The elephant in the room

By Agnese Smith April - May 2014

Will Canadian law societies follow Britain’s lead and allow outside investment in law firms? They’re thinking about it — and it’s making lawyers nervous.

The elephant in the room

Illustration by/par Robert Johannsen

There’s an elephant sitting in law society offices around the globe. And it speaks with an English accent.

It’s saying that based on the British experience in liberalization, neither the rule of law nor legal ethics are undermined when outside supervision and investors are allowed into the legal services industry, which still enjoys a near monopoly in many jurisdictions on public interest grounds.

“There is no evidence that standards have been let down” as a result of the Legal Services Act of 2007, says Chris Kenny, chief executive of the Legal Services Board, the independent regulator for England and Wales created by the Act. It has, however, resulted in a wholesale change of attitude, even in legal areas that are not covered by the LSA, he said.

“I don’t think any jurisdiction can justify a monopoly in legal services,” Kenny added.

Most legal societies disagree, despite the fact that the system in Britain did not implode after outsiders were admitted to the club several years ago in the name of improving access to justice and encouraging innovation.

As access to legal counsel moves increasingly beyond the reach of the average person and technological advances render old paradigms for legal regulation problematic, this may change. But for the moment, the United States and many other countries have come out against liberalization.

The situation in Canada is somewhat different.

While Canadian provinces still prohibit non-lawyers from owning law firms, law societies here accept that change is necessary and many are seriously studying the experience in Australia and Britain, which have permitted outside investment in the form of Alternative Business Structures (ABS) for several years.

The question is: Will the Canadian system, which is regulated in the public interest by 14 provincial and territorial law societies, allow for greater competition, and to what degree? Are the self-regulated law societies capable of leading such monumental change without being forced to do so?

Observers agree that Canada is moving in the right direction, but there is some concern that if law societies do not act, the government will do it for them, and in the process, remove the regulators’ ability to oversee members. This was the case in Britain and Australia.

“Access to justice in Canada is a real problem, and if practitioners themselves cannot find a way to alleviate the pressure, there is a good chance that governments will be forced to act,” said Jordan Furlong, an Ottawa-based partner at Edge International, who has written extensively on this topic. “The quid pro quo of self-regulation is: you have to clearly show that you are regulating in the public interest. The day the public and governments lose faith that we’re doing that is the day we start to lose self-regulation.”

Not all legal professionals will be overjoyed at the increase in competition that new ownership structures would create, he adds.

“There will be a lot of resistance from rank and file lawyers,” added Furlong. “They see regulatory liberalization as a threat — that we would be opening the floodgates to new competitors” at a time when lawyers are already struggling financially.

"The existing tight regulatory restrictions on business structures are not justifiable given the lack of evidence that regulatory liberalization will cause harm."

Britain’s experience suggests that Canadian lawyers, especially those who aren’t at the top of the legal food chain, have reason to be nervous.

The ABS sector represents only a sliver of the UK’s £25-billion ($CAD46-billion) market and only a small percentage of legal services are actually regulated, or “reserved.”  Nevertheless, the very idea of liberalization has already sparked concern among the 11,000 or so firms in England and Wales.

Lawyers were initially ambivalent about the threat of competition, “but now there seems to be a belief that there are many more threats out there,” said Giles Murphy, head of business services at accountancy and investment management group Smith & Williamson in London. 

And they see a limited upside to liberalization. Murphy believes that’s because many have yet to alter their business practice sufficiently to attract outside investors or partners in different types of business.

A recent survey by Smith & Williamson found that 9 out of 10 respondents expect greater levels of competition as a result of the LSA. (The survey was completed by 102 respondents from the top 250 UK-based law firms.) Only one in 10 firms with 49 partners or less expect to become a multidisciplinary practice. Only one in four expect to recruit non-lawyers as partners.

Meanwhile, the Law Society of Upper Canada’s Alternative Business Structures working group has recommended the regulatory body consider allowing non-lawyers to own at least a portion of legal firms. Although it’s no panacea for the current problems facing some practitioners and the public, it could help boost innovation and increase access to justice, the group said. 

“The existing tight regulatory restrictions on business structures are not justifiable given the lack of evidence that regulatory liberalization will cause harm,” the report said. “This is coupled with substantial evidence that business structure liberalization combined with entity regulation is likely to provide greater flexibility and more options for both licensees and the public.”

The group, which provided four different models for further study in its report, suggested that a broader definition of permitted investment would lead to faster and more meaningful reform than either restricted or incremental adjustments in ownership. “Liberalization is the logical conclusion absent evidence of real risk,” Malcolm Mercer, co-chair of the working group, said in a telephone interview.

Change, however, won’t happen overnight. The law society still needs to decide whether liberalization is even in the public interest before it considers which model to follow, says Mercer.

“There are numerous consultations yet to come, and a lot can still happen,” Furlong adds. “But the fact that Convocation [the law society’s governing body] unanimously approved this report speaks volumes about its willingness to look to the public interest first and to lawyers' more parochial interests second.” 

In other provinces, the Nova Scotia Barristers Society and the Law Society of British Columbia are mulling or have already passed some reforms, including expanding the role of paralegals and ABS. In Quebec, non-lawyers are already allowed to own a minority stake in legal firms.

