Chapter 2: Alternative business structures
2 This section outlines how the legal profession is presently structured, the background to reform and what changes would be needed to permit different sorts of alternative business structures ( ABS).
2.1 The Scottish legal profession is essentially made up of solicitors and advocates. Around 95% are solicitors, the position of advocates is discussed in chapter 8.
2.2 Solicitors can work alone or form a partnership with other solicitors. Only solicitors can own a firm of solicitors and employed solicitors cannot act for third parties. Solicitors are prevented from forming a partnership with non-solicitors (except with registered foreign lawyers in multi-national practices). Solicitors cannot form a business relationship with an advocate. 11
2.3 The Law Society of Scotland ("the Society") has statutory responsibility for regulation of solicitors under the Solicitors (Scotland) Act 1980 ("the 1980 Act"). The Act provides for the statutory basis for the Society, the right to practice, conduct and discipline, professional practice and complaints 12 and disciplinary proceedings relating to solicitors in Scotland. The Society has statutory responsibility for the promotion of the interests of solicitors, as well as the interests of the public in relation to the profession.
2.4 Section 34 of the 1980 Act permits the Council of the Society to make practice rules, subject to the approval of the Lord President for rules relating to professional practice and conduct and discipline of solicitors. Any rule which has the effect of prohibiting the formation of multi-disciplinary practices must be approved by Scottish Ministers subject to consultation with the Office of Fair Trading ( OFT).
2.5 There are two other categories of professional who fall within the scope of the "legal profession", for the purposes of the Bill: those holding rights of audience by virtue of Sections 25-29 of the 1990 Act and licensed conveyancers and executry practitioners.
2.6 Sections 25 to 29 of the 1990 Act provide that the Lord President of the Court of Session and the Scottish Ministers may grant professional and other bodies rights to conduct litigation and rights of audience. An application to the Lord President of the Court of Session and the Scottish Ministers has to be accompanied by a draft scheme which indicates the code of conduct required of members, a complaints procedure, disciplinary procedures and sanctions. The Lord President and Scottish Ministers must approve the scheme before it can come into effect, and have powers to withdraw rights if they feel that the body is in breach of that scheme.
2.7 To date, the Association of Commercial Attorneys has successfully applied for and been granted rights to conduct litigation and rights of audience and the Institute of Chartered Accountants of Scotland ( ICAS) has submitted an application for approval.
2.8 The 1990 Act made it possible for people other than solicitors to be licensed to practice as conveyancing or executry practitioners. Originally these practitioners were regulated by a public body - the Scottish Conveyancing and Executry Services Board.
2.9 The Society is now responsible for the regulation of conveyancing and executry practitioners as a result of the Public Appointments and Public Bodies etc (Scotland) Act 2003. There is an official register of these practitioners maintained by the Keeper of the Registers of Scotland. This currently lists ten executry practitioners.
2.10 Throughout the rest of this paper, we use the term "legal professionals" to refer to solicitors, advocates, licensed conveyancers and executry practitioners, and those holding rights of audience under the 1990 Act.
The options for alternative business structures
2.11 The Government supports the view of the Society that the restrictions on the business structures applying to solicitors should be reformed.
2.12 The LSA 2007 which applies in the main to England and Wales only, will reform the regulatory structure of the legal profession in those countries. It establishes a "super-regulator" - the Legal Services Board ( LSB). In turn, the LSB will authorise and provide oversight of "front-line" regulators, which will regulate providers of legal services such as solicitors and barristers. The Act envisages that the regulatory framework will oversee the development of ABS.
2.13 The LSA 2007 provides for a limited form of ABS known as Legal Disciplinary Practices ( LDP) to emerge before the Multi-Disciplinary Practices and other forms of ABS are authorised . Legal practitioners will be permitted to provide services for third parties and form practices with other professional groups to offer legal services. The Solicitors Regulation Authority ( SRA) is hoping to enable regulation of these new structures from March 2009.
2.14 Multi-Disciplinary Practices (as referred to in paragraphs 2.28 to 2.30), though permitted, are unlikely to be implemented before 2011.
2.15 The Government does not believe that the approach for England and Wales is right for Scotland. There are key differences between the legal services markets north and south of the border and we want to shape proposals to fit Scottish circumstances.
