The legal landscape – looking with new eyes

Good afternoon everybody, and thank you Professor for that kind welcome. Thank you also to Oxford Law School and to the Novak Druce Centre for Professional Firms here at the Said Business School for their support and involvement in the organisation of this lecture.

I first became a member of the Law Society Council in 2001. Like the majority of my colleagues, if not all, I had no idea of the transition that the legal profession would undergo over the next nine years. My arrival on Council coincided in fact with the start of the transition process, namely the OFT report in 2001 on Competition within the Professions, which led directly to the Clementi Review of 2003. If it is possible to cut to the chase on the Report and Review, then the OFT recommended greater competition on the provision of legal services to the consumer on the high street and Sir David Clementi said that regulation should be split from representation and that new entities (legal disciplinary practices) should be permitted to enable non-lawyers to own law firms on the high street. Clementi felt that moving to multi-disciplinary practices should be for a second stage – regulators should learn to walk before they ran.

By the time I became an officeholder of the Society in 2007, the Legal Services Act was three months shy of receiving royal assent. As the last President of the Law Society to have served as an officeholder in the supposed antediluvian days before the passage of the Act, I have seen first hand the remarkable process of debate, discussion and, it must be said, disagreement around the implementation of its terms.
I have also been intimately involved with the negotiation of many of the changes stemming from both Clementi and the Act, and I have travelled extensively on behalf of the profession, speaking to lawyers in all corners of the globe on their perceptions and hopes for the legal profession in England & Wales.
As I enter the last months of my Presidency, I wish to share with you my thoughts on the experience of the last three years and hopefully to leave some food for thought for all those associated with the legal profession and its governance and regulation.

That I do so in this magnificent, modern business school is no accident. Law and business are inextricably linked. For centuries, the legal sector in England & Wales has provided a predictable, flexible framework which has enabled business to thrive. It has underpinned our growth not only at home, but overseas, where English law has been more influential even than our language in building peace and prosperity for us and for our friends in other nations.

A thriving legal sector is good for business, good for trade and above all, good for the people of this nation.

The legal ecosystem

For this reason more than any other, we need to be sure that the radical changes that we have put in place have the intended effect, and that in doing so we have not compromised either the rule of law or our position in the world.

Like any system which has grown up and evolved over centuries, the legal sector is akin to an ecosystem – interconnected, diverse, finely balanced and inherently fragile. If we make even small changes to the environment in which it has thrived, we must accept that the repercussions could be far greater and far more severe than anything originally intended.

I have always approached reform of the legal sector with an open mind and a willingness to change as appropriate. This is a position embraced also by the Law Society. Three years after the Act, it is time to look at whether this change has strengthened the legal ecosystem or weakened it.

Marcel Proust once wrote that “The real voyage of discovery consists not in seeking new landscapes, but in having new eyes.” Having spent the last three years building a new landscape, it is time to look at what we have created and what we are still trying to create; and in so doing we must look not only with a perspective informed by these experiences, but also through the eyes of others.

The purpose of the Act

Leaving aside consumer complaints, the Legal Services Act had three purposes:

• to simplify a system of regulatory oversight which was over-complex and inconsistent;
• to ensure that representational functions within professional bodies were separated from regulatory functions; and
• to increase competition, flexibility and choice.

It provided for the Legal Services Board, a single supervisory body to oversee the approved regulators such as the Law Society and the Bar Council.

It created a single point of entry for consumer complaints, the Office for Legal Complaints.

It opened the door to alternative business structures (ABSs), which will allow lawyers to form partnerships with non-lawyers, and accept outside investment or operate under external ownership.

And it required professional bodies, such as the Law Society or the Bar Council, to separate their regulatory and representative functions, and provided new statutory objectives and duties for all regulatory bodies.

Implementation has been rapid. The Legal Services Board is up and running and the Office for Legal Complaints is due to become fully functional later this year. The Solicitors Regulation Authority and the Bar Standards Board do the regulatory heavy lifting as separate, but connected parts of the Law Society and the Bar Council, and different types of lawyer are able to partner with each other through legal disciplinary practices.

