Scottish Government

Chapter 8 Restrictions on business structures

(a) Restriction on partnerships between advocates

8. Advocates are obliged to practise as sole practitioners by a rule which provides that "An advocate may not form a partnership with another advocate or any other person in connection with his or her practice." The Group reviewed this restriction.

Background

8.1 The Bar in Scotland was constituted by the Faculty of Advocates and was a library-based bar. Each member of Faculty was entitled to use the Advocates Library and the other resources of the Faculty of Advocates, such as its consultation facilities. Other services, including clerking services in particular, were made available to advocates who chose to use them by a service company, Faculty Services Limited. There were about 470 practising advocates at present in Scotland.

8.2 In England and Wales barristers practised from chambers (though they were not permitted to practise in partnership) and a barrister needed to obtain a tenancy in chambers in order to be able to engage in independent practice; there were currently about 11,000 barristers in independent practice in England and Wales and about 3,000 employed barristers.

8.3 In Scotland the number of advocates who were employed in legal practice (as opposed to being engaged in independent practice) was very small indeed. That might be because of the common training followed by solicitors and advocates, the relative ease with which an advocate might be admitted as a solicitor if he or she wished to practise in that form, and the absence of any restriction analogous to the requirement to obtain a tenancy in chambers. In England and Wales there was a practical need for the Bar Council of England and Wales to provide for and to regulate the category of employed barristers, but that had no equivalent in Scotland.

8.4 That brief comparison indicated the very different scale of the market for the services of advocates and barristers north and south of the border, but also suggested that the small size of the Scottish Bar needed to be taken into account when considering where the consumer interest lay in relation to the Faculty's existing prohibition on partnerships between advocates. It might be that partnerships would diminish consumer choice (if all the experts in a particular field were in one partnership, one of the parties would have to go elsewhere) and result in increased costs (by dispensing with the very cost effective service currently provided by Faculty Services Ltd). These were considerations which needed to be borne in mind in considering the implications of adopting legal disciplinary practices ⁷⁵ in Scotland (see section (c) below).

8.5 Advocates in Scotland were bound by a rule that "[An advocate] cannot enter into partnership with another advocate or with any other person in connection with his practice as an advocate." ⁷⁶. Statute provided however that any rule whereby an advocate was prohibited from forming a legal relationship with another advocate or with any other person for the purpose of their jointly offering professional services to the public should have no effect unless it was approved by the Lord President and the Scottish Ministers. ⁷⁷ It also required the Scottish Ministers to consult the Office of Fair Trading on such a rule ⁷⁸.

8.6 The form of the rule originally approved on 17 March 1993 was :

"No advocate whose practice is in Scotland may form a legal relationship with another advocate or with any other person for the purpose of their jointly offering professional services to the public."

Rationale for the restriction

8.7 The Faculty of Advocates observed that, apart from the relative sizes of the two bars, there were some other features of the bar in Scotland which differed from the position in England and Wales and which should be borne in mind when considering this issue :

(a) In Scotland the education and training of solicitors and advocates was typically common up to the point when the practitioner decided to become an advocate. No doubt because of that common training, there was a tradition of movement between the two branches of the profession in Scotland. Most intrants to the bar would have qualified as solicitors and many would have practised as solicitors for a number of years before deciding to become advocates. They might subsequently decide to return to the solicitor's branch of the profession.

(b) Unlike the position in England, there was no requirement for someone who wished to practise as an advocate to find a tenancy in chambers. Anyone who completed pupillage and fulfilled the entry requirements was entitled to practise, with full access on an equal basis with all other advocates to the library and to the facilities provided by Faculty Services Limited.

(c) Unlike the position in England, the number of employed advocates in Scotland was very small indeed. The overwhelming majority of advocates practised as sole practitioners specialising in advocacy and advice work on a referral basis.

(d) In the Faculty's view, the decision to become an advocate was usually taken at the stage in a practitioner's career when the practitioner had a practical choice between pursuing or continuing to pursue a career as a solicitor. The decision was to practise as a sole practitioner specialising in advocacy and advisory work on a referral basis rather than as a practitioner providing services directly to lay clients in partnership with others. A practitioner who wished to combine advocacy in the higher courts with direct access to clients and/or practice in partnership with other lawyers was free to do so as a solicitor advocate.

(e) The Faculty believed that the availability of the independent referral bar enhanced the choice and potential quality of legal representation available to clients throughout Scotland. Because each advocate was available to be instructed by any solicitor in Scotland (and for any court or tribunal in Scotland), consumers throughout the country were able to obtain access to the highest level of expertise which the bar could provide. Small firms (wherever located) might, through their access to the bar, be able to provide a greater range and quality of legal service to their clients than would otherwise be the case: that might not only have benefits for their clients and for the administration of justice throughout Scotland but perhaps for competition between solicitors' firms. Because advocates were sole practitioners, it was unlikely that the advocate of choice would have to decline instructions because of conflict of interest. Moreover, the introduction of partnerships could well diminish the flexibility which the current position afforded to the solicitor to select a team of advocates appropriate for the case in hand from across the whole bar.

(f) The essential tools of effective advocacy (and indeed of advisory work of the sort which advocates were called on to do) were legal training and experience, forensic ability, access to legal resources and the ability, when required, to free themselves from other demands to devote the necessary time to the task in hand. The Faculty believed that there was no obvious disadvantage for that sort of work (and indeed some apparent advantages) in sole practice as compared with other business forms.

(g) The necessary infrastructure for practice on a referral basis was available to all advocates immediately upon qualifying through the Faculty and Faculty Services Limited. The Faculty believed that the introduction of partnerships could not only increase costs but also, if partnerships were to become the norm, undermine the relatively open access to practice at the Scottish bar. A new entrant to the profession would require to find a place with an existing partnership, particularly if the development of partnerships were to undermine the existing arrangements which were made through Faculty Services Limited. For practical purposes that would create a restriction on entry analogous to the requirement in England and Wales to find a tenancy in chambers. Moreover, if advocates engaged in particular areas of work were to become concentrated in a relatively small number of partnerships, such concentration could have an adverse impact on access to justice and might have anti-competitive effects.

