John Wotton, president, Law Society of England and Wales, 24 January 2012
Thank you Professor Endicott, (Timothy), and Said Business School for hosting this occasion. I understand that the business school's stated purpose includes the study of how “businesses appreciate the rules of the game...through entrepreneurship and innovation” a subject which is particularly relevant to the legal profession at this time.
I welcome the opportunity this evening to lay out some thoughts on the implications of changes affecting the legal profession in England & Wales, which are driven by the Legal Services Act and by a range of market forces.
I start by making some observations on the current structure of the legal services market, viewed from the perspective of the solicitors' profession. Then I turn to the interactions between solicitors and other providers of legal services - in short, I shall ask: are we looking at fusion or fission?
Finally, I shall discuss a number of issues regarding the maintenance of professional independence and standards under the new regulatory structure, noting their importance to the standing of the legal profession at home and abroad and its ability to perform the vital function of lawyers in our society.
My thoughts are based upon my thirty five year career in what is now a very large international City legal practice, where I have practised chiefly, in the fields of regulation and competition law, capped by the experience of the past three years holding office in the Law Society.
My thoughts are my own and occasionally they may not sit squarely with Law Society thinking!
I am delighted to have been joined by such a distinguished audience and make no claim to have the definitive answer to any of the questions that I pose tonight. I hope that you will share your thoughts and questions at the end.
A longer paper is available developing my thoughts on tonight's subject – and is what I would have said given rather more time!
Structure of the Market
Let us first examine the market.
A look at the legal services market in England and Wales shows us 125,000-odd practising solicitors, providing 80-90% of legal services in this jurisdiction, not to mention a healthily high proportion of legal services provided to global business.
We would see three quarters of those solicitors working to serve consumers and business through around 11,000 regulated practices, with the remainder working in-house.
Clients are served through small, local firms and by larger firms, some using internet-based or other forms of marketing, and some paying referral fees, to generate a high volume of cases which can be undertaken at a relatively low unit cost.
We could compare the business models of larger regional firms undertaking corporate work with specialised boutique firms attracting high net worth clients, both domestically and from overseas, and in-house legal practices serving their employers in the public, corporate and third sectors.
If we choose to focus in on the City, we would see the largest practices with their international office networks and client base and noted that some of them now have a minority of English-qualified partners and fee-earners and generate most of their revenues abroad.
We could also examine foreign law firms, barristers, licensed conveyancers, notaries and the other specialised professions in the market too.
Fusion or Fission – will Solicitors remain a separate profession?
(i) Barristers and solicitors – drivers of change
In fact there is a fallacy in the description of the legal profession I have offered so far, because there are now few restrictions on members of the separate legal professions practising together in partnership or other permitted business structures.
There are already 62 mixed solicitor/barrister practices, which can provide advocacy services in courts and tribunals where a member or employee of the firm has rights of audience and can also provide the practice-based final stage of training for both professions; training contracts and pupillage.
One is forced to ask: what implications can we expect this change to have on the future development of these two great, separate pillars of the English and Welsh legal system?
It is worth noting that the barrister/solicitor division, which was originally based on higher court advocacy being reserved to barristers and the conduct of litigation (and some other non-contentious legal services) to solicitors is unknown in the civil law world and increasingly anomalous in today's common law world, surviving in a handful of jurisdictions internationally.
With solicitors gaining higher court advocacy rights, one of the key functional planks supporting the division of the profession by two separate titles has already been removed.
There must be competitive advantages and efficiencies to be gained from having the full range of dispute resolution services under the same roof.
It is not unreasonable to assume that, for publicly-funded work, the Legal Services Commission and its successor agency will drive suppliers in that direction; informed purchasers of privately funded services might come to the same conclusion.
A number of corporate law firms have recruited experienced barristers. This seems entirely rational, for it is unlikely that the international commercial success of UK corporate firms has been achieved because, rather than in spite of, their lacking the trial advocacy capability of their US competitors.
The concern on the part of the Bar to adapt their traditional structure to compete more effectively for legal aid contracts and other work appears to be a recognition of this imperative.
Given the multiplicity of providers in the market, additional costs and conflict of interest questions I ask myself, does it make sense to establish additional structures such as 'ProcureCo' to enter into legal aid contracts, procuring advocacy from the members of chambers and litigation from solicitors, when any mixed solicitor/barrister, SRA-regulated practice, can provide an integrated service?
