"If ABSs are the answer, what's the question?"

One of the things about policy is that often you don’t come to any conclusion; you just say what the issues are. This is largely what I’m going to do this morning. I want to try to lay out the territory – which means, of course, that whichever side of the argument you’re on here, I’m probably going to say something that gives you ammunition, and I’m probably going to say something that upsets or challenges you. And if that’s the case, I’ll be happy because I’ll have done my job!

If ABSs are the answer, what’s the question? I’ll give you what I think the question is later, but what I want to address first is: “What is it that this answer of ABSs is supposed to be delivering to us?” From a policy point of view there are a number of possibilities.

(a) Competition. Some people seem to think that the legal industry isn’t competitive enough. I suspect that from where some managing partners sit, that’s not an easy case to make! But, there is a view out there that it should be even more competitive. ABSs could deliver that.

(b) Greater “ease of use” for legal services. Some clients, some consumer groups, think that legal services are too difficult to access and are too difficult to use, and we should make it easier for them. ABSs could be part of that solution.

(c) A different complaints profile. There are too many complaints against lawyers. I’ve been horrified recently to look at the numbers of people in England & Wales who deal with discipline and complaints against lawyers – it’s close on 1,000 people, for 10,000 law firms in England & Wales. Again, the hope is that different structures, different ideas, might reduce that profile.

(d) Fewer restrictions on business structures. Here’s one that might benefit the lawyers. The reaction from most lawyers, of course, is: “We don’t want to be free. We want to be independent, but we don’t want to be free to do what we want because that might make life more difficult for us!”

(e) More cost-effective legal services. There is too much evidence around the world that legal services are not cost-effective.

(f) Different forms of access to legal services. Opening up the market is likely to bring new methods of access and delivery.

It intrigues me that, certainly in our jurisdictions, the push for reform needs to come from Government. Because if you think about the things I’ve listed, they could all have been delivered by lawyers themselves, without any parliamentary push.

Why was the question necessary?

Here’s a contentious issue! I think, as you look around the world in all the developed legal economies, we have an oversupply of lawyers. I don’t claim great knowledge of the Scottish system, but I can say with absolute confidence that in England & Wales we have lawyers doing things that you do not need a lawyer to do (and to be perfectly honest, it would be better if lawyers didn’t do them). But because they’re being done by lawyers, they are more expensive than they would be if done in some other way.

When we then see calls for reform, the typical reactions are: we have to be lawyers to do what we do. Otherwise quality will suffer, clients will suffer, justice will suffer, all sorts of things will suffer.

You know who will suffer most? Lawyers will. And that’s how too many people out there see the lawyers’ reaction.

But if I’m going to lay any fault truly and only at the feet of the legal professions, it is this: they have not been truly businesslike. Most firms have moved some way to be more businesslike, but they haven’t gone far enough, and law firms do not generally regard themselves as truly businesses. Well, there’s a great line in Sir David Clementi’s report which basically is that if you don’t think you’re in business, it doesn’t really matter because you’ll soon be out of business anyway.

Legal process outsourcing organisations these days have turnovers running into billions. They are doing things that lawyers used to do inside, but did in an expensive way. These businesses do them at scale and much more effectively and innovatively. And, because law firms don’t think like businesses, they’re in danger of being left behind.

I’m starting from the proposition that the pendulum was originally too far in the lawyers’ favour, and it’s now swinging in the opposite direction. My big question is: “Will it swing too far?” We don’t have to go from one extreme to the other – but that typically is what pendulums do before they begin to find some middle ground. My plea, in a sense, is: let’s get our heads around this, look at the issues, look at what’s at stake and come up with the middle ground to begin with rather than have something which becomes too extreme in another equally unpleasant direction.

Should lawyers be treated differently?

Is there a case to be made that lawyers are somehow different, that they’re not just a business? You’ll be pleased to hear that my answer is “yes”.

There are things that lawyers protect and preserve: the very legal system itself, the things that underpin the rule of law, the effective and efficient administration of justice, and access to justice.

