MDPs - independence of advice is the key issue

I have come to the view that the key issue which arises is the essential need to ensure that the independence of legal advice must be able to be given without fear or favour. The adviser must not be compromised in giving that advice by his own economic position, the business entity within which he practises nor the views of those with whom he is associated. Nor should his position be tainted by suspicion of conflict of interest. Independence of advice is what the law is about and why, for example, advocates do not share profits amongst themselves. The other underlying principles relating to the practice of law are set out further below, but at the end of the day the preservation of independence of advice is the touchstone for any proposed solution in regard to MDPs.

Having set that out I think it would be useful to go back some two years to when the Working Party was set up and to review how matters have developed and thoughts have moved on.

Background

In early summer 1997 Dundas & Wilson and Arthur Anderson revealed their intention that Dundas & Wilson would become part of the AA Group. The statement of that intention led to the formation of the MDP Working Party.

In August 1997 the Working Party indicated in a Partial Paper the underlying principles as to why MDPs should not be permitted (see further below). It was clear, however, that the Council of the Society felt that the matter required to be further explored. In particular it was felt that in rural areas there perhaps was both an economic and a client need for MDPs to be able to be formed. Further more there was a view within Council that the Adam Smith doctrine that a “Free market should rule” should, subject to necessary protections being built in, apply.

During autumn 1997 consideration was given as to what the underlying principles which caused the legal profession to remain separate from other professions were, and to question whether those principles remained valid today. If they did then how could these principles be preserved in the event of MDPs being allowed to emerge. It was accepted that the interest of the public was paramount and that a level playing field would be required.

In January 1998 a meeting took pace in London with the MDP Working Parties of the Law Societies of England and Wales, of Northern Ireland and of Eire. That provided a useful forum for the exchange of views and it became clear to all involved that no easy solutions existed and that each Society would require to give in-depth consideration to the position, in particular as it impacted onto them in their respective jurisdictions.

During spring 1998 the underlying principles were confirmed together with the protections which had been introduced to meet the underlying public need.

Ongoing considerations thereafter arose and in autumn 1998 it was felt that the MDP debate required to be put into the broad context of the changes being faced by the Law Society, namely:

• The Establishment Directive – opening up the practice of law to lawyers throughout the EC.
• Multi-National Partnerships – the underlying need for solicitors in Scotland to be able to enter into partnership with solicitors in England or elsewhere, and
• MDPs.

It was perceived that there was need for these inter-related areas to be resolved, but in that order.

By February 1999 the Working Party had formulated the possibility of a contractual as opposed to a statutory solution to the problem with non-lawyer partners in an MDP contracting into the Law Society protections. In April 1999 a Report on this basis was made to Council. Council accepted there was a need for caution but nevertheless took the view that there was desire for progress to be made, perhaps on the contractual front.

In the meantime the Institute of Chartered Accountants of Scotland had set up their own Working Party which in turn reported to their Council in summer 1999 in a paper which reflected in part some of the underlying problems identified by the Society’s MDP Working Party. An invitation has been issued to the Society to meet with the Institute through their respective working parties to discuss the underlying issues.

Principles and protections

What therefore are the principles which underpin the role of the legal profession and what are the protections which have been introduced? I simply list these as follows:

a: Four principles

• Independence: As above stated to advise without fear or favour.
  
• Conflict of interest: Not to act in a conflict of interest situation.
•  Confidentiality: To treat all discussions with the highest confidentiality.
•  <>Privilege: The client’s right to sanctity of discussion – essential to protect the rule of law.

b: Four protections

• Error: The public is protected against professional error by the compulsory Law Society Master Policy Scheme.
  
• Fraud: The public is protected by the compulsory Guarantee (Compensation) Fund.
  
• Client Funds: The integrity of the “Client Account” supported by the 6 month self certification requirement with a 2 yearly cycle of inspection.
  
• Complaints: A mature complaints procedure with outside lay representation and subject to the overview of the Ombudsman.

Is there a problem?

So far as the four protections are concerned no other profession has the same range of protections as those afforded by the Law Society. Not all other professional firms can secure full indemnity cover. It is noticeable that no other profession provides full compensation against fraud. The protection of clients’ money through a “Client Account” procedure are not mirrored in all professions nor to the same extent even in those professions which adopt the “Client Account” procedure. The complaints procedures in other professions are generally less advanced than those within the legal profession.

Nevertheless it is clear that with goodwill the other professions could seek to take on board the protections afforded by the Law Society to the public as a necessary concomitant to entering into an MDP with solicitors.

Can the four principles so easily be dealt with? As an English playwright once said, “therein lies the rub”. Let us therefore give further analysis to these principles:

I emphasised this at the start of this article. The problem of “independence” cannot be over emphasised. In advising a client his solicitor must ignore any commercial or other pressure which may apply to him in giving that advice. Indeed he must give that advice even if it is against his own interest so to do if he is to advise at all. In an MDP different pressures may come to bear from those within a legal firm where the concept of independence of advice is understood. That does not mean that the other partners within an MDP cannot be brought to understand this, but it is not a concept which is ingrained into them. There is a concern that economic pressure might be brought upon the legal adviser to downgrade or minimise his advice in order to avoid potential damage to perhaps another business relationship between the client on the one hand and the MDP on the other.

It is quite clear that the concept of conflict of interest as known to the legal profession on the one hand is different from that known to, for example, the accountancy profession on the other. I think it is fair to say that within the accountancy profession as a whole it is felt that conflict of interest is a matter which requires to be “managed” whereas in the legal profession it is a matter which requires to be avoided. The concept of Chinese Walls has been developed within the City of London by financial institutions and by the accountancy profession to cope with conflict of interest situations. The problem as I perceive it with Chinese Walls is that although they are intended to work and will probably work effectively in 95% or more of the cases in which they are brought into play, they may well not work when the chips really are down for the residual 5%. In any event even if they do work will a client, where the outcome of a transaction was less favourable to him than perhaps he hoped, really believe that the Chinese Wall did not “whisper” at some point either inadvertently or advertently to his disadvantage. Justice at the end of the day requires not only to be done, but also to be seen to be done. A conflict of interest can at the end of the day only be avoided; it cannot be managed.

