Roll of the dice

19 December 2011 - Enough of the doom with outcomes-focused regulation

Last month the Law Society published the outcome of a survey it had conducted among small firms, which claimed that one in ten small practices were planning to close down because the cost of complying with the regulatory regime contained in the new solicitors’ handbook, commonly known as ‘outcomes-focused regulation’ (OFR), would be prohibitive.

The report claimed that nine per cent of firms surveyed were planning to close or merge as a result of the increased costs of compliance. The report also suggested that 23 per cent of firms with fewer than ten partners did not record how much time was spent on compliance, whereas those that did claimed to spend a whopping 27 days a year on it. That, of course, must be on the old code of conduct, not the new, but, as each firm will now have to get on top of the new rules, and will have to appoint a compliance officer for legal practice (COLP) and a compliance officer for finance and administration (COFA), by next March, the amount of compliance work is only going to increase, in the short term anyway. It does not help that these new roles cannot be outsourced.

My initial reaction to OFR (aka freedom in practice) was that, while it may be yet another issue with which to get to grips, the emphasis was on saying goodbye to box ticking and taking a more common-sense approach to regulation. Provided you adhered to the Ten Commandments (sorry, Principles) you ought to be fine and if you had complied with the 2007 code of conduct you would have little to fear from OFR. The new handbook is significantly shorter than the old, and there are ‘indicative behaviours’ to guide you as well. This, taken with the SRA’s stated desire to be friends with the profession, to supervise and help and only to come down hard on those firms that refuse to change or accept help, left me feeling that maybe this was not such a bad development. The Law Society’s survey said that 56 per cent of respondents were in favour of OFR, so I wasn’t alone in being cautiously optimistic.

Then last month I went to a seminar organised by business consultancy CoreLegal, the message of which shook me out of my complacency. Granted, I was always slightly suspicious of the SRA’s desire to be warm and cuddly. How could they give up the pedantic, hard taskmaster image cultivated so successfully over so many years? Could they really get away from a culture of prescriptive micro-regulation? The desire to ‘supervise’ always had an element of doublespeak about it. But, there is force in the SRA’s admission (stated during their ‘freedom in practice’ roadshows earlier in the year) that they can’t micro-manage every law firm and ABS and need to concentrate their resources on the law businesses that do pose a real risk to the profession, leaving those that comply (or show that they are attempting to comply) in peace.

Thou shalt be professional

However, the message from the seminar is that nothing in OFR is clear and law firms face great uncertainty in what they are being asked to implement. Yes, there are ten principles that are set in stone, but instead of being clearly understandable they are a movable feast. Thou shalt not kill is easily understood, no room for confusion there, but “you must provide a proper standard of service to your clients” – while also seemingly unobjectionable and reasonable – begs the question: what is a “proper standard”? Is it a good service or merely middling? Is it more subjective and does it depend on the type of service being provided, i.e. is the level of service demanded of a firm acting for individuals (particularly vulnerable clients) going to be higher than that demanded of a big commercial firm acting for corporate clients (answer = yes). Where is that level of service to be pitched? There is no one prescriptive level of service and that is what makes the whole prospect of OFR so daunting for many. In other words, what constitutes a proper standard for one client may not be sufficient for another.

Similarly, outcome 1.1: “You (must) treat your clients fairly.” Who judges what is fair? Isn’t this highly subjective and bound to be interpreted against the solicitor? But hold on a minute: is this really so onerous? Are there any solicitors who do not want to treat their clients fairly? The difficulty for practitioners is that we simply do not know how these rules will be interpreted, but surely it is better to have guidelines for behaviour rather than pedantic rules and requirements that must be obeyed, even if they are not relevant to that particular firm’s area of practice?

The handbook came about from an understandable desire by the SRA not to have a two-tier regulatory system – one for ‘traditional’ law firms and the other for ABS law firms. That means that much of the new handbook is drafted with ABSs in mind – new entrants to the legal marketplace that may have many other commercial interests.