My very firm belief is that those public good elements of what lawyers do, what they protect and what they preserve are not susceptible to “normal market forces”. If this set of reforms was only about competition, we would be in deep trouble. So yes, there is in a sense some special pleading to be done, but lawyers need to be very careful how they do it and the territory they pick.

It’s because of this that the consumer interest – however powerful it might be – in my view, can never trump the public interest in those public good elements.

Five ABS issues

I want to deal with five issues around the ABS territory, and look at what they might mean in an ABS world.

1. Cost

Where you have an oversupply of lawyers, who expect to earn a lot of money, who expect to progress to a certain level in their businesses, who expect a certain status and the rewards that go with it, and they’re fragmented in small businesses – which, around the world, still typically is the case – that has to be an inefficient market.

I don’t really care how it happens, but we have to sort that problem out if we are going to be able to sustain legal services as a healthy, profitable business. If lawyers don’t do it for themselves, Government, or financiers, or other people who look at business differently, will do it in a way that’s going to make lawyers feel uncomfortable. If you want a decent outcome to this question, grab the issues and sort them out for yourselves.

There are a lot of private clients out there, and lots of small businesses, who would use lawyers if they perceived them to be more cost-effective and represent better value for money. So this isn’t necessarily all bad news: if lawyers can re-engineer how they deliver legal services, we might actually find more clients going to them rather than fewer.

So what’s the ABS answer to this cost issue? It is to shift the barriers to entry to promote competition and reduce the costs. Notice that what I’ve said is “shifting” the barriers, not “removing” the barriers. For the most part, even with ABSs, this remains a regulated business.

2. Asymmetry of information

This is the economists’ issue. Typically, from the client’s perspective, lawyers have power and they charge a lot of money: that’s an asymmetry of both information and power in the lawyer-client relationship.

Wherever there is an asymmetry, you could argue – on a public good basis – that you need to protect the client. The four principal areas where they need protecting are the four Cs:

(a) The choices about which lawyers they can engage: this is why referral arrangements can be so contentious.

(b) The competence of lawyers needs to be assured.

(c) We also have to deal with complaints.

(d) Finally, if something goes wrong, we have to be able to compensate clients.

So what do ABSs do here? Well, they increase competition to improve the access that clients have to sources of legal advice, but they seek to do it on a regulatory level playing field. So if we get people coming in who don’t behave like lawyers, or who don’t organise their businesses like lawyers, they are nevertheless subject to the same obligations in dealing with clients.

3. One-stop shops – MDPs

When you talk to clients about this, there’s a lot more open-mindedness than there is typically within the legal profession. Most people (by volume, rather than by value) who buy legal services are occasional buyers; they don’t have the market knowledge, and often they don’t have a lot of time. Putting those things together, there’s quite a good case to be made.

Imagine a local community – any relatively well-defined geographical area. If within that area you could put together the best lawyer, the best accountant, the best real estate people, the best wealth advisers, and so on, you could have a very attractive proposition. If such a package were offered by a high street retail brand (and that’s quite likely), an alternative local offering based on well-known, quality professionals could be a perfect antidote to buying a brand. But of course, unless lawyers offer it, they’re not even in the market.

I think MDPs are going to be a supply-driven change, not demand-driven: the clients probably don’t know what they want until they see it.

What’s the ABS answer on this? It is to remove the restrictions against multidisciplinary practice to allow innovation to take place, but still – remember – within a framework of regulation. This is probably one area where the regulators have their biggest challenge. I’m not going to pretend that it’s easy, but human ingenuity will find a way of dealing with it.

4. Alternative providers

Most of the resistance offered by lawyers to this development is: “There is no doubt, if we let these non-lawyers in, quality will fall.” As if lawyers are the only arbiters of what good quality legal services look like! Lawyers would have the moral high ground on this if there were no complaints against lawyers. But there are claims in the thousands against lawyers that require an expensive system because law firms won’t deal with complaints themselves.

There’s a difference between technical quality (getting the law right) and service quality (being available, speaking the client’s language, doing the work quickly, doing it when you say you will, sending a bill that has some connection to their expectation). And other people are pretty good at doing those things: they understand customer service. But it’s also about utility: giving clients advice they can use. Value for money is going to be found in that complete package.

