13 April 2012Print This Post

Two nations – divided by external ownership of law firms

Posted by Neil Rose, Editor, Legal Futures

Many of the lawyers who have only just woken up to the prospect of non-lawyer ownership of firms (a sizeable group, I’d wager) generally react with horror. The argument I hear all the time – exemplified by the letter signed by nine general counsel in the US – is that it will dilute the professionalism of lawyers, damage the lawyer-client relationship and lead to dastardly non-lawyers strong-arming lawyers to put profit before ethics.

Professor Stephen Mayson has skewered these arguments with characteristic precision in a new blog – as he succinctly puts it, “ethics is a state of mind, not a state of ownership. There are ethical and unethical lawyers, just as there are ethical and unethical ‘non-lawyers’”. Indeed, through the rose-tinted glasses of ABS opponents, you might start to wonder if lawyers are in business at all, let alone to make a good living (a look at the The Lawyer 100 should disabuse you of that notion, however).

The general counsel are reflecting a common view in the US – frankly if it wasn’t for what is happening here, they wouldn’t be discussing it at all. Though in some ways they are coming from a very ‘pure’ vision of the role of the lawyer – it’s the same in mainland Europe – I’m not impressed by people sitting on this particular high horse; would that any law firm showed the same commitment to ethics as the Co-op. Even more, it is hard to swallow morality lessons from the American legal profession.

This is the country that gave us the advert for a divorce law firm that began “If you and your spouse hate each other like poison and want to get out of the hellhole you call a marriage, you’ve come to the right place”. It gave us class action feeding frenzies and the $1.2bn Ponzi scheme by now imprisoned lawyer Scott Rothstein. It even gave us general counsel in jail for backdating stock options (not among the nine signatories, of course).

This is not to say we haven’t had our share of scandals and crooks over here, but as in most things, the Americans do it bigger and better.

I don’t intend to come over as a cynic who thinks lawyers are amoral hucksters just in it for the money – that is patently not true (otherwise there wouldn’t be any junior criminal barristers, for example) and there are unique qualities to the legal profession, such as being an officer of the court, that do make it different.

The tens of thousands of calls that the Solicitors Regulation Authority’s ethics helpline receives every year is evidence of the desire among solicitors to act ethically and with good conscience – I spent some time sitting in on the helpline a few years back and almost all of the calls were from solicitors wanting to make sure they complied with the rules, rather than looking for ways around them.

But, like Stephen, I have yet to see convincing (or even any) evidence beyond supposition to suggest that the risks that already exist with lawyer-only firms will be any greater with a broader ownership structure. Principles do not belong to lawyers alone. Yes there’s Enron, but that doesn’t really tell us about lawyers. Indeed, there is an overlooked school of thought that non-lawyer ownership will reduce risks.

Back in 2005, what is now the Ministry of Justice commissioned a series of academic studies following Sir David Clementi’s recommendations. One, by Paul Grout, a professor of political economy at Bristol University, said the view that non-lawyer owners would put pressure on lawyers to act unprofessionally so as to maximise profit overlooks the fact that there would be little personal gain for the lawyer in doing so.

By contrast, where the lawyer has a larger ownership of the business, there would be far more incentive to take the risk, Professor Grout claimed, adding: “A large legal disciplinary partnership or multi-disciplinary partnership with concentrated ownership is more likely to be a problem with a lawyer owner/manager than a lawyer manager and a non-lawyer owner. This is the exact opposite of the view that underpins the current debate.”

Another paper, by James Dow – finance professor at the London Business School – and Carlos Lapuerta, a director of the Brattle Group, said: “We see insufficient appreciation of the conflicts of interest that currently confront [lawyers]. Lawyers today have direct financial incentives to sacrifice service quality and ethics for the sake of significant short-term financial gains.

“The introduction of outside equity could mitigate such problems, as the separation between ownership and management reduces the incentives of the manager to maximise profits.” They argued that there is no reason to believe that outside equity might degrade service quality and lead to the relaxation of conflicts rules.

And that remains the case. There may well be an externally owned ABS that gets up to all sorts of mischief and will have the opponents saying “I told you so”. Equally there will undoubtedly be traditional law firms that do the same. Protectionism won’t stop it but the regulators should; we need confidence that they are up to the job (I won’t ask for a show of hands).

One positive may in fact come from the recognition that has emerged over the last year that pre and post-qualification legal training does not currently focus enough on ethics. Developments such as Professor Richard Moorhead’s appointment as University College London’s first chair in law and professional ethics are also to be welcomed.

The debate over whether the law is a profession or a business is now moot but equally has underpinned most of the tensions of recent years. The irony is that non-lawyers I meet are interested in investing in the law precisely because it is an ethical, professional business. They see that as having real strength and appeal, making a good basis for a business rather than an opportunity to rip people off. And as it develops over here and elsewhere, you can bet that America will not want to be left behind.

 

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2 Responses to “Two nations – divided by external ownership of law firms”

  1. The blanket criticism of the American legal profession may be a bit harsh. As a long time and active member of the ABA I would say that standards in the US are at least as high as England and Wales. The Courts are at least as ready to disbar and suspend as the SRA or BSB might be here. The ABA have had long debate about MDPs and the like so equally I am not sure it would be entirely fair to say they would not be debating this if it were not for what is happening here. The first commission of the ABA on MDPs was established in the late 1990s .

  2. Gerard McDermott on April 13th, 2012 at 12:45 pm
  3. The issue that Neil raises is extremely valid. Novel to the British legal market with the Legal Services Act, cases can now be funded by third party investment, including hedge funds, who will recover outlay and profit from successful judgments and awards. Yes, this is the arrival of the investment business in our £23bn legal service marketplace here in the UK.

    The Legal Services Act has given England and Wales one of the most liberalised legal markets in the world. But is this really a good thing for the client? Is it right that 3rd party business should be allowed to invest in litigation? Now we could have lawyers working under the direction and financial control of an alternative business structure, whose executives may be focussed on profit rather than justice.

  4. Stephen Twist on April 13th, 2012 at 4:45 pm

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