Competition between solicitors and accountants – as old as the hills though it may be – has been brought sharply into focus by the controversial issue of whether or not legal professional privilege in relation to tax avoidance disclosure rules and money laundering reporting gives lawyers an unfair advantage.
At the same time, the appetite for solicitors and accountants to join forces if Sir David Clementi paves the way for multi-disciplinary partnerships (MDPs) seems to be waning. So how are relations between the two sides?
Mike Hardwick, chairman of the Law Society’s tax law committee, is sanguine. ‘There is a lot of concern being aired about the issue of privilege, particularly in the accountancy press. But I don’t think it is damaging day-to-day relationships between solicitors and accountants on the ground.’
Ronnie Fox, president of the multi-disciplinary Association of Partnership Practitioners (APP) and senior partner of City law firm Fox Williams, agrees: ‘Accountants and lawyers have to work together too often for that to happen.’
While their views are shared by the Institute of Chartered Accountants for England and Wales (ICAEW), these are highly sensitive issues and the professional bodies representing the two sides are keen to stake their claims – without turning it into a war.
The Home Office is now considering the responses to its informal consultation on a draft order which would, in relation to money laundering reporting, extend privilege to accountants, auditors and tax advisers when they are providing a ‘directly comparable service’ to lawyers, provided they are members of a professional body and subject to discipline and regulation.
The Law Society has raised some drafting points but, in broad terms, says it ‘does not have a difficulty, per se, with another professional, who is qualified and regulated to give legal advice, doing so under privilege. But there are conditions which must be satisfied in order to ensure those professionals are subject to the same responsibilities and duties as lawyers’.
Robin Booth, the new chairman of the Law Society’s money laundering task force, says: ‘We are not presenting this in terms of “this is our patch, get off” or as a marketing point. We are simply saying that if privilege is to be extended, there are good grounds for being cautious and ensuring any extension meets the right criteria and ensures the court’s ability to safeguard clients’ rights in the same way it does with lawyers.’
He says the issue of privilege in relation to money laundering reporting arose because the Proceeds of Crime Act 2002 (POCA) appeared to limit privilege protection to lawyers and made no provision to extend it to experts, such as accountants, instructed by solicitors, or to other members of solicitors’ firms, including money laundering reporting officers.
Mr Booth, a partner at BCL Burton Copeland in London, says: ‘The government attempted a sticking-plaster solution by amending the Money Laundering Regulations 2003. But this was unsatisfactory both because it defined “legal professional adviser” in a way that conflicted with the ordinary meaning of the words and because it was doubtful whether an amendment to subsequent regulations could operate as an effective amendment of POCA.’
He says lawyers recognise the need to resolve this situation just as clearly as accountants. However, he says the Home Office will need to define exactly what is covered by ‘directly comparable services’ because, while accountants and other professionals may provide similar services to lawyers, they do so with different aims and different business considerations.
Karen Silcock, chairwoman of the ICAEW’s working party on money laundering, says the two sides should be close together on this issue to avoid the ‘invidious’ situation that an accountant instructed by a lawyer may have to report something that the lawyer is exempt from reporting. She stresses that the institute is looking at the issue ‘simply and only’ in relation to money laundering reporting obligations and not as a way to try to widen privilege generally.
That could be because the accountants have tried this and failed. The possibility of extending privilege to the likes of accountants was considered by the Department for Constitutional Affairs in its In the Public Interest? consultation. However, in summer 2003, it decided against any change, in part citing ‘serious concerns’ as to the effects of increasing the rights of non-disclosure.
Nonetheless, Ms Silcock says accountants maintain that the current situation is contrary to the principle of equal treatment. ‘We do not see any objective or proportionate reasons to confine the privilege defence to lawyers. I think if left unresolved, this issue has the potential to make relationships between solicitors and accountants difficult – not so much in a market-place situation but in working together effectively and openly for the benefit of the client.’
 | Goldsmith: privilege should not be dilutedThe Council of Bars and Law Societies of the European Union (CCBE) takes a less inclusive stance. Secretary-General Jonathan Goldsmith, himself a solicitor, says it does not usually respond to consultation papers but it did respond to the Home Office because the body that represents lawyers at a European level is so concerned about the issue of privilege. ‘We find ourselves non-stop defending confidentiality protection, as it is called in Europe, because governments want to intervene all the time.
‘We came down against extending privilege to accountants because legal privilege is something which arises out of the specific role of the lawyer in access to justice and the rule of law. Diluting it would be bad for those values on the principle that if something is spread more widely, then it loses its original focus and reason and becomes less meaningful and easier to take away.’
Mr Goldsmith says lawyers are the only professionals who are granted confidentiality rights in all member states, although states differ in the methods by which this protection is achieved. Some states also give other professionals protection – in Germany, the ethical rules for accountants and lawyers are identical and so they are under the same duty of confidentiality.
‘At the end of the day, accountants want to use privilege as a marketing tool. But our view is that confidentiality arises from the specific role of lawyers in society and we do not believe it should be diluted,’ Mr Goldsmith says.
The issue of competition is central to the debate over the government’s new tax avoidance disclosure rules. Accountants reacted sharply to the Law Society’s guidance that solicitors can rely on legal professional privilege not to disclose information from clients. The Consultative Committee of Accountancy Bodies wrote to the Chancellor of the Exchequer Gordon Brown, expressing its ‘extreme concern’ that the rules might hand the legal profession an ‘unfair advantage’ (see [2004] Gazette, 30 September, 3).
Mr Hardwick, a tax partner at magic circle firm Linklaters, says: ‘Accountants are concerned that privilege gives lawyers a competitive advantage. As far as the Law Society is concerned, that is not what we are seeking. What we have been trying to do is work out what obligations solicitors actually have under the rules, given they specifically say solicitors do not have to reveal privileged information.’