The current Chairman of the Bar Council is right to recognise the vulnerability which the Bar experiences, as a referral profession and respond by identifying tways in which more direct access to clients might be achieved, but this might be stretching the chambers model of practice to breaking point?
(ii) Will the two professions remain separate?
I suggest that now is the time to consider, realistically, the long term future of our two professions, as currently divided.
In the short-to medium term, I expect to see more barristers practising in SRA-regulated entities and more higher and lower court advocacy undertaken by the barristers and solicitor advocates of the firm conducting the litigation.
It is not unreasonable to expect to see more barristers undertaking their pupillages in such practices and I would suggest that joining such a practice, as a salaried employee, could be a more attractive way for an aspiring advocate to start his or her career than embarking on a pupillage in a set of chambers.
In this environment of mixed practice, it is necessary to reconsider the extent to which the education and training of the two professions should continue to separate at the postgraduate stage
The disparity between the numbers of students undertaking the BVC and the far smaller number who find pupillage is striking. Many students who have done the BVC, and some who have completed all or part of their pupillage, ultimately qualify as solicitors.
It might be more useful for all concerned, for a common postgraduate training course to have the capacity to prepare an aspirant lawyer for either profession.
Similarly there are advantages to be gained from going one stage further and adopting a training model offering flexibility for trainees to move on into advocacy or transactional practice, depending on their particular modules of study and application.
For mixed barrister/solicitor practices, this would seem eminently sensible
A law firm with a strong litigation and advocacy practice may choose to take a group of new recruits who have completed the common postgraduate course providing them with an integrated training/pupillage.
In due course those best suited to advocacy would emerge and receive sufficient advocacy training to secure higher court rights, while others would receive the training necessary for litigation or non-contentious work.
This model is capable of operating in the context of a fused profession, or one which remains divided by professional title, albeit at the expense of some of the current traditions of both professions.
This does not preclude the final stage of professional training from being undertaken in organisations which looked only towards traditional barristers' or solicitors' work, but would facilitate a significant proportion of advocates gaining their training in SRA-regulated entities, with some moving to the independent Bar at a later stage of their careers. It is not a novel idea, it is the way in which Scottish Advocates have for many years begun their careers.
It is on the other hand particularly at the more experienced and specialised end of the advocacy market that economic and public interest considerations favour the existence of an independent, referral-based Bar, whose services are potentially available to all law firms and their clients.
I assume, however, that the two separate professional titles of barrister and solicitor will survive for the foreseeable future, if only because there is no strong current of opinion in favour of fusion. The Bar has a well-established, relatively low-cost model for its traditional work, from which it will not lightly depart (though I harbour doubts about the long term sustainability of the low fees charged by junior barristers in some cases). One might, however, envisage a time at which the distinction between barrister and solicitor is more a matter of tribal culture than function.
- But all could aspire to both roles.
(iii) Should the regulatory structure change?
What then is the most appropriate regulatory and representational framework for the environment in which they will practise?
As the SRA rightly point out in their recent response to the LSB's consultation 'Enhancing consumer protection, reducing regulatory restrictions', there are three dimensions to regulation of legal service: by professional title, entity and function.
As between barristers and solicitors, there is overlap in respect of both entity and function.
It is only in point of professional title that they remain fully separate. I ask myself, does this justify the retention of two separate regulators and codes of professional conduct, with all the complications this brings to mixed practices?
In its response to the LSB, the SRA asks whether it is in the public interest to retain the Legal Services Act model of an open set of separate approved regulators, based initially on the pre-existing professional bodies, but open to new entry and exit (by merger or otherwise).
The issue which seems to concern the SRA is that of regulatory competition leading to a 'race to the bottom' in terms of cost and standards. Nevertheless, as the financial crisis has demonstrated, neither weak regulation nor fragmented regulatory responsibilities are necessarily in the public interest.
The Law Society naturally welcomes the SRA's aspiration to regulate as much of the legal market as possible. It is in the interests of the solicitor's profession and the public, that they succeed in doing so.
Competitive discipline requires each profession to make its combined representative and regulatory offering as attractive as possible, so that the value of the profession's reputation outweighs the cost of regulation and the profession is attractive to new entrants.