One of the examples cited at the seminar as being a difficulty for law firms was outcome 8.4, the mandatory requirement that “clients and the public have appropriate information about you, your firm and how you are regulated”. I disagree. For law firms that do not convert to ABS the information to be given is simple and is set out at outcome 8.5 – you need to inform clients via your letterheading, emails and website that you are authorised and regulated by the SRA. Job done? For ABSs that do unreserved as well as reserved legal activities, or for example a firm of accountants that becomes an ABS, I can see that these issues might be more problematic, but should it be concerning to the plain vanilla smaller law firms that are owned wholly by their partners/members?

The answer to all these (and other problems), at least according to the speakers at the event, is to communicate with clients to assess what they need and how they perceive the service they receive. No longer will what is on the file be enough evidence to show that you have provided a proper level of service. Instead, it was suggested, you will need to have a dialogue with clients throughout the case and afterwards (in the form of questionnaires) to ascertain whether they felt they had received a proper level of service. That may involve retaining external consultants to send out questionnaires and to interview clients on the retainer relationship. I don’t have a problem with this in principle, indeed probably all successful businesses listen to their clients and work on feedback, but does it require a satellite industry to be created? Is this really a regulatory requirement or merely good commercial practice? I suspect it is the latter.

There are troublesome aspects to the new handbook and this is where potential difficulties lie. If a law firm makes a mistake there is now a positive duty upon the solicitor to inform the client “if you discover any act or omission which could give rise to a claim by them against you”. Just what should you say in this situation that will not prejudice your PI insurer’s position? There is sure to be much debate over that issue in the future.

Risk management is a main focus in the new regime. That is not just legal risk, but financial and managerial as well and many firms may struggle to get to grips with it. For the first time, the business of being a solicitor is a matter of professional conduct.

Consider principle number 8: “You must run your business or carry out your role in the business effectively and in accordance with proper governance and sound financial and risk management principles.” And, under outcome 7.4, “you maintain systems and controls for monitoring the financial stability of your firm and risks to money and assets entrusted to you by clients and others, and you take steps to address issues identified”.

In other words, if the bank called in its overdraft to your firm suddenly, what contingency plans do you have? For those firms that are run properly and prudently, do they have much to fear? No one wants to see another Halliwells disaster and I cannot help but feel that these requirements are prudent and sensible. If you read chapter 7 of the code of conduct it reads to me as though it is written with the ABSs in mind, not with law firms that already are used to supervising staff. It must surely be in the profession’s interest that rogue firms, or firms that are shambolically run, are forced out of business and also to make sure that no such businesses are allowed to enter.

Undoubtedly challenges lie ahead, but I cannot help thinking that many of the people prophesying regulatory doom actually have much more idea of what lies ahead than others. We are all in the same boat: no one quite knows what is expected and that is indeed an unsatisfactory state of affairs. I don’t think that requires large numbers of small practices to shut up shop: finding new work, paying ever-increasing indemnity premiums and coping with pressure on fee income are probably greater threats to many practices. However, the profession has claimed for years to be over-regulated and now the SRA has, hopefully, taken steps to remedy it. Put the doom-mongers to one side for the time being and give it a chance. In turn the SRA has to ensure that it doesn’t lose this opportunity to build bridges with the profession. It will only take a few well-publicised harsh regulatory decisions to alienate practitioners and throw OFR into disrepute.

 

16 September 2011 – Legal big bang?

Justice secretary Kenneth Clarke was busy giving lawyers a congratulatory pat on the back on Wednesday when he addressed a seminar at Clifford Chance on the introduction of alternative business structures. “I want to make it clear that the City of London is not just one of the world’s great financial centres, it is one of the great legal centres as well,” he said.

The conjunction of finance and legal fitted in with his headline point that the introduction of ABSs in England and Wales could have the same effect as the 1986 deregulation of financial markets. Financial deregulation was widely seen as a huge success at just about any time up to 2008; sceptics of the legal revolution will fear a similar calamity happening in the legal sector.