Competition issues

8.8 The OFT noted the Faculty's argument that permitting partnership would lead to an inadequate choice of advocates which would prove detrimental to competition and the public interest. The OFT questioned that argument in the context of Scottish advocates as it had done in the context of barristers in England and Wales and for the same reasons. While it might be true that in some areas of advocates' practice, the number of practitioners was relatively small, not all areas of practice were concentrated. In any event competition rules existed to prevent concentration, where that might damage competition. The total ban failed to discriminate between partnerships that might increase competition and choice and those that might not.

8.9 On the other hand, prohibiting partnerships restricted choice: the choice of advocates to adapt their business structures in the way that best met their needs and those of their clients was restricted. That choice should be open to advocates as advocates in OFT's view, and without the need to requalify and to market themselves as solicitors. Similarly, the client's choice to seek the benefits of an integrated service was restricted where partnerships with non-advocate professionals were prohibited. In any event, in the context of partnerships between advocates and other professionals, partnership might expand the availability of advocates.

8.10 The OFT noted the 3 differences highlighted by the Faculty which distinguished it from the Bar in England and Wales :

(a) the fact that most intrants qualified as solicitors before joining the Faculty which resulted in a tradition of movement between the two branches of the profession;

(b) the fact that once admitted, an intrant did not face the obstacle of finding a position (tenancy) in chambers; and

(c) the fact that the relative size of the Faculty was small.

8.11 Commenting on these arguments in turn, the OFT pointed out that :

(a) Movement between the two branches of the profession would clearly be relevant to a consideration of whether or not the restrictions on structure were appreciable. Common qualifications and training undoubtedly facilitated movement, but were unlikely however to be determinative on this issue where in order to move, an advocate had to surrender membership, title and practising rights enjoyed as an advocate. It remained the case that an advocate was restricted from practising as an advocate (using that title and exercising associated rights) other than in sole practice. Advocate participation in a partnership that could provide an integrated legal service (litigation and advocacy done by the same practice) therefore remained restricted. Where the advantages of advocates providing integrated services in partnership with others were not evident, one would then expect movement to practise in partnership to be slow. If on the other hand there were efficiencies perceived, the move might be more rapid. Lifting the restriction would allow that to be properly tested.

(b) The OFT recognised and welcomed the absence within the Faculty structure of any equivalent restriction to the "tenancy" restriction that might be placing a restriction on practice at the England and Wales Bar. It was unclear, however, that the availability of an option to practise in partnership would undermine in any way the current infrastructure for sole practice. Specialisation in advocacy might continue both by advocates continuing in sole practice or by the development of advocate specialists or teams of advocates within partnerships.

(c) Where an integrated service (litigation and advocacy done by the same practice) would best meet the needs of clients, such restriction might be material where a significant proportion of advocates were prevented from participating by a professional rule. The Faculty, though small in number, clearly represented a very significant proportion of the supply of advocacy services, particularly in the higher courts.

Economic analysis

8.12 To consider the likely impact of the Faculty of Advocates rule against partnerships, Professor Frank Stephen suggested it was necessary to consider the factors which might influence a lawyer's desired choice of the organisational form in which to practise. Different organisational forms might have an effect on the lawyer's cost of providing legal services.

8.13 Professor Stephen drew attention to a number of factors which suggested that permitting practice through the organisational form of partnership would be attractive to lawyers. These were related to size. The most general was that economies of scale could be captured the greater the output of the firm and output was likely to be a function of size (the number of lawyers). Every introductory textbook in economics listed sources of economies of scale. Principal among these were those emanating from the more efficient use of capital and specialisation of labour. The former of these was doubtful in the case of legal services, at least where it was physical capital that was involved. The physical capital requirements of legal services were quite small and were likely to involve limited economies of scale. Access to appropriate reference works and case reports might be the exception. Legal services were essentially human (rather than physical) capital intensive.

8.14 Provision of legal services through a group practice organisational form allowed specialisation of lawyers in particular areas of law, with the consequence of lowering the cost of providing services. Multi-lawyer firms would also benefit from economies of scale in the use of non-lawyer support staff who themselves might also become more specialised (and thus efficient). Practices of lawyers with different specialities had the further benefit of risk spreading. Different specialisms might face different business cycles and thus fluctuations in specialist income might be smoothed across the group of specialists. The absence of risk spreading might lead to a higher fee being charged for each case. Furthermore, economies of scope might exist when a client had a range of legal service needs which could be serviced by specialists within the firm or when a legal problem had dimensions involving a range of specialisms. Economies of scope meant that the services required by an individual client might be provided at a lower cost in a single firm than by separate specialist firms. Economies of scope were available to the sole practitioner but in the multi-lawyer firm they were combined with economies of specialisation. The more complex the issues the more likely that specialists would dominate because the benefits of economies of specialisation outweighed the economies of scope to the sole practitioner. Lower costs associated with economies of scale, economies of scope and the benefits of risk sharing in the multi-lawyer firm were likely to lead to multi-lawyer firms dominating where they were permitted and there was unimpeded competition between organisational forms.

8.15 The foregoing would appear to suggest that the Faculty of Advocates' rule against partnerships increased the cost of the services which its members provided as compared to what might be the case were partnerships of advocates permitted. However, that took no account of the impact of two cost sharing devices provided to members of the Faculty. The first was the Faculty library and the second was Faculty Services Limited. Both devices spread these costs over a large number of practitioners: 470 or so members of the Faculty ⁷⁹. Thus for those services the Faculty had to be achieving economies of scale (to the extent that they existed) greater than any firm of solicitors in Scotland.