This is a reality, for it is not so long ago that a number of City law firms, raised the prospect of forming a separate regulator for large corporate law firms.
There are public interests at stake, for the rules of practice and client guarantee differ substantially as between regulators.
For example, if the Bar is going to offer direct access to lay clients, considerable change will be needed for barristers to provide a consumer guarantee which matches that offered by solicitors (for example in terms of the information to be provided to clients, accounting rules, scope of PII cover and compensation fund, to name but a few).
What implications would a change have for the balance between professional independence and public accountability which lies at the heart of the middle course between traditional professional self-regulation and public accountability and oversight adopted by Legal Services Act?
There are, I suggest, two respects which would tilt the balance away from professional independence.
One is that, the less direct the connection between an Approved Regulator and a single professional body (of which it forms part) the harder it will be to maintain the regulator's line of accountability to the regulated profession for its standard of performance and efficient use of resources.
The other is that in our legal system, the ability to choose between more than one professional title and regulator (and even for a group of practitioners to bring about the establishment of a new regulator), are facets of lawyers' professional independence.
My own tentative conclusion is that the balance of the argument lies in favour of maintaining the model of a number of regulators, based currently (but not immutably) on professional title. One could envisage a merger between the SRA and Bar Standards Board, without losing either the distinct professional titles of barrister and solicitor, or the separate professional bodies of which they are respectively members.
The advantages? A single code of conduct for areas of overlap, such as advocacy, conflicts of interests and rules regarding entities. But the costs – of initial integration and of long term loss of competitive stimulus - are likely to outweigh those benefits unless mixed practices of barristers and solicitors became so prevalent that separate regulation can no longer be justified.
(iv) Will there be other mergers or splits among the legal professions?
There is no strong imperative for other changes to the structure of the legal professions and their regulators at present.
The idea of dividing the solicitors profession into corporate lawyers and the rest, and the related suggestion of creating a separate regulator for corporate law firms and the lawyers who work in them has always seemed seriously flawed - although one can understand the frustrations on the part of the managers of some firms, which led to these suggestions being floated.
As the SRA found, when trying to draft a distinct rule on conflicts for corporate firms, the truth is , as Algernon observes in The Importance of Being Earnest 'rarely pure and never simple'. The difference between corporate and other work is hard to tie down and mixed practices are more numerous than 'pure play' corporate practices.
Neither separate qualification nor separate entity regulation on this basis would assist clients. It would be an approach to professional organisation without international precedent, so far as I am aware and I am sure it would be very unpopular with solicitors who, on the whole, value the unity of the profession.
There is occasional speculation on whether any of the other approved regulators will merge. I doubt this is likely in the near future. One could make a case for members of the Institute of Legal Executives being regulated by the SRA, on the grounds that most of them work in SRA-regulated entities. Equally one could make a case for ILEX and the Council of Licensed Conveyancers merging, particularly if ILEX Professional Services gains entity-regulating powers, as the typical areas of work of their respective members are neatly complementary. No doubt, if material cost savings or reputational advantages were identified for any development of this kind, the bodies concerned would consider it seriously, in the interests of their members.
I turn now to professional independence and standards
(i) Criticisms of the Legal Services Act
The twin innovations of the Legal Services Act were in the structure of regulation and to ownership and management of law firms. The linked topics of professional independence and professional standards, which lie at the heart of the many criticisms levelled at the Act, home and abroad.
My paper lists many of those criticisms. They shouldn't be dismissed out of hand. They raise legitimate grounds for concern, and require an answer.
I will spend the next ten minutes or so discussing them.
(ii) Lawyers' independence from the State
There is no doubt that, to sustain the rule of law in a democracy, there must be a strong and independent legal profession, specifically one which is independent of the State.
It does not follow, though, that this independence overrides all other considerations, to the extent of preventing society from specifying, through legislation, the services and broad standards expected of its legal profession. Society must have means of holding the profession and its regulators to account for delivering those objectives. The LSA provides a means of doing just this and was enacted through a legitimate democratic and parliamentary process.
The Act contains many safeguards against government influence over the legal profession:
professional bodies are responsible for appointing and resourcing the approved regulators;
the public accountability of the approved regulators is to the LSB, not to government;
the powers of the LSB are generally limited to oversight so as to secure performance of the regulatory objectives of the Act;
and although members of the LSB are appointed by a minister, they are independent individuals.
