In October 2005 some barristers, incensed byAfter years of discussion, the proposed change in the regulation of the provision of legal services is finally coming to head. The criticism of the OFT in 2001 led to a consultation paper from Lord Chancellor’s Department in 2002. The outcome of this consultation was the appointment of Sir David Clementi to review the situation. Sir David’s appointment led to another consultation in March 2004. But, at the end of last year, the Clementi report emerged, albeit offering several possible models of regulation for the government to choose from. The government have now published a White Paper outlining their proposals and this has been followed up by a series of speeches by Lord Falconer. The title of the White Paper is subtitled ‘Putting the customer first’ which, in case you were not sure, provides a crisp one sentence summary of the government’s view of the existing system.

There are two main types of changes have been proposed in the White Paper and the ensuing presentations. One concerns changing the regulatory structure, which is supposed to be the core issue. Currently the profession is mainly self-regulated but the White Paper proposes introducing a new Legal Services Board (LSB), which will have statutory powers to regulate the profession. The intention, however, is to devolve these powers to the current front line regulators (FLRs) and for the LSB to adopt a strike out role where problems arise (not only on specific rules but also, in the ultimate scenario, the LSB can strike out the whole FLR). So in many respects, after all the ballyhoo, the Law Society and the Bar Council will retain their self-regulatory role, albeit under the watchful eye of the LSD. Only time will tell how much effective change materialises. One critical thing will be that the Law Society and the Bar Council will be obliged to separate out their regulatory and representative functions and this will be a big improvement both in practice and perception.

The second major change, somewhat of a side issue along the way, is that the government favour the introduction of new ownership structures. In particular allowing non-lawyers to own and manage firms, referred to collectively as alternative business structures (ABS firms). The new firms may choose to offer legal services only, so called legal disciplinary practices (LDPs), or may even involve lawyers working for firms offering one-stop services, multi-discilinary practices (MDPs). The legal profession has been particularly concerned about ‘outside ownership’ by which they mean non-lawyers. The phrase ‘Tesco Law’ has been used frequently in the debate to represent what the new structures might look like, and indeed, many household names have indicated an interest in setting up LDPs and MDPs. For a long while the RAC were a leading light in this debate but appear to have stepped back now the reality is emerging.

As part of the reform process, I was commissioned by the DCA to analyse the potential downsides of new ownership structures and to suggest regulatory remedies, and this report has been recently published. Amongst other aspects of the problem, I looked at the relation between dishonesty and firm size and whether it matters whether a lawyer or non-lawyer owns a large LDP or MDP, and to my surprise it is these issues that seem to have attracted most attention.

The government argue that outside ownership will bring in new money and new ideas into the profession, and that large firms will have reputations to protect that will improve the efficiency and quality of legal services. Since concerns have been raised that a negative outcome of the current reforms is that small practices may be driven out by well funded outside owned firms, the relation between size and professional quality is very relevant, which is why I tried to address this. The problem I quickly found is that there is very little data and what exists is not quite what is wanted. It would be an obvious point to suggest that there is no big surprise in finding that a self-regulated industry has limited evidence to get to the bottom of what causes dishonest practices. From my dealings with the Law Society (who supplied the data) I feel that this would be an unfair implication to draw, but this does alter the fact that it is very hard from existing data to understand how much dishonesty there is and where and why it occurs.

However, what evidence I have been able to find indicates quite strongly that dishonest practices are far more prevalent in small firms than large ones. This is true even before we take into account that a large firm is likely to have at least twenty times more partners than a small one. Trying to correct for size is difficult but we can show if we correct for firm size by taking account of the number of solicitors in the firm then a partner in a practice with 2-4 partners is almost 60 times more likely to engage in dishonest practices than partners in firms with 21 or more. If we correct for size by fees then the picture is even more dramatic.

The really interesting issue, and here we know even less, is why. Clearly, the type of business may differ. It may also be that it is harder to ‘take on’ a big firm, and more cases may get settled at an early stage. While there are many potential explanations, anecdotal evidence indicates that a major reason is that it is more common to have formal procedures in place in large firms. This is likely to restrict ability to be negligent or dishonest, and helps create a positive culture in this regard.

So in the new regime are lawyers running large firms more likely to be enticed into dishonest practices if there is a non-lawyer owner than when they own the LDP themselves? The professional wisdom is yes, calling for ring-fencing of legal teams within new ownership structures. My view is that the opposite is at least as likely to be the case.

It is difficult to believe that lawyers have a stronger ‘social conscience’ than other professions. For example, there is clear evidence from recent research that the medical profession’s treatment of patients changes as economic incentives change and there is little reason to suppose that lawyers are likely to be less responsive to financial incentives. The new regulatory regime will be in a position to strip dishonest lawyers of their professional livelihood. So a non-owning lawyer manager will be placing a great deal of his/her livelihood at risk if they acquiesce to an outside owner’s pressure to bend the rules, no matter how much of the LDPs value is at stake. In contrast, if the LDP’s ownership is concentrated in the lawyer-manager’s hands then the bulk of the lawyer’s value at risk is the value of the LDP. If there is large financial benefit to bending the rules for a major client this is more likely to prove attractive to lawyer manager when they are owner than when there is outside ownership. Indeed, one of my primary regulatory concerns relates to the asymmetric attention given to outside ownership relative to the comparatively lax view of practices where ownership is highly concentrated in lawyer hands. Tighter financial regulation seems appropriate whether firms are lawyer owned or not.

So, while, large LDPs and MDPs, may or may bring big benefits, it is not obvious that the profession should be so concerned about outside owners. Indeed, if there is genuine concern about dishonesty in large, concentrated LDPs, the profession may do better worrying ‘closer to home’ than focussing on outside owners. Of course, whether any of this is relevant for barristers, as opposed to solicitors, is a battle formally yet to be fought. One can change the law to allow new ownership structures but it is a step further to force the associations to remove their membership rules. The White Paper says that FLRs will be authorised to license ABS firms which meet the required standards and will be be forced to regulate in the consumers interests. So it is clear where the government is coming from, but one suspects there are more battles ahead before the position is resolved.

Paul A. Grout
Professor of Political Economy
Head of Economics Department
Centre for Market and Public Organisation

Contact Details
Email: P.A.Grout@bristol.ac.uk