American Bar Association:
Section of International Law
John Wotton, president, Law Society of England and Wales, 19 April 2012
Thank you Stephen and Justin, and to SIL and the International Law Practice Management Section for inviting me to speak this morning.
I speak to you today wearing two hats - firstly as the president of the Law Society of England and Wales, and secondly as a consultant to the international law firm, Allen & Overy.
Common values
What has struck me most strongly from my many visits to firms in my presidential capacity is that fundamentally the same standards, values, ethics and professional ambitions are evident in small high-street law firms as in large international practices.
Of course the large, profitable firm has many more options and resources available to it, but the approach to client service and successful competition is essentially the same.
Successful law firms in all corners of the market have lot in common. Just as Leo Tolstoy observed at the beginning of Anna Karenina, 'happy families are all alike, every unhappy family is unhappy in its own way'.
Successful law firms are all alike in rather fundamental ways: adherence to professional values; their attitude to their own people and to their clients; and their open-mindedness and willingness to adapt to changes in the market, whether on the demand or the supply side.
This last point; the foresight to anticipate and willingness to adapt to changes in the market and opportunities which those changes create is perhaps the most important.
A firm which is flexible in this sense will adapt its business model, allocate its resources carefully and be innovative in its service provision, at the right time, and thereby maximise the opportunity to capitalise on the skills and talents of its lawyers.
Challenges of change
In these times the changes to which law firms must respond are too numerous to mention. The pace and multi-dimensional nature of change in a globalising legal market represent the greatest challenge to law firms throughout the world.
I could cite, for example:
- The emergence of new types of legal service, resulting from anything from changes in legislation or individuals' ways of life, to adapting for the legal sector new service delivery models developed in other industries;
- changes in the ways in which clients wish to have legal services delivered;
- changes in the skills and talent pool available to the legal sector, or in the competition for that talent;
- growth in the provision of outsourced services, locally or globally; and
- economic factors, such as (i) patterns of growth and relative decline in different countries and regions, and (ii) changes in relative costs in different countries (iii) trends in government expenditure on legal services, or the court system, or in individual incomes or corporate profits; and (iv) the emergence of new business, financial and dispute resolution centres and the decline of others.
We have seen over recent years how dramatically and rapidly such factors can affect demand or legal services, in fields as diverse as banking and capital markets, corporate m & a and what in England we call 'residential conveyancing' – the transfer of title to homes. Demand in all these fields has collapsed since the financial crisis, for a longer or shorter period.
A firm which is inflexible, ignoring changes like these that are going on around it and simply trying to carry on as it has always done, is likely to be set on the slow road to oblivion.
Indeed, its situation may be worse, for if the firm has invested heavily in a business model based on the status quo, it may get into financial difficulty if circumstances change. As we have seen in England, firms have failed for this reason.
Globalisation of legal services and the international expansion of law firms
We have seen the progressive, ongoing internationalisation of the legal services market, a trend which is likely to continue. This process of internationalisation has at least three dimensions, all of which present growth opportunities to law firms;
They include the ability to provide services cross-border, whether remotely or in person, the ability to establish in other jurisdictions and, no less important, the ability to source inputs to legal services internationally.
Indeed, when one looks at the whole area of outsourcing, whether BPO or LPO, in-jurisdiction opportunities may be as significant as cross-border ones. Also, we have seen, in my jurisdiction, City of London firms saving costs by establishing offices in satellite towns around London to service some of their transactions (equivalent to a Wall Street firm having some of its lawyers and back-office staff in New Jersey), keeping the work in-house, but executing it in a lower cost location; some like my own firm and one or two others, have gone a little further afield, by near-shoring in Belfast, N.I. (technically a separate jurisdiction, though within the UK).
Other firms in-source or outsouce certain inputs in cheaper jurisdictions around the world, like South Africa or India.
In terms of international establishment, we have seen the emergence of truly international practices, like my own, with offices in 40 or more jurisdictions. It is significant that investment in growing these global networks has continued strongly despite the financial crisis and that its focus has recently been weighted very much to the Asia-Pacific region, including the Gulf. In other words, international law firms are investing where growth is happening and it is surely the case that in many Asia-Pacific markets, the potential for growth in the legal markets is a good deal higher than in these economies as a whole.