The need for confidentiality is ingrained into lawyers. Other professions have more relaxed view. The Prince Jefri v KPMG case highlights this. The solicitors acting for Prince Jefri declined to act for Brunei Investment Agency in regard to investigations which they are making inter alia into the actings of Prince Jefri. KPMG held confidential information relating to Prince Jefri which had come from Prince Jeffri. KPMG felt that this could be dealt with by use of the concept of the Chinese Walls. The House of Lords, although not ruling out that Chinese Walls could in certain circumstances be utilised, identifies how high a hurdle that actually was and that merely managing the problem was not sufficient.

The working of any legal system demands that discussions between a client and his lawyer are not open to scrutiny before the Court. That privilege is the right of the client. It is unlikely that the privilege will ever be extended to discussions with other professions. Sanctity of discussion is essential to preserve the rule of law by ensuring that the other side to a dispute (whether it be a Government agency, a business rival or another) cannot force disclosure of the advice given to the client involved. In the case of an MDP a real problem emerges on how to ensure the preservation of legal privilege where advice may be given by a variety of advisers of different professional background possibly or indeed probably acting together.

A threat to the law?

It has to be accepted that in forming an MDP the question of where control within an MDP lies requires to be addressed. In most instances what arises is not a merger but a take-over, albeit on friendly and agreed terms. Remember the essential truth that he “who plays the piper call the tune”. If there is a ponderance of one profession in an MDP then they are likely to control the practice. That is probably what they are about anyway.

Is there a particular problem in Scotland? Because of its relatively small size the prospects of MDPs in the commercial world may be seen as perhaps a threat to the Scottish legal profession. In 1997 there were four commercial legal firms in Scotland of some size as compared with the “Big 5” accountancy firms. One of the legal firms (D & W) is now linked up with one of the accountancy firms (AA). That reduces the equation to three and four. No doubt each of the remaining three legal firms will have received approaches. Each firm will of course require to come to its own decision. Independence of the individual firm may be a key factor. Indeed, independence of advice from a different perspective (see above) is the key issue.

It may also be considered that with a Scottish Parliament having been established it would be unfortunate for a dilution perhaps to take place in the quality of contribution to that Parliament on legal topics from the legal profession. In essence will MDPs provide support in this area for what is essentially non-fee productive work. Indeed, will support for activities involving the legal profession as a whole continue to the same extent.

Litigation and audit?

This is an issue which really must be fully faced up to. The job of a litigator is to advise his client with privacy encompassing all discussions. The job of an auditor is to report on his client to the outside world through his audit report. It is difficult to se how these diametrically opposed obligations can sit within the one MDP. It perhaps might be argued that if accountants are to form an MDP with solicitors then they will require to forego the provision of audit services. Chinese Walls will not suffice.

The worldwide view

It is argued by many, including the accountancy profession, that MDPs are inevitable. In so doing, however, are they seeking to state a self-fulfilling prophecy? The concept of MDPs has flowed and ebbed over the last 15 years or so. What therefore is the position today? In Northern Europe it would appear that a resistance may be growing to the concept of MDPs. This is on the basis that the principles underpinning the legal profession cannot be made to fit into an MDP. In the USA the American Bar Association having received a Paper in favour of MDPs has deferred a decision on that for at least 6 if not 12 months with opposition to MDPs growing.

There is, however, another matter which may be the most important aspect of all for consideration. In Holland the Dutch Bar have been challenged regarding their opposition to MDPs and that challenge has now gone to the European Court of Justice in Luxembourg. The question which is being posed goes to the heart of the matter and that is whether the Dutch Bar in maintaining their opposition to MDPs are acting (as they see it) in the public interest or acting (as the accountancy firm involved sees it) in the interests of the legal profession. A decision from the European Court is not anticipated until perhaps summer 2001. Until that decision is reached it may be argued that it would be precipitate for the Law Society of Scotland to take a decision.

Regulation

The Working Party took on board the question as to whether it would be possible for members of other professions to contract into the Law Society’s Rules on the basis that these maintain the 4 principles and apply the 4 protections. It is thought that the Law Society Rules might be able to be modified to permit MDPs provided that the MDP itself brought itself fully within the Law Society Rules with the majority of the partners being solicitors and with the non-solicitor partners contracting into the LSS rules as associates or licensees of the Law Society but without vote.

To many, however, that either will be too far or not far enough. The real underlying question is how to regulate an MDP if it does not opt in to the LSS Rules. It is clear of course that each partner will be subject to regulation by his own profession. If a client complaint or claim emerges, however, which professional rules are to apply. This will be particularly key where advice perhaps was given jointly by two or more professional advisers from different professions acting together – which is what an MDP is all about.

In my view it is crystal clear that an MDP must be subject to separate regulation which can only be brought about by Government, who would determine the principles and protections which were to apply. Whilst each individual partner would remain responsible to his own professional body the MDP would be subject to review by an independent regulator whose job it would be to ensure compliance with the regulations introduced and to enforce penalties if the principles and protections were breached. It is not sufficient for an individual partner to be subject to review by his professional body, compliance and penalty require to be enforced against the business entity within which a partner practises.

Ian M. Stubbs is chairman of the Society’s MDP Working Party and finance convenor of the Society. He is a qualified lawyer and chartered accountant, but practises in the former capacity as a partner in MacLay, Murray & Spens. His views are very much his own.