But, of course, if there is to be a big bang it won’t take place on 6 October for the simple reason that the SRA isn’t ready to go ahead because of the necessary regulations not being in place. The only ABS that will be able to trade from then will be conveyancing and probate businesses regulated by the Council for Licensed Conveyancers (CLC). With all due respect to the CLC and its members, it is not going to be quite the massive conflagration that many had hoped or feared.

The SRA came in for some very pointed criticism recently from Professor Stephen Mayson, director of the Legal Services Institute, when he criticised the chaotic implementation of ABS: “The SRA will introduce outcomes focused regulation on 6 October... but with one crucial outcome missing. The planned date for SRA-regulated ABSs will come and go: we now have certainty replaced with uncertainty. Policymakers and regulators rightly want the legal services market to be more commercial and business-like. But, with new entrants, new capital, and entrepreneurial law firms ready to respond, the regulators have failed them.”

And: “At this point, the implementation of ABS has become – I say with deep regret – something of a shambles. Whether there has been a failure in aspiration, project management or communication, I’m not sure. For those new entrants and sceptics who are unsure about the regulators’ ability to supervise a new framework and style of regulation effectively, the failure even to start on time presents a significant blow to credibility.”

The SRA website states that it hopes to be “formally designated” to license ABS before the end of the year. As Mayson comments acerbically in the above speech, “if a week is a long time in politics, three months is an age in the world of business”. As reported on 6 September on solicitorsjournal.com, the SRA has come under attack from many other sources for the delay, which won’t be able to license ABSs before January or February next year because of a failure to get the necessary regulations through parliament.

Does the delay matter though? Yes. It reflects badly on the profession and gives onlookers an opportunity to criticise solicitors for not delivering on time and for it being another typically British muddle. The LSA received Royal Assent back in 2007 and, although it was always going to involve a massive upheaval, surely four years should have been ample time to get everything in place?

The new regulatory structure is a muddle; the system hasn’t been simplified or made any clearer, it has instead put in place a maze of labyrinthine complexity that would have made King Minos proud. And that may be the key to this. The SRA has had its role to play in this but it may be harsh to single it out wholly for blame, when it is just one actor in a drama that may yet turn out to be worthy of a Greek tragedy.

12 July 2011 - Oh to be in a shed now that summer is here

There was such an interest in my last blog where I relayed news of a new marketing initiative for solicitors, Shed_Law, that I made contact with them to find out more. I was delighted to meet up with Rufus Stone, the company’s tall perma-tanned CEO with an accent that you can’t quite place and a ponytail, and Brook Bramshaw, the company’s elegant head of business development, a couple of days ago, just after they had returned from Glastonbury, not showing any signs of partying or sleep deprivation.

We met in their virtual shed in central London. They call it a virtual shed because it is only used for meetings when needed and isn’t permanently occupied. Their corporate HQ is a summerhouse in Rufus’ backgarden in the middle of rural West Sussex.

I started by asking about Glastonbury. How was it? It was fabulous, gushed Brook, we met lots of really interesting people – several solicitors among them. We realised some months ago that Glasto would be a great place for us to promote Shed_Law. We see ourselves as bringing the Glasto vibe out of Somerset and into the wider community. We’re about providing a service to the consumer and having fun while we do it. Think of the legal profession as a dusty, lumpy old cushion. Alternative business structures are going to give that cushion a damn good beating – well, we aim to put the stuffing back in and give lawyers the tools to fight back, so that in future the legal profession will be more like a nice cosy duvet, or sleeping bag. Lawyers like substance not froth, real work not marketing hype, so you could say that our corporate vision is ‘get stuffed with Shed_Law’.

But isn’t the concept of Shed_Law rather old fashioned? It’s the sort of thing your granddad would do isn’t it, pottering about in his shed? I asked. “No,” Rufus exclaimed, “just the opposite. The shed has lots in common with the tent, and they’re really cool.” (I grimace slightly at this.) “For instance, during Glasto I had three girls in my tent all at once at one point.” But do you think this model will appeal to all practitioners, I persist? For instance, some of the more traditional and dare I say staid lawyers out there won’t be attracted by this will they? “Well, who wouldn’t want three babes in their tent at Glastonbury?” says Rufus, giving me a pitying look before standing up quickly and banging his head on the roof.