Liberalization is also on the radar of the CBA’s Legal Futures Initiative, which will release its final report later this year. Alternative business structures proved to be a major point of contention during consultations which wrapped up earlier this year. Most respondents came down either for or against the idea, with little middle ground, according to an interim report.

Proponents were excited about the opportunities for innovation that outside investment in law firms would open up; critics seemed mainly concerned about how lawyers could ethically and professionally carry out their duties while also acting in the interests of corporate shareholders.

Observers outside of Canada are encouraged by the recent developments here.

“A number of jurisdictions in Canada are doing exactly what they should be doing,” Laurel Terry, a Pennslyvania State University law professor, said in an email. “They have researched the approaches used in other jurisdictions, they have tried to figure out whether there is data that suggests a particular approach has been successful, and they have been educating their thought leaders and decision-makers about these complex (and sometimes controversial) issues with an eye towards taking appropriate action.”

So far, there appears to be limited government interest in altering the current system of self-regulation for law firms in Canada. However, some practitioners fear the tide could turn. 

Prudent banking regulation and a commodity bull market have allowed the Canadian economy to fare much better than most over the past five years. This has arguably helped curtail resentment toward the privileged, which includes much of the legal community. That could change with sinking commodity prices and weaker growth in general, despite the fact that many lawyers are already hurting in a challenging legal marketplace.

Considering Britain’s recent experience, some observers there question how hard Canadian legal societies can push for changes that could hurt practitioners, even though organizations such as LSUC are mandated to regulate in the public interest — not promote lawyers’ well-being.

“I don’t think it’s absolutely impossible, but if you try to make a degree of change like ABS happen, the research work suggests that the economic imperative will lessen the ambition for that change,” added Legal Services Board (LSB) Chief Kenny, referring to the possibility of law societies themselves endorsing meaningful change.

The spat in Britain between frontline regulators and the LSB about the future of legal regulation there illustrates the reluctance of some legal societies to relinquish power.

The current regulatory system in the UK, forged out of the necessity to compromise with legal practitioners, features the LSB at the top of the pyramid while frontline regulators handle the day-to-day management of the industry. It’s an expensive and complicated system that has its share of detractors.

Many observers believe the best possible solution to the current messy half-way measure would be the creation of a unified, independent regulator that could spur greater competition and innovation. But public and government apathy coupled with resistance from practitioners mean that, for now, the unhappy status quo will remain.

“I think [a single, independent regulator] is logical, not inevitable,” says Richard Moorhead, director of ethics and law at University College London. “History in the lobbying power of the Bar Council and Law Society stand in the way,” he said by email.

Of course in Canada, the notion of a single, independent regulator is a non-starter; with 14 provincial and territorial law societies, decisions on how to promote innovation in the legal sector rest with many different jurisdictions.

But rest assured, they’re all paying close attention to the elephant with the English accent.


“The Tesco law”

In 2001, Britain’s Labour Government ordered an independent inquiry after the Office of Fair Trading criticized competition and restriction in the legal services industry. In 2004, Sir David Clementi issued his report: “Review of the Regulatory Framework for Legal Services in England and Wales.”  

The government supported many of Clementi’s conclusions and brought in The Legal Services Act of 2007 (LSA), which put consumer interest at the heart of reforms aimed at increasing competition and innovation.

Dubbed the “Tesco law,” the Act opened the door for businesses like supermarkets and insurance companies to expand into legal services. Previously, only lawyers could own legal firms, as is the case in many jurisdictions. More than 250 Alternative Business Model (ABS) firms have been approved since 2011.

The LSA also created the Legal Services Board, which oversees the frontline regulators for approximately 150,000 solicitors and barristers in England and Wales


Liberalization of legal services in Canada

The Law Society of Upper Canada’s working group recently suggested four models of Alternative Business Structures (ABS) for further consideration:

  • Entities that provide legal services only, and in which non-licensee owners are permitted an ownership share of up to 49 per cent;
  • Entities that provide legal services only, and in which there are no restrictions on non- licensee ownership;
  • Entities which may provide both legal services and non-legal services (except those identified by the law society as posing a regulatory risk), and in which non-licensee owners are permitted an ownership share of up to 49 per cent;
  • Entities which may provide legal services as well as non-legal services (except those identified by the law society as posing a regulatory risk), and in which there are no restrictions on non-licensee ownership.

For an overview of the debate surrounding liberalization of legal services in Canada and abroad, visit :

LSUC Convocation Decisions February 2014

CBA Futures Report on the Consultation

Agnese Smith is a regular contributor based in London, England.

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Comments
Bradley Wright 5/6/2014 1:08:03 PM

The barrier to access to justice in Canada that dwarfs all other real and alleged barriers combined is the extremely high cost of litigation. ABS does next to nothing to address that other than around the fringes. What much of ABS is directed at are the accessible and low cost services delivered by small firm solicitors. This serves to deflect attention away from the real barrier. It is the shiny new toy that, contrary to those who claim otherwise, is already starting to cause the harms predicted, harms that will only worsen over time. Selling ownership of the practice of law is an evil genie that, once loosed upon a jurisdiction, can never be re-bottled. Never. Once the inevitable harms become obvious, they will be entrenched, and there will be nothing that can be done about them. Nothing. ABS is the blunder of the century, and, if adopted here, will be proven to be so.



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