New bedfellows

Multi-disciplinary practices between lawyers and non-lawyers are suddenly back on the agenda. Neil Rose investigates how they might work and the regulatory problems they pose

They were arguably the hottest of all legal topics in the late 1990s, but the demise of Enron and Andersen seemed to have put paid to them. And then, out of nowhere, multi-disciplinary practices (MDPs) leapt back into life.


While the Lord Chancellor, Lord Falconer, had previously expressed his support for MDPs, nobody expected him actually to propose their introduction when last month he published the White Paper, The Future of Legal Services – Putting Consumers First (see [2005] Gazette, 20 October, 1).

In almost every other respect, the government decided to implement the recommendations of Sir David Clementi’s 18-month review of legal services regulation. However, Sir David was cautious about MDPs because of a host of difficult regulatory issues, and viewed his proposed legal disciplinary practices (LDPs) as ‘the necessary first step’, which would facilitate the emergence of MDPs at a later date.


According to Sir David, LDPs would see the different types of lawyer working in partnership, and also allow non-lawyer administrative managers – such as the heads of finance – to become partners.


But the White Paper goes a step further. The underlying ethos of the entire reform package is to make legal services more consumer-focused. How would this be done? By removing barriers to make it easier for new providers to enter the market through alternative business structures (ABS). We are assured that the fabled one-stop shops, ‘which deliver packages of legal and other services that better meet consumers’ needs’, would provide greater convenience for consumers. The idea merges MDPs with so-called supermarket law, in which non-lawyers can invest in and own law firms.


The White Paper continues: ‘Tapping into external investment and allowing different types of lawyers as well as lawyers and non-lawyers to work together on an equal footing will enable firms to upgrade their infrastructure and generate fresh ideas about providing services in consumer-friendly ways.’ Plus, there should be reductions in costs as a result of efficiencies, it predicts.



Other benefits could include better access to justice, as ABS firms might find it easier to provide services in rural areas or to less mobile consumers; greater convenience (‘ABS firms can provide one-stop shopping for related services, for example, car insurance and legal services for accident claims’); and increased consumer confidence. This could arise from well-known non-legal brands entering the legal market and having a strong incentive to maintain their reputation when providing legal services. The AA said last week that it would be one of them (see [2005] Gazette, 17 November, 1).


The attractions for practitioners, the White Paper says, are increased access to finance, a better spread of risk, increased flexibility, making it easier to hire and retain non-legal staff, and more career choices for young lawyers.


Sir David identified regulatory reach as the biggest stumbling block to MDPs. How could a legal services regulator exercise authority over people who are not lawyers, offer clients a different professional service, and have different ways of practice? And what happens when there are more than two regulators involved and no obvious lead regulator? An additional complication is the role of legal professional privilege and the problems it could cause within an MDP where only part of the work done for a client is privileged.


The Law Society has championed the concept of MDPs for some years. As long ago as 1987, a consultation revealed that 54% of solicitors backed them, and following another consultation showing strong support a decade or so later, the council adopted a policy in favour in 1999.


It told Sir David that one way around the regulatory challenges would be to ring-fence the legal practice in some way, possibly by placing it into a separate legal entity. This would lead, in effect, to a de facto MDP, through the existence of different practices (one of which could be an LDP) with common ownership and branding. This could be particularly important if the firm were owned by a non-legal entity.


The White Paper goes some way to offering a solution, but clearly there is a lot more detail to come. Under the planned regulatory framework, the overarching regulator – the legal services board (LSB) – will have all the regulatory powers, but delegate most of them to the frontline regulators, such as the Law Society, Bar Council and Institute of Legal Executives; so in practice, lawyers may not see much day-to-day change. These bodies will then require the board’s further authorisation to regulate ABS firms, which in turn will be able to seek licences to practise from any authorised regulator.


Crucially, the White Paper anticipates that any ABS regulator will already be authorised by the board to regulate one or more reserved legal services – this presumably means that, for example, the Royal Institution of Chartered Surveyors will not be able to regulate an ABS firm of lawyers and surveyors. At the same time, it has decided against requiring an ABS firm to be composed of a majority of lawyers, although the LSB will have the power to decide whether the services provided by some firms require some lawyer control.


Nonetheless, the intriguing prospect raised by Clementi of regulators competing to attract firms under their umbrellas survives; the LSB will be tasked with ensuring that standards do not drop as a result in the battle to offer the most appealing regulatory regime. In reality, though, there is every chance the Bar Council will not participate as it does not have, for example, rules for handling clients’ money, and has shown no interest in going down that road.