The final piece in the jigsaw, the licensing of the first alternative business structures, is scheduled for October next year.

So far then, so good. Or is it?

Has the Act in fact disturbed the legal ecosystem in ways we cannot yet see? Are we in fact in a Rumsfeld territory where not only are there known unknowns, but there are also unknown unknowns?

The view from overseas

The view from overseas is generally highly positive. Our legal profession has long enjoyed a sky-high reputation across the world. The law of England & Wales governs many global contracts. Solicitors both in the City and across England & Wales have been enormously successful in providing global legal services to the point where such services secure around £2 billion for the economy each year. The Bar is a model for advocacy standards accepted across the world. Our judiciary has a worldwide reputation for impartiality, experience and skill. It is the reputation of the legal profession and the judiciary which is the foundation for all our overseas success.

Yet there is some concern that all is not as it should be.

I hear a growing belief amongst lawyers overseas that the Legal Services Act has created a structure which could in certain circumstances represent a real threat to legal independence. In part, this belief reflects a view that replacing the judiciary as final overseers of the legal profession with the Legal Services Board – with its substantial powers under the Act – is a threat to independence that should not be ignored.

There is also concern that by permitting partnerships with non-lawyers, our legal profession is losing its ethical heart. There is a potential danger for all of us if the unparalleled character and quality of our legal profession is seen to be diluted.

There are also concerns about the education of our lawyers. Reciprocal arrangements allow our lawyers to practise in their jurisdictions and vice versa. But there are fears that the massive expansion of higher education has led to some of our undergraduate degrees simply not being rigorous enough. This has the potential to hinder the ability of our lawyers to move between jurisdictions.

On alternative business structures, there are concerns in some places that the duties owed by solicitors as officers of the court may well in future be overridden by duties to shareholders.

Although the primary focus of the Legal Services Act was an improved environment for the consumer, we cannot simply serve the consumer interest in isolation. The legal ecosystem must also take account of the ability of the profession to serve the needs of justice. It is essential that we marry these observations to our own experience of the changes of recent years to ask ourselves the big questions that arise.

Independence

The question has to be asked as to whether or not the Act in introducing change has resulted in the legal profession losing its independence. What does independence mean? It means the ability of legal practitioners to operate without fear of sanction from Government or other authorities as a result of representing their clients.

But it is of note, surely, that the Legal Services Board is a body with a direct line to Government. The Legal Services Board is the overseer of authorised regulators. Should the Legal Services Board, in prescribed circumstances, find approved regulators inadequate then it can – with Government consent – seize control of regulation for itself. Now all of that might seem to be a far fetched circumstance, especially in light of the present leadership of the Legal Services Board, but…

The LSB was not designed to play an active role in the regulation of the legal profession, but a more hands-off oversight role of assistance to enable the approved regulators to achieve the regulatory objectives in the public and consumer interest.

However a careful watch must be maintained that undue powers are not misused. One notes the tendency of the LSB to regard itself as shepherding a supposedly recalcitrant legal profession into modernity, although it is absolutely apparent that many lawyers are at the vanguard of innovation, whether it be in developing new legal services, or refining existing legal services.

When the 2001 OFT report called on the legal profession to open up to competition, the Law Society sought statutory change so that it could allow the creation of multi-disciplinary practices and a form of ABS. However, we were told to wait for the Legal Services Act, and by the time the Act reached the statute book, the Society had already split its regulatory and representative functions.

Quite simply, there is no evidence from at least the last 25 years that the legal profession has been unable to regulate itself in the best interests of the public, which begs the question of why the draconian powers of intervention were gifted to the LSB in the first place. I accept that consumer complaints need to be dealt with differently, but that is a separate matter.

The legal profession, indeed the legal sector, is the last bastion of a citizen’s defence against the state, which is by and large why in every democratic country in the world, legal professions have been allowed some degree of self-regulation. Lawyers, be they solicitors or members of the Bar, are imbued with duties to the court which require openness and transparency, balanced by the need for client confidentiality. If education and ethics are right, then the duties are absorbed as if by a process of osmosis.

