ABS - Actual Benefit Soon?

The Office of Fair Trading may have taken the view that introducing alternative business structures to the Scottish legal profession only requires the regulatory mechanisms to be put in place, but many solicitors are still asking “Why?” rather than “How?”

With the Law Society of Scotland’s special conference on delivering legal services imminent, the Journal sought the views of solicitors across the spectrum of practices on whether they saw benefits in allowing ABS, and whether a workable structure can be put in place to safeguard the interests involved.

Responses to date tend, though not without exception, to confirm the view that the debate has a “big firm versus small firm” flavour. This includes a clear divide as to the very need for reform (and whether it will really benefit the consumer, in whose name the whole exercise is being undertaken). Probably without exception, the larger firms fear for their ability to compete with other commercial providers of legal services, and/or English firms attracting investment through the opportunities to be created under the Legal Services Bill, unless they too can attract external equity interest. Many smaller firms deny they will be left at a competitive disadvantage if no reform takes place, and question how the pending commoditisation of legal services in the hands of a much reduced number of providers will really work in the consumer’s interest.

Will more mean less?

“I’m not against change and I understand the problems of the large firms”, says Bruce de Wert of Georgesons in Wick, “but the OFT fail to realise that undermining the current financial structure is likely to lead to less competition, rather than more.”

At present, he adds, a multiplicity of small firms compete, keeping prices low, but further “cherry-picking” and packaging of certain areas would be likely to leave rural firms with only the “difficult” areas and insufficient income to maintain the business.

Similarly, Graeme McCormick of Conveyancing Direct, Glasgow, predicts that small firms will have to rely on niche work unprofitable to larger concerns, “costing the consumer much more for legal work out of the ordinary”.

Ken McCracken of mid-sized firm Wright Johnston & Mackenzie agrees that consumerism and commoditisation seem to go together. “Most of us tolerate call centre services because we can attend to our business whenever we want, and it is cheaper”, he points out. “This type of trade-off will have to be accepted in the commoditisation of legal services.”

He questions, however whether the resulting competition really equates to choice. “If we are unhappy with our service provider we can always move our business, but we already know that the credible competitors are doing business the same way.” The process accelerates the more the market consolidates. “Exercising service choice has no impact on the way the providers do business. How many consumers would it take to change Tesco’s business model?”

Valuing the solicitor brand

Solicitors at both ends of the spectrum recognise that legal services cannot be delimited from other forms of advice – but take a different perspective on the implications. For Bruce de Wert, the value of an experienced solicitor is the ability to advise on issues “which require the light, not only of law but of the realities of life shone upon them”. The clients he has saved from expensive errors in this way would not, he claims, find the same service from solicitors having a narrow breadth of experience because they only deal with packaged products.

For Christine McLintock of McGrigors, on the other hand, the most pressing need is to protect and improve the “solicitor” brand and ensure that solicitors are able to compete in the market. “We are already seeing large successful organisations, such as the Halifax and the Co-operative Group, gearing up to provide legal services. We firmly believe that solicitors in Scotland will face increasing competition from non-solicitor providers of legal services – whether or not there is any deregulation in Scotland. Our concern is that if this happens Scottish solicitors will be competing with one hand tied behind their backs.”

If the profession is to retain or increase its market share, she adds, it will not be by protectionism but “through excellence in service delivery standards, innovation and a focus on quality and effective working. More innovative business structures and access to capital and more diverse skills and experience could well be the key to greater efficiency and marketability”.

Graeme McCormick, who denies he will be disadvantaged if present rules continue, believes we should look further than England alone. “Since devolution many aspects and features of life and law in Scotland are going down a different path from the rest of the UK. The national momentum which is driving this will increase, so it is at best premature to follow England in haste.”

Advice in the high street

Anderson Strathern’s chairman Robert Carr is one who questions the polarisation of the debate. “There is an appetite for reform within many firms beyond the ‘big four’, including both large and smaller practices. Small firms with a high street presence could consider opportunities to join with complementary professional practices and agree suitable profit sharing arrangements. Many are in the same building, where they would benefit, and clients and consumers would benefit, from a mechanism for sharing profits.”

One west of Scotland practitioner, now a consultant to a high street firm, does take a relaxed view of new competition: the small firm can be the corner shop to the new supermarkets. “A client of mine had his remortgage done through a branch of the Halifax 50 miles away, and they used solicitors in Edinburgh. But he still comes to me for his licensing work.”

Another suggests that if high street firms lose the domestic conveyancing market, as is often predicted, the public will not be adequately served for the availability of legal advice without publicly-funded advice centres – the “access to justice” aspect.

Robert Carr, who supports reform, believes that that situation has already arisen. “I think we need to look at the nationwide supply of legal services across Scotland so that all our people have access to justice”, he comments. “There will be a need for independent law centres to provide advice in areas such as housing, immigration, benefits, because the economics of private practice in certain parts of Scotland are becoming ever more desperate, and legal aid is woefully behind any level that makes legal aid work profitable. This is especially so given the costs of practice in the bigger cities, but now applies to every part of Scotland.”

