MDPs compromise core values

While the ruling of the European Court of Justice in the Nova case appears to reverse a tide that seemed to be leading irrevocably to widespread adoption of MDPs across Europe, it’s unlikely to mark the end of a debate that polarises the profession.

Addressing the Law Society of Scotland’s AGM last month, President Martin McAllister said: “The decision by the ECJ in the Nova case is important for lawyers in Europe in that the Court decided it was in order for the Dutch bar to make rules prohibiting MDPs, perhaps even more important given the ongoing unravelling of the events following the Enron collapse, but for me the key part of the judgment were the remarks made about the core values. ‘The duty to act for clients in complete independence and their sole interests, the duty to avoid all risk of conflict of interest and the duty to observe strict professional secrecy.’

“These core values are the same for all solicitors in Scotland. They are values to be proud of, to tell people about and at all times defend.”

Director of the Centre for Law Computers and Technology at Strathclyde University, Professor Alan Paterson has studied the arguments for and against MDPs and remains in the first instance unconvinced by the business case in favour of MDPs.

“There is very little by way of hard research into what the attitude of the business community might be to MDPs.”

But primarily his concerns relate to risks associated with MDPs and most fundamentally of all the regulatory problems which remain unresolved.

“The last 20 years has seen a great change in notions of professionalism amongst lawyers.

“There are large and ever increasing differences between different types of practice, so much so that some have argued that it’s debatable if they are really members of the same profession any longer. I resist that argument, I think ultimately all lawyers continue to share to a meaningful extent the core values of competence, independence, confidentiality, loyalty ( in the sense of conflict of interest) and access to justice.

“I hope and believe that still holds the various members of the profession together in a way that is not shared by other professional groupings. MDPs would do nothing to maintain such collegiality that exists, in fact it would dissipate it.”

For Paterson there has been no satisfactory regulatory model developed for MDPs.

“If you have a variety of professions with different codes of ethics and different standards, it’s difficult to see whose ethics and whose standards would apply.

“From time to time it has been suggested  that the solution is for each professional or member of an MDP to be governed by their own code of conduct – assuming they have one – so if it’s  a surveyor his standards apply, if a lawyer, her standards, and so on. As far as clients are concerned, the level of protection you  would get would  depend on who you are dealing with; this is wholly impractical and a recipe for buck passing when things go wrong. It would make things like the Master Insurance Policy and Guarantee Fund simply unworkable.”

One of the things that worried the court in Nova is the fundamental conflict between accounting firms who provide auditing services, with the correlating duty of public disclosure, joining with law firms who offer litigation services and are under a duty of non-disclosure.

“That convinced the court that although the ban such as exists in the Netherlands was prima facie anti-competitive it was considered necessary in order to ensure the proper practice of the legal profession”, explained Paterson.

In recent times in England and Wales it had begun to look as though notions of the competitive interest would dominate and notions of the broader public interest would take a back seat.

“Nova puts a stop to that and says firmly in relation to the legal profession, it’s not enough to say regulation is anti-competitive we also need to see if it can be justified by some higher interest as it was in the Nova case.

“Before Nova there was a better opportunity of persuading the competition authorities that if the more restrictive rules of the legal profession were anti-competitive then they were automatically against the public interest. Now the public interest is shown to be larger than that.”

Despite the Nova judgment, Paterson anticipates continuing pressure to accept diminishing standards of conflict of interest.

Last year the City of London solicitors came out with the proposal that conflict of interest standards as applying to lawyers in England and Wales should be less restrictive, in order that they could fight for an even larger share of European commercial business than they already had. The notion that they should fight for stricter conflict of interest rules in Europe never seems to have been seriously entertained.  

“In terms of the appropriate standards for MDPs it is unclear where these common standards for all MDP professionals/staff are to come from. The lawyers want their standards to govern, the accountants see no reason why that should be so in an MDP which they control. We could try an amalgam of everyone’s ethics, but it’d be like Esperanto ethics, standards dreamt up by some working party to which no professional owes any allegiance and has never internalised. There aren’t MDP workers as a breed, only a group of different professionals working together.”

In essence, Nova offers something for all parties in the debate. It’s open to the English Law Society to carry on down the route they appear to be taking in backing MDPs., Equally, The Law Society of Scotland which is committed to values which oppose MDPs can continue to do so if they can justify in the public interest.

The potential for problems in this scenario are obvious.

“If England embrace MDPs, link them to multi national partnerships which might have Scottish firms in them, that way they might create MDPs which have Scottish firms in them by the back door.”

Yet isn’t there a strong argument to suggest that it really ought to be left to the client’s choice as to whether they want to employ the services of an MDP, let them make an informed decision and accept the risk that ensues.

“There is an element of paternalism. Large clients might say I don’t need this protection, we should have the right to choose. But after Enron I’m not sure if people are going to be quite as sanguine.

“Can a client contract out of the ethical protections that govern the legal profession and say they are prepared to accept less than full and zealous advocacy from my lawyer - because that’s what consenting to a conflict of interest means.

“The lawyer then becomes a limited purpose lawyer and the client becomes a limited client in the sense that they are not getting the full benefit of their lawyer’s skill and knowledge. They might say we’ll settle for that because they’re worth it.

“The challenge for the legal profession is to say we believe our rules are what are needed and justified so that a client is always assured of getting a full legal service.”

The law of agency seems to allow clients to consent to their lawyer acting in a conflict of interest situation, consenting to their lawyer giving less than 100% even though the lawyers’ ethical rules do not.

“But Enron will make everyone think a lot harder. What appears to have happened – though we do not know at this stage if this is what happened - but the way the large accounting firms grew was through captive clients. They got the auditing, which is an ongoing relationship, year by year giving the accountants great opportunities to cross-sell, so that their consulting arms grew big and profitable.

“They grew large from cross-selling, but it doesn’t take rocket science to see an inherent potential conflict of interest there between duty of disclosure as auditors, to qualify accounts that were suspect, and the interest not to do so if it risks jeopardising valuable consulting contracts.”