It cannot seriously be suggested that the ability of any lawyer to practise, or of any group of lawyers to form a practice, could be compromised by politically motivated considerations as a result of the creation of the LSB.
To eliminate the LSB and thereby make the approved regulators responsible directly to the Ministry of Justice would be a severe setback for professional independence.
A more robust guarantee of the independence of LSB from government might be secured if its members were to be appointed by an independent commission - including representatives of civil society, the judiciary and the legal professions, as well as a minority of ministers or officials.
This benign view of the LSA regulatory structure, however depends upon two behavioural considerations. The first is that the LSB recognises the limits of its statutory remit and the Parliamentary expectations underlying that remit. The LSB should not seek to direct the activities of the approved regulators except where necessary to ensure delivery of the Act's objectives. Nor should it seek to function as a standing legal services reform commission. Its role is not to reorganise the legal market, nor is it the economic regulator or competition authority for the legal sector.
The second is that the approved regulators recognise those limits and assert their right (and, I would suggest, duty) to act independently of the LSB. There have been times over the past three years when one has wondered whether the approved regulators are bending too far towards the will of the LSB.
More recently, thought, there have been encouraging signs of them finding their feet and asserting their independence, for instance by the professional regulators taking control of the review of education and training.
The Ministry of Justice's current triennial review of the LSB (and Legal Services Ombudsman) will provide an opportunity for interested parties to comment upon the performance to date and future role of the LSB, and the Law Society will submit its views.
I would observe that the LSB has played a highly active role in preparing for the changes made by the LSA, such as regulatory separation and the licensing of ABS. Now these preparations are complete, it might be suggested that the role of LSB would naturally reduce to one of monitoring performance against the regulatory objectives and responding to regulatory innovation.
Indeed, one might reasonably question whether, once regulatory separation has been achieved to the satisfaction of the LSB, any public purpose is served by the need for approved regulators to submit rule changes to the LSB for approval. There are signs of the LSB taking an unduly detailed approach to oversight of the approved regulators, for instance in the prescriptiveness of the LSB's internal governance rules, designed to secure the independence of regulatory decision-making from representative considerations and in the detailed requirements imposed on Approved Regulators to self-certify compliance with these rules.
In some respects, these requirements have gone back on matters which were widely understood to have been settled in the course of the debates on the Act, such as the ability for the regulatory boards to have a lawyer as chair and a majority of lawyer members. The LSB's current approach could, in my view, undermine professional independence.
(iii) The unique culture of the legal profession
I now turn to the assertion that the introduction of business ownership and management into law firms will undermine the profession's culture of independence. Solicitors have always been free to form partnerships, which are businesses.
Over time these partnerships have grown, become more professionally managed and evolved into a variety of corporate and quasi-corporate structures, with in some cases non-lawyer participation in ownership and management. Their structures have, as might be expected, developed to accommodate the many complexities of multinational partnership.
It may fairly be said that UK firms have led the way in developments of this kind.
Coming as I do from one of the largest and most international City practices, which has during my career gone through all stages of evolution from conventional, single office partnership to a global, professionally managed business I find surprising any suggestion that there is a necessary conflict between running a firm as a business, for profit and the ethics and values of the legal profession.
On the contrary, I think lawyers owe it to themselves, their employees and their clients to run their practices in a thoroughly professional, businesslike way. Lawyers, as managers and owners of a business, are not in my experience less demanding of performance than any other executives or providers of capital. Lawyers have no monopoly over professional and business ethics; many other professional activities are carried on in this country, under a variety of types of external ownership without convincing evidence of compromised standards.
Lawyers are not a caste apart. They are providers of professional services, in common with many other groups in society. Their role in our democracy demands that their independence from the state be secured, but that does not prevent their association in business with other professionals or capitalists in the organisation of the businesses which provide those services.
Compliance with professional standards and prevention of fraud are matters to be addressed by regulation and monitoring. At this stage one can say that all the foreseeable risks inherent in ABS have been identified and measures taken by the SRA to ameliorate and manage them. I hope that these measures will prove to be sufficient, but the principles underlying them are all sound; a common code of practice, a single disciplinary system, a single compensation fund to protect consumers and careful review of non-lawyer participants backed by regular reporting.
