For sale -- the legal profession (going cheap!)
As the President, Sir John Wickerson, said in his letter accompanying the discussion paper on multi-disciplinary partnerships, the issues which it reviews 'are perhaps the most fundamental to have faced solicitors since we emerged as an independent, self-regulating profession in the last century'.
The new Secretary-General, John Hayes, emphasises that we need a strategy to take us up to the end of the century and 'enable the Council .
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to develop its vision of the solicitor as an independent man or woman of affairs to whom the public can safely turn for impartial advice'.
He also rightly stresses the inter-relation of all the matters raised by the paper and the fact that a coherent philosophy is essential if an effective policy is to emerge.
As practice management consultants to the profession we have a wide knowledge of grass-roots opinion in firms, large and small, in the country as well as in cities and towns, in depressed areas and those of greater prosperity.
The feed back we get from our seminars and consultancies indicates that solicitors wish to preserve their independence.
As a Past President of the International Bar Association said in a paper to the IBA in Cairo in February: 'The practising lawyer should be independent of: Government, public authorities, the legislature, the judiciary, branch organisations whether they represent employers, industry, employees or workers, large and powerful corporations, banks and other financial institutions, and strange as it may sound, the practising lawyer should also be independent of her or his clients'.
The current position
Before commenting upon the discussion paper, it is essential to examine the present rules and the reasons for them.
As the President said in his introduction to The Professional Conduct of Solicitors, 'some rules are set in tablets of stone but others are subject to change over the years to reflect the changes in society generally and the role of solicitors in it'.
The difficulty is to decide which rules are in which category.
The new r.1 is clearly in the former and is worth repeating because its principles impinge upon all the other issues.
'A solicitor must not obtain any instructions or do anything in the course of practice, which compromises or impairs:
(i) The solicitor's independence or integrity.
(ii) The client's freedom to instruct a solicitor of the client's choice.
(iii) The solicitor's duty to act in the best interest of the client.
(iv) The good repute of the solicitor or of the solicitors' profession.
(v) The solicitor's proper standard of work.'
The rules against conflict of interest are also clearly in the first category.
Examples of rules in the second category are those relating to advertising (r.2) and fee sharing (r.9).
It is possible to envisage circumstances in which these rules could be modified, subject to the r.1 principles, to meet changing circumstances.
The rules about arrangements (rr.3 and 9), hiving off (r.5), employment of solicitors to do professional work for persons other than their employer (r.4), fee sharing (r.7) and receipt of commissions (r.10) are those which are the subject of the current discussion paper.
The justification for the rules
Although in the past some of the rules seemed to be concerned primarily with regulating relationships between solicitors, the only justification for any profession's rules is that they are necessary in the client's interest and that of the public generally.
The response to the discussion paper needs, therefore, to be based firmly upon principle and not upon what short term advantage the profession might gain in any particular instance by relaxing or tightening the rules.
Recent developments in the house-move market
Practising solicitors who are involved in conveyancing on a day-to-day basis, know that the estate agency business has become increasingly ruthless in recent years.
A recent lett er from Messrs.
Taylor Tyrrell Lewis and Craig [1987] Gazette, 7 January, 3, tells a sad but not uncommon story.
Those, such as the Office of Fair Trading, who advocate freedom in the market, do not appreciate the minefield facing the unsuspecting consumer.
We exempt Austin Mitchell from this criticism as he has clearly warned about the 'cosy professional back scratching which has held the house buyer to ransom'.
In the battle to control the consumer, conveyancing is very much a secondary weapon when compared with estate agency.
The battle has been joined on the estate agency front by banks, building societies and insurance companies.
Prudential Property Services, Royal Life Holdings, Hambro Countrywide, Nationwide Estate Agency, Black Horse agencies and the General Accident Group all now have approaching or even in excess of 500 estate agency branches each.
The Halifax and other building societies, although slow to start, are fast catching up.
The aim of the institutions is to sell more insurance and other financial services.
In addition to selling directly to consumers who have an immediate need for insurance because they are moving house, the institutions will also use their outlets to build up a client data base to facilitate more general selling of financial services.
The Financial Services Act 1986 poses particular problems of independence to the institutions.
They have been forced to grapple with the issue of polarisation.
They have to decide whether to offer genuine, independent advice on a whole range of financial services or to reserve their right to sell a limited range of products.
Midland, Barclays, Abbey National and TSB have decided on the latter opinion, the Halifax, Nationwide and Leeds Permanent on the former with Lloyds and Nat West still undecided.