Carr goes further in calling for the Scottish Ministers to set out their policy approach. “We should not be awaiting developments south of the border – both professionals in Scotland and consumers can gain an advantage by moving ahead now instead of waiting for developments in England & Wales.”

Professing himself “a believer in professional self-regulation”, he maintains that Scotland is too small to need the complex regulatory arrangement proposed down south, where the Legal Services Board will oversee “front line” bodies such as the Solicitors Regulation Authority, the now quasi-autonomous regulatory arm of the Law Society of England & Wales.

Regulation, internal and external

How to regulate a more diverse set of legal services providers is in many respects the nub of the whole issue. Conflicts of interest, liabilities under the Guarantee Fund, and indeed who might regulate the non-lawyer components of any combined practice are agreed to be some of the central issues. Douglas Connell of Turcan Connell, in the article below, proposes a model under which practices would retain a majority lawyer interest and the Law Society of Scotland’s present role would remain more or less intact. As Christine McLintock, herself a Council member, recognises, were we to go further and authorise the Society to license and regulate alternative business structures, separation of the Society’s representative and regulatory functions may become necessary.

Carr thinks it timely to revisit the statutory structure of the Society in any event. “It’s a creature of the 1940s with the Council and the present management structures. It has served us well but it’s right to step back and take a fresh look at it.”

As for conflict of interest, McLintock says: “In the context of a multi-disciplinary practice this will require care and the concept of self interest (in terms of defining what is, and what is not, a conflict) may need more clarification, but we believe a workable solution can be found. During the years that McGrigors were in association with KPMG we operated successfully without any compromise on adherence to core ethical standards. A rigorous internal conflicts checking process is essential.”

Conflicts and corporate governance

Ken McCracken insists that it is important to be “transparent about the conflicts of interest that are inherent in alternative business structures”. “The response to the apparent conflict of interests in a MDP seems to be that the multi-disciplinary partners are all acting in the best interests of the same client, and if one of them makes a mistake the consumer can always instruct another lawyer to pursue a remedy. This ‘all for one’ argument is based on a certain view of human nature, but not one that will find many adherents in contemporary UK corporate governance.” Hence the raft of codes and guidelines to be found there for controlling managerial opportunism, and techniques like share options that are meant to align the different self-interests of owners looking for return on investment, and managers seeking to maximise personal income.

“Those in favour of MDPs will have to provide stronger arguments to clarify how they will be held accountable to their clients/ consumers beyond being nice people.”

He adds that if the safeguards being built into the proposed regulation of ABS in England & Wales are based on the corporate governance model, “then we should expect shareholder value to be the paramount interest to be served, rather than consumer interest… Until the conflict of interest issues in ABS are seen for what they are and addressed, there is a risk that the OFT’s cure could be worse than the disease”.

In whose interests?

Christine McLintock can envisage different professionals within MDPs being bound by different regulatory rules: McGrigors is already regulated by three different law societies, and “In setting our standards we tend to adopt the highest possible standard and this works”. Where the rules of different professions apply, she adds, “the question is whether the rules conflict in a way which unnecessarily constrains the business”.

For McGrigors, therefore, the way forward is for the solicitor profession, with its commitment to “core ethical standards, rigorous education and training, and code of professional conduct”, to compete on equal terms with non-solicitor providers of legal services: “More innovative business structures and access to capital and more diverse skills and experience could well be the key to greater efficiency and marketability”.

Such an approach shows the two sides to the competition argument: whereas some see it as allowing others to compete with solicitors, on McGrigors’ view it involves allowing solicitors to compete on equal terms with others who are already gearing up to take a slice of their market.

In contrast, McCracken goes out on a limb in suggesting that “maybe we need a return to partnership as the preferred business structure, exposure to unlimited financial risk being an incentive to make any business owner very attentive in managing their affairs”. While it may make good sense to lawyers not to shoulder too much risk in an increasingly litigious environment, “it’s not clear that the change to LLP status was driven by a desire to serve the interests of consumers”.

It is not lost on the smaller firms that the pressure for change from their big cousins often appears to be based on financial self-interest rather than consumer priorities. McGrigors’ rationale for permitting ABS comes the closest to reconciling these interests; the firm also cites its contribution to the Scottish economy, which might not be replaced were external competitors to seize the market. But for many the wider question remains, will market-based reforms deliver what is expected?

To return to Bruce de Wert: “If the large firms do have a problem, I am sorry about that, but unfashionable as it may be to say so, the present structure has served the consumer very well. I suspect that it will take a great deal of courage by the OFT to recognise that. I don’t doubt that those at Which? who started this ball rolling had the best intentions, but I do not think the outcome will be what they intended.”

Is there any common ground? Yes, to the extent that no one in the profession appears to want the English type of regulatory structure being imposed on Scotland, as Which? proposed. In particular, says Christine McLintock, if rising costs result in an exodus from the Society of those who remain solicitors because of a commitment to the profession and its values, rather than because they require a practising certificate, this will not promote competition or benefit consumers.

