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The only way is ethics

Posted by Neil Rose, Editor, Legal Futures


Lord Neuberger tells lawyers that ABSs might be a good thing after all

Was Tuesday the day we began to see the future a bit more clearly? Capital-infused alternative business structures (ABSs) with clear, market-dominating ambitions, using their financial clout to consolidate their markets? Is this the nightmare scenario for those being dragged into the ABS era?

Slater & Gordon revealed it is to swallow up three practices in one go [2], while the Parabis Group has sated itself (for now) with ‘just’ acquiring Greenwoods. Quindell Portfolio, which has already bought three law firms itself in its well-documented acquisition frenzy, announced some big numbers in its 2012 results [3].

Following the launch of ABS joint ventures with the likes of Admiral and Ageas, this is the starkest evidence yet of the consolidation that most predict will sweep across the law in the coming years. These ABSs aim not just to be a part of the consolidation, but to lead it.

Whether they will be able to, of course, is another thing. A new skill I for one need to learn is how to read the annual results of public companies, as more become involved in the law – the last time I really tried to get to grips with accounts was during my Law Society Finals 20 years ago, and it wasn’t my finest hour.

The Quindell results looked pretty impressive on their face, although it is not clear how much of the 900% rise in turnover and profit was organic growth and how much attributed to the acquisitions. But, as I report today [4], people far more able to read a balance sheet found something to concern them and the share price has plummeted as a result.

There will be no shortage of schadenfreude among personal injury lawyers, I can assure you, but there is some good news here in my view – and it’s that this is happening out in the open. The terms of all Quindell’s various deals are in the public domain (as are the Co-op’s and Slater & Gordon’s in Australia). The unusual arrangement that was used in the acquisition of Accident Advice Helpline is subject to the scrutiny of financial experts (and not, dare I say, just the Solicitors Regulation Authority, whose knowledge of equity swaps may not be at the same level – I might be doing the regulator a disservice here, but I’m probably not).

At a time when the SRA is predicting more significant law firm failures [5], most of which are a total surprise to all until the administrator’s report reveals the grisly details, this can only be a good thing and to my mind offers a measure of reassurance to the many sceptical of organisations like Quindell providing legal services and of the SRA’s ability to police them. And where they are not, arguably we are in no worse place than we are with private law firms.

These kinds of ABSs operating in a way that no law firm could hitherto means that the profession’s ethical spectrum needs to change to encompass new ways of doing business. At the moment this debate has not really got past the obvious fact that non-lawyer owners are not bound by the same ethical standards as lawyers. This is usually said in such as a way as to indicate that lawyers are somehow more ethical than others.

Professor Stephen Mayson has eloquently skewered this thinking [6], but I was a bit bothered at a conference recently when a private equity representative repeatedly made the point that the law is like any other business. Ultimately, while they may be very similar, there are unique features – how many other businesses on the Australian Stock Exchange tell shareholders, as Slater & Gordon does, that the company’s primary duties are to the court and its clients, even if that is against the interest of the firm’s shareholders and short-term profitability?

Equally, solicitors still often refer me to the documentary last year that showed sales malpractice in a corner of the Co-op’s funeral business, as if this is evidence that an organisation like the Co-op therefore cannot be trusted with legal services.

On that basis, what should we read into the most up-to-date statistics showing that around 500 solicitors were subjected to some form of disciplinary action from the SRA in 2012, while 121 barristers are currently facing action? There is a fair sprinkling of them residing at Her Majesty’s pleasure, in fact. What does this tell us about the firms they worked for, or the chambers they were in? About the same as the funeral programme told us about the Co-op’s ability to conduct a divorce, I think.

Nonetheless, an interesting side-effect of ABSs has been an unprecedented focus on ethics – the Legal Education and Training Review (remember that?) is likely to put a major emphasis on improving the teaching of ethics if and when it finally reports; we have the likes of Professor Richard Moorhead in University College London’s first chair in law and professional ethics.

On Wednesday, the president of the Supreme Court, Lord Neuberger, talked about the ethical challenges brought about by conditional fee agreements, damages-based agreements and third-party litigation funding (the ethical implications of which were agonised over for many years, but there has been no evidence to date of them causing any problems, it is worth noting).

While he said the advent of ABSs could compound these challenges by adding to the pressures on maintaining ethical standards, Lord Neuberger admitted: “It may equally be that, as all these changes have made us peculiarly aware of ethical standards, they will have a beneficial effect rather than the opposite.”

ABSs mean that ethics have undoubtedly assumed a more significant role in professional debate, but they are not set in stone. Laws and ethics flex and change with the times – as the dying out of champerty and maintenance, and adoption of different contingent fee agreements themselves prove.

The rules of the new legal world may well turn out to be different, but it does not automatically mean they will be worse.