information was given, that rule of the interaction of the courts and the legal profession is put at risk.

Notwithstanding this, it is not for the legal profession to obstruct the demands of the community at large to change the way in which its conducts legal practice, if changes do not damage the principles which are essential and for a lawyer to create and maintain the confidence of the client and for the proper administration of justice.

What are the essential principles which distinguish the practice of a lawyer from the professional practice of others?

The professional rules which solicitors practise under can be divided into two categories.

Core principles of the legal profession

The first category is that of the core principles.  These are the principles which a lawyer must observe to allow him to operate as a lawyer.  If they are not respected and observed and subject to effective professional discipline, the lawyer’s client cannot be confident that the lawyer is in a position to carry out the role which he is required to perform.

The primary role of a lawyer is to represent others in their dealings with the courts, and with others including Government agencies, bodies of persons of all kinds and individuals.  The task can only be performed effectively on condition that:
ß Confidences given by the client are respected, or they will not be given.
ß The lawyer will not represent others whose interests may conflict with those of his client.  Otherwise the confidence in the role of the lawyer will be lost.
ß Lawyers’ work done and advice given will not be subject to influence or pressure for the benefit of any person other than the client.  Otherwise the trust which is essential to the lawyers’ function will not exist.

“Consumer directed” rules applying to solicitors

  The second category is that of the “consumer directed” rules.  These are rules which are intended to increase the confidence which clients have in the lawyers they instruct.  They are not part of the lawyers’ core function because it would be possible for lawyers to work without them.  They have all been introduced in recent times as part of the movement to protect consumers.

  They include:

• The Accounts rules
• The professional indemnity insurance rules
• The complaints system
• The competence rules
  
• The continuing professional development rules
• The Guarantee Fund

Cicero would have accepted the first category without any difficulty.  He would not have recognised the second.

Operating the “consumer directed” rules in an MDP

The second category can be dealt with more easily in relation to an MDP than the first.  The rules in the second category are primarily imposed by regulating individual solicitors rather than the firm to which the solicitor belongs.  They can be applied fairly readily to a lawyer whether or not the lawyer shares fees or profits with members of other professions.

For example, the rules regarding complaints, competence and CPD are at present applied to individual solicitors.  These rules could be applied to solicitors whether or not they work in a solicitor’s practice.  They already are in relation to solicitors employed by industry, commerce and Government agencies.

The professional indemnity insurance rules are applied primarily to the individual solicitor.  It should be possible with the help of the insurance industry to devise a way of providing the required insurance cover for the work of a solicitor who shares fees and profits with other professionals.  A change would be needed to the Master Policy scheme.

The Solicitors Accounts Rules require special treatment for clients’ funds.  They set up a system for ensuring respect for those rules.  The rules are applied to an individual solicitor but each partner of a firm of solicitors is responsible for securing compliance for those rules.  If a solicitor shares fees and profits with other professionals there are two possibilities.  One is that the solicitor’s accounting is kept separate from that of the other professionals.  The other is that the whole accounting unit (including the activities of the other professionals) is required to comply with the solicitors’ rules.  One way or another the introduction of other professionals to the solicitors’ accounts rules environment should be capable of a workable solution.

The Guarantee Fund presents a more difficult challenge.  Solicitors are not likely to accept a responsibility to contribute to the consequences of the dishonesty of professionals who are not solicitors.  Solicitors may share profits and fees with non lawyers in a large MDP such as a large accountancy firm.  The risks associated with a major insolvency of such an organisation which may have international consequences are not be undertaken by the solicitors’ branch of the legal profession.  One possible solution would be to exclude the application of the guarantee fund indemnity where fees or profits were shared with other professionals.  If this solution were adopted it would still be necessary to require the solicitors to comply with the accounts rules and to pay their share of the cost of the Law Society’s regulation of the accounts rules.  An insurance or other reliable indemnity solution may be required to solve this difficulty.

 I suggest therefore that as regards solicitors who share profits or fees with other professionals, it should be possible to achieve the effective application of the “consumer directed” professional rules.       

The core principles of the legal profession and the MDP The application of the first category (the rules which Cicero would have accepted) presents an entirely different challenge.

In considering the nature of these core professional principles three features can be observed.  

Firstly, they are not simply rules.  They are ethical standards and principles.  They are intended to create and protect relationships of trust and confidence between lawyer and client.

Secondly, although these principles are understood and applied in other professions, the way in which they are understood and applied is a factor of the role to be performed by the profession concerned.

For example, the professions of engineer and architect and the achievements of their members rightly command great respect from the community.  If it is important or necessary their members will certainly respect confidences given to them by their clients.  However their function in the community is entirely different from the function of lawyers.  It is I suggest unrealistic to ask architects and engineers to accord the same priority to the notions of confidential information or conflict of interest as lawyers are required to observe.  The nature of the relationship between the engineer and the architect and their clients requires confidence in the skill and application of their professional skills and discipline.  In contrast the discipline of the lawyer is associated with the representation of clients.  The principles of independence, respecting confidential information and avoiding conflict of interest between lawyer and client are of the essence of the relationship if the necessary trust and confidence is to exist.