I anticipate the courts playing a significant role in addressing conflicts issues that arise from external ownership, and our adversarial system of litigation is well-designed to cope.
(iv) Competition and access to justice
The final criticism I wish to address concerns the potential for ABS to out-compete smaller firms and the effects this may have on access to justice.
I will start by saying that I do not think that predatory pricing is feasible in our legal markets. Whatever competitive advantages new entrants may have, it will not be worth their while pricing legal services below cost; costs of entry are sufficiently low that any subsequent attempt to recoup by raising prices above competitive levels will be thwarted by new entrants coming into the market.
ABS have no magic bullet in competitive terms.
Some potential ABS entrants have the advantage of a well-known brand or existing, nationwide customer connection, but they will have to invest to establish their reputation in the legal market and recoup that investment.
In the very long term, if big brands capture most of the consumer market, it is possible that barriers to entry will rise, but I do not think that eventuality very likely.
Large scale and low cost do not always march hand-in-hand. There is substance in the proposition that small businesses can offer consumer services at lower cost and respond faster to changes in the market.
I have no doubt that well-managed firms will continue to thrive in the more competitive legal markets of the future, and it will be no mean feat for new ABS entrants to displace them. It is, however, important that the government's laudable proposal to ban referral fees in personal injury cases does not have the unintended result of making it harder for small practices to compete with big ones, by placing unnecessary restrictions on joint advertising.
It should not be assumed that ABS practices will confine their activities to consumer legal services such as conveyancing and will writing, delivered at high volume and low unit cost. ABS are likely to provide some of the legal services which are vital in ensuring individuals can assert and defend their rights against the State or organisations which are bigger than they. Consumer litigation, for example, is likely to be an attractive area for ABS. In contentious areas of practice, the need will remain, for a multiplicity of providers will remain to provide representation to all parties. ABS may well play a role, but are unlikely to displace a core of well-established current providers.
Contrary to some expectations, a major declared ABS entrant, Co-op Legal Services, has announced its intention of providing family law services, including potentially some provision through legal aid
It is imperative that the Legal Services Act reforms are successful, so that the profession can continue to serve society effectively and maintain its international standing (on which many economic benefits to this country depend). We cannot, in the final analysis, expect the rest of the world to take our innovative approach to legal services on trust and will over the course of time have to demonstrate that the changes are benign, or even beneficial.
Conclusion
I do not underestimate the significance of the changes that have been made under the LSA to the traditional structures and organisation of the legal profession in England and Wales or the potential for market forces to do the same, however peering into the crystal ball I do not expect them to transform the profession immediately. Rather, I think that the new modes of practice will increasingly challenge the norms under which lawyers practise under the separate titles of barrister and solicitor.
I believe this development will lead inevitably to the need to revisit the question whether these two professions should continue to be separately trained, represented and regulated, as they have been for the past 180 years. I envisage the time coming when the barrister/solicitor distinction will be more a decorative than a functional aspect of our legal constitution.
The regulatory structure established under the LSA is capable of performing satisfactorily in the face of the changing market environment, but aspects of the structure have to be kept under close review, to ensure that the essential independence of the legal profession is not compromised.
The effects of introducing external capital and management into legal practices will emerge over a number of years, as existing practices explore the new commercial freedoms in different ways and new entrants invest in establishing their reputation. The effects of these changes will chiefly be felt in the consumer market, but there will inevitably be knock-on effects for corporate and mixed practices. Some firms who advise businesses are reported to be among the initial group of ABS applicants, though it is unclear at this stage whether their plans are potentially transformative, rather than merely technical, in order to retain non-lawyer partners.
The number of independent practices will reduce, but the best will compete successfully in the new environment
Overall, the public's demand for legal services will be met and to equally high standards. It would be surprising indeed if the legal sector did not continue to grow, as it has consistently in the past.
The scope for such growth will continue overseas and the continued international success of our corporate law firms will remain as vital as ever. The threat which ABS, as implemented under the LSA, poses to the international standing of our profession cannot be ignored and is likely to deter international firms from ABS for some time. Nevertheless, because the foreseeable risks have all been properly addressed and there is a regulator in place with the resources and expertise to manage those risks, it is reasonable to hope that the scepticism of our critics at home and abroad will in time be overcome.
I would be surprised if 'full' ABS remains for long an innovation confined to England & Wales.
Thank you.