Some, such as Barclays, Abbey National and Midland, are trying to have the best of both worlds by opting for the latter status for their branches and the former through subsidiaries or associated operations.
It is in this context of increased potential for conflict of interest and exploitation of the consumer that the independence of our profession becomes even more important.
Council member, Robin Smith, recently stated that 'the real debate now is going to be over independence, perhaps the first great hall mark of the profession .
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Independence is [at risk] and somehow amongst all the controversy about multi-disciplinary partnerships, arrangements with third parties and employed solicitors, it must be preserved.
Apart from philosophical considerations, it is a distinctive marketing feature.
It singles us out from the advice agencies and commercial and financial institutions, a fact which must surely be of a special value today in the aftermath of the big bang, City scandals and cyncism about Chinese Walls'.
(A 'chinese wall' is a device suggested by some as a means of acting on both sides of a transaction and yet avoid conflicts of interest.) It is, therefore, important at this crucial time that we do not relax our rules in such a way that the exploitation of the consumer will be facilitated.
Arrangements
This is the fundamental issue.
The profession's response to it will govern its response to all the other issues.
If we fool ourselves that arrangements will not prejudice our independence and integrity, the arguments of principle involved in the other issues will also go by the board.
Under the present r.3, a solicitor may not enter into an arrangement with another person for the introduction of clients to the solicitor.
This has been a practice rule for many years both in this country and abroad.
The justification for the rule, is to be found, inter alia, in the Council's statement on property selling by solicitors which says that arrangements are prohibited in order to 'ensure that the client is not improperly influenced in his choice of solicitor and to demonstrate that the solicitor is free to serve the client without outside influence'.
This is vital -- we must not only be independent but must be seen to be so.
If this was important prior to the institutionalisation of estate agency, it is now even more so.
Further justification is to be found in the declaration of Perugia which sets out the principles of professional conduct of the bars and law societies of the European Community.
The declaration states that, 'the multiplicity of duties to which a lawyer is subject requires his absolute independence, free from all other influence, especially such as may arise from his personal interests .
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this independence is necessary in non-contentious matters as well as in litigation.
Advice given by a lawyer to his client has no real value if it is given only to ingratiate himself, to serve his personal interests or in response to outside pressures'.
Eventually, arrangements may lead even to criminal activity.
The current spate of mortgage scandals in London, Bristol and other major cities, involving alleged frauds is a direct result of cosy arrangements.
The loss of independence, which arrangements involve, is the first step in the prejudicing of our integrity.
Solicitors must be prepared to stand completely independent from others involved in the house-move transaction.
Exactly the same principle is applicable in connection with financial dealings in the City.
In practice, however, the problem is how to draw the line between acceptable and unacceptable referrals.
Every practising solicitor knows that this distinction can be drawn.
As a profession, we have distinguished between the two for over 100 years.
It is only recently that there have been suggestions that we can no longer do so.
It simply will not do for the profession, and the Law Society on its behalf, to attempt to wash its hands of the matter.
The difficulty is that, because of a recent decline in standards, the profession's idea of what is and what is not acceptable has become blurred.
If we are to think clearly about this issue we need to examine closely the definition of the term 'arrangement'.
In his recent note at [1987] Gazette, 17 June, 1793, Christopher Bramall sets out the definition of an arrangement which is now found in r.13 of the 1987 Practice Rules: 'an arrangement for the introduction of business means any express or tacit agreement between the solicitor and another person, whether contractually binding or not, for the introduction of clients to the solicitor'.
He adds that 'an arrangement for the introduction of business exists if a solicitor merely agrees that his name should go on a panel of solicitors for the referal of clients, or if the solicitor merely agrees to act for clients referred to him'.
In our view, this definition needs to be restated.
We would re-define an 'arrangement' as any connection between a solicitor and a non-solicitor which is against the public interest.
There is, therefore, nothing wrong in a solicitor recommending an estate agent, building society, mortgage broker, accountant, architect or bank to a client as long as, in making the recommendation, the client's interest is uppermost in the solicitor's mind.
Neither is there anything wrong in a client being recommended to a solicitor of good repute.
Problems emerge only where the solicitor's independence and integrity, or the client's freedom of choice, are prejudiced as they will be where there is a tie-up which results in the solicitor being in the pocket of the introducer of business.
Neither is there anything inherently wrong (ie against the public interest) in solicitors agreeing that their names should be included in a panel for referral of clients.
Christopher Bramall's statement about panels is an echo of the old days when our rules were mainly concerned with the regulation of behaviour between solicitors as opposed to more direct protection of the public interest.
Although many panels will be against the public interest, some will enhance it.