8.16 Against these economies of scale available to members of the Faculty there had to be set any loss of benefits from risk spreading, economies of specialisation or economies of scope ⁸⁰ available to partnerships. In the case of the multi-lawyer practice all three of those might be achieved with an appropriate number of practitioners. In the case of a sole practitioner, specialisation worked against risk spreading and economies of scope. The impact of the rule against partnerships on the cost of providing legal services depended on the relative magnitudes of these factors which was, essentially, an empirical question on which there was no data.

8.17 Removal of the rule against partnerships would allow advocates who wished to gain the benefits of risk sharing and possibly economies of scope to do so, but presumably they would have to forego the economies of scale derived from using Faculty Services Limited. Again, which factor would dominate depended on their relative magnitudes. The table below summarises these considerations comparing the likely situation of specialist and generalist advocates under the present system with advocates in partnerships.

The argument put forward above by the OFT was essentially that the current rule against partnerships prevented advocates from exercising a choice between sole practice and partnership. If the Faculty of Advocates' points of justification were valid, few if any would exercise the right to practise in a partnership if that option were available.

8.18 It was likely that a practitioner's attitude to risky or uncertain income streams might be the determining factor in choice of organisational form. Highly risk-averse advocates would be more likely to prefer group practice if the risk spreading and economies of scope offered by partnership, at least, compensated for the reduction in economies of scale from being unable to use Faculty Services Limited. On the other hand less risk-averse individuals were likely to opt for the economies of specialisation and greater economies of scale as a specialist advocate. In the absence of empirical evidence on the magnitude of these factors the arguments of both the Faculty and the OFT were speculative. That might be an area where empirical research was needed.

8.19 The OFT argued that the rule against partnerships meant that advocates could not choose freely their organisational form and only removal of the rule would allow the optimal organisational form to be discovered. However, that was not the case. The fact that solicitors had been willing to re-train as advocates at some cost suggested there were benefits to be obtained from so doing. On the other hand advocates who were willing to give up the benefit of specialisation (at least in opinion work) for the benefit of risk spreading could re-qualify as a solicitor. Furthermore, since the creation of solicitor advocates it had become possible even for those who specialised in advocacy to make a similar move. Again the costs (including foregone income during retraining) might have an influence. Nevertheless, in a world where no area of legal service was the monopoly of one branch of the profession, flexibility in organisational form should be viewed across both branches of the profession and not separately for each branch as appeared to be the position of the OFT.

8.20 Combining specialisation with risk spreading through partnership was now possible for those specialising in advocacy as they could become solicitor advocates. The cost structures of solicitor advocates and advocates would differ but so too would the risks they faced. The issue at hand was whether there were implications for competition in legal services. There would appear to be none so long as there was no impediment to competition between solicitor advocates and advocates. Competition in that context would imply freedom of entry to (and exit from) each market for a legal service. Unfortunately, it would appear that the rule against 'mixed doubles' (see chapter 5) was an impediment to freedom of entry to the market for advocacy for solicitor advocates. It restricted competition between lawyers for advocacy work. It also prevented solicitor advocates from gaining the experience of working with a senior counsel, an experience which was available to junior advocates.

8.21 Were there no rule against 'mixed doubles', there would be a situation where there were two categories of lawyer in practice in Scotland. One category would be free to practise as a sole practitioner or in partnership according to their preference (and if qualified as a solicitor advocate to plead in any court in the land). The second category would voluntarily restrict themselves to independent practice but, as members of the Faculty of Advocates, share non-lawyer cost through participation in Faculty Services Limited. For the practitioners concerned the choice was likely to be one of trading the benefits of risk spreading against the benefits of specialisation ⁸¹. In the long run ⁸² (with no rule against 'mixed doubles') consumers of legal services would be able to choose between practitioners offering their services in different organisational forms with differing levels of specialisation and corresponding costs. There would be a situation of competition between categories of lawyers who chose different organisational forms in which to practise. The fact that one category of lawyer voluntarily chose to restrict its options for organisational form had no implications for competition so long as the other category of lawyer could choose alternative organisational forms and was free to enter all markets for legal services unimpeded.

8.22 In summary, the Faculty of Advocates rule against partnerships would not be anti-competitive (from an economic perspective) if there were no impediments to competition between advocates and solicitors (including solicitor-advocates). The rule against 'mixed doubles' is such an impediment to competition.

Further competition arguments

8.23 The OFT agreed that the removal of the rule against mixed doubles would be a positive step in competition terms (see chapter 5 above), but questioned whether it would be a sufficient step in order to meet competition concerns raised by the prohibition on partnerships. Where partnerships remained prohibited, an advocate would be obliged to surrender membership, title and practising rights enjoyed as an advocate in order to enter partnership. Given the historical dominance of Faculty members in advocacy in the Higher Courts, the absence of advocates practising as such within partnerships might act as a disincentive to clients and as a brake on the development of alternative business structures.

8.24 Although the Scottish Consumer Council had some concerns about the small size of the Scottish bar and the potential impact on consumer choice, the Council was persuaded on balance by the OFT argument in favour of permitting partnerships between advocates. If the restriction on partnerships between advocates was lifted, the Council believed that the OFT could if necessary use its competition powers to ensure that concentration did not distort the market.

(b) Restrictions on non-lawyers owning a law firm and on employed solicitors acting for third parties

8.25 Restrictions were imposed on non-lawyers owning a law firm and on employed solicitors acting for third parties by a rule which prohibited solicitors from sharing their fees with any unqualified ⁸³. The effect of the rule was that non-lawyers might not own a law firm and employed solicitors might at present act only on behalf of their employers and not the clients of their employers.

