“The Legal Landscape – Looking With New Eyes”

25 May 2010

Good afternoon everybody and thank you Professor for that kind welcome.

When I first became a member of the Law Society Council in 2001, little did I know
the transition that the profession would undergo over the next ten years. As it
happened, my arrival on Council coincided with what I consider to be the start of that
process – namely the OFT report on competition within the professions, which led
directly to the commissioning of the Clementi Review in 2003.

By the time I became an officeholder of the Society in 2007, the Legal Services Act
was three months’ shy of receiving Royal Assent. As the last President of the Law
Society to have served as an officeholder in the antediluvian days before the
passage of the Act, I have seen first hand the remarkable process of debate,
discussion and, it must be said, disagreement around the implementation of its
terms.

I have also been intimately involved with the negotiation of many of the changes
stemming from both Clementi and the Act, and I have travelled extensively on behalf
of the profession, speaking to lawyers in all corners of the globe on their perceptions
and hopes for the legal profession in England and Wales.

As I enter the last months of my Presidency, I wish to share with you my thoughts on
the experience of the last three years and hopefully to leave some food for thought
for all those associated with the legal profession and its governance and regulation.

That I do so in this magnificent, modern business school is no accident. Our law and
our business are inextricably linked. For centuries, the legal sector in England and
Wales has provided a predictable, flexible framework which has enabled business to
thrive. It has underpinned our growth not only at home, but overseas, where English
law has been more influential even than our language in building peace and
prosperity for us and for our friends in other nations.

A thriving legal sector is good for business, good for trade and above all, good for the
people of this nation.

THE LEGAL ECOSYSTEM

For this reason more than any other, we need to be sure that the radical changes
that we have put in place have had the desired effect, and in doing so that we have
not compromised either the rule of law or our position in the world.

Like any system which has grown up and evolved over centuries, the legal sector is
akin to an ecosystem – interconnected, diverse, finely balanced and inherently
fragile. If we make one small change to the environment in which it has thrived, we
must accept that the repercussions could be far greater and far more severe than
anything originally intended.

Over the last ten years, I have always approached reform of the legal sector with an
open mind and a willingness to consider to the case for change and so, it has to be
said, has the Law Society. But I think that now, three years after the Act, we must
also be open-minded about what hasn’t worked and what has proved, in fact, to be

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counter-productive.

Marcel Proust once wrote that “The real voyage of discovery consists not in seeking
new landscapes, but in having new eyes.” Having spent the last three years building
a new landscape, it is time to look at what we have created and what we are still
trying to create; and in so doing we must look not only with a perspective informed by
these experiences, but also through the eyes of others.

THE PURPOSE OF THE ACT

The Legal Services Act had three purposes.

• To simplify a system of regulatory oversight which was over-complex and

inconsistent;

• To provide common standards for professional practice; and

• To increase competition, flexibility and choice

It provided for the Legal Services Board, a single supervisory body to oversee the
approved regulators such as the Law Society and the Bar Council.

It created a single point of entry for consumer complaints, the Office for Legal
Complaints.

It opened the door to Alternative Business Structures (ABSs), which will allow
lawyers to form partnerships with non-lawyers, and accept outside investment or
operate under external ownership.

And it forced, professional bodies, such as the Law Society or the Bar Council to
separate their regulatory and representative functions, and provided new statutory
objectives and duties for all regulatory bodies.

Implementation has been rapid.

The Legal Services Board is up and running and the Office for Legal Complaints is
due to become fully functional later this year.

The Solicitors Regulation Authority and the Bar Standards Board do the regulatory
heavy-lifting as separate but connected parts of the Law Society and the Bar Council
and different types of lawyer are able to partner with each other through Legal
Disciplinary Practices.

The final piece in the jigsaw, the licensing of the first Alternative Business Structures,
is scheduled for October next year.

So far then, so good.

Or is it?

In truth, it hasn’t all been plain sailing, a fact borne out by the many conversations
that I have shared with countless lawyers in countless jurisdictions.