In the latter category, referral agencies, such as Citizens' Advice Bureaux should clearly be allowed, if they wish, to draw up panels of specialist solicitors in the neighbourhood in fields of work such as employment law, housing, social security, family, immigration, tax and planning.
Many other types of panels, however, would clearly be against the public interest.
The centralisation of estate agency business in the hands of the institutions, if coupled with arrangements with specific firms of solicitors, would severely restrict the consumer's freedom of choice and the solicitor's freedom to advise the client independently of all contraints.
In any event most practices are fooling themselves if they think that such arrangements would be to their advantage.
If we allow solicitors to have such arrangements in conveyancing, we predict that the institutions will approach a limited number of very large firms and set-up fully computerised conveyancing systems with networks across the country.
The further statement of Christopher Bramall that 'an arrangement .
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can exist even if no quid pro quo is offered by the solicitor in the shape of payment or referral of business to the other person' also needs to be examined carefully.
The statement mentions two forms of reciprocation.
Mere reciprocal referral of business to another person is not, in itself, contrary to the public interest.
Indeed, it is to be commended where solicitors are referring clients to others on their merits.
Reciprocal referral becomes a problem only when the client's freedom of choice is inhibited rather than enhanced or where the client's interest is prejudiced because of a quid pro quo offered by the solicitor to the introducer.
How can a solicitor who has an arrangement with an estate agent, building society, or mortgage and insurance broker, preserve her or his independence and integrity in the following situations?
(a) The estate agent asks the solicitor to ensure exchange of contracts that day as the client is holding up a lucrative chain.
It is in the client's interest to delay.
(b) The solicitor believes that the client is paying too much for the house, the sale of which the agent has negotiated.
(c) The estate agent sends a client to the solicitor under the arrangement; the solicitor knows that another agent would be more suitable or cheaper for marketing that particular property.
(d) The estate agent insists on a pre-contract deposit of £500 from the client who has been introduced to the solicitor.
(e) The client asks the solicitor if an amount should be kept back from the estate agent's fee because of unsatisfactory service.
(f) The client says to the solicitor when they first speak: 'I told the estate agent that my solicitor was "X" but they said they prefer to use you.
I do not want to rock the boat and risk losing the property'.
(g) The building society offers the client, or a broker arranges, a mortgage at 11%; the solicitor is able to arrange a mortgage at 10 1/2% with another society, or broker, outside the arrangement.
(h) The building society offers the client, or the broker arranges, a mortgage over 20 years.
The solicitor is able to arrange a mortgage over 25 years with another society, or broker, outside the arrangement.
(i) The loan offered by a building society to a borrower, or arranged by a broker, may be either too much or too little.
In the first six months of 1987 there were a record 11,500 re-possession cases.
One of the major reasons for this is the present glut of mortgage funds which has led lenders to use unrealistically high income multipliers and to press 100% mortgages upon borrowers.
Will a solicitor in an arrangement with a building society, or broker, warn a client who might be over-stretched? In the reverse situation, if the building society's offer of loan is too low for the client, will the solicitor recommend the client to another society, outside the arrangement, which will lend a higher sum?
(j) The building society decides that the stance it will take under the Financial Services Act 1986 is to represent one insurance company.
Will the solicitor get alternative insurance quotations for clients introduced to him by the society under the arrangement?
(k) A building society, estate agent, or broker sends a client to the solicitor with an endowment mortgage already arranged.
Will the solicitor advise the client that a mortgage protection policy may be better?
It is not enough to answer that the solicitor must cease to act.
These situations arise every day and, in an increasingly competitive property and financial services market, they will multiply.
The protagonists of arrangements say that policing the present rules is difficult.
However, if it is hard to police the present rule so as to protect the r.1 principles, it will be virtually impossible to police any rule which allows arrangements whilst purporting to retain those principles.
How can a solicitor, receiving a large proportion of clients under an arrangement, be challenged on the issue that it seems that the clients' freedom of choice is being impaired and the possibility that such a large percentage of fee income coming from one source may make the solicitor less than independent?
Ironically, if our rules stand firm against arrangements, as we advocate, the institutionalisation of estate agencies may make it easier for the Society to prevent such arrangements.
Our rules need to define clearly, with examples, what is against the public interest.
They should then be enforced.
The rules should be supplemented by agreed codes of practice with the institutions.
Such codes would deal, for example, with the growing problem of estate agents, building societies and brokers who persuade clients not to use the solicitor for whom they have stated a preference but to use instead a 'tame' solicitor.
The profession must take a firm stand on this issue.