8.26 The Clementi report proposed for England and Wales that ownership of legal practices by non-lawyers should be permitted, subject to a 'fit to own' test and also to a number of safeguards built around the identity of those who managed the practice and the management systems they employed. Clementi also recommended that solicitors employed by organisations owned by non-lawyers should be able to offer services direct to the public (ie third parties).

Rationale for the restrictions

8.27 The proposed lifting of these prohibitions had been publicly opposed by the Law Societies of Scotland, Northern Ireland and Ireland and the Faculty of Advocates as in conflict with the core values of the lawyer : namely, guaranteed independence, avoidance of conflicts of interest and client confidentiality. It had however been supported by the UK Government in relation to England and Wales ⁸⁴.

8.28 The Law Society of Scotland could see no circumstances in which the ownership and control of law firms by non-lawyers could be permitted, without surrendering the prime objectives of maintaining independence and public protection. The Society foresaw grave risks to maintaining the rule of law if non-lawyers were to have either ownership or control of law firms. The Society considered furthermore that the risk to clients and the difficulties of regulating such firms would be insurmountable, particularly with regard to potential conflict between the commercial interests of the owners and the professional duty of solicitors working in the firm to serve the interests of the client.

Competition issues

8.29 The OFT considered that removal of that rule could allow competition from those suitably qualified, working in different business structures. That would, for example, further enhance opportunities for capitalisation from outside the profession of the provision of services typically provided by solicitors such as litigation, advocacy, executry work and conveyancing. Such change would also allow for a different career structure and working hours for some solicitors. The Law Society of England and Wales had recognised that might be a factor in ensuring equal opportunity for those wishing to join the profession and might broaden entry to the profession.

8.30 The Scottish Consumer Council agreed with the OFT view. The Council believed that the removal of the rule would potentially open up a variety of new and more convenient methods of providing legal services to consumers, thus increasing consumer choice.

Economic analysis

8.31 Professor Frank Stephen noted that restrictions on employed solicitors raised economic issues of a different type from those of legal disciplinary practices ( LDPs) and multi-disciplinary practices ( MDPs). The opposition of the Law Societies to removing that prohibition rested on the solicitor's duty to the client being in conflict with an employee's loyalty to an employer. The OFT argued that such a prohibition might preclude desirable innovations in service provision, exclude sources of capital for providers and limit the career opportunities of professionals. A further potential benefit might accrue to the clients of these providers of professional services: the 'owners' of firms employing solicitors were 'repeat purchasers' of legal services and were therefore better informed about quality issues than individual clients. The employers of the solicitors became, in effect, regulators of the professionals which could be interpreted as another form of 'self-regulation'. Professor Stephen believed it was important to recognise that that argument relied on the significant reputational capital of the employers of the professionals being at stake to guarantee its interest in maintaining the quality of professional service.

8.32 Professor Stephen recognised that to non-economists the foregoing might seem a strange argument but it was one which had begun to emerge in the economics literature on the professions recently ⁸⁵. It was based on an older economic argument concerning reputational capital. In the case of legal services being provided by an employed solicitor, the employer had an incentive to monitor the quality of the services provided by the employee because any failure of the employee to provide an appropriate quality of service rebounded on the employer's reputation which might be of greater value than that of a small solicitors firm. Indeed the loss of reputation might go beyond the area of professional services. For example, if 'Tesco law' were to come to pass and solicitors employed by Tesco were to provide legal services, that view suggested that Tesco had a strong incentive to provide an appropriate quality of service because failure to do so would result in adverse publicity which would undermine their role throughout the market for legal services and even beyond. Some had argued that Tesco's incentive to ensure an adequate quality of service was greater than that of the solicitors' professional body ⁸⁶.

8.33 The Law Society of Scotland for its part did not agree that "employers" could be viewed as "regulators" or that "employment" was a form of "self-regulation". The Society thought that this phraseology revealed a confusion in meaning which underscored the need to be conscious that the unscrupulous would manipulate the system to their own advantage.

(c) Restrictions on legal disciplinary practices ( LDPs)

8.34 In considering business structure regulations, the EC Report on Competition in Professional Services observed that such regulations appeared to be least justifiable in cases where they restricted the scope for collaboration between members of the same profession, noting that collaboration between members of the same profession would appear least likely to reduce the profession's independence or ethical standards (paragraph 62 of EC Report). (That observation was also relevant in the context of the Faculty of Advocates rule against 'mixed doubles').

8.35 In his review of legal services in England and Wales Sir David Clementi drew a distinction between MDPs and LDPs. He described LDPs as law practices which brought together lawyers from different professional bodies, such as for example solicitors and barristers working together to provide legal services to third parties; and envisaged a split between those who owned the practice and those who managed it, both in relation to LDPs and MDPs.

Rationale for restrictions

8.36 The Law Society of Scotland was concerned about the prospect of LDPs with non-lawyer ownership and was strongly opposed to the idea unless satisfactory arrangements for the regulation of non-lawyer proprietors could be identified. The Society was concerned that the ownership of legal disciplinary practices might fall into in the hands of non-lawyers involved in organised crime, money laundering or drug running. With regard to the proposals made by Sir David Clementi in his Final Report, the Society did not believe that the case had been made out on an empirical basis which demonstrated consumer demand for legal disciplinary practices. In the Society's view a satisfactory explanation had not been given of the arrangements for the regulation of such practices; and the fitness to own test would require to be sufficiently rigorous to prevent solicitor firms becoming prey to organised crime. Exposure of the Society's Master Policy, the Guarantee Fund and the complaints system to non-solicitors might have substantial implications for the continuity of such valuable public protections.

8.37 The Faculty took the view that there was a logical division between practice on a referral basis and practice offering services directly to lay clients, which was reflected in the organisation of the profession in Scotland. The existence of an independent referral bar of lawyers operating as sole practitioners was of great benefit to the administration of justice (including access to justice) in Scotland. It was pro-competitive. Practitioners who wished to practise in other ways might do so, as solicitors (including as solicitor advocates). There was accordingly no practical need for permitting advocates to enter into partnership with non-advocates.