In 2013 it is estimated that the global legal services market will be worth around £450 billion, increasing by 23% over 2008. In the UK, the market is worth £23 billion (5% of the global total, a good deal more than the UK's share of global GDP) and this represents around 1.8% of UK GDP. To take an economy like India, for example, legal services are worth only about 0.6% of GDP. It is reasonable to anticipate that, as the Indian economy grows and with it both domestic businesses and personal income and assets, the legal market will grow even faster.
Regulatory barriers to expansion
It is impossible to over-estimate the significance of the opportunity for growth in legal services that jurisdictions like India (and many other Asian nations) offer and the growth potential they present to international law firms. However, we run up here into perhaps the greatest barrier to growth in international trade in legal services, namely geographically fragmented and over-restrictive regulation of lawyers and law firms.
It sometimes seems that providers of other professional services, such as accountants, surveyors and architects, are able to establish in whatever jurisdiction they choose, whereas legal markets remain closed or heavily restricted to foreign lawyers. I well remember grinding my teeth in frustration when attending a reception given by UKTI in Delhi to celebrate the opening of a British architect's office there, at a time when there seemed no prospect of UK flaw firms being allowed to open in India.
Indeed, despite a hint of progress last autumn, the Indian legal market seems likely to remain closed for the time being. A new Chairman of the Bar Council of India has just been elected, who has announced 'Throughout we have been opposing the entry of foreign law firms and we still oppose it. If we have to allow the entry of foreign lawyers, it will be allowed only on the basis of reciprocity”. It is hard to discern how such protectionism serves the interests of the Indian public or business community.
The same may be said of Brazil, whose Bar Association has set its face against a proposed IBA resolution, of modest scope, which seeks to encourage greater international co-operation among lawyers. In many emerging markets, in fact, firms face barriers, whether it is in establishing, using their own name or employing local lawyers.
In the world's most successful jurisdictions, linked to the leading financial centres, the position is of course, rather different. Over 200 foreign law firms have established in London, (around half from the US). Some play in the domestic market, others confine their activities to foreign law. They have made the London legal market a lot more competitive, but they have also helped it to grow. I am sure that the same is true in New York.
Although entry of foreign law firms into the City of London, poses interesting questions for our regulator, as does the international expansion of UK firms, they are being addressed in a sensible way and we have benefited from an open market with light touch regulation for foreign law firms and lawyers
The Law Society has been active in the emerging markets I have been speaking of, working with our members, regulators and the government to lobby for the removal of barriers to practice for foreign law firms. We have been working on this with our counterpart, the Bar Council of England & Wales. The ABA has been doing the same for US lawyers and so, I believe, have the Australian professional bodies.
Restrictions at home
While we may draw a contrast between the relatively open legal markets in the UK and the US, we should not allow ourselves to think that we have reached anything like an appropriate system of regulation (or, indeed, professional representation) for a modern legal profession in a globalising world.
Regulation remains resolutely based on jurisdiction (three in the UK, with the possibility of a fourth, as Wales considers whether to create a separate legal jurisdiction), 50-odd in the US, which makes it harder for law firms to exploit even their national markets.
At the same time, a significant proportion of lawyers in the UK and in the US work in international practices, operating multi-jurisdictionally. There are bound to be avoidable costs and inefficiencies inherent in this disconnect between the industry and the regulatory structure.
Equally, the representative bodies are organised on, at most, national lines. While the ABA can at least represent all US lawyers, the Law Society can represent only English solicitors. I can only speak for the Law Society, but we recognise how limited our formal remit appears, in contrast to the wider interests of the firms in which our members work and we are addressing that in our corporate strategy. We would like to be the representative body of choice for international law firms, based on the investment we have made over many years in international expertise and lobbying. But our members represent only one component of the membership of the leading international firms and I would suggest that their interests can only be represented effectively through greater co-operation between bar associations and law societies internationally.
