Conference on the Future of the Legal Profession and the Bar
St Petersburg, 16 May 2012
John Wotton, president, Law Society of England and Wales
Good afternoon. President Semenyako, I congratulate you on this jubilee conference in the beautiful and iconic city of St Petersburg. Thank you for inviting me to lay out some of my thoughts on the future of the legal profession in England and Wales.
In order to explain my views, I will first examine what the legal services market in England and Wales looks like today, offering a range of diverse services to domestic and international clients, and then consider the implications of the Legal Services Act (2007), which was an important piece of legislation that created new structures for the delivery and provision of legal services. The Act, in combination with a range of market forces is likely to have a significant impact on the future shape of the profession and the legal market within our jurisdiction.
A brief (it has to be brief) look at the current legal services market in England and Wales shows us 120,000-odd practising solicitors, all of whom are members of the Law Society, providing 80-90% of legal services in our jurisdiction, not to mention a substantial proportion of international legal services provided to global business. We also have over 10,000 practising barristers, most of whom are self-employed and operate on a referral basis. Solicitors and barristers together form the legal profession.
Three quarters of those solicitors work to serve consumers and business through over 10,000 regulated practices, with the remainder working in-house ensuring that legislation and regulation is applied. Our market has space for the business models of larger international, national and regional firms undertaking a wider range of corporate work and specialised boutique firms attracting both high net worth private clients, both domestically and from overseas. 25% of the market is represented by in-house legal departments, serving their employers in the public, corporate and third sectors.
The largest corporate practices with their international office networks and client base are headquartered in the City, which now extends over a considerably wider area than the traditional Square Mile. A number of them now generate most of their revenues abroad.
Our legal services market is diverse in its location, size, composition and services offered, but it is bound by the professionalism, specialised skills, cove of ethics and business acumen of our members.
The Legal Services Act (2007) introduced many changes to our profession, but it did not change that fact that there is a rigorous regulatory environment for solicitors in England and Wales or undermine their commitment to high standards, professionalism and a focus on clients and their needs.
The chief innovations of the Legal Services Act are in the structure of regulation of the legal profession and in the ownership and management of law firms. Non-lawyers were for the first time allowed to own, invest in, or manage law firms, allowing for corporate ownership or for law firms to seek equity investors. Multi-disciplinary practices are also now possible. This change is designed to enable a much wider range of legal and non-legal services to be provided to consumers by the same business. We call these two newly-permitted types of practice Alternative Business Structures, or ABS.
It is important to remember that no change in the individuals who can actually provide legal advice and representation flows directly from the choice of practice structure. Things which, in a law firm, must be done by a qualified lawyer, must also be done by a lawyer in an ABS.
ABS are unquestionably a significant innovation in legal practice, not just in this jurisdiction, but also when viewed from an international perspective. The degree of liberalisation of ownership of legal practices which has been permitted under the Legal Services Act goes way beyond what is allowed in almost any other country.
In my opinion, the introduction of ABS is not axiomatically either a good thing or a bad thing for our profession – they bring with them both opportunities and risks. The owners and managers of legal practices and those who wish to invest in them, will identify and pursue the opportunities which have been created by these new structures. In other words, the market will decide which structures are efficiency-enhancing and which are not.
The Law Society as a representative professional body, will do its best to ensure that the profession in England and Wales is fully aware of the options now available and the potential implications of change, so that solicitors can take the most rational decisions concerning the future of their practices and careers. We will also seek to ensure that other interested parties (both at home and abroad) continue to retain confidence in the exceptional legal services market that England and Wales offers.
It would be disingenuous of me to deny that there are no risks inherent in external ownership. Strict measures have been adopted by our regulatory body, the Solicitors Regulation Authority (SRA) to minimise and manage these risks. ABS are held to the same rigorous and robust high-professional standards as existing law firms and there are stringent fitness to own tests for the non-lawyers involved. Individuals are appointed within each law firm to ensure the firm's legal and financial compliance, and the penalties for not complying, are significant, quite apart from the risk to the reputation of the profession.