THE VIEW FROM OVERSEAS

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Our legal profession has long enjoyed a sky-high reputation across the world. Our
solicitors’ profession is well respected and our Bar is a model for advocacy
standards. Our judiciary has a worldwide reputation for impartiality, experience and
skill. It is this reputation which is foundation of our success overseas – success
which secures around £2 billion for the economy each year.

Yet there is some concern that all is not as it should be.

There is a widely held belief among many lawyers overseas that the Legal Services
Board is a real threat to legal independence.

There is also concern that by permitting partnerships of different types of lawyer, our
legal profession is becoming too homogenous. This has potential repercussions for
the Bar more than solicitors, given their unique historical status as sole traders – but
there is a potential danger for all of us if the unique character of our legal profession
is seen to be diluted.

There are also concerns about the education of our lawyers. Other countries rely on
the reciprocal arrangements we put in place to allow our lawyers to practise in their
jurisdictions and vice versa. But there are fears that some of our undergraduate
degrees in particular are simply not rigorous enough. This has the potential to impact
on the ability of our lawyers to move between jurisdictions.

And on ABS, there are concerns in some areas that the duties that we owe as
officers of the court may well in future be over-ridden by duties to shareholders,
concerns which have been aired in this country too. In the US, on the other hand,
there is real fear that England and Wales will outstrip the American competition due
to the potential for external investment. In New South Wales, where a form of ABS
called Incorporated Legal Practices have been in place for some years, there is
some bemusement at the fear engendered by the prospect of law firms listing. Two
firms have listed in Australia in 6 years, and the notion is treated by pretty much all
parties as a total non-event.

Although the primary focus of the Legal Services Act was an improved environment
for the consumer, we cannot purely treat the consumer interest in isolation. The legal
ecosystem must also take account of the ability of the profession to serve the needs
of justice. It is essential that we marry these observations to our own experience of
the changes of recent years to ask ourselves the big questions that arise.

INDEPENDENCE

The first question is perhaps the most pressing. In attempting to simplify our
regulatory oversight, have we lost our independence?

I believe that the answer has to be yes.

Independence means the ability of legal practitioners to operate without undue

influence from Government or elsewhere, yet the Legal Services Board is a body
with a direct line to Government.

It also possesses undue powers of intervention and it has not been shy in
threatening to use them.

The LSB was never designed to play an active role in the regulation of the legal
profession, bar a hands-off, light-touch oversight role to protect the consumer

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interest.

Yet the Board itself seems to hold the view that it is responsible for shepherding a
recalcitrant legal profession into modernity. This is not and never has been the case,
either in terms of the LSB’s role or the profession’s unwillingness to take action.

After the 2001 OFT report which called for the legal profession to open up, the Law
Society actually tried to amend its rules to allow for the creation of multi-disciplinary
practices and a form of ABS. As it was, we were advised that we were unable to do
so without fresh legislation and that we had to wait for what, ultimately, became the
Legal Services Act.

By the time that the Act reached the statute books, the Society had already taken
additional steps to separate its regulatory and representative functions.

So quite simply, there is no evidence that the profession has ever not been able to
regulate itself in the best interests of justice, of the consumer or the public - which
begs the question of why the LSB retains the power of intervention?

The legal sector is unlike any other, which is why, by and large, it is regulated in a
different way to any other. At times I have wondered whether one effect of the
financial downturn has been to tar all regulators with the same brush as the FSA –
but lawyers are very different to bankers. They are imbued with duties to the court
which require openness and transparency, but this is also balanced by the need for
client confidentiality.

In my experience, it is incredibly difficult for those without legal training to fully

understand this balance, which is why the Legal Services Board (with its lay majority)
exists to provide consumer oversight, but not to interfere directly in the regulation of
the legal profession.

There is a question of what should happen to the LSB in the long-term, once the
OLC is self-sustaining and ABS are up and running. What will it be required to do
and what form should it take?

In the first instance, it is vital for the independence of the legal profession that it
should not be allowed to morph into an activist regulator as a pretext for maintaining
its existence.

The approved regulators have a responsibility to the profession to keep the cost of
regulation as low as practicable, which means that they have a duty to ensure that
the LSB does not sustain itself artificially.