“In my experience,” he continues, “I find that the decision-making process is considerably enhanced when personal space is, ahem, compromised. So, with Shed_Law, clients can be sure of a warm welcome but they won’t want to stay for ages, meaning your appointments can be speeded up and you keep a tight rein on the time incurred on each matter.”

Brook then went on to explain. “We set up a shed in the ‘Greenfields’ zone; prime territory for combining traditional skills and creative thinking where the ethos is all about change and discovery and how to release your potential. We were inundated with enquiries from people seeking legal advice.”

Do you mean people needing advice on possession of drugs? I interjected. “Heavens, no,” says Brook. “You’re out of touch, Glasto is a family affair these days, with kids, iPads and everything. No, we had a lot of enquiries from members of the public asking what they can do now the government is going to cut legal aid for welfare benefits advice – it’s a disgrace it really is – and from loads of lawyers interested in alternative ways of working. There was even one eminent QC who came up to ask for an information pack. He was interested in creating a new set from a shed. He thought we wouldn’t recognise him with his beany on but I recognised him straightaway. The Shed_Law model probably works better for barristers than solicitors,” she mused. “There are a lot of lawyers out there wondering where they’ll be in five years time and the concept of opening an IT-based practice from a low-cost mobile facility strongly appeals.”

Tell me more about the virtual shed concept, I ask. Surely that diverts attention from the central concept of Shed_Law, mobility? “No,” says Rufus, “it complements it. Flexibility is at the heart of the Shed_Law concept. It might not always be possible to relocate your shed at a moment’s notice so we’ve planned a network of virtual sheds which a member can use if they have an urgent appointment.

“For instance, consider you’re based in Cornwall but have a without notice injunction on at the High Court in London. Time is of the essence. Using our network of sheds you can set up shop (or shed) in our conveniently located facility just off the Embankment. Many members won’t need this flexibility, but for those that do it is extra value added.

“In time we’ll build up a nationwide network of virtual sheds, all carrying the Shed_Law logo, so that it will become a recognisable brand name in the legal market place.”

It all sounds very exciting, although I have some reservations about how it will all be financed. Sadly the company CFO, Elgin Marbles, wasn’t able to make the meeting (and it would have got slightly claustrophobic if he had been there). He is the brains behind the company’s financial model and business plan and I hope to catch up with him soon.

26 May 2011 – Coming to a car park near you: an exciting new development in ABSs - it involves a shed

New marketing collectives seem to be springing up all over the place at the moment, with QualitySolicitors’ link up with WHSmith being just one example. So I wasn’t surprised to find an email with details of a new initiative drop into my inbox the other day. It is about to launch imminently and takes a radically different approach to the brand challenge posed by the Legal Services Act. It’s called ShedLaw.

It is promoted by a company called Solicitors Holistic Innovations Tactics & Endeavours Ltd, and is aimed at smaller law firms that don’t want to rebrand themselves or cannot afford to pay the joining fee/percentage of turnover required by some marketing collectives. It is based on the premise that the crucial point in the process of acquiring new clients is to get to them first before others do, which is the vital purpose of the QualitySolicitors’ newsagent tie-in.

In this new initiative, the law firm will go to where the clients are; not in shopping malls or via telephone call centres, but where consumers really are: in the street, car parks, lay-bys, playing fields, even on their allotments. Nowhere will be off limits. Shed law will have immediacy, visibility and accessibility. How can it achieve all this? The key to all this is via cost-effective, lightweight shelters or structures: the shed.

In the minds of the promoters, the shed is quintessentially English, as natural as warm beer, cricket on the green or steam engines. Throughout our great island story the shed has played a fundamental, if discreet, role. Great men have written great works of literature in their sheds. George Orwell wrote Down and Out in Paris and London from a shed, George Bernard Shaw penned Pygmalion in a prefab at Shaw’s Corner and Phillip Pullman bashes away at the bottom of his garden.