Thirdly, lawyers have a traditional and direct role in the administration of justice.  As a counterpart of the ethical principles and role of lawyers, the law allows the client of lawyers special rights.  The courts will not normally order the disclosure of information given to a lawyer by his client.  Thus the lawyer and client can prepare for a litigation without fear of such disclosure.  Fairness and justice before the court demands this situation.

If non lawyers have access to this information because they share profits or fees with lawyers, the court can require the non lawyer to disclose the confidential information given to a lawyer.  The link of confidentiality can then be broken.  The system on which the courts rely is then put at risk.  The courts cannot be expected to refuse to order disclosure of communications between lawyer and client if such information is available to non lawyers with whom the lawyer is in business.

MDPs including accountants, auditors and lawyers The case of the accountancy profession is prominent in this debate.  In some ways accountants and lawyers are in competition for the same work.  Why should they not be allowed to go into business together? Accountants are also bound to respect confidences and avoid conflicts of interest.

The case of Prince Jefri Bolkiah v KPMG 1999 2 WLR 215, decided in the House of Lords on 18 November 1998, illustrated the point that the similarities are more apparent than real.  

KPMG, a firm of accountants, acted for Brunei Investment Agency (BIA).  For many years its chairman was Prince Jefri.  KPMG also provided “litigation support services” which included the services in relation to litigation usually carried out by solicitors.  KPMG acted also for Prince Jefri in a major litigation in which Prince Jefri was personally involved.

 Prince Jefri then lost favour with BIA.  In June 1998 the Government of Brunei appointed a Finance Task Force to investigate the activities of BIA.  They instructed KPMG to act for them.  Confidential information which KPMG had received in the litigation work for Prince Jefri would be relevant to the investigation work for the Government of Brunei and could lead to court proceedings against Prince Jefri.  

In order to avoid improper use against Prince Jefri of the information which KPMG had received while acting for Prince Jefri, KPMG set up an ad hoc system of internal information barriers sometimes known as “Chinese Walls”.  Such systems of internal information barriers are widely used by financial institutions in London and elsewhere to manage conflicts of interest where financial business is carried on by a conglomerate.

The House of Lords decided that KPMG had been unable to show that they could provide the protection to which Prince Jefri was entitled in order to ensure that there was no risk that confidential information which they had acquired from him would be disclosed to those engaged in the later work which was in conflict with his interests.  The court confirmed the grant of an injunction in terms which protected Prince Jefri against that risk while enabling KPMG to continue to provide services to BIA as its auditors.  Lord Millett said that an effective “Chinese Wall” needs to be an established part of an organisational structure, not created ad hoc and dependent on the evidence sworn for the purpose by staff engaged on the work.

If a solicitor receives confidential information he is not entitled to set an internal information barrier between himself and others with whim he is in business.  This applies whether or not he is involved in contentious work.  If it were otherwise the public would over time lose confidence in the integrity of the solicitor.  This is in the interest of neither client nor lawyer.

The basic and essential function of the auditor is public disclosure.  It is not representation of clients.  The fundamental ethical principles of the auditor are directed at a different purpose from those of the lawyer.  This is demonstrated by the fact that KPMG apparently did not consider themselves bound to accept the principle of confidentiality as applied by solicitors until the House of Lords obliged them to do so.

Possible regulation by one profession of the rules applying to another profession     It is not realistic to think that other professionals can be expected to respect core ethnical principles as understood and applied by lawyers to themselves.  The governing bodies of other professionals cannot be expected to require that their members observe lawyers’ ethics.  The lawyers’ professional authorities cannot be expected to apply lawyers’ ethics to members of other professions.

If notwithstanding these concerns, the restrictions on lawyers sharing fees and profits with other professionals are removed, essential features of the core principles of the lawyers’ profession are at risk.  Effective regulation cannot be maintained as it is now.

 Lawyers have already entered into sharing arrangements for marketing and training with accountancy firms.  The best known example in this country is the Arthur Andersen/Dundas & Wilson association.  I suggest that the lawyers in any such arrangement must always retain sufficient independence to retain full control over the core ethical principles of the lawyers’ profession as described in this paper.  There should be no compromise on this issue in the interest of the public, of the administration of justice, of the relationship between lawyer and client and of the lawyers themselves.  

A possible challenge to the present structure of the legal profession It may be that some solicitors consider these core ethical principles less important than do others.  These principles come into sharper focus when applied to lawyers who are engaged in contentious civil and criminal work than they do for those engaged in transactional work.

Fee sharing and profit sharing by solicitors with other professionals may be allowed in future.  It is possible to imagine that some solicitors could then decide that they wished to make it clear to the public that they would not participate in this.  Their purpose would be to avoid putting at risk clients’ confidence in their work and the willingness of the court to respect confidentiality of communications between them and their clients.

This could lead to a division in the profession between those who considered the core principles of paramount importance to their work and those who did not.  

We already have a divided legal profession.  Members of the bar may not share fee or profits with any one.  This is their way of seeking to ensure independence of members of the bar.  It is not self evident why members of the bar should not be involved in this debate.  Lawyers who practise before the courts in other jurisdictions certainly are involved.

The issue of lawyers sharing fees is so fundamental to the practice of the lawyer that changes in the present arrangements which prevent fee sharing and profit sharing with other professionals might cause pressure for a change in the structure of the profession.

Walter Semple, of Walter Semple Solicitors, is Dean of the Royal Faculty of Procurators in Glasgow.