If it is to retain consumer oversight, then it must either allow the profession to get on
with the tasks of regulating itself and deciding the substance of regulation, or it must
ensure that it possesses the legal experience and expertise to be able to contribute
effectively. There may be a role here for the judiciary.

I think that it is a point of great regret that the judiciary remained largely silent on
these points during the passage of the Act. They were highly reticent about taking
any active role in the regulation of the profession or on the LSB, meaning that the
historic link between the profession and the judiciary was ultimately lost. Now that
we have a new Supreme Court which is the very embodiment of legal independence,
I hope that our judges will throw off their reticence and play their part, perhaps
directly by joining the LSB. Once all of the pieces of the Act are in place, I see no

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reason why the Board should not have as its Chair a High Court Judge or the Master
of the Rolls to help preserve legal independence and to augment to skills that the
Board already possesses.

Ultimately, the future of the LSB is a long term question for the legal profession, but
the independence of the profession is not. It is a critical disturbance of the legal
ecosystem and we must take it back.

REGULATION

A corollary of the independence debate is the issue of outcomes-focussed regulation,

which brings me to my second set of questions: 1) Are we asking too much of the
profession, too soon in terms of regulatory change? 2) By asking the SRA to
implement outcomes-focussed regulation, has the LSB asking them to perform an
impossible task?

Let me rewind a little.

Towards the end of last year the LSB decided that it required the SRA to implement a
form of outcomes-focussed regulation for the whole profession. Such a move
requires great thought. To give some sense of context, when the profession revised
the code of conduct three years ago, it was after a gestation period of some six
years. Since the Act, the Law Society also commissioned an independent review of
the substance of regulation which reported last October after nearly a year of
consideration. OFR, conversely, seemed to appear on the radar overnight.

It is an open secret that the LSB sees OFR as the best regulatory system for ABS,
which is why the SRA is working to an incredibly tight timetable to introduce it in time
for the licensing of the first ABS in October next year.

Under OFR, the SRA would draw up a list of desired outcomes and provide clear
guidance to the profession on what they mean. The emphasis would then be on the
profession to meet those outcomes in a way that they see fit and to report back
accordingly.

Superficially, it is a very attractive system, although it is worth noting that ABS would
not in any way require OFR to function. In reality, it is incredibly difficult to
implement.

To begin with, it requires a huge cultural shift. In recent years, regulation of the
profession by the SRA has been particular intrusive, and enforcement has at times
verged on the draconian.

For OFR to work, the profession has to report to the regulator with honesty and
frankness. To do so, it has to have faith that the regulator can work with it
constructively to assist it to comply, rather than attack it for its failings. It has to be a
two-way relationship of trust, rather than a confrontation founded on mutual
suspicion.

A great deal has to change, not least within the SRA itself.

Firms will also need time to prepare. We are not simply talking about large firms,
many of whom already have effective compliance systems in place. We’re talking
about the high street and about sole practitioners. The top 100 might be able to
adapt quickly, but can the smaller firms?

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OFR does not exist anywhere, in any country. It is untried, untested and unrealistic
on the timescale that the LSB has specified.

I have heard it suggested from within the LSB that OFR should be brought in “come
hell or high water”. Does this therefore mean that we burn or drown?

If we are serious about introducing a system of outcomes-focussed regulation, we

need to take the time to do it in a controlled manner, rather than rushing it to meet a
wholly artificial timetable created by the LSB for the creation of the first ABS.

The current situation does not work to the benefit of the LSB, the profession or,
indeed, the consumer. We are in danger of trying – and inevitably failing – to achieve
the impossible.

This isn’t the SRA’s fault. It has taken great strides to address the deficiencies
identified by Hunt, Smedley and others. But rather than asking the regulator to fit a
system to the needs of the profession, the LSB is asking the SRA to fit the profession
to the needs of a system. In keeping with the literary theme of this lecture, I was
reminded the other day of a poem called “The Solution” by Bertolt Brecht, in which he
suggests that the East German regime believes its citizens not worthy of its
government, and suggests that they ought to maybe dissolve the people and elect
another. It is an attempted subversion of the ecosystem. We cannot redesign the
profession to fit a system, at least on the current timetable.

