Anthony E. Davis ()
This article compares and contrasts the changes in the way that legal services are provided in England and Wales under the regulatory regime adopted there in 2007 with New York’s traditionalist approach.
After a series of public investigatory commissions, the British Parliament adopted the Legal Services Act in 2007. The act created a new regulatory regime covering all those authorized to provide “reserved” activities (e.g., drafting wills and deeds, and appearing before tribunals) by virtue of membership of one of the professional bodies. The two largest groups subject to the Legal Services Act are barristers and solicitors.
By way of background, beginning in the 1990s, two quite separate forces gathered steam toward the restructuring of the English legal profession. First, there was considerable and ongoing public outcry that the self-regulatory mechanism for disciplining solicitors was failing adequately to protect the public. Second, the authorities responsible for addressing antitrust practices within the wider British economy began to focus on the many ways that the traditional structure of the entire legal profession stifled competition and maintained the cost of legal services at an unjustifiably high level. By the mid-2000s the government of the day, after reviewing the reports of the various investigatory commissions, concluded that dramatic changes were needed in how all the constituents of the legal profession in England and Wales (principally, but not exclusively, solicitors and barristers) should be regulated. Those changes were incorporated in the Legal Services Act.
The act changed the regulation of lawyers in two fundamental ways. First, it completely restructured the regulatory framework—establishing entirely new agencies that would henceforth be responsible for overseeing the various components of the legal profession, and a new approach as to how regulation should be accomplished. At the heart of these changes was the principle that legal professionals should be required to define their specific objectives as service providers, and to identify in detail how they planned to meet those objectives.
In turn, the goal of the regulators was to make sure that the service providers delivered on the commitments enshrined in their self-defined goals. This change is generally referred to as “outcomes-focused regulation,” and is modeled on precedents developed in Australia during the previous decade. It is premised on the idea that regulation that is reactive, and that focuses on punishing rule breakers, does little either to provide useful remedies to those actually harmed by “bad” service providers, or, looking forward, to improve the quality of services being delivered to the public.
Those changes, and their implications and lessons will be explored in a later article. This article will focus on the second fundamental change embodied in the provisions of the Legal Services Act—the establishment of an entirely new framework to encourage the development of innovative ways in which legal services might be provided.
It may help readers to understand the thoughtful underpinnings of both of these changes in the English legal system to consider the objectives of the Legal Services Act, set out in straightforward language in Section 1:
1. The regulatory objectives
(1) In this Act a reference to “the regulatory objectives” is a reference to the objectives of—
(a) protecting and promoting the public interest;
(b) supporting the constitutional principle of the rule of law;
(c) improving access to justice;
(d) protecting and promoting the interests of consumers;
(e) promoting competition in the provision of services…;
(f) encouraging an independent, strong, diverse and effective legal profession;
(g) increasing public understanding of the citizen’s legal rights and duties;
(h) promoting and maintaining adherence to the professional principles.
It is assumed that American lawyers would not find surprising, and would support and agree with subsections (a) through (c) and (f) through (h). It is in subsections (d) and (e) that controversy arises on this side of the Atlantic. Before exploring how effect is being given to these two subsections, one comment is worth making. It is notable that subsection (d) refers not to “clients” but to consumers. The significance of this word in the context of the present discussion is that it denotes a recognition that the public—consumers of legal services—have a right to expect that their interests will be adequately protected by the new regulatory regime. But perhaps even more important, is the fact that both of these subsections immediately follow subsection (c) improving access to legal services.
As we shall see in our discussion of the actual developments on the ground in England and Wales since the adoption of the Legal Services Act, that objective—often echoed by leaders of the profession in the United States, including New York’s own chief judge on many occasions—has been and is being demonstrably accomplished in ways unheard of in the United States, and impossible under our traditional regulatory structure.
The critical change that subsections (d) and (e) foreshadowed is that—subject to appropriate regulation—legal services can be provided by entities that include non-lawyer investors and owners, and non-lawyer partners. These entities are known as Alternative Business Structures (ABS’s). The first ABS’s were approved to operate in March 2012. As of the date of writing this article, 266 such entities have now been approved and are operating.1
In reviewing the kinds of enterprises that have sprung up, it is critical to recognize and acknowledge two things. First, the application process for approval to set up an ABS is rigorous, and involves detailed and careful scrutiny by the regulators of the proposed venture and everyone involved (both lawyers and non-lawyers, all of whom have to pass the equivalent of a character and fitness review). Second, once the entities and its constituent investors or owners have been approved, the provision of the legal service component of the services to be provided by the enterprise must at all times be under the direct and complete control and continuous supervision and direction of a lawyer, and must be governed by and subject to the equivalent of the rules of professional conduct at all times and in every way.