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 a conventional, single office partnership to a global, professionally managed business, with several thousand employees, 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 England and Wales 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, as Genry Resnick said earlier, 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 I can say that all the foreseeable risks inherent in ABS have been identified and measures taken by the SRA to ameliorate and manage them. The principles underlying these measures 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.
Some domestic and international colleagues have expressed concerns that the introduction of ABS will have a negative impact on competition and access to justice in our market, with large new corporate players driving out existing firms. I think these fears are exaggerated, for ABS have no magic bullet in competitive terms. I do not, for example, 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.
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.
Large scale and low cost do not always march hand-in-hand. Small businesses can frequently offer consumer services at lower cost and respond faster to changes in the market, and ABS may offer an attractive option to many of our solicitors.
We are already seeing some variety in the ABS models coming forward, which supports what I have said. Of the first five ABS licences granted by the SRA under the new rules, the Co-operative Group is a well known retail brand on high streets and already employs over 300 staff in its legal practice, many of whom are qualified lawyers. Two others are, however, smaller existing legal firms. One has seven fee earners and another has just one solicitor/fee earner whose wife is currently the practice manager and will become a director of the firm with a significant shareholding. Another ABS licensee is an enterprising and fast-growing firm in Wales and the last is Slater & Gordon, a large practice from New South Wales, which is listed on the Sydney Stock Exchange and has acquired a London litigation firm as a subsidiary.
We also know that an Italian firm has applied for an ABS licence to allow accountants and lawyers in its London partnership to share revenues and profits, meaning that it is set to become one of the first non-UK law firms to convert to an ABS.
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. The Co-operative, for example, intends to undertake some publicly-funded legal aid work.
Consumer litigation is likely to be an attractive area for ABS. In contentious areas of practice, both civil and criminal, a multiplicity of providers must remain in the market in every locality to provide representation to all parties. This is very important, in terms of access to justice for all citizens, at a time when public funding for legal aid is being reduced in England & Wales.
In fact, whatever the eventual consequences of ABS (and they have, of course, yet to play out) I have no doubt that well-managed firms in England and Wales will continue to thrive in the more competitive legal markets of the future, and it will be no mean feat for any new ABS entrant to displace them.
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 the UK 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, and perhaps beneficial.
I do not underestimate the significance of the changes that have been made under the Legal Services Act to the traditional structures and organisation of the legal profession in England and Wales or the potential for market forces to do the same. Neither do I underestimate or dismiss the concerns that many of my colleagues have.
However peering into the crystal ball I do not expect regulatory changes or the liberalisation of ownership rules to transform the profession immediately. Rather, I think that the new modes of practice will increasingly challenge the norms under which lawyers practise (although that is a speech for another time!
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. I believe that the effects of these changes will chiefly be felt in the consumer market in England and Wales, but there will inevitably be knock-on effects for law firms serving corporate clients and for 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 may 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. If the sector becomes more efficient, it certainly will grow, as there is undoubtedly unmet demand for accessibly-priced legal services.
The scope for such growth will continue overseas and the continued international success of our corporate law firms will remain as vital as ever for our economy.
The threat that ABS, as implemented under the LSA, may impact on the international recognition and standing of our profession cannot be ignored. Most recently, the New York State Bar's Committee on Professional Ethics determined that a lawyer who primarily practices in New York cannot be an employee of an out-of-state or foreign firm owned or managed by non-lawyers, even if non-lawyer ownership is permitted where the firm is established. The Ethics 20:20 Commission of the ABA has recently withdrawn, for lack of support, a modest proposal to liberalise the ownership of law firms.
Although I fully understand the commitment of the ABA and State Bars to protecting the independence of the legal profession (I feel the same way) decisions like these set back the progress of firms to operate internationally to meet the need of their global clients.
Restrictive approaches like this will not encourage international firms to expand their operations, and may deny some lawyers the opportunity to participate fully in the world's leading law firms.
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, I am confident that the scepticism of our critics at home and abroad will in time be overcome. I therefore share President Semenyako's confidence in the future of the legal profession and I would be surprised if 'full' ABS, along the lines we are following, remains for long an innovation confined to England and Wales.
Thank you