8.38 Difficult regulatory issues would arise if such partnerships were to be permitted. An advocate practising in partnership with solicitors would (presumably) be liable jointly and severally with the other partners for the firms' debts. Such an advocate would (presumably) be responsible along with the other partners for the relationship of the firm with its clients and for the proper handling of clients' funds. In the Faculty's view the advocate would, to all intents and purposes, be practising as a solicitor. The Faculty believed that the logical approach to regulation was for a practitioner who wished to provide advocacy services in the context of a partnership structure to become a solicitor advocate, and thereby be regulated by the Law Society of Scotland. This option was available to practitioners at present.

8.39 So far as ownership of legal practices was concerned, the Faculty had serious concerns about the implications of permitting legal practices to be owned by non-lawyers. Firstly, there was a risk of the independence of the legal practitioners being compromised. Secondly, if a change were to have an adverse impact on the economics of High Street legal practice, there could ultimately be implications for access to justice throughout Scotland.

8.40 Clementi addressed concerns about non-lawyer ownership by proposing a "fit to own" test which might have regard to (a) honesty, integrity and reputation; (b) competence and capability; and (c) financial soundness (report page 117). It would be the responsibility of the Legal Services Board proposed for England and Wales to carry out such tests.

8.41 Sir David also considered the concern that outside owners, even if they passed the "fit to own" test, might bring unreasonable commercial pressures to bear on lawyers which might conflict with their professional duties, but concluded that adequate safeguards would exist. LDPs would be regulated entities and the outside owner would not be entitled to pursue his own financial interests, and certainly not where they conflicted with the best interests of clients of the firm or with other core values of the legal profession (report, page 118).

Competition issues

8.42 The OFT for its part would welcome the introduction of legal disciplinary practices that would bring together advocates and solicitors to provide legal services to third parties. The introduction of LDPs, in particular those in which ownership could be separate from management, would address a number of significant restrictions on the freedom of lawyers to adapt their services to meet the needs of clients. It would also be a significant step towards the subsequent introduction of MDPs.

Economic analysis

8.43 Professor Stephen noted that markets for legal services, historically, had not been viewed as competitive markets. They were subject to market failure arising from the asymmetry of information between consumers and suppliers. This had resulted in those markets being subject to regulation. Because the form of regulation adopted included restrictions on the form of business organisation through which legal services might be provided, there was no guarantee that the traditional form of business organisation remained the most cost effective form. In these circumstances it was not clear how a demand for a more efficient service might manifest itself. If the case for regulating a market was based on the premise that consumers lacked the knowledge by which to judge the quality or adequacy of the service provided to them, how were they in a position to know how the service might be provided ? Further, in a market where the form in which a service was provided was restricted to prescribed forms what incentive was there for existing producers to devise new business forms ? Thus an argument for the status quo based solely on 'lack of demand' was not persuasive in the present context.

8.44 A possible approach to evaluating the case for LDPs might begin by identifying the advantages and disadvantages of permitting such an organisational form. That was essentially the approach taken by Clementi, which might be built on by seeking to attach magnitudes either to the actual advantages and disadvantages and/or their likelihood of occurrence. That was however very difficult for a phenomenon that did not yet exist. What could be done was to set the proposals within the analytical framework of economics, which might allow a reasoned view to be taken on the significance of the various points that had been made.

8.45 Essentially, Clementi argued that in the absence of 'valid' arguments against an organisational form it should be permitted. If it reduced costs, it would be attractive to suppliers and the process of competition would result in the cost reductions being passed on to consumers in the form of lower fees. If it did not reduce the cost of providing legal services of an acceptable quality, it would not be adopted and consumers would be neither better nor worse off.

8.46 LDPs involved the bringing together of 'lawyers' from different branches of the profession in a single business organisation. The different branches of the profession had their own qualifications and regulatory norms and were at present prohibited from being principals in the same business organisation. What would be the advantage of their forming an LDP? First, there might be the advantage of all forms of group practice: risk spreading. Risk spreading in that context would only arise if the members of the different branches of the profession had different areas of specialisation in their practice. There would seem to be limited gains from risk spreading from generalist advocates combining with generalist solicitors that would not be obtained by the advocates entering into partnership with other advocates or solicitors entering into partnership with other solicitors. In other words, the risk spreading was not so much a function of combining different types of lawyers but of combining different areas of law.

8.47 Only where the lawyer's licence to 'practise' was in a limited area (such as conveyancing) would there be a gain from risk spreading by combining 'authorised conveyancing practitioners' with solicitors ⁸⁷. In that case the combined practice's income would fluctuate less than that of a conveyancing practice if the business cycle in the conveyancing market was uncorrelated with business cycles in other areas of legal practice. Present rules prevented a conveyancing practitioner/licensed conveyancer becoming a principal in a firm of solicitors. However there were few areas of legal practice in Scotland with such limited recognition.

8.48 It was more usual, perhaps, to think of an LDP combining the litigation role of the solicitor with the advocacy role of the advocate as generating economies of scope. That implied that the combined cost of providing litigation and advocacy services in a single firm would be lower than the combined cost of providing the litigation services through a firm of solicitors and the advocacy services through an advocate in independent practice. However, it was not obvious that that would be so if in the LDP the two types of service were provided by different individuals: both have to become acquainted with the nature and facts of the matter in dispute. Economies of scope might be more obvious when the litigation and advocacy services were provided by the same individual e.g. a solicitor advocate ⁸⁸. In that instance the economies of scope were available without LDPs. LDPs would only be relevant here were advocate members of the LDP permitted to provide litigation services. Here the gains from economies of scope would have to be compared to any loss of economies of specialisation from the advocate no longer specialising in advocacy services. As in many other instances that was an empirical question on which there was no evidence.