We have heard rumours that if we do not relax the rule about arrangements, the Government might revise its undertaking limiting building society conveyancing to non-borrowers.
If this threat is made, the profession should resist it strongly and repeat to the Lord Chancellor the statement he made at the time of that undertaking, when he was Attorney-General, to the effect that he had discovered that there were difficulties through conflicts of interes t, involving banks and building societies offering conveyancing services and generally that: 'An employee of a financial institution carrying out conveyancing would find a conflict between his employer, who offered the loan, and the borrower, to whom he was giving legal advice'.
If arrangements are permitted it will split the profession down the middle.
Some solicitors will choose to enter into arrangements whilst others will keep clear of them and demand the right to advertise their independence.
The Law Society will not be able to resist a change in the publicity code to allow the latter to compare themselves favourably with the former.
Employment
We oppose any move to allow solicitors to be employed by institutions to offer legal services to the public.
This would clearly be in breach of the basic r.1 principles.
Situations will arise, on a daily basis, similar to those we have listed above.
If employment were allowed in connection with conveyancing services, it would be the thin end of the wedge.
Soon the independence of the profession would be sacrificed in other areas of work to the detriment of the public.
Hiving-off
We oppose any extension of hiving off part of a solicitor's practice to a separate business.
Everything which is recognised as being within our present field of work, including property selling and financial and insurance advice, should remain part of a solicitor's practice.
All who wish to call themselves solicitors must be subject to the Society's rules and the profession should remain united, particularly in the present climate.
If solicitors wish to operate a separate business they should leave the Roll.
We suspect that not many will be prepared to do this.
It is true that a fair proportion of licensed conveyancers are solicitors but the number is small and will not pose much of a threat.
However, even if a significant number of solicitors left the Roll to set up as licensed conveyancers and establish closer links with the institutions, this is a price we must be prepared to pay in order to retain our independence and integrity.
Employing members of other professions
This is already permitted where the work, such as insurance and financial advice, is within the scope of a solicitor's practice.
However, there are anomalies.
Subject to safeguards as to conflict and professional negligence, we would allow a solicitor to employ a surveyor to undertake surveys as well as property selling.
Similarly, the employment of an accountant to give tax advice presents no problems.
Employees would be subject to their own professional rules and the employing solicitors would be responsible for ensuring that their employees comply with our rules.
Incorporation
We favour allowing practices to incorporate with unlimited liability, subject to the proviso that solicitors alone are involved.
We welcome the recently given power to limit liability contractually.
Incorporation with limited liability should only be a last resort; meanwhile the Law Society should monitor how contractual limitation of liability is operating in practice and how the new professional indemnity scheme works out.
Mixed partnerships
Partnerships with estate agents, whether professionally qualified or not, should continue to be prohibited as they would give rise to irreconciliable conflicts of interest and standards.
Other forms of mixed partnership, eg with those involved in lending money or selling insurance, may also be incompatible.
A comprehensive list should be drawn up of such prohibited mixed partnershi ps, although it may be easier simply to list what is to be allowed.
We would allow mixed partnerships with accountants subject to strict control in terms of numbers within a practice and of professional standards.
In cases where the professional rules of chartered accountants are less stringent than ours, the latter should prevail.
Proportionate limitation in terms of numbers (say 10 or 20%) poses problems because of the varying sizes of practices.
It will probably be necessary for a practice to have a specified minimum number of partners before being permitted to take a partner from another profession.
Subject to this, we would favour a limitation of 10% non-solicitor partners.
Partnerships with architects, town planning consultants, engineers and patent agents on the same basis as above would be acceptable.
We doubt whether discussions with the Bar about the possibility of partnerships with barristers will bear fruit.
We would, therefore, pursue the alternative strategy suggested of making it easier for barristers to transfer.
We would also be prepared to make a unilaterial declaration that solicitors could be in partnership with barristers and await the reaction of the Bar and the Office of Fair Trading.
This is a tactic which the Bar has recently used in its new draft code of conduct over such issues as direct access and employment of barristers to do work for the public.
The reason why we would impose limits on mixed partnerships is simple.
At present, solicitors are the consumer's long stop.
If our client's interest requires it, we need to stand against the state, the commercial institutions and against fellow professionals.
We must reverse the trend towards solicitors merely rubber stamping deals struck on our client's behalf by other professionals often before the client ever reaches us.
We must insist that every such transaction is viewed objectively and critically.
We can do this only if solicitors retain control of their practices and remain subject to the most stringent practice rules.
We need to make progress very cautiously in these areas and we support the call for more research.