That would leave ABS firms with a limited choice – unless new bodies try to enter the market – and in all likelihood many would end up staying with the Law Society; indeed, Peter Williamson, chairman of the newly established regulation board, says it is already taking steps to prepare for the new arrangements, including the regulation of ABS firms. It might be that the Institute of Legal Executives (ILEX) turns out to be a cheaper and lighter-touch regulator than Chancery Lane, although it has yet to decide whether it will seek authorisation, but would a top-ten City firm operating across the world be happy being regulated by ILEX?


One area where competition is likely is conveyancing. As it is, there has been a steady trickle in recent years of solicitors handing in their practising certificates and requalifying as licensed conveyancers, partly because of regulation that, while robust, provides greater freedom. For example, the Council for Licensed Conveyancers (CLC) already allows external investment in firms it regulates.


CLC chief executive Tom Horrocks confirms that his organisation would be interested in regulating conveyancing ABS firms. The only issue, he says, is the need for the ABS regulator to be able to regulate the whole practice. This could cause the CLC problems if a conveyancing firm sought to expand into an unrelated area of law.


The frontline regulators will regulate both the ABS firm through licences and the individuals within it. They will have the power to remove a director or partner of an ABS firm and prohibit them from holding any position of control in an ABS firm, either for a fixed period or permanently. Consumer complaints will be passed to the proposed office for legal complaints, while ABS regulators will pass cases of misconduct to the relevant disciplinary body.


Of course, in the case of non-legal professionals, that will mean non-legal bodies. The White Paper is sketchy on how such co-regulation will work. The LSB and frontline regulators will need to establish ‘working relationships’ with regulators in other relevant sectors to ensure seamless protection for consumers, it says. ‘Frontline regulators will want to decide whether they consider it appropriate to allow the provision of services that are regulated under other legislation, for example financial services or consumer credit.’


At the same time, as the paper points out, there is an existing model in the financial services area, where those law firms that offer clients mainstream financial services must be additionally authorised by the Financial Services Authority.


Another sign that legal services will have primacy in ABS firms comes from the decision that regulators ‘must not permit ABS firms to provide any service likely to be incompatible with the principles of the legal profession’.


Simon Young, who represents the law management section on the Law Society Council, envisages that the regulatory structure outlined is viable. ‘The key will be the flexibility of the licensing arrangements,’ he explains. Assuming they could be tailored to meet individual needs – and the White Paper indicates that they could be – then it should be able to work. ‘People are going to have to get used to the difference between the regulation of the entity and regulation of the individuals within it,’ he adds.


The other key stumbling block is privilege. It has long been argued by opponents of MDPs that it is unfeasible to have, for example, lawyers and accountants working in partnership; while the former work under privilege, the latter have a professional duty to disclose information in certain circumstances. As a separate issue, accountants have lobbied to have some of their work covered by privilege, on the ground that in areas such as tax, it gives lawyers an unfair competitive advantage.


Both groups will be disappointed by the White Paper’s conclusions. The government has decided ‘at this stage’ that the current arrangements regarding privilege should remain. ‘Where an ABS firm includes non-lawyers, the LSB will need to ensure that the ABS regulators and the firms concerned have appropriate arrangements in place to ensure that the consumer’s interest in respect of their right to legal professional privilege is maintained and safeguarded.’ This suggests the Law Society’s solution – some form of ring-fencing for the legal part of the ABS firm.


Allowing external investment and ownership raises a host of additional issues. There will be a ‘fitness to own’ test applied to potential investors by ABS regulators, while the LSB will have to determine the extent of external investment allowed and provide clear rules relating to the prevention of conflicts of interest. This could mean specifying an actual percentage level of ownership below which conflicts are not a concern.


For some, MDPs are good news. Law Society President Kevin Martin says: ‘We continue to support the introduction of alternative business structures because they could provide greater choice for consumers and enable some law firms to remain competitive by attracting external investment.


‘The Law Society will develop rules to ensure that non-solicitors can only invest in law firms if they are fit and proper persons. Our rules will also ensure that any such law firm is ring-fenced from the rest of a corporate owner’s activities.’


Andrew Greensmith, vice-chairman of Resolution, says the ABS proposals dovetail well with the work of his association’s members. ‘Family law practice lends itself to solicitors working with other disciplines, such as mediators and family counsellors,’ he points out. The Legal Services Commission, for example, has been piloting a more holistic service in its family advice and information service, in which clients are referred by solicitors to appropriate professionals outside the practice – this might be even better if all under the same roof.