The legal profession is not immovable, but it is currently a square peg being forced
through a round hole. It is too soon to ask it to make the Great Leap Forward. It
needs time to change shape.

ETHICS

My third question relates to legal ethics – is there really an understanding of ethics?

Adrian Evans, an expert on legal education from Monash University has rightly made
the point that at a time of increasing competition, it should be our ethics which are
our biggest competitive advantage. I would go further than this – our ethics are also
our biggest and best argument for greater freedom to regulate ourselves, whether as
individuals, firms or as a profession, and we have to protect them and augment them
wherever possible.

Legal ethics have always been derived from a solicitor’s obligation to the court. As
officers of the court, they owe their duties to the court. Yet the truth, of course, is that
many solicitors have never actually set foot inside a court.

Prior to 2007, a formal link at least existed between solicitors and the court through
the Master of the Rolls, yet that link was severed following the passage of the Legal
Services Act.

Is it unreasonable therefore to expect solicitors to recall the ethical parts of the

profession if they are unable to see themselves as part of the continuum of justice?

Whilst ethics teaching forms a part of the Legal Practitioner Course, it doesn’t receive
the same kind of academic emphasis as in some other jurisdictions. Whilst there are
great practical benefits to a vocational approach to ethics training, there are also
huge problems – not least that as well as passing on good practice from generation

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to generation, we risk passing on deficient practice too.

Given its importance, is there any reason why we cannot do both? Would it not be
sensible to teach ethics at the most basic level as part of undergraduate training,
covering concepts such as conflict of interest, confidentiality, duties to the court and
duties to the client?

While in Australia, I was struck by the degree to which the judiciary is closely linked
to the legal profession. This is a link that we have sadly lost. Our judges are the
embodiment of our courts, and just as we need to ensure that all solicitors are aware
of their duties, so we must re-acquaint the transactional profession with the judiciary.

One way to do this might be through the admissions process, thus placing the link at
the heart of actually becoming a solicitor. It could be through the LSB.

The benefits could not only be for ethics, but for judicial appointments too.

Whichever way we do it, it is not just solicitors who must become acquainted with the
judiciary. The judiciary must also become acquainted with solicitors.

It has been especially pleasing in recent months to hear the Master of the Rolls make
his voice heard on ethics and professionalism, and I look forward to hearing more to
come. Everybody involved in the legal sector has a responsibility to uphold the rule
of law, and we need to work together in that task. It is not enough to simply have an
activist profession – we need activist judges too.

This is partly our fault. We have imperilled the ecosystem ourselves by working to
our own devices. We have to be more collegiate in our approach.

This should form part of a comprehensive and wide-ranging review of our legal
education system. In recent years we’ve had work-based learning pilots, reviews of
QLTT, a review of the LPC – but it’s not enough. We have to work out what we need,
how we can provide it and how we can equip tomorrow’s lawyers to compete with the
very best that the rest of the world has to offer – and we need to do it not as
solicitors, barristers or legal executives, but as a single legal profession comprised of
many parts.

ABS

My fourth question concerns Alternative Business Structures. A great deal of time,

breath and news-ink has been expended on the potential consequences of ABS.
Some believe that we should speed up, others that we should slow down. Some
extol the opportunities that they will bring, others the dangers that await. So are we
moving too fast towards ABS, and do we have anything to fear from them?

There’s no question that ABS are a big innovation. As with any new form of business
structure, the profession will take time to adapt. Take-up may not be quick. There is
unlikely to be a rush to invest in law firms. They may not have the instant
transformative impact that many appear to expect.

Similarly, the attraction of ABS may not be what we expect.

The legal market looks very different to when ABS were first envisioned. The
downturn and the consequent need to cut cost has led to a proliferation of
outsourcing and off-shoring of legal activity. Within this context, we simply don’t

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know what the impact of ABS will be.

That said, they know something of it in New