So if all of this right, then after alternative business structures are up and running, what will the future of the LSB be? By such a date, some six years after their establishment, the approved regulators will be by then fully experienced. What oversight will be needed? What will the LSB be required to do then?

It is my view that it is vital for the independence of the legal profession that the LSB should not be allowed to morph into an activist regulator in order to justify its existence. Is it right for the direct connection to Government to continue after what might be described as a transitional period, where new methods of providing legal services are introduced to the public? Or should there be a reintroduction of the link between the legal profession and the judiciary, as many considered appropriate at an earlier time? Now that we have a new Supreme Court which is the very embodiment of legal independence, perhaps it is possible to say that it is time for our judges to re-engage. Is it too much to ask or question why the Legal Services Board should not have in future as its chair a very senior judge, to ensure that legal independence is maintained and to augment the skills that the Legal Service Board already possesses?

Ultimately, the future of the LSB is not a long term question for the legal profession, but the independence of the profession is. And if there is no independence or a fractured independence, then that must be a critical disturbance of the legal ecosystem.

Regulation

In almost all other jurisdictions in democratic countries, there is a close inter-relationship between the regulators and the regulated community. Here of course the requirement of the Legal Services Act is that for all sections of the legal profession, regulation should be clearly separate from representation, even if under statute the responsibilities for regulation and representation are left within the same entity – the Law Society, the Bar Council, ILEX.

It is notable that in other jurisdictions, even those with legal service commissioners to oversee regulation, the application of regulation in terms of investigation of conduct is often left to the representative entity, whether it be a separate Law Society or Bar Council.

We should not seek to restore that here, but I am bound to say that we went the wrong way in the early years of the SRA in terms of separation between regulation and the regulated communities. An artificial separation led to huge misunderstanding on both sides which bred mistrust and threatened the whole effectiveness of regulation.

The Hunt and Smedley reviews commissioned by the Law Society helped to reverse what appeared to be an incredibly destructive process of absolute separation uncalled for by the Act. There is now an understanding shared by the SRA and the Law Society of what empathetic regulation means – concern and understanding of the business of the legal professional, coupled with a determination to improve standards of service to the consumer in the public and professional interest.

There is now also a movement away from a prescriptive regime of rules to one that provides a measure of freedom to solicitors in achieving the statutory objectives laid down by the Act. For solicitors then, we have avoided what might otherwise have been a horrendous train crash and are now set fair on a route towards outcome-focused regulation, which requires the SRA to draw up a list of desired outcomes and provide clear guidance to the profession on what they mean.

This must benefit the public and strengthen the legal ecosystems. The emphasis is put firmly and squarely with the legal profession to meet the desired outcomes (which are, in fact, the statutory objectives). One is bound to say that there is concern that the legal ecosystem will be threatened if the huge cultural shift required of both the regulator and the regulated is not achieved, and achieved against a timetable imposed by the Legal Services Board which, to say the least, is ambitious if not frightening. I have heard it suggested that outcome-focused regulation should be brought in “come hell or high water”, but does this really mean that our only choice is whether we burn or drown?

And so, we turn to ethics.

Ethics

Is there really an understanding of ethics?

Adrian Evans, an expert on legal education from Monash University, has rightly made the point that at a time of increasing competition, it should be our ethics which are our biggest competitive advantage. I would go further than this – our ethics are also our biggest and best argument for greater freedom for the profession to play the lead role in regulation, whether as individuals, firms or collectively, and we have to protect them and augment them wherever possible.

Legal ethics have always been derived from a solicitor’s obligation to the court. As officers of the court, they owe their duties to the court. Yet the truth, of course, is that many solicitors have never actually set foot inside a court.

Prior to 2007, a formal link at least existed between solicitors and the court through the Master of the Rolls, yet that link was severed following the passage of the Legal Services Act.

Is it unreasonable therefore to expect solicitors to recall the ethical parts of the profession if they are unable to see themselves as part of the continuum of justice?

Whilst ethics teaching forms a part of the Legal Practitioner Course, it doesn’t receive the same kind of academic emphasis as in some other jurisdictions. Whilst there are great practical benefits to a vocational approach to ethics training, there are also huge problems – not least that as well as passing on good practice from generation to generation, we risk passing on deficient practice too.