For instance, a prerequisite of any change is a review of the rules and standards of other professions and persons with whom it is suggested we might become more closely involved.
Even then, it must be remembered that rules are sometimes more honoured in the breach than the observance.
From our preliminary comparative study, some of the differences revealed are significant.
Although their rules are clear it would appear in practice that chartered accountants have a more lax interpretation of conflict of interest.
Whether instructed by individual or corporate clients, they often manage to continue acting on both sides of a matter.
Fee sharing
We are opposed to any form of fee sharing which would open the back door to mixed partnerships of the wrong kind.
However, we favour allowing solicitors to share profits with non-solicitors on a wider basis than at present allowed under approved staff bonus schemes.
Suitably qualified professionals working in-house for solicitors in finance, personnel and administration should be permitted to be remunerated in whole or in part on a profit-sharing basis.
The detailed rules will depend upon the decisions reached about mixed partnerships.
Property selling by solicitors
Although the discussion paper does not specifically call for comment on this topic, it is vital for the profession to clarify its thinking on the matter as it is closely inter-related, politically and practic ally, to several of the issues raised by the discussion paper.
The present rules allow solicitors to sell property subject to clear safeguards for the public.
For example, the property selling guidance rightly emphasises that 'a solicitor who negotiates the sale may .
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be faced with difficult questions of conflict of interest .
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a solicitor must not act (or continue to act) if such conflict of interest arises or is likely to arise'.
In the past, we have argued strongly that there should be no liberalisation of these rules because the public interest requires them and because the Government has still to decide on the extent to which estate agents will be allowed to offer conveyancing services to the public.
Representations have been made as to the undesirability of allowing them an unfettered right to offer conveyancing services.
The Government has been considering this aspect for some time but a statement has still not been made although the Director-General of Fair Trading has said that he wants to see one-stop conveyancing.
Presumably the new Lord Chancellor needs further time to consider the implications and this is the reason for the delay in publishing the Recognition Rules under the Building Societies Act 1986.
Bearing in mind the rate at which building societies are taking over estate agents, it would be ironic if the Government, having stated that building societies will not be permitted to offer conveyancing services to borrowers, allows them to acquire control of the house-move transaction through the back door.
We have urged that estate agents should be limited to offering conveyancing to vendors and should not even be allowed to do this if they are acting for the vendor's purchaser in the sale of the purchaser's property.
If these restrictions are imposed on estate agents, our view is that solicitors should continue to be allowed to engage in property selling, subject to the same restrictions.
We have always sympathised with the aim of property selling solicitors, namely to put solicitors back at the 'sharp end' of the house-move transaction where they give truly independent advice to the consumer as opposed to merely rubber-stamping deals struck by others.
Such a position becomes increasingly more important if the public interest is to be protected in the face of the packaging of the consumer which will result from the move into estate agency by the institutions.
If it is right, as we have argued, that solicitors should stay outside such packaging, either through arrangements or employment by the institutions, then property selling by solicitors could well become more important as we seek to regain our position as the first point of contact with the client.
We, therefore, see no reason to place any further restrictions on solicitors' selling property.
Indeed, if the rules under which estate agents can offer conveyancing services are less stringent than we have advocated, property selling solicitors will have a strong case for the existing guidance being relaxed as long as this can be done consistently within the r.1 principle.
Conclusion
The present uncertainty about rule changes has made it very difficult for the profession as a whole, and indeed for individual firms, to market a particular message to the public.
The essence of our response to the discussion paper is that the profession has created its own problems as a result of panic induced by fear of what government and our competitors might do.
We now need immediate positive action to restore our position as an independent source of advice.
As soon as the fundamental decisions are made, the Law Society should run an institutional advertising campaign stressing all the qualities of independence and integrity for which we are fortunately still held in reasonably high regard.
Such a campaign should show the profession as the consumer's protection against exploitation by the recognised institutions.
It should emphasise that solicitors are prepared to be involved with clients at the outset of negotiations, whatever the transaction.
The campaign would be a considerable unifying factor within the profession.
More important, we would be seen as the guardians of the public interest at a time when the consumer in the house-move transaction faces enormous pressures.
In the next few years our independence, if retained, will be a most powerful marketing tool.
In conclusion, we can do no better than cite again the briefing which the Society issued to Peers last year when the Building Societies' Bill was being debated: 'In no other country in the western world are lawyers permitted to be employed by, or subordinated to, commercial interest .
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Such a move would destroy the independence of solicitors' advice'.
We urge the Society not to lose its nerve but to do everything to retain and strengthen the practice rules in the public interest.