Now ShedLaw will take that creative process right into the heart of British life. By becoming the premier brand for the provision of legal services, it will not only give the consumer access to justice but give the humble shed the recognition that it deserves.

The membership fees are said to be minimal and the only requirement for entry is that each member has to build its own shed on the basis that if you can’t build your own shed you should not be practising law. Members will be able to acquire their own sheds via the company, which hopes that it can use its purchasing power in the market to drive hard bargains on wholesale rather than on expensive marketing campaigns. Failing that, members can all pool their Tesco clubcard points together and buy their sheds via Tesco direct. If you wait for a bank holiday or a royal wedding, Tesco might even offer to double your clubcard points for you.

The shed will need to be big enough to accommodate at least two deckchair-sized seats, so that client consultations can be held in comfort. The company will offer basic services in electrics, to hook up to the mains (lampposts are a good source of mains electricity, but care is needed) for power, water supply and sanitation – it having a background in the latter area.

Members will be free to practise where they like, subject to any applicable planning or other laws and it being safe to do so as well as in whatever area of law they choose. It is anticipated that heavy-duty litigation or large transactional work will not be well suited to the model, but there is no absolute bar. Neither should this be seen as a parochial business model: the company has plans to develop an expertise in crofting law, being an ideal cross-border area of practice.

In preliminary trials, concerns were expressed among the public of the security of data and client information. Clearly this is a very important issue but one that can be addressed by ensuring: (a) that a decent padlock is used when the shed is unattended; and (b) that the shed is not left anywhere where it might be likely to be removed by police or security guards on a flatbed truck. To avoid these problems future plans include developing a spin-off brand – Caravan Law – to provide ultimate mobility in the provision of legal services.

Additional services can be offered once ABS comes into force on 6 October, such as refreshments and sales of ancillary items. The company sees this as a key area of growth for the brand – after all, what can be better than a cup of tea while discussing complex legal problems? Perhaps with a slice of cake. Or a Rich Tea biscuit.

The benefits are obvious: low overheads, flexibility and mobility. In the right location, with heavy footfall or at the right time of day or night, there could be a good passing trade. One potential scenario the promoters suggest is that a member could locate their shed in a town centre, perhaps near to a pubs and offer burgers (or kebabs) with initial free legal advice on the side, but with a loyalty card scheme as well so that on the client buying their tenth doner they would be entitled to one hour’s free legal advice.

The company welcomes applications for membership from any law firm, big or small. It is open to everyone, although the promoters envisage that the scheme might have more appeal to men. Member firms will be regulated by the SRA – the Shed Regulation Authority.

You can follow them on Twitter: @Shed_Law. In true shed fashion the website www.shedlaw.com is currently under construction.

 

28 March 2011 – Horses bolting and the ABSs' stable doors

You may have read that the Sole Practitioners Group (SPG), a body representing the interests of solicitor sole practitioners, has launched a campaign to try and lobby members of the Law Society for a postal ballot on whether the SRA should be authorised by the Law Society Council to regulate ABSs. The Law Society vote was heard last week and resulted in a 54 – 16 vote in favour of the SRA being authorised to regulate ABS.

So, full steam ahead for ABSs at the SRA then.

The LSB will be sighing with relief. In the light of that vote, the SPG, thankfully, decided not to press ahead with its plan to request a postal ballot of solicitors.

I cannot help but feel that the SPG’s proposal was always a case of way too little and far too late. Clive Sutton, the honorary secretary of the SPG, conceded that the ballot would not have delayed the introduction of ABSs in October but he thought a vote against it would have assisted in demonstrating the opposition of the profession in any dialogue with the government.

The government is not going to back away from ABSs in principle now. If it were to do so it will be because all the necessary regulations are not in place and certainly it won’t be because the lawyers themselves don’t like the brave new world about to be foisted on them. The whole premise of the Legal Services Act, as informed by the various inquiries into the profession that culminated with the Clementi report, is to put the consumer first, to modernise the delivery of legal services and generally give the legal profession a good kicking. What else is there left to negotiate over?