The OFT and the Scottish Government may between them have put the ball in the legal profession’s court to propose a way forward, but the profession is still asking some serious questions of its own as to how the best interests of the public as a whole are truly to be advanced.

TOWARDS A SCOTTISH SOLUTION

Douglas Connell sets out his scheme for a form of alternative business structure suited to both larger and smaller legal practices in Scotland

Turcan Connell is a multi-disciplinary practice. Our total team of 270 people includes lawyers, investment managers, financial planners, accountants and taxation specialists. This combination of professionals allows us to offer a holistic service to clients – we genuinely believe that the whole is more than the sum of its parts. Having lawyers working closely with non-lawyers also seems to create a strong esprit de corps in relation to managing client affairs.

Ever since we founded Turcan Connell 10 years ago, we have believed that a private client firm offering legal, financial, accounting, taxation and investment advice should have the flexibility to develop an ownership structure which reflects the services we are able to offer. It has been suggested that the way to do this is to erect ring-fences around the different areas of the business and place legal services, financial services and investment management in separate legal entities. That is of course an option, but we believe that such a structure would detract from the benefits to clients of providing wholly integrated services and consolidated reporting, and that it would create unnecessary barriers to the team spirit which we think is important and of value.

We wish non-lawyers to be able to become genuine business partners in a firm which is providing a range of professional services. Under the present rules, only lawyers can become partners in the firm and these other contributors to our business cannot invest in or acquire a stake in the business. The same goes for internal practice managers, including those in finance and HR. Rules preventing us sharing fees with non-lawyers and prohibiting the promotion of suitable candidates to partnership represent a brake on the development of the business as a whole. These restrictions are anti-competitive, give us problems attracting and retaining some key staff and are forcing us to consider “foreign” solutions.

I believe that the alternative business structure which we are seeking would have benefits not only for large firms such as Turcan Connell, but also for local service providers throughout Scotland where accountants, solicitors, financial advisers and surveyors would have the option of coming together to share overheads, add value to client services and help to secure the survival and development of these important local advisory businesses.

The Law Society of Scotland has concerns about external ownership of law firms and how to regulate firms which are controlled by non-lawyers. It should not be a surprise that there are individuals in some Scottish law firms who are understandably attracted by the idea of selling their equity stakes to third party purchasers. If their entrepreneurial approach has created successful businesses with sustainable profits, they should be congratulated. We ourselves are not advocates of third party ownership of Scottish law firms and I am personally rather sceptical about the need for external equity finance to allow the development of Scottish law firms. Where a legal business is sufficiently robust to be attractive to external investors, it should be able to support the level of borrowing and investment by those working in the business to allow development and expansion. There is a possibility that the introduction of external equity finance simply provides a one-off windfall for a few individuals but does not actually promote the longer term interests of younger lawyers in these firms, who would not themselves benefit from the sale of equity.

The alternative business structure we are proposing is a solicitor-controlled model. For this model to be possible, a change will require to be made to the Solicitors (Scotland) Act 1980, s 26 by statutory instrument in order to allow the sharing of profits by Scottish solicitors with non-lawyers. A similar statutory instrument was promulgated in 2004 to allow the sharing of profits by Scottish solicitors with “foreign lawyers”. That is what has allowed the multi-national practices which already exist.

What we propose is a model which would allow up to one third of the partners to be non-solicitors, that the non-solicitors should be subject to an individual “approved person” regime, and that these non-solicitors should specifically sign up to a number of obligations including the acceptance of joint and several liability with the other partners in respect of the Guarantee Fund and generally sign up for the core values of Scottish solicitors in relation to confidentiality and other issues. These non-solicitor partners should not be permitted to hold themselves out individually as solicitors. They would be bound by the Accounts Rules of the Law Society of Scotland, its disciplinary regimes and general practice rules.

The approved persons regime would not be dissimilar to the one operated by the Financial Services Authority. Practitioners in the financial services industry are in all cases individually authorised by the FSA, which defines key “threshold competence” tests and qualifications. Outwith the financial services sector, there is a range of appropriately qualified professionals who would meet an “approved persons” test and be acceptable as fit and proper persons. These would include chartered accountants, chartered surveyors, actuaries, advocates (subject to rule changes) and members of the Chartered Institute of Taxation. This list is not exhaustive and it is within the competence of the Law Society of Scotland to define a generic category of likely “approved persons”, all of whom could be individually assessed and approved prior to their acceptance as being suitable candidates to be partners in solicitor-controlled businesses.

This proposal will not be a complete panacea for all the structural challenges facing the profession in Scotland, but a move towards new business structures which are essentially controlled by solicitors and regulated by the Society would seem a positive step forward. This would be a Scottish solution to Scottish issues. I hope that the creation of this alternative business structure will be an option which may have the effect of helping to revitalise the provision of advisory services by solicitors in various parts of Scotland.

Douglas Connell is Joint Senior Partner at Turcan Connell