Although we have seen great strides made over recent years to enable international firms to practise in an ever-wider set of jurisdictions, we now face the risk that some on these gains will be lost, as a result of divergence in the regulation of law firm ownership and management. The recent liberalisation measures in England & Wales and the reaction by some other jurisdictions to them is a case in point.
REFLECTION ON LIBERALISATION IN ENGLAND AND WALES
I believe that liberalisation of the legal services market heralded by the Legal Services Act (2007) offers significant opportunities for lawyers and law firms.
Only recently our regulatory body, the Solicitors Regulation Authority (SRA) announced its first licences for Alternative Business Structures (ABS): which allow non-lawyers to invest in, own and manage law firms, while being subject to close scrutiny and the same regulatory standards as solicitors in England and Wales. This represents a significant innovation for our profession.
It is probably fair to say that it has been viewed with some scepticism on both sides of the Atlantic. But it opens new sources of external expertise and capital to law firms who are interested in innovation, growth and offering a wider range of services to their clients.
It is likely that, in the domestic consumer market, ABS will have a significant impact. It is too early to know if we will see significant inroads made by ABS into the corporate legal sector, but their implications will not only be felt in our jurisdiction. More than one substantial UK with international offices has announced ABS plans and published research indicates that significant numbers of major firms are considering such options.
However, UK firms that convert to an ABS may face barriers outside England and Wales.
The New York State Bar Association recently ruled against New York attorneys working for the New York office of UK ABS and the ABA's Ethics 20:20 Commission has this week withdrawn a modest proposal for liberalisation of ownership. We are following this development with interest and I have been meeting our counterparts at the New York State Bar and ABA to discuss its implications.
I do ask myself, however, whether that opposition will be sustained if ABS prove to be a success in our jurisdiction and in international competition for work?
If ABS prove that they can increase the competitiveness, range of services offered and profitability of English and Welsh law firms, might other jurisdictions not overcome their initial reservations, in the interests of their members?
SUPPLY AND RETENTION OF TALENT
I would like to conclude by raising briefly two other challenges facing law firms today, which I think are of some significance.
The first is the need to ensure that enough of the brightest and most ambitious people around the world choose to become lawyers and to remain in the profession once they qualify. We live in increasingly complex societies and have to meet the needs of ever more demanding clients in highly competitive legal markets. Inevitably, these developments raise the bar, in terms of the legal and business skills required to succeed as a lawyer and the cost of training to acquire those skills.
In my jurisdiction we have embarked on a comprehensive review of legal education and training, to ensure that it meets the needs of the modern world, in the face of evidence that it is becoming harder for those without social and economic advantages to join the profession. There seems to be recent evidence in the US that fewer of the brightest undergraduates are going to law school. There is incontrovertible evidence that many fine women lawyers are leaving the profession, or failing to advance in their careers. We need to address all these issues if the legal profession is to discharge its mission to society as it should.
ANTI-PROFESSIONALISM
My second (and last) issue is that of governmental assaults on the legal profession and its independence. We cannot realistically expect that lawyers will be popular with government, or that we will rank very high in the affections of the public at large. We can, however, expect that governments will respect the essential mission of an independent legal profession in a democratic society.
I have no objection in principle to a State setting out in legislation what is required of the profession, as we have in England and Wales, but I do object to legislative and regulatory measures calculated to undermine the standards and independence of the profession. In my jurisdiction, we are seeing an anti-professional regulatory creep towards allowing vital legal services to be provided by those who have not qualified as lawyers, or imbued the ethical standards which underpin the service we provide to our clients.
In some other European countries, we are now seeing ill-considered measure of liberalisation being adopted, ostensibly as a result of the financial crisis and in some cases the terms of the bail-out by the troika, which have the capacity to undermine fundamentally the legal profession's independence from government. Our colleagues in these jurisdictions, which include Ireland, deserve our support in seeking a better outcome.
In the long term, these developments may prove to be some of the most difficult we face as we seek to serve our clients and sustain the rule of law.
Thank you