Successive governments have had little regard for the interests of lawyers, particularly solicitors, so why the SPG ever thought holding a ballot, which would, reportedly, have cost the profession £70-80,000, would have sent a signal out to government is beyond me. If there were a Champions League of Futile Gestures this would be a sure fire winner. Futile and expensive.

Most lawyers have been sleep-walking towards ABSs for the last three years and only now are they waking up to what may, or may not, happen. Now is the time to be making preparations for the new environment, not standing like King Canute on the beach ordering the sea to go away.

 

17 February 2011 – Separation of powers

Next month sees a potentially historic vote in the Law Society Council on whether the SRA should be allowed to tout itself as a licensing authority for alternative business structures (ABSs).

So I was intrigued to read the recent comments of the Law Society president, Linda Lee, on why the SRA might not be a shoe-in.

The Legal Services Act (LSA) requires the appointment of frontline ABS regulators so that the Legal Services Board (LSB), as the watchdogs’ watchdog, can avoid getting its hands dirty in day-to-day matters. It has always been trailed that the SRA would ‘probably’ want to be a licensing authority, and, given that it currently watches in the region of 120,000 solicitors, has responsibility for more lawyers than the other professional legal bodies combined. For the SRA not to be a licensing authority seems incredible, yet clearly we should not take it for granted.

The fear of reputation damage and claims on the compensation fund to the SRA, and, by extension, the Law Society, seems to be the main reason why Lee thinks the SRA should not be a licensing authority. But why should the Law Society fear reputational damage from the SRA acting as a frontline regulator? Is it more than just a distaste of all those nasty businessmen entering the profession?

I don’t think so. The Law Society has been in favour of reform ever since the time of the Clementi report. The regulation of ABSs does provide a huge challenge, especially when the final rules and regulations governing ABSs have not been formulated and there is only eight months to go before they come into being.

There is another reason as well. In case you’d forgotten (as I had) the SRA, billed as the independent regulatory arm of the Law Society, is in fact a committee of the Law Society Council. It is therefore rather less than arms length from the Law Society. This seems to me to be unsatisfactory and less than transparent, especially in the prevailing climate of distrust of professionals and regulatory bodies.

The SRA ought to be entirely independent of the Law Society and free to make decisions about whom it regulates without needing the Law Society’s input. That would reduce the risk of reputational damage to the Law Society as well and provide a demonstrable “separation of powers”.

It seems inconceivable that the SRA will not be a frontline regulator of ABS for another reason. The LSA allows for ‘regulator shopping’, so that if a firm of solicitors practiced only conveyancing and probate it might decide to be regulated by the Council of Licensed Conveyancers if it thought the CLC regulatory regime was more to its liking.

Conceivably a firm of solicitor criminal practitioners might prefer to be regulated by the Bar Standards Board if it felt it more appropriate (and always assuming that these bodies put themselves forward as frontline regulators as well).

What about firms that have more mixed practices? Where would they go if the SRA was not available as a regulator of ABSs? The only other option would be for the LSB to act as a frontline regulator, which is not what was originally intended but would almost certainly become reality if the SRA does not step forward.

The SRA is currently the only regulator that covers all of the reserved legal activities – save for notarial activities – that are governed by the Act. For the SRA not to be a frontline regulator of ABS would both undermine its own position and leave it facing a future as the regulator of a rump (albeit probably a large one) of solicitors’ firms that don’t convert to ABSs.

But is there something more Machiavellian afoot in Chancery Lane? The relationship between the existing regulators and the LSB has not been a happy one over the last few months. Both the SRA and BSB have severely criticised the LSB over its plans on advocacy and training in the profession.

The SRA derided the LSB’s proposals over publication of all referral fees and there was a very unpleasant row over the number of lay members on the council of each of the SRA and the BSB. The LSB has got its hands more than full at the moment and taking on the role of frontline regulator for ABS might just stretch it past breaking point, especially as ABSs are supposed to be with us from October.