Given its importance, is there any reason why we cannot do both? Would it not be sensible to teach ethics at the most basic level as part of undergraduate training, covering concepts such as conflict of interest, confidentiality, duties to the court and duties to the client?

While in Australia, I was struck by the degree to which the judiciary is closely linked to the legal profession. This is a link that we have sadly lost. Our judges are the embodiment of our courts, and just as we need to ensure that all solicitors are aware of their duties, so we must re-acquaint the transactional profession with the judiciary.

One way to do this might be through the admissions process, thus placing the link at the heart of actually becoming a solicitor. It could be through judicial membership of the LSB, as I mentioned earlier.
Whichever way we do it, it is not just solicitors who must become acquainted with the judiciary. The judiciary must also become acquainted with solicitors.

It has been especially pleasing in recent months to hear the Master of the Rolls make his voice heard on ethics and professionalism, and I look forward to hearing more to come. Everybody involved in the legal sector has a responsibility to uphold the rule of law, and we need to work together in that task. It is not enough to simply have an activist profession – we need activist judges too.

This is partly our fault. We have imperilled the ecosystem ourselves by working to our own devices. We have to be more collegiate in our approach.

We need a comprehensive and wide-ranging review of our legal education system. In recent years we’ve had work-based learning pilots, reviews of QLTT, a review of the LPC – but it’s not enough. We have to work out what we need, how we can provide it and how we can equip tomorrow’s lawyers to compete with the very best that the rest of the world has to offer – and we need to do it not as solicitors, barristers or legal executives, but as a single legal profession comprised of many parts.

Alternative business structures

And what of alternative business structures? A great deal of time, effort and news ink has been expended on the potential consequences of ABS. Some believe that we should speed up, others that we should slow down. Some extol the opportunities that they will bring, others the dangers that await. So are we moving too fast towards ABS, and do we have anything to fear from them?

There’s no question that ABS are a big innovation. As with any new form of business structure, the profession will take time to adapt. Takeup may not be quick. There is unlikely to be a rush to invest in law firms. They may not have the instant transformative impact that many appear to expect.

Similarly, the attraction of ABS may not be what we expect.

The legal market looks very different to when ABS were first envisioned. The downturn and the consequent need to cut cost has led to a proliferation of outsourcing and offshoring of legal activity. Within this context, we simply don’t know what the impact of ABS will be.

For example, there was talk that some finance houses would invest here in England & Wales and develop new business models – breathtaking in scope and innovation – and transform the high street. It looks now as if that money is destined for offshore enterprises where legal services online can be provided at much reduced cost.

So access to legal services will be improved, but is that the same as access to justice? Equity finance houses are on the prowl for suitable investment vehicles for the long term, but will suitable cases for acquisition really fall so easily into external hands, bringing management and status change to those who might like but probably do not need the money?

They know something of this in New South Wales. They have had their own version, called incorporated legal practices, since the first half of the last decade.

Since incorporation became possible in 2004, the great majority of firms who have chosen to incorporate have been SMEs, who did so in order to limit liability or share equity with family members for tax purposes.
Nowadays, virtually all new firms choose ILP status. It reduces PII costs as well as liability. Pre-existing firms have been more cautious, both for tax reasons and because they were already gaining the benefit of reduced PII through other means.

Amongst ILPs, there are only a handful of multi-disciplinary practices – 17 out of around 900 – largely because the obligations of lawyers are applied to everyone in the partnership, whilst the main benefit, legal professional privilege, applies only to lawyers.

What was most startling from my conversations in Australia was the utter lack of concern about the listing of law firms. Since incorporation became possible, only two firms have listed on the Australian Stock Exchange, for fairly specific reasons associated with their individual business models.

The big questions which have troubled many people in England & Wales have been easily overcome. The firms in question held extensive discussions with the legal authorities about their ethical obligations and settled fairly quickly on an agreement which ranked the firms’ duties in the prospectus documents. This clearly indicated to shareholders that as far as the firms’ duties are concerned, they are at the bottom of the heap, below duties to the court and duties to clients.