- The legal services market is much larger in England and Wales in terms of both turnover and numbers of legal professionals. There are about 108,000 solicitors and 14,000 barristers in England and Wales compared with 10,150 solicitors and around 460 advocates in Scotland.
- The regulatory framework in Scotland is not complex by comparison with England. Legal professionals are regulated by either the Law Society of Scotland or the Faculty of Advocates. 13 This contrasts with the "regulatory maze" which was identified by the Clementi report in 2005 in England and Wales.
2.16 Furthermore, the Government is committed to the simplification of the Scottish public sector. We do not believe it is necessary or proportionate to establish a "super-regulator" to licence and oversee the bodies which regulate legal services.
2.17 The Law Society of Scotland's position is that it is not a particular business structure which should guarantee the protection of professional values, but the regulatory framework within which legal businesses operate.
2.18 We accept this analysis although, as we discuss in chapter 8, we believe that there are some special circumstances applicable to the Faculty of Advocates.
2.19 We believe the current restrictions on business structures potentially constrain innovation, and do not deliver a competitive market across the range of legal services. 14 We also recognise that a number of Scottish legal firms wish to be free to deliver services in new ways, and that they need to be able to compete effectively against legal practices from other jurisdictions, as well as unregulated providers of similar services.
2.20 In reforming the regulatory framework, we need to recognise not only that the private legal profession is offering commercial services in a competitive marketplace but also that an independent legal profession is vital to underpin the rule of law, and that the public must be able to place trust in the competence and integrity of anyone operating as a legal professional.
2.21 We set out our proposals for the regulatory framework in the following chapters. This framework would make it possible for any of the following types of ABS to operate in Scotland.
An ABS involving non-lawyer ownership
2.22 This would allow non-lawyers, who participate in a practice without offering a direct service to clients (for example as a chief executive or financial director) to hold an equity stake in the practice.
2.23 The potential advantages include attraction and retention of expertise within the senior reaches of the legal profession. Directors would have a stake in the practice and be incentivised to deliver good quality, efficient and competitive services. This would ultimately benefit consumers.
2.24 Safeguards would be required to ensure that only fit and proper persons were able to exercise influence or control over a legal practice and that such practices were properly regulated.
An ABS involving external ownership
2.25 This type of ABS would allow shareholding by people other than a director of the practice, including investors holding sufficient shares to give them an influencing or controlling interest in the practice. Ownership by non-lawyers of a legal practice would be allowed and organisations would be able to employ solicitors to provide legal services to the public.
2.26 The potential advantages include:
- increased access to external capital may allow firms to grow and compete; and
- incentives for staff who could be rewarded with shareholding.
2.27 The potential risks include:
- the possible pressure to act in improper or illegal ways, or to compromise core values such as independence, protecting the interests of the client and confidentiality (issues that are considered in chapters 5 and 6); and
- a concentration of practices into larger units, which could be detrimental to access to justice, particularly in rural areas or specialist forms of practice. (Access to justice issues are considered in chapter 4.)
2.28 Provisions would also need to be in place for either the continued operation of the Guarantee Fund and Master Policy or some other form of insurance cover. (These are considered in chapter 7.)
Multi-disciplinary practices ( MDPs)
2.29 This would allow solicitors and other professionals (such as accountants, architects and surveyors) to come together in business to provide legal and other services to third parties.
2.30 The potential advantages include the following.
- Greater flexibility and choice for clients by using one-stop shops to conduct a range of business.
- Firms would be able to share overheads and in turn pass cost savings to clients.
- Sustaining legal practices in small communities, where a solicitor's practice might not be commercially viable on its own.
2.31 The main difficulty which needs to be resolved before MDPs can operate is reconciling the different regulatory codes that may impact on the business. In particular, there may be a potential threat to the client's right to confidentiality and legal professional privilege. The standards and core values of the legal profession should not be compromised and the rights and redress of consumers must be protected. (This is considered in chapter 5.)
1 Do you agree that alternative business structures ( ABS) should be permitted for the provision of legal services by solicitors in Scotland?
2 Are there any of the 3 business structures described in paragraphs 2.21 to 2.30 which should not be permitted?
3 Are there any of these 3 business structures which should be permitted but which you feel would require additional safeguards?
4 Should there be any change to the present arrangements for regulating licensed conveyancers and executry practitioners, or those with rights of audience, as described in paragraphs 2.5 to 2.9?