A sanity check on legal regulation

David Johnston

David Johnston

The UK's authority on mapping governance, risk, compliance, regulation and legal services markets.

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A dispassionate and revealing analysis on the impact of legal services deregulation from Boston Consulting Group makes interesting reading. Nordic Bar Associations and Law Societies commissioned it, and as such it is not merely speculative. Its core finding is that the UK’s Legal Services Act has not resulted in lower prices or better quality for consumers. Of ten criteria for success, it has enabled progress in at most two. This is not just a ‘could do better’ or ‘needs further research’, and certainly not a ‘needs more regulation’ – this is a WTF!

Back to basics: Clementi’s terms of reference considered what regulatory framework would ensure an efficient and effective independent legal sector (pretty broad terms). It has been suggested that the LSA was never meant to set international precedents, but it will have been clear to all involved that England & Wales, as the home of Common Law, was going to be setting precedents here with any steps taken.

The report is couched in often technical economic terms, but has a number of findings that are very much at odds with the narrative around legal services reform currently.

  1. Sustained levels of profitability in the legal services market suggest not much has actually changed. In core economic terms that’s true, but a lot has changed. The partnership business model is largely unchanged, but it is under sustained pressure. Take Irwin Mitchell, an overtly more commercial than most firm. Ten years ago 53 partners generated £3m each; now it’s 230 partners generating £1m each. That involves sweating the non-partner fee earners hard, and non-partner average salaries are only £37.6k. Sure this still works for the handful taking their third holiday with their privately educated kids in the Maldives. For the red brick law graduate, it’s a pretty poor bargain. None of this comes from Clementi or the LSA. It’s how an esoteric business model deteriorates; period. Clementi should have offered an opportunity for the sector to reposition itself. Partners overwhelmingly prefer to watch the frog boil.
  2. The number of providers of legal services has not increased. We have often pointed out that ‘the competitor who kills you doesn’t look like you’, but even allowing for an additional c500 GRC consultancies doesn’t move the dial significantly. The dial is actually going backwards among traditional law firm models. What this misses is that the market finds its own pressure release valves. The increase in in-house counsel and their growth in influence in mid-market clients is the elephant in the room. Again; this has nothing to do with Clementi and has been entirely outside the remit of the new regulatory regime. Business consumers don’t change the music; they put a bouncer on the door.
  3. Law firms are getting bigger, and predominantly they are doing so without using either ABSs or listed markets. This is through lateral hiring, team moves, and mergers, all of which reinforce or buttress most firms’ partner-centric approach. This is precisely not what the Clementi reforms were hoping to achieve. 4% taking up ABS structures is a resounding raspberry to the opportunity offered. Sure all of the Big 4 accountants use it, but they’re clean boots. But thank you, Mr Clementi, the spouses of sole practitioners and a handful of Finance Directors are deeply grateful for recognition of their equity impact.
  4. Prices are up; and they’re up even in the consumer law areas. Consumer satisfaction is in a parlous state at 85%. If it’s moved it is from ‘awful’ to ‘pants’, but the dial appears not to have moved much if at all. If any other B2B services business management settled for 85% customer satisfaction rates, they’d be sacked. Transparency is also largely cosmetic as the adoption of fixed-fee business models is sporadic at best, albeit favoured by the industry’s competitors.
  5. The headline negative risks are all neutral or ameliorated. The ‘rule of law’ profile for the UK internationally seems (on a charitable viewing) unchanged. A helicopter review such as this cannot be expected to drill into undoubtedly real pressure points in criminal justice and legal triage areas especially, but Clementi was not focused on this, only to preserve the ‘independence’ issue. Geographical issues point to the decline of the rural or High Street generalist, but this is again not an issue-driven by LSA changes. Despite repeated claims by lawyers that they face a heavier burden of compliance than their competitors (which is simply wrong, incidentally), the fees for such have also in relative terms actually declined.

Perhaps the most insightful piece of this report is that the ‘legal services market’ cannot be considered a cohesive whole. Sue, Grabbit & Runn on the High Street cannot do what EY Law does. Twitter’s GC is not going to tackle personal injury. Any future policy and lawmakers have to recognise this. Trying to make one size fit all is not working, and it is certainly no justification for an extension of regulatory oversight by any given type of lawyer. To call this ‘half-baked’ is a travesty. Clementi had the hubris to tackle everything; the LSA over a dozen years on shows it cannot be done. Calling for a cohesive model that ignores the GRC, TIC, FCA, ISO, BRC and industry-specific regulators is nonsense.

Critics f BCG have argued that looking at the top 100 firms is a misleading segment to sample. But if the advent of the Big 4 accountancy practices launching directly into that sector has resulted in only 8.5% of the lawyers (by turnover) using ABSs to compete, that tells you a lot. If the deep pocket global commercial teams see the LSA as an irrelevance, it probably is. If all it is doing is letting spouses save tax, it may harmless but it is economically worthless.

The fact is the LSA is not affecting the number of law firms, the quality of advice, the prices, transparency, or competitive dynamics of the legal profession in any meaningful way. It is not moving the dial on a parlous quality of service perception, and a 38% rise in PI claims does not bode well for the future. There are commercial determinants of quality, namely CAGR and RoS (sustained growth and profitability), and there are plenty of firms demonstrating these. There will always be a need for good lawyers, but they do not demonstrably come from LSA changes. In fact, the insurance teams who have bought into law have generally struggled, while lawyers opting out of SRA regulated fields have thrived.   Access to justice is not the same as access to a lawyer, or a lawyer’s regulator.

Why on earth would you make a proven failed effort the starting place for more regulation? The problem here is also a repeated failure by regulators to distinguish between consumers and customers. Technically B2B vs B2C. Typically those dealing with B2C legal services are more regulated than law firms, especially when you consider the role of the FCA, UKAS, ISO and myriad other industry-specific regulators and certification bodies none of which the SRA would even know how to compare to, let alone regulate. This gap is where the GCs live, and they police it well; better than any regulator.

Having failed to make a dent in the real competitive pressures on legal services providers, there is simply no logic in extending powers for, or even that the SRA is the appropriate place to start. The position taken by Myson, et al is that unregulated providers especially should be regulated on the basis of public interest, but the LSA impact has been zero on consumers so far. Removing Clementi’s consumer interest test in favour of a public interest one would be very retrograde. Calamities like ‘lawyer of the year’ Shiner, uninsurable sole practitioners, and stubborn levels of SDT complaints speak louder than stats. The UK is behind Estonia on world justice rankings on civil justice, and again that dial does not seem to be moving. The accessibility metric dropping from 31st to 79th out of 178 countries is an atrocious statement, as is the 23rd out of 24th in terms of ranking among its peers.

The last laugh has to go to the consumers, however. Business clients are buying in house talent at pace to balance the supplier relationship. They’re using good tools too. Even SMEs and LMEs achieve something similar with contract lifecycle and supplier certification plays. The individual consumer is effectively denied legal services outside of commoditised insurance options, however, and the criminal system is a farce. The LSA impacted none of this. I reiterate our earlier suggestion. The monopolies granted to legal professions should be removed, and a surcharge on (rising) fees similar to the IPT in insurance should be used to hypothecate and fund legal aid, law centres and immigration services properly. Only then can lawyers legitimately claim to have Justice at the heart of their professionalism.

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