Sea change around the globe

The reform of the Scottish legal services market is now at the top of the policy agenda within the profession and the Scottish Government. However, the debate has already progressed significantly in other jurisdictions across the globe, resulting in more liberal markets in some states, and in others continued debate with no firm prospect of reform. Contrary to the views of the more cynical observer, the debate is not solely concerned with the prospect of higher profit margins, and various ethical issues also abound with regard to the prospect of outside ownership of firms (by non-lawyers), and lawyers entering into partnership with other professionals through multi-disciplinary partnerships (MDPs).

In this respect, a number of these jurisdictions are worthy of further discussion in order to inform the Scottish debate.

Outside ownership

One of the most common ethical objections raised to the notion of outside investment in law firms is that the solicitors could be forced to compromise the interests of their clients in favour of the interests of the firm’s shareholders.

Australia

Since 2001, three states in Australia have allowed legal firms to incorporate and allow outside investment. This has resulted in over 500 firms incorporating in Australia to date. This year Slater & Gordon became the first law firm in Australia (and indeed, the world) to float, but its solicitors retained ownership of 56% of the shares and a higher than proportionate share of the voting rights. This method of insulating solicitors from the potentially more negative aspects of outside ownership could be further developed by placing provisos in outside owners’ share interests, e.g. prohibiting the investor from having any role in any legal matter being handled by the firm.

This method was proposed by Clementi himself, and also formed the basis on which Slater & Gordon floated, with their prospectus stating: “Lawyers have a primary duty to the courts and secondary duty to clients… There could be circumstances in which the lawyers of Slater & Gordon are required to act in accordance with these duties and contrary to other corporate responsibilities and against the interest of shareholders or the short-term profitability of the company”.

England & Wales

The proposals south of the border, as contained in the Legal Services Act 2007 (which are due to come into force from 2010 onwards), involve a licensing system determined upon a “fitness to own” test. The Act requires all entities with non-lawyer owners or managers to be licensed by the Legal Services Board (LSB), if they wish to provide legal services. Each firm will be required to have in place a head of legal practice, who will be responsible for ensuring that everyone in the firm complies with the terms of the licence. The specifics of the “fit and proper” test have yet to be defined, but will be applied to all potential non-lawyer owners if their interest in the firm exceeds 10% and will involve an assessment of their reputation, disciplinary record and honesty, amongst other criteria.

If the LSB believes that a non-lawyer’s involvement in the licensed firm may compromise consumer interests or standards, it will have the power to block their involvement accordingly, and will also be able to disqualify such individuals from continuing involvement in a licensed firm if they breach the guidelines. It would be fair to suggest that the LSB will probably avoid setting the bar for this test too high, as it may end up discouraging the very external investment that the 2007 Act aims to allow.

South Africa

Back in the southern hemisphere, one of the largest legal firms in South Africa, Edward Nathan, became the first South African law firm to be bought out by an investment bank – Nedcor – in 2000. However, this did not trigger a sea-change in the South African legal market, and in 2005 the firm’s directors bought the firm back from the bank in question.

United States

Meanwhile, across the Atlantic, the American legal profession, on the whole, continues to be surprisingly conservative in its attitudes to potential reforms to the legal services market. However, noises from the US Federal Trade Commission and the Department of Justice, coupled with the developments in the UK and Australia, have stimulated a (largely academic) debate about the prospect of increasing liberalisation of the US market.

Regulation of the legal services market in each state in the US is the preserve of the relevant state bar association. An earlier draft of rule 5.4 of the American Bar Association’s (ABA) Model Code of Professional Responsibility, as adopted by the majority of the state bars, originally permitted non-lawyer investment and fee-sharing with other professionals, but it was subsequently amended to prohibit both in order to “protect the lawyer’s professional independence of judgment“. Change was again mooted in 2000, but the ABA’s governing body, the House of Delegates, voted in favour of maintaining the prohibition on the basis that the “sharing of fees and ownership and control of the practice of law by non-lawyers are inconsistent with the core values of the legal profession”.

However, another aspect of the market systems common in state bars throughout the USA is rules which permit lawyers to take their clients with them when they leave to join another firm. It is fair to say that any similar rule is definitely not on the agenda in Scotland.

Multi-disciplinary partnerships

Concerns about MDPs include the solicitor’s potential loss of professional independence, on the basis that the solicitor’s duty to provide independent advice to clients may become compromised if they have conflicting duties to the non-lawyer partners of the MDP. Furthermore, it has been suggested that conflicts of interest could also result from different professionals within the MDP being subject to varying degrees of professional standards and codes of practice. For instance, the solicitor’s duty of confidentiality to a client would be in direct conflict with an auditor’s duty of public disclosure.

Europe

Despite a shaky start, which saw the European Court of Justice upholding the prohibition of MDPs in the Netherlands, continental jurisdictions appear to be fairly relaxed about MDPs in practice, in contrast to the more muted approach by common law jurisdictions. In Italy, Germany and the Netherlands, MDPs involving a combination of lawyers, notaries (commonly a separate profession on the continent), accountants, patent agents and tax advisers have now been operating for a number of years. However, in order to provide legal services, MDPs in each of these jurisdictions must be controlled by a majority of lawyers.

With regard to the potential conflict of ethics between the different professions, Germany’s solution is to allow other professionals to become members of an MDP only if they are members of a professional body and are subject to the same standard of professional conduct and rules as the lawyer members. Italy’s approach to the potential conflict between lawyers and accountants regarding confidentiality issues is to require the latter to be subject to the same rules as the former.