The main concern was voiced by the Stock Exchange – about whether a firm would be able to disclose market sensitive information. As it turns out, recent events over the Vioxx case have quelled their worries. Overall, they do not believe that there is a single issue which is unique to a law firm which cannot be dealt with.

This isn’t to say that we have nothing to worry about. Part of the reason that listing and other forms of incorporation have proven so uncontentious is that control over access to the profession is much tighter than in England & Wales, and that there are countervailing restrictions on advertising and referral fees.

It was also suggested that we are doing things the wrong way round by allowing external investment first and only then, possibly, listing. Steve Mark, the Legal Services Commissioner of New South Wales, holds the view that the only law firms which would be able to list would be those with a brand name, which would provide some protection against unethical conduct or other wrongdoing.

At the same time though, I am convinced that we have nothing to fear from ABS. As President, I have spent a great deal of time in conversations with other Bar Association Presidents encouraging them to liberalise their markets and to open up to foreign competition. We do this because there are advantages to competition, but also because we have absolute faith in our ability to compete. As a profession, we have never feared competition and we should not start now.

I understand that many are worried about the impact upon access to justice, especially in rural areas. We have to build safeguards to defend against this, but we shouldn’t rush to judgment on the back of an apocalyptic worst case scenario. As we have already seen in Australia, things don’t always work out how we expect. In fact, it is arguable that access to justice in rural areas has been improved in Australia due to the expansion into the country of Slater & Gordon – funded by the fruits of having listed on the Australian stock exchange.

The Legal Services Act has created some threats for those businesses with a static business model – but we far too easily overlook the opportunities that it has presented. The ability to partner with other professions isn’t something to be scared of – it’s something to be embraced. It presents new opportunities where they did not hitherto exist.

Ultimately, we should not and we cannot deny our clients the choice of whether to use an LDP or an ABS if there is no evidence that they threaten justice. Concern about the legal ecosystem does not mean a rejection of change – it is about understanding and preserving the checks and balances in the face of change.

Conclusion

The strength of the common law is that it is clear enough to provide predictability, yet adaptable enough to move with modernity.

The legal profession is cast in a similar mould. We are not and have not ever been afraid to change, but we must also pay heed to the value of what we have previously had.

The Act was designed to simplify a system of regulatory oversight which was over-complex and inconsistent. Instead, it has maintained a profusion of separate regulators and blurred many of the boundaries between them. There is simply no evidence from any field of human endeavour that supports the idea that “adding complexity can create simplification”.

The Act was designed to ensure that representational functions within professional bodies were separated from regulatory functions, but that doesn't mean that regulation should be divorced from the profession, or that outcomes focussed regulation can be concocted without considerable consultation with ordinary solicitors. In implementing OFR, can the Regulator meet the challenge of culture change demanded, and in the time demanded. And at what cost?

The Act was designed to increase competition, flexibility and choice. So is the consumer going to get a good deal? Not if the profession is forced to pass on the inflated cost of an increasingly unwieldy regulatory system, and not if the means of delivering access to justice have been compromised as a consequence.

In the rush to build a new world, the perception of a loss of independence must be reversed. It requires cooperation between solicitors, barristers, legal executives, legal educators and, yes, judges – and it needs Government in time to use the opportunity of a new start to look afresh at the arrangements which govern the profession.

No regulator can regulate without the consent of the regulated, and right now the Legal Services Board is failing to carry the profession with it. It must slow down, look around and take stock of all that has happened before heading full tilt into a future that none of us can predict.

The solicitors’ profession must also protect itself from the forces around it. It must renew its ethical commitment and reassess the educational needs of the future. Nothing less than a comprehensive review of the needs of the domestic and global markets will do.

And on ABS, I say this. We have nothing to fear provided that there is a level playing field for all firms.

Over the last few years, the profession has been swept along by the tide of reform, yet we find ourselves facing a new set of problems, every bit as potent as those that we have been trying to cure.

We cannot and should not attempt to roll back the years, but it is time that we took another look at where we are and where we want to be.

Robert Heslett is President of the Law Society of England & Wales

This address, delivered on 25 May 2010, is reproduced with permission