The situation has been resolved by the Inland Revenue putting an obligation on the client to disclose details of tax avoidance schemes. ‘There is also always the option for clients to waive privilege so the solicitor can make the report.
‘Accountants may well continue to make an issue of it – even though in reality I don’t think this does give solicitors a competitive advantage.’
Mr Hardwick reckons the government would not extend privilege to accountants. ‘The genesis of the rules was that the government was concerned about the activities of the big four accountants and, to a lesser extent, the banks, who have teams devoted to developing tax avoidance schemes and selling them directly to clients. Given that, it would be quite a surprise if privilege was extended to accountants.
‘The legislation included the exemption for lawyers because the Revenue took account of the House of Lords case in R v Special Commissioner and Another, Ex p. Morgan Grenfell and Co Ltd [2002] 2 WLR 1299; [2002] 3 AER 1, which says that legal advice privilege is a fundamental human right. Where things seem to have gone awry is that the Revenue seems to have thought privilege only had a limited impact in this area whereas in reality it has a much wider impact.’
The Department for Constitutional Affairs’ response to the privilege aspect of the In the Public Interest? consultation also gave little hope to accountants, saying it found ‘a lack of evidence that lawyers have a significant, if any, competitive advantage over other professionals’.
It concluded: ‘There is no evidence that the existing privilege is significantly distorting the market in favour of lawyers and the drawbacks in terms of public interest would outweigh the removal of any minor distortions that may exist.’
For Ian Young, technical manager of the ICAEW’s tax faculty, the privilege issue has not damaged relationships with solicitors, but he says they will have to see the impact of the proposed changes in practice before deciding how to proceed.
Mr Hardwick predicts that one outcome is likely to be increased competition for tax services between solicitors and accountants – ‘not least because if these tax avoidance disclosure rules are effective, it might cut down the amount of tax avoidance work that is done and that will mean more competition for advisory work and work in the context of mergers and acquisitions’.
 | Ronnie Fox: no pressure from clients for MDPsAnd that raises the question – if the Clementi review recommends allowing multi-disciplinary partnerships, which the government has indicated it supports – how likely is it that solicitors and accountants will want to join forces?
Mr Fox says he personally supports MDPs, including associations between lawyers and accountants – ‘though that doesn’t mean I would want to be in one’.
He adds: ‘However, the history of accountancy firms linking up with law firms has not been happy, partly because the Sarbanes-Oxley rules, introduced in the US in the wake of Enron, suggest that accountancy firms doing audit work should really be independent from lawyers who look at the work and advise clients.
‘I also think that clients actually like the two to be independent from each other and I haven’t noticed any pressure from them for a one-stop shop.’
Philip Burroughs is the London senior partner of McGrigors, formed from McGrigor Donald and KLegal, the Scottish and English legal arms respectively of KPMG. They split from KPMG because of US regulatory pressures post-Enron and their interpretation by the UK authorities.
He says: ‘I can’t see any basis at all for law firms and accountants to join forces given the regulatory climate at the moment. It can’t be the utopia people thought it would be four years ago unless you tear up all the Sarbanes-Oxley legislation and start again – if not, I don’t see how conceivably you can have a meaningful union.’
Accountant Christopher Honeyman Brown is chief executive of leading south-east law firm ASB Law. He says there are different issues about MDPs at different levels of the market place. ‘There is no question that the American development with Sarbanes-Oxley has meant a fundamental shift in large firm thinking about peripheral services – be they taxation, consultancy, legal services or anything else – and we have seen the steady dismantling of the legal arms of the major accounting firms.
‘However, at the small and medium-sized enterprise level where the regulatory environment is deliberately softer, I think there are huge potential economies of scale. It makes obvious sense to have a high street lawyer, an accountant and a surveyor working together, possibly with a financial adviser, to give clients comprehensive advice.’
Where he would personally welcome MDPs is to end the ‘somewhat nonsensical’ situation that he can be the business leader of his firm but not a partner.
Tina Williams, corporate partner with Fox Williams, chaired the APP’s working party on Clementi. ‘In the late 1990s, the key demand was from the large accounting firms who were seeking to extend the range of their services. Post Enron, the provision of non-audit services to the client may well be incompatible with the independence requirement of the auditor. I think in more complex areas of the market there is a high potential for conflict and I see little appetite for it among lawyers or accountants.
‘However, the wheel of fortune will turn. As larger accountancy practices regain their confidence, they will naturally start to look again at expanding the range of their services – provided we don’t have any further scandals.’
However, she reckons there is still a demand for MDPs in the less sophisticated areas of the market – a view shared by Tony Bromell, head of accountancy markets and ethics at the ICAEW, who says: ‘There is no evidence to suggest that enthusiasm for MDPs has dampened since the Office of Fair Trading pointed out in its 2001 report that MDPs are likely to be particularly attractive to high street firms.’
When it comes to Europe, Mr Goldsmith says the European Commission is coming down in favour of structures that permit MDPs, as long as there are protections to avoid conflict of interest and ensure independence. However, he says it is a live issue only in the UK, which is the sole member state actively pursuing a very liberal agenda in opening the legal services market.
He explains: ‘National competition authorities, under guidance from the European competition authority, are on the heels of the profession in other member states. The difference in the UK is that it is the government and the Department for Constitutional Affairs which are very actively pursuing it.’
Competition between solicitors and accountants is nothing new – an issue of the Gazette in 1952, for example, highlighted disputes between the two as to who should be doing company formation work – and even if they do start working together under one roof, there is no sign that it will come to an end.
Grania Langdon-Down is a freelance journalist
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