There is good reason to fear that the introduction of ABSs could lead to serious flack from consumers and the media. The SRA and the Law Society may feel it safer to sit smugly on the sidelines while the LSB takes a kicking, but it’s a dangerous game and could just consign the SRA to a much-reduced role in the future of the profession.

 

20 January 2011 – To refer or not to refer...

That is the question. But what’s the answer? With both the Legal Services Board and its consumer panel having come out in favour of referral fees, it looks like they’re here to stay.

The BSB dislikes referral fees and the SRA doubts the LSB’s research suggesting that referral fees have improved customer choice. Meanwhile, the LSB has suggested in the interests of transparency and disclosure that all referral fee agreements between lawyers and providers should be published, leading to another spat with the SRA which has pointed out the gross impracticality of such a scheme.

I’ll come clean: I don’t like referral fees and have never liked them. More to the point, my firm doesn’t pay them and never has. I believe, in a rather old-fashioned way perhaps, that clients should come to a firm because of the quality of the work they do, not because they have paid someone to refer clients. I may be in a minority.

Referral fees are common in most business sectors, so why not the law? Good question. They are the way of the world. However, they don’t promote competition, indeed are anti-competitive and favour bigger firms over smaller. As the BSB argues, they don’t ensure that the client receives the best possible advice for their problem.

What the profession needs is a level playing field, one which is not distorted by referral fees or other tie-ins.

A similar issue arises with legal expense insurance panels. A client may have LEI but, pre-issue of proceedings, they can’t make the insurer instruct a firm of their choice, which I believe is wrong. Post issue most clients aren’t going to seek alternative representation. The insurer can have arrangements with chambers, meaning that you have to seek an opinion from a barrister in that set (as stipulated by the insurer) before you can pursue the claim. The fee offered to the barrister is usually next to nothing, especially in complex cases. It doesn’t look good to the client when the advice is negative.

With ABSs only ten months away and new entrants expected into the market, these issues will only get more explicit. If ever there was a time for there to be a level playing field in the legal services market, it is now. Ban referral fees and open up the LEI market to those firms that can demonstrate quality and excellence in their areas of practice – that’s the answer.

15 December 2010 – Don’t jump the gun

At the end of last month and with less than 12 months to go before ABSs become a reality, the SRA issued guidance on what firms can and cannot do to prepare for the brave new world.

The guidance is long on principles and short on hard examples of what will land firms in deep water, but this is necessarily so. The SRA hasn’t finalised all the relevant rules governing ABS yet: the latest code of conduct is still in consultation and the SRA is in discussions with other regulators over how the different codes of conduct will work. The SRA itself isn’t even a licensing authority for ABSs yet, although it would be fairly earth shattering if it were refused by the Legal Services Board.

The profession hurtles towards what has been billed the most radical shake up in English legal history and no one can be quite sure what will be allowed and what won’t.

What seems to be allowable is that firms can prepare to become an ABS. At paragraph 15 of the guidance examples are given of what will be permissible. For instance, preparatory discussions with potential business partners, agreements to enter into exclusive negotiations with a potential business partner, non-binding arrangements with a potential business partner to enter into an ABS, and “certain contractual arrangements to be activated once the regulatory requirements have been changed (post October 2011) and all necessary approvals granted by the SRA”. Examples include agreeing to accept new non-lawyers, or outside investors, into partnership.

However, as always, whether these are acceptable will depend on the fine details. The general theme running through the guidance is that you can prepare to be an ABS now but you mustn’t enter into any kind of arrangement that would give an unregulated third party any control or financial interest in your law firm.

For an example of the type of deal that is not allowed (currently) consider the case, last August, of Optima Legal. Optima had entered into an agreement with Capita to supply it with outsourced administration, payroll and IT services. There was also a loan arrangement under which Capita was given an option to buy shares in Optima post October 2011.

This example is specifically referred to in the latest guidance where it states: “You may not enter into any arrangement which would involve selling your ownership interest in the practice or any part of it (or any service company) before you have been authorised as an ABS. e.g. you should avoid granting any option to purchase your interest...”

