Proposed changes in competition and regulation

by David J Bilinsky

Get on up, look around,
can’t you feel the wind of change?
Words and music by Barry and Robin Gibb, recorded by The Bee Gees

Today there is much talk about the rapid changes in the environment. For lawyers, however, discussion of change typically takes place at a more sedate level – akin to glacial change. This is no longer the case in England and Wales where, on November 24, 2006, the government published the Legal Services Bill, currently before the House of Lords, setting out its proposals for the regulatory reform of legal services. This Bill, if passed, will have a definite and dramatic impact on the legal profession within England and Wales – but the blast radius of this Bill will be much much wider.

The Regulatory Impact Assessment (RIA) that was developed for the Bill is insightful with regard to the motivations behind the proposed changes in the Act. For example, section 1.26 provides:

“In March 2001, the Office of Fair Trading (OFT) identified a number of rules of the legal professions that were potentially unduly restrictive, and that may have negative implications for consumers by affecting the quality and price of legal services.⁸ The OFT recommended that the legal professional rules should be fully subject to competition law and that unjustified restrictions on competition should be removed.

The RIA continues:

“1.29: Markets in which competition is weak not only allow inefficient firms to survive, but can also weaken their incentives to innovate. In the extreme, firms in an uncompetitive environment can use market power to raise prices and restrict output, and hence earn higher profits at their customers’ expense.”

“1.31. However, lawyers’ customers often lack the detailed knowledge necessary to make an accurate assessment of the value for money of the services they procure, and whether the legal advice and representation they have received can resolve their problems. In addition, the “credence” nature of legal services means that even after the consumer has received the expert advice, they may still be unable to judge the quality of the advice or representation received.

1.32. The problem is exacerbated by the fact that many legal services are purchased infrequently, which means that consumers do not have the opportunity to compare the quality of advice they received against previous purchases. Therefore, the legal services market fails to deliver efficient outcomes, as it does not display the characteristics of a free market.”

The Bill is based on the “Competition and Regulation in the Legal Services Market” report prepared by Sir David Clementi. His report has many implications from a legal practice management perspective. For example, he stated that:

“Business practices have changed. In particular, the skills necessary to run a modern legal practice have developed; but while those with finance or IT skills may sit on the management committee of a legal firm, they are not permitted to be principals in the business. There is concern also about whether the restrictive practices of the main legal professional bodies can still be justified….”

Sir David’s recommendations included, in part, that non-lawyers be involved in management and ownership of law practices (emphasis mine).

Regardless of whether one agrees with the statements in Sir David’s report, one certainly senses the perception that now is the time for changes to be wrought to the legal profession. It is interesting that at least some of the changes lie precisely in the area of practice management and the delivery of legal services. The Bill itself, in section 1, sets but the seven regulatory objectives of the Bill, two of which are: “(c) protecting and promoting the interests of consumers; (d) promoting competition in the provision of services within subsection (2);”

What are the lessons to be gained from this Bill and the Clementi report? The first is that unless the legal profession itself changes to meet the demands of an increasingly demanding consumer culture, those consumers will seek change through other means, perhaps in ways that will fundamentally affect the legal profession as we know it today. There is certainly a power shift today toward the consumer, partly due to the Internet and partly due to the erosion of the image of the profession generally.

Secondly, the “soft” skills in the delivery of legal services – namely the ability to communicate at all times that the consumer has received high-quality legal services – will be increasingly important. This is no longer a matter of competitive advantage – we need to raise awareness among all lawyers of the fundamental importance of not only delivering quality legal services, but of reinforcing this at all “points of contact” between the consumer of legal services and the legal system.

Thirdly, the legal profession will be under increased pressure to be sensitive toward and innovative in terms of the delivery of legal services to all markets. It is no longer acceptable to leave gaps where identifiable groups of consumers are unable to obtain legal services in a cost-effective manner. For example, it may be time to undertake a dialogue on how to deliver legal services to the middle class in a manner that is perceived to be both cost-effective and results in a high degree of goal satisfaction.

Fourthly, it may be appropriate to start a dialogue on how to provide law firms with greater access to capital markets, thereby separating law firm ownership and finance from management and administration, and providing the capital necessary to bring about a more flexible approach to the development and innovation of legal services and products. Furthermore, as noted by Sir David, it may be time to allow non-lawyers to take equity positions in law firms, provided that the independence of the profession and the standards of the profession are maintained.

Regardless of the final disposition of the Legal Services Bill, it is apparent that if we take a moment and look up from our desks, we can feel the winds of change blowing through the halls.

David J. Bilinsky is the Practice Management Advisor at the Law Society of B.C. E-mail: daveb@lsbc.org. The views expressed herein are strictly those of the author and may not be shared by the author’s employer, the Law Society of B.C.

⁸ Office of Fair Trading, March 2001, “Competition in Professions” – www.oft.gov.uk/NR/rdonlyres/B08439C8-C5F6-4946-8AFF-71C050D34F46/0/oft328.pdf.”

This article originally appeared in the the February 2007 issue of BarTalk and is reproduced here with permission of both the author and the Canadian Bar Association, British Columbia Branch.