8.49 Another way of looking at an LDP involving solicitors and advocates was to view it as a form of vertical integration between the litigation stage and the advocacy stage in the solution of a dispute. The division between stages in this context was perhaps not as clear cut as in the case, for example, of brewers integrating forward into the ownership of the retail outlets which sold their product. Nevertheless, the comparison did have some merit.

8.50 Why did industrial firms wish to integrate forward into the retail market for their product ? Traditionally many economists had argued that was in order to exercise monopoly power by extending the power which they had in the upstream market to the downstream market, or in order to foreclose the downstream market to their rivals in the upstream market. That argument was less prevalent nowadays, having been replaced by a view that vertical integration arose from a desire to reduce transaction costs.

8.51 Transaction costs might be viewed simply as the costs of co-ordinating activity between the two stages or involving the costs of ensuring that the conditions under which the product was sold in the downstream market did not harm the reputation of the product and its upstream producer.

8.52 Did any of these general arguments apply to LDPs involving solicitors and advocates? Given the structure of the market for litigation services it seemed unlikely that any firm of solicitors had sufficient market power that integrating forward into the market for advocacy by forming an LDP would be motivated by the extension of market power. Anyway, integrating forward into the market for advocacy was already possible for firms of solicitors through solicitor advocates.

8.53 On the other hand, forward integration to foreclose the market to its rivals might be a more plausible reason. The formation of an LDP with one or more senior counsel could be seen as foreclosing the market for those particular senior counsels' services. However, what incentive would there be for senior counsel to join an LDP ? Given the significant difference between the overheads of solicitors and those of advocates ⁸⁹ in independent practice it was not clear that would be attractive to senior counsel.

8.54 Joining an LDP might be more attractive to junior counsel for whom income from independent practice might be less certain. That could not, however, be seen as foreclosing the market for advocacy in the sense discussed above. However, to the extent that an LDP would be using advocacy services of its own members the choice of advocate for a particular client would be more restricted than under the present system. The significance of that argument depended on the extent to which choice was truly exercised on behalf of clients under the present system. The research being undertaken on the market for advocacy services should shed some light on this issue.

8.55 It was pointed out above that the reduction of transaction costs was nowadays seen as a more significant motivation for vertical integration by economists. It was probable that the costs of co-ordinating the two stages would be less in an LDP, although they would still exist. At present advocacy services were essentially purchased in a spot market. That would not be the case with an LDP. The LDP would have to have a sufficient demand for advocacy services to justify the membership of an advocate. More flexibility might be obtainable from a solicitor advocate. It was difficult to judge whose reputation would benefit from the LDP : solicitors or counsel.

8.56 Clementi linked the discussion of LDPs to the introduction of non-lawyer managers and particularly external owners. Managers were Principals in the LDP and owners could be Principals or external to the firm. Of course LDPs and external ownership of law firms were not necessarily linked. There could be LDPs without outside ownership and there could be outside participation in the ownership of firms composed of only one branch of the profession. (See discussion of legal services provided to third parties by employed solicitors at [8.29, 8.30] supra). It was not clear why Clementi tied the two together.

8.57 The role of outsider (partial) ownership was seen by Clementi as having the advantage of bringing new sources of capital, modern business organisation and a consumer orientation. However, his final report did not substantiate the view that the current arrangements resulted in under investment in law firms. Given that law firms were human capital intensive rather than physical capital intensive (information technology notwithstanding), it was not clear that financial capital was a binding constraint for contemporary law firms.

8.58 There was a stream of literature on the economics of business organisations which argued that partnerships were the most efficient organisational form for professional service firms because of the asymmetry of information between professional and others ⁹⁰ and the absence of the need for the financing of large amounts of physical capital. There was now an extensive literature on 'corporate architecture' which related observed forms of business organisation to the characteristics of the industries concerned and the nature of the agency problems inherent in each industry.

8.59 Clementi also dealt with the complex issue of how lawyers from different branches of the legal profession who formed LDPs should be regulated. The proposed solution was that it was the business unit ( LDP) that should be regulated, not the individual members. Given that the nature and composition of an LDP was likely to be related to the submarket in which it operated that might come close to the regulation of sub-markets rather than the regulation of individual professionals.

8.60 The foregoing discussion attempted to put the issue of LDPs into the wider context of the economics of business organisation because there was no data on which to judge the performance of LDPs.

Faculty of Advocates

8.61 The Faculty of Advocates thought that an LDP would have a very strong incentive to encourage its clients to use its "in house" advocate whether or not that advocate was in fact the most suitable representative for the client. There was a real issue of client choice and consumer protection which would have to be addressed. The Faculty was less sanguine than Professor Stephen about the risks associated with foreclosure of the market and the extension of market power if LDPs were to be permitted. It was also concerned about the potential access to justice implications and referred to the Scottish Office research summarised in Annex C. There was a risk that, at least in relation to certain areas of work, sufficient practitioners might join a single LDP, or a small number of LDPs, to create real issues about access to justice and market power. The availability of a body of independent advocates equally available to any client anywhere in Scotland provided real benefits in terms of access to justice and competition. In circumstances where any individual practitioner could choose to practise as a solicitor advocate (and where accordingly advocacy services could be provided by any solicitor's firm) there was no convincing justification for permitting LDPs.

Conclusion

8.62 The economic analysis suggested that the market should be left to determine whether LDPs would be a business structure which the users of legal services would find of value. It was however difficult to determine how LDPs with advocates and solicitors could be effectively regulated under current arrangements, in the absence of a Legal Services Board in Scotland with specific powers in relation to LDPs similar to those suggested by Sir David Clementi for a Legal Services Board in England and Wales.