In “More for Less,” an article by Neil Rose appearing in the Financial Times on October 4, 2013, the author describes four basic kinds of entity that have been formed:
• “those created by smaller but traditional law firms seeking to bring non-lawyer members of staff into ownership;”
• some big “movers” into the mass (“consumer”) market for legal services;
• corporations seeking to turn their legal departments—previously “cost” centers—into profit making ventures; and
• firms combining technology and new business models to provide corporate clients with “fixed price annual contracts and…a new model of outsourcing without the need for panels of law firms…”
Simply by way of example, The Co-operative (a chain of supermarkets) was “the first mover” into the mass market for consumer services, but others have followed. For instance the “AA” (the UK equivalent of the American Automobile Association), has established its own ABS. This model—often derided in the United States as “Walmart Law”—has enormous implications for improving access to justice.
Imagine that there is a small office between the photograph counter and the pharmacy at your local supermarket, or can be accessed by calling or emailing the AAA for assistance with automobile related problems, where customers can get standardized legal services—consumer law assistance, wills, house closings, some kinds of family law advice and assistance—at standardized and fixed prices, subject to quality control and risk management across the brand. Is that approach likely to provide a higher or lower quality of service, and to more or fewer members of the public, than that which is likely to be provided by lawyers with little or no expertise or supervision performing 50 pro bono hours per year?
As the same article notes, “BT (formerly British Telecom, a UK equivalent of Verizon or ATT) captures another strand of these changes, turning a cost cent[er]—the in-house legal team—into a profit cent[er] by offering services, mainly around motor claims, to other companies.” In other words, if a company has a fleet of trucks, the ABT will handle all the problems for it, without the company having to employ and manage either an in-house legal team of its own, or a panel of different law firms.
The article highlights Riverview Law as “one of the most eye-catching new entrants to the market” as an example of a firm offering fixed fee services to corporations, and as an example of “[w]hat marks out many of these new ventures [namely]…the ability to rethink the law firm model—Riverview has no partners, no billable targets, and recruits people for jobs previously unknown to the law, such as project manager or data analyst.”
The article rightly points out that “ABS is no panacea. A… listed online conveyancing ABS called In-Deed bought a law firm as part of its bid to change the way that market operated and threw in the towel earlier this year, selling back the law firm to its founder for £1. ABS is also not a strategy in itself. It is a means to an end. That end, almost certainly, will leave lawyers in a very different market to the one they inhabit now.”
The question we in the United States need to ask is whether these developments would enhance the range and quality of services, at competitive prices, to clients (or “consumers”) whether individuals or large corporations, if available in the United States?
But of course that question is, for the present at least, purely theoretical, when it comes to New York. By contrast to these developments in England and Wales, New York’s regulatory system—like that in place in all of the states (with the partial exception of the District of Columbia)—absolutely forbids sharing fees or entering into partnership with non-lawyers. Indeed, the New York State Bar Association Committee on Professional Ethics, in its Formal Opinion 911, issued on March 14, 2012, went much further, and explicitly concluded that “A New York lawyer may not practice law principally in New York as an employee of an out-of-state entity that has non-lawyer owners or managers.”
The only exceptions it found were if the New York lawyer was also admitted in another jurisdiction (such as D.C., where non-lawyer partners are expressly permitted) and principally practiced in that jurisdiction and not New York. If the opinion is a correct interpretation of the rules, then a New York-admitted and based partner in a national firm, with non-lawyer partners in its D.C. office, is in continuous violation of the New York Rules of Professional Conduct and, therefore, presumably subject to discipline. And the opinion explicitly prohibits such an arrangement with a duly constituted and regulated ABS entity in England.
This opinion, and the historical regulatory scheme on which it rests, raises many questions that deserve thoughtful answers based on an informed debate. Are our clients well served by this approach (and the multiple other anti-competitive, turf-protecting rules that operate in all of the states under the guise of the unauthorized practice of law, when even American lawyers seek to move among states to provide services to clients)? Is there any significance to the fact that (according to a recent press release by The Law Society, the English solicitors’ equivalent of the ABA) London law firms and other English legal service providers collectively earn more gross dollars annually from the provision of international legal services than New York firms? Further, is there any relationship between that apparent development and the changes underway in England and Wales?
If you were a client, and had the choice of obtaining high-quality legal services in a fully competitive marketplace where technology and investment in efficient delivery of those services are the norm, or in a market governed by a system where anti-competitive practices, and traditional fee structures are the norm, where would you take your business? Of course, there will be plenty of “local” New York work for the foreseeable future, but in an increasingly global economy, do our restrictive rules and regulatory structure—let alone Formal Opinion 911—continue to make any sense for the world in which our clients operate and in which we seek to practice?
Anthony E. Davis is a partner at Hinshaw & Culbertson, and is a past president of the Association of Professional Responsibility Lawyers.
1. A complete list of the firms registered so far may be found at http://www.sra.org.uk/absregister/ and by clicking on any of the listed entities a detailed description may be found of the kinds of activities each one intends and is authorized to engage in.