What we seem to forget is that when brands come in, they are passionate about their reputation: they’re not just going to lose a legal reputation if they get this wrong.

This notion that new people will pile it high, sell it cheap and sell it bad is not a great argument for resisting it. The ABS answer is that, again, we remove the restrictions to allow that innovation and competition to take place – but on the basis of equivalent regulation. This is not a free-for-all.

5. Alternative finance

Two things are beginning to combine. The first trend is slimmer equity ownership in law firms, to maintain or improve profitability. That constrains the ability of the business itself to raise debt. Now factor in the second feature – a changed banking climate where money is not so easy to come by – and where is the money you say you need to invest, to compete, to innovate, going to come from?

A point of resistance is: “These people are going to interfere with our judgment, with our ability to serve our clients well.” Frankly, that’s not in the outsider’s best interests in the long term. You can make the point, but I don’t think it flies very far.

Let’s be honest: lawyers are not immune to undue influence either. Look at the way some client relationships have developed, and the influence some clients have as a percentage of a firm’s business. Look at some of the internal targets that law firm managers – often misguidedly – impose: tell me this doesn’t influence behaviour, and possibly even some of the advice given. Lawyers cannot take the moral high ground on this one, either. I’m not going to pretend that undue influence is not a possibility with outside involvement; it certainly is. But is it going to undermine the issue of alternative finance to a point of it not being viable? Absolutely not.

The ABS answer here is to allow those forms of investment, to allow that innovation – but with, again, some regulatory territory that helps to bolster the business against some of these (potentially) malign influences.

Good and bad practice is no more or less likely with non-lawyers than it is with lawyers.

So, what is the question?

So, back to where I started: if ABSs are the answer, what is the question? I’m afraid lawyers are not going to like the question! It seems to me that, when you boil it down, it’s this: Why are lawyers so slow to change, so slow to take up best business practice and so slow to adopt innovation – and what is it we can do to forestall them from using the professional principles they hold dear (quite rightly) as a justification for resistance?

The answer is a new regulatory framework. The truth is, lawyers have been rumbled! They’ve had it good for a long time, but they’re not quite performing as they should. And if it takes something from outside to shake them up, then that’s probably what needs to happen.

Reform needs a balance

We have to balance three principal interests: the lawyers, the clients, and the public interest. We need to remove restrictions that get in the way – not just of other people who wish to provide legal services, but of lawyers providing a better and more cost-effective service. But we do need regulation to make sure that this vital public interest isn’t compromised.

There is an inexorable (and probably inevitable) shift from lawyer to client as the pendulum moves. But are we in danger of moving from one imbalance to another? I think we are. We need to be mindful of that, and make sure it doesn’t happen. The public interest therefore becomes for me one of the key elements of regulation and of ABSs in particular.

So where should this pendulum stop? If the goal is market-based reforms, the fundamental question is: what sort of market are we talking about? It cannot be a free market, because that will potentially undermine the public good. What we need is a fair market, and that’s a very different proposition.

What I say to the regulators is that we need to remain risk-aware. There are things that could still go wrong here, but they are not terminal risks that mean we shouldn’t move ahead. The regulators do need to be hands-on. They can’t step back – it’s not light touch – and they do need to be uncompromising in making sure that compliance with this robust regulatory framework actually happens. If it doesn’t, we are all doomed. There would be no point in doing it if compliance is not assured.

And the message for lawyers is that this notion of being professionals – and just professionals – is being replaced. ABSs could accelerate that change, but equally could accelerate your responses. These reforms provide new opportunities for doing things differently, and better – not only in clients’ interests, not only in the public interest, but also in your own interests. You can take advantage, or not. The odds are, though, that if you don’t, you might be victims.

So I say to the regulators: be careful. I say to the lawyers: think about and seize the opportunities. Good luck! Thank you.

Stephen Mayson is Professor of Strategy and Director of the Legal Services Institute, an independent policy advisory body established by the College of Law. t: 01483216393 e:stephen.mayson@lawcol.co.uk   w:www.college-of-law.co.uk/about-the-college   /legal-services-policy-institute.html

• The full version of this paper is available at www.college-of-law.co.uk/ about-the-college/Institute-Papers.html