8.63 The repeal or modification of certain professional rules would also be necessary to enable LDPs to be established, such as :

• the Faculty of Advocates rule against an advocate entering into partnership with another advocate or with any other person in connection with his practice as an advocate ⁹¹;
• the Law Society of Scotland's rule which prohibited a solicitor forming a legal relationship with a person or body who was not a solicitor with a view to their jointly offering professional services as a multi-disciplinary practice to any person or body. ⁹²
• the Law Society of Scotland's rule which restricted membership of an incorporated practice to solicitors or other incorporated practices. ⁹³

The introduction of close collaboration between branches of the profession in LDPs would also make rules restricting advocates and solicitor advocates from appearing in the same team anomalous (see chapter 5 on the restriction on 'mixed doubles').

(d) Restrictions on multi-disciplinary practices ( MDPs)

8.64 In Scotland the Law Reform (Miscellaneous Provisions)(Scotland) Act 1990 removed the statutory restriction ⁹⁴ which prevented solicitors engaged in private practice from entering into multi-disciplinary practices with non-solicitors. The 1990 Act did not however prohibit the Law Society of Scotland from making rules which would have a similar effect.

8.65 The Society's rules currently provided that "A solicitor shall not form a legal relationship with a person or body who is not a solicitor with a view to their jointly offering professional services as a multi-disciplinary practice to any person or body." ⁹⁵

8.66 The rule was made under a statutory provision ⁹⁶ which provided that a rule prohibiting the formation of MDPs did not have effect unless the Scottish Ministers, after consulting the Office of Fair Trading ⁹⁷, had approved it. The rule was approved in 1992 by the then Secretary of State for Scotland, following consideration of advice submitted to him in June 1992 by the Director General of Fair Trading (though that advice favoured the amendment of rules to facilitate the introduction of MDPs). It was only a legal relationship which was prohibited; there had been examples of parallel partnerships eg the relationships between McGrigor Donald and Klegal/ KPMG and between Dundas and Wilson and Andersen Legal, both of which subsequently broke down, the latter in the wake of Enron. The parallel partnership meant that the solicitors' practice and the other professional practice were kept entirely separate and there was no legal relationship. Consumer protection for clients of the solicitors' practice would be the same as the protection available to the clients of Scottish solicitors generally.

Rationale for the restriction

8.67 The Law Society of Scotland Working Party on MDPs measured MDPs against the 4 core values of the solicitor profession. As regards independence (to give advice without fear or favour), the Working Party concluded that there could well be greater commercial or other pressures on solicitors in an MDP, which could threaten a solicitor's duty not to allow their independence to be impaired. Strict rules apply to solicitors on conflict of interest (not to act in a conflict of interest situation) and the concept of "Chinese walls" was not operated. Though it would be possible in theory to impose the Society's rules on all other persons in an MDP, the Working Party thought it would be difficult to achieve and to regulate compliance. On confidentiality (to treat all discussions with the highest confidence), any Chinese walls would have to separate one department from another within an MDP clearly and decisively, which would raise questions about the operational viability of MDPs. On privilege (the client's right to sanctity of discussion) the Society did not favour a restriction of the doctrine of legal professional privilege in view of its importance to the rule of law.

8.68 The Society was concerned that the economic advantages of MDPs were incompatible with the 4 core values. If means could be devised to establish MDPs without compromising those protections, the Society had indicated that it would be prepared to reconsider its view. The Society could not however see how MDPs could operate without compromising those principles, short of requiring all other MDPs to become subject to the rules of the Society.

8.69 The Society had been concerned about the effect that MDPs might have on the provision of legal services across Scotland and especially in rural areas. If MDPs resulted in greater concentration of legal service provision within urban areas, rural communities could in its view be less well served than they were at present. Large MDPs might draw more profitable work away from smaller rural practices which would be a concern, given the relative remoteness from larger towns and cities of a considerable proportion of the Scottish population. It was necessary to weigh in the balance however that the delivery of legal services by electronic means and the development of an online market place might mean that such concerns became less substantial over the next decade.

Competition issues

8.70 The longheld position of the OFT had been that it was desirable in principle to permit the formation of MDPs. In its report Competition in Professions in 2001, the OFT noted that restrictions on MDPs might both inhibit new entry and prevent the exploitation of possible economies of scale and scope. It remained the OFT view that the opportunities to provide combinations, in particular, of High Street professional services under one roof, should unlock potential cost efficiencies and enhance customer choice and convenience at that level of the market. Potential benefits might accrue also from combinations at other levels of the market. Given continued improvements in communications, it seemed unlikely that access to more restricted (and less efficient) legal services would be in the long term interests of rural users of such services in Scotland.

8.71 The OFT recognised in its 2001 report that particular safeguards would be necessary, in particular in relation to combinations involving auditors. They doubted however if the need for such safeguards in relation to audit services could justify the current blanket prohibition on MDPs outside of the field of auditing services; nor did they consider that to be a necessary implication of recent European case law. Even in the field of audit, the response of those with responsibility for regulating audit following the Enron situation had not been blanket prohibition of the provision of non-audit services by auditors, but had been to consider the specific risks involved in the provision of each combination of services and only to prohibit those combinations of service where identified risks could not be addressed by appropriate safeguards.

8.72 The issue of legal professional privilege was highlighted by the Law Society of Scotland as a possible inhibitor to the development of MDPs (see chapter 5). In the OFT report on Competition in Professions in 2001 and its subsequent progress statement, the OFT highlighted the concern that where lawyers were in competition with non-lawyers, legal professional privilege might distort competition in favour of the lawyer. The OFT drew no conclusions as to whether protection for lawyers' clients might be decreased or that afforded the clients of other professionals increased. The Government subsequently concluded that it would not be in the public interest to alter the scope of privilege.