The difficulty for law firms is that there is plenty of guidance on what is not allowed, but little on what actually would be permitted. The guidance makes clear that after October 2011 some arrangements will be prohibited, namely anything which compromises a law firm’s ability to give independent advice to clients or that allows a third party access to confidential information concerning its clients.

Applications for businesses to become an ABS will be accepted from August next year, with the first of them being allowed to trade from 6 October. More guidance will undoubtedly be published over the next few months but for the moment it’s a walk in the dark for those wishing to become an ABS.

Merry Christmas!

18 November 2010 – Legal aid: burning the budget

Radio 4 has just embarked upon another series of the Dickens’ satire Bleak Expectations. For litigators and legal aid practitioners, the timing is exquisite. Last month we had the ‘bonfire of the quangos’; on Monday the Ministry of Justice set light to the civil legal aid budget and announced proposals that, if implemented, will take close to 500,000 people out of scope of legal aid. The government also announced its consultation paper on the Jackson report, called Proposals for Reform of Civil Litigation Funding and Costs in England and Wales.

The “key intention” of those proposals is “to reduce the spiralling costs payable by people who have been sued in ‘no win, no fee’ cases”. As is widely known, Jackson LJ recommended that conditional fee agreement success fees and after-the-event insurance premiums should no longer be recoverable from the defendant. He also recommended introducing ‘damages-based agreements’ (aka ‘contingency fees’) where the lawyer takes a proportion of the claimant’s compensation – perhaps up to as much as 25 per cent. In both cases the intention is to give the client a stake in the costs process and thus keep lawyers’ costs under control.

Much less attention has been focused on what, I think, is the government’s real intention in all this: to encourage the uptake of before-the-event insurance (BTE). Jackson suggested more use be made of this form of insurance and Lord Young of Graffham, the author of the recent report on civil litigation costs and the compensation culture, intends to consult with the insurance industry on this.

According to the consultation paper announced on Monday, about 22.7m UK adults have BTE as a component of their existing insurance provisions. Often it is a paid for ‘bolt-on’ or is included as a ‘freebie’. I would confidently guess that approximately 50 per cent of those 22.7m people don’t know they’ve got it, if my experience as a claimant solicitor is anything to go by. The government wants to rectify this and states: “The government… would welcome a change in culture so that there is a greater use of existing BTE insurance policies and the development of the market to expand BTE insurance coverage” (Proposals for Reform of Civil Litigation Funding and Costs in England and Wales).

BTE is already well established in cases where costs can be recovered from the losing party (think most personal injury cases) and where costs can’t (usually) be recovered (employment tribunal cases for instance), so why shouldn’t it be extended to other areas such as family or welfare benefits? In other words, those areas that will be taken out of scope for legal aid if the government gets its way (as it undoubtedly will). The previous Labour government tried to foist responsibility for the cost of personal injury litigation onto the insurance industry by introducing CFAs and that led to the birth of claims farmers and solicitors losing control of the PI sector. Could the same thing happen again?

Picture this scenario. BTE insurance takes off to cover all those areas of work that can no longer be funded by legal aid. Those insurers (such as DAS) may even convert into alternative business structures to do the work themselves and that will have the effect of excluding the majority of smaller, less systematised, law firms from undertaking litigation until such time as the BTE market becomes properly free and policyholders have true freedom of choice to decide which law firm they want to instruct from the beginning (and not from the issue of proceedings as at present). Also expect them to do the work offshore to minimise costs and maximise return. The insurers will be fully in the driving seat unless solicitors can respond.

Law firms face two difficulties in this market. The first is pricing their services and the second is making them affordable. Only those firms that are truly specialised are going to be able to do the former and only those that abandon hourly rates and either offer a BTE product themselves (or perhaps as part of a consortium of law firms) or a subscription pricing model will have any chance of competing for the better-quality work. The rest will be left fighting over the scraps that the main insurers won’t touch for one reason or another.

Bleak Expectations anyone?

---

Copyright & permissions