From a City perspective, Stuart Popham, senior partner of Clifford Chance, says: ‘Although we have no current plans to change the current ownership structure of the firm, we are pleased with the flexibility that the recommendations offer for all law firms in the UK.’


As part of the liberalisation, the White Paper envisages a wide range of ownership structures for ABS firms. These could include limited liability partnerships, unlimited liability incorporated practices, mutual societies, private limited companies, and public limited companies, opening up the possibility of stock market flotations for large practices.


There is a school of thought that MDPs may have less impact in the City. For one thing, corporate clients consider the quality of advice to be more important than the convenience of having all their professional advisers in the same place. Then there is the international concern, particularly in relation to external investment, that the big firms will need to avoid structures that could cause problems with more conservative legal regimes in other countries.


However, there may still be a role, according to Chris Hinze, chairman of the Professional Services Marketing Group, a marketing professional who watched the collapse of Andersen Legal from the inside.


He says the ability to buy legal services packaged with other forms of advice, such as accounting or consulting, has always been attractive to a small but significant proportion of the corporate market, especially among companies that are still relatively mid-market in size. ‘This creates opportunities to create more integrated professional advisory firms that can differentiate themselves through the provision of high-quality legal services,’ he says.


Arguably the high street could be more fertile ground for MDPs, where convenience and price are stronger drivers. However, qualitative research among lawyers, conducted recently by brand and design group Dragon, found that while clients would be more than happy to buy combined services if they were available, nobody is looking to exploit this. It said lawyers considered the reforms to be a threat, rather than an opportunity, and there was a general sense of ‘wait and see’ or ‘it doesn’t affect us’.


Mr Young, former managing partner of Exeter law firm Veitch Penny and now a law management consultant, acknowledges that the profession’s innate caution could work against it. He sees a parallel in the slow adoption of limited liability partnership status, where many firms preferred to wait to see if others made mistakes. ‘I also feel a bit disappointed that firms haven’t taken up the relaxation of the fee-sharing rules,’ he says. This move was a precursor to what is coming but has been met with no apparent interest.


Mr Hinze stresses that ABS firms are potentially attractive from a marketing point of view: ‘There is scope to build truly world-class and very high-quality personal consumer brands in the legal sector. Given the currently diffuse nature of the legal market, new market entrants will need to build and promote their brand in the market relatively loudly if they are to win the hearts, minds and – ultimately – the wallets of consumers. Legal providers that put clients first will succeed.’


However, he says there is a danger that the reforms could trigger a wave of publicity from some new entrants around legal issues such as divorce or buying a house that would dwarf the current concerns over claims farmers.


There may be a lesson for the profession in its approach to property selling. A huge activity for solicitors north of the border – the Edinburgh Solicitors Property Centre has virtually the whole city sewn up – it has only taken root in a few disparate locations around England and Wales.


The reasons put forward for this – such as a lack of entrepreneurialism, an unwillingness to co-operate with others, and caution over entering non-legal areas of work – apply equally when it comes to predicting why solicitors may not embrace MDPs. But with high street conveyancing seriously under threat as it is, even before the likes of building societies can own their own ABS firms, could diversifying be the answer? If nothing else, fees from estate agency work are usually several times that from conveyancing.


Mr Young says he is ‘not particularly confident’ that many solicitors will take the initiative in this brave new legal world, but as it begins to take root, they may have no choice. By then, however, the opportunity may be lost. ‘With anything like this,’ he says, ‘I’m sure there are going to be losers but there are going to be some serious winners as well.’ Those losers, the government says, may be small high street firms. Hidden away in the regulatory impact assessment at the end of the White Paper is this stark warning: ‘There is a risk that the anticipated increase in the level of competition in the legal services market may lead to the withdrawal of some inefficient suppliers of legal services from certain areas of the market, in particular those located on local high streets and in rural areas.’


It accepts this could potentially reduce consumer choice and harm access to justice, but this risk is likely to be mitigated by a new regime that would encourage new owners of ABS firms to enter the market. ‘In the long run this can increase the number of participants in the legal services market, and can potentially make it more competitive.’

The demise of small firms has been predicted for a long time and yet they have proven remarkably resilient. These reforms may not have the impact some think, but if they do, solicitors cannot say they have not been warned.