8.73 The OFT considered the following point to be of general relevance when any new business structure was considered. The question of how services were supplied was generally best determined by unfettered competition between producers for the custom of consumers. Regulators at whatever level should therefore avoid prescribing how professional services should be supplied. It followed that where, as currently, restrictions were placed on the freedom of patterns of supply to evolve and improve, those restrictions should be removed unless they could be justified. The OFT remained of the view that the removal of restrictions in professional rules and in statute which prevented lawyers participating in MDPs was likely to have a positive effect on competition in the supply of legal services throughout the UK. The Scottish Consumer Council endorsed the OFT's views.

Economic analysis

8.74 The survey at annex E looked at the position of MDPs within jurisdictions worldwide. It summarised the key arguments put forward in literature to justify removal of prohibitions on MDPs, and also the arguments put forward by those wishing to maintain the prohibition. Models of MDPs were discussed, and a brief jurisdictional comparison was undertaken.

8.75 Professor Frank Stephen observed that the debate on MDPs was somewhat bedevilled by a lack of empirical evidence since MDPs were precluded in most jurisdictions (as annex E confirms). The debate usually centred on whether any economies of scale and (particularly) scope attributable to MDPs would be at the cost of compromising what the Law Society of Scotland referred to as the four core values of the solicitors' profession. There was little detailed analysis in the debate of what form the economies of scale and scope might take or what their magnitude might be. Furthermore, little consideration was given to the variety of forms and combinations MDPs might take. MDPs involving lawyers, accountants and management consultants servicing multinational enterprises were likely to be different in scale and function from a 'High Street' MDP encompassing a solicitor, a surveyor and, say, an estate agent, or perhaps an accountant. The former were likely to be justified largely on the basis of economies of scope since the individual professional firms were likely to have exhausted economies of scale. 'High Street' MDPs might involve both economies of scale and scope. The individual professional firm might not yet have exhausted economies of scale. The greater generation of business by the MDP might allow each profession to benefit from lower costs available to larger mono-profession firms. In addition economies of scope would arise if the cost of producing more than one type of professional service in the MDP was less than the cost of producing the same services in mono-profession firms. That could arise from the sharing of fixed costs such as advertising, billing and accommodation as well as in assessing clients' multiple needs.

8.76 Professor Stephen concluded that to a certain extent, both the benefits and costs of MDPs remained hypothetical. Where they were permitted, however, they seemed to emerge with a significant market share, particularly in markets serving major business clients ( e.g. legal markets in Germany). From an economic point of view it could be argued that MDPs which supplied combinations of professional services would only survive if clients gained net benefits. Large commercial clients were likely to be sufficiently informed to make a judgement on that. Infrequent (usually personal) clients might not be as well informed as to potential problems and might need assurance from a regulator. That suggested that 'High Street' MDPs might need greater scrutiny than those providing services to commercial clients. Since the professional combinations were likely to differ across those market types, the focus of policymakers should be on the particular combinations of professions that might be problematic rather than excluding all forms of MDPs.

8.77 In a small scale jurisdiction with a widely dispersed population such as Scotland, the viability of professional practice in rural areas might arguably be safeguarded by an MDP which provided a range of professional services, but there was no certainty that professional firms in rural areas would wish to form MDPs, assuming that an appropriate regulatory model could be identified.

Clementi's views on MDPs

8.78 In his final report Sir David Clementi identified a number of issues around Multi-Disciplinary Practices. He acknowledged the fundamental difficulty of regulatory reach which would arise from bringing lawyers and other professionals together to provide legal and other services to third parties. In those circumstances he recognised that a regulator, such as the Legal Services Board proposed for England and Wales, would have no jurisdiction over activities outside the legal sector. Clementi's conclusion was to recommend that attention should focus on the setting up of a new regulatory system for lawyers with the Legal Services Board at its centre, and the authorisation of LDPs. He believed that this experience would facilitate the emergence of MDPs at a later date, if the regulatory authorities should at some time in the future consider that sufficient safeguards could be put in place.

Conclusions

8.79 The Group concluded that the issue of MDPs appeared likely to stay on the agenda and that identifying an appropriate regulatory model would be an essential first step if they were to become a reality.

8.80 The Group noted in the latter context that the UK Government in its White Paper "The Future of Legal Services : Putting Consumers First" published in October 2005 had expressed its intention to liberalise very extensively the way in which legal services could be provided in England and Wales. The White Paper explained how the UK Government envisaged that the alternative business structures would be regulated by the Legal Services Board proposed for England and Wales in conjunction with front-line regulators; and how the necessary safeguards would work in practice. The White Paper defined alternative business structures widely to include MDPs, LDPs, and other ownership structures including non lawyer ownership and external investment, including public limited companies that could issue shares.

8.81 The White Paper suggested that prospective ABS firms should be licensed by an authorised ABS regulator or by the Legal Services Board (in the absence of an ABS regulator); that different types of lawyers such as barristers and solicitors and lawyers and non-lawyers should be able to work together in ABS firms on an equal footing; that ABS firms should be able to tap into external investment; and that existing front line regulators (such as the legal professional bodies in England and Wales) should be able to apply to the Legal Services Board for permission to regulate ABS firms.

8.82 The Group concluded that

• the case for alternative business structures in Scotland and the suitability of regulatory arrangements such as those proposed for England and Wales were a matter for further policy development by the Scottish Executive in consultation with interested parties; and
• its report would serve as a basic source of evidence for future consideration of the case for alternative business structures in Scotland.

The Scottish Consumer Council was of the view that such further work must happen quickly, in order to ensure that Scottish consumers were not at a disadvantage in the market in comparison to their counterparts in England and Wales. The competition review process in Scotland had begun in 2004 however in response to the EU report on Competition in Professions as was the case in other EU member states, whereas in England and Wales the competition review had been triggered in 2001 by a report from the Office of Fair Trading.