Australia

The Legal Profession Act 2004 in Victoria, Australia permits both incorporated legal practices (ILPs), which can be owned by non-lawyers, and MDPs. The Act further requires that each ILP or MDP must have at least one legal practitioner director who will, alongside any other legal practitioner directors, be solely responsible for the provision of legal services and for any other legal practitioners employed by the firm. Therefore, only the legal aspects of the business will be subject to the regulation and oversight of the Law Institute of Victoria (equivalent to a Law Society) and the Legal Services Board (equivalent to its namesake in England and Wales).

This “ring-fencing” of the regulation of each of the professions within the firm is a potential solution to the perceived problem of differing levels of professional standards co-existing within one practice. However, such a scenario has also been criticised as much too cumbersome and lacking in transparency, with the end result only being a very confused client. Therefore, in order for MDPs to work in Scotland, another solution would be either for each profession to harmonise its standards and professional rules, or for each non-lawyer member of the MDP to agree to be subject to the Guarantee Fund, practice rules and guidelines of the Law Society of Scotland – which is the solution mooted in the Society’s consultation on ABS, alongside the requirement that the MDP should have a majority of legal members.

North America

This type of system already operates in the District of Columbia (including Washington DC), where MDPs are permitted and can also be owned by non-lawyers. However, despite fees being shared with the non-lawyers in the practice, there is a requirement that the MDP’s sole purpose must be the provision of legal services, with the lawyer members of the practice being responsible for the activities and conduct of the non-lawyers, who must also obey the lawyers’ professional conduct rules. The province of Ontario in Canada permits MDPs on a similar basis – requiring that the MDP is effectively controlled by a majority of lawyers, ensuring that the MDP’s professional indemnity insurance covers the activities of the non-lawyers, and requiring that the primary role of the MDP is as a legal service.

Lessons for Scotland

Despite the debate regarding complaints handling and the reform of the legal services market occurring at the same time south of the border, the passage of the Legal Profession and Legal Aid (Scotland) Act 2007 resolved the former issue in Scotland, while the establishment by the then Scottish Executive of the Research Working Group at the same time effectively delayed the debate about market reforms and thus brought it about that any changes to the market north and south of the border may not be simultaneous. It is this prospect which has led to suggestions from some of the larger Scottish firms with a London presence that they will re-establish themselves as English entities if they feel that they are placed at a competitive disadvantage in Scotland vis-‡-vis a more laissez-faire market south of the border.

A precedent has already been established in the UK, with a number of other professional firms floating in recent years, such as surveyors, architects and accountants. All such professions are regulated by professional standards, codes of conducts and the like, and it would be hard to argue that their standards of professional conduct are substantially less rigorous than those of their legal counterparts. In this respect, the nature of law firms is that they are client-facing, and as their success depends on their client base, it would arguably be unthinkable for them to subordinate their clients’ interests to those of any shareholders.

Furthermore, it is interesting to note that a number of professional bodies in the UK already permit their members to practise in MDPs, including the Institute of Chartered Accountants in Scotland (ICAS), the Royal Institution of Chartered Surveyors, and the Royal Incorporation of Architects in Scotland, amongst other bodies. ICAS, in particular, is in favour of its members entering MDPs with solicitors, and is monitoring the debate about the reform of the legal services market with interest. It is likely that the potential conflict between the duties of auditors and solicitors will be at the forefront of their minds come any substantial changes to the Scottish market.

Two major Scottish law firms have already experimented with a form of MDP, which saw “integrated partnerships” between Dundas & Wilson and the late Arthur Andersen, and between McGrigors and KPMG (KLegal); both ultimately disaggregated due to the fallout from the Enron scandal. Additionally, a number of Scottish law firms provide non-legal services – such as McGrigors, with its public affairs division McGrigors Public Policy; DLA Piper, which also provides a government relations service (as part of its global operation); and Pagan Osborne, who provide a range of financial and property services alongside the more traditional legal services.

Most notably, Turcan Connell employ a substantial number of non-lawyers such as accountants and financial planners, and notwithstanding the fact that only the solicitors employed by the firm are allowed to be partners, the firm has still managed to provide a holistic service to clients free of any problems caused by conflicting professional standards amongst their employees, despite the fact that they are presumably still subject to their own governing body’s regulatory standards (as well as those of the Financial Services Authority and the Law Society of Scotland). Therefore, would permitting these non-lawyers to become partners, and thus own a stake in the business, be such a large leap to make?

Likewise, whether the prospect of merging into an MDP for local IFAs, accountants and solicitors in small towns throughout Scotland – to become a “one-stop shop” – is an attractive option remains to be seen, due to the more vocal contributions, thus far, of the larger firms to the debate. Hopefully, this imbalance will be addressed through responses to the current consultation on “Delivering Scottish Legal Services”.

Michael Torrance is a first year trainee with Brodies LLP in Edinburgh Any views expressed in this article are the author’s own and do not in anyway reflect the views of the firm

LSEW ON ABSs

The Law Society of England & Wales believes “that the entities through which solicitors can provide services should only be restricted by safeguards to protect clients and the public”. Non-lawyers must not be able to compromise lawyers’ professional ethical duties; regulators must ensure that access to justice is not reduced by ABS firms cherrypicking market segments; and ABSs must be regulated by the same standards and principles as other providers. It further believes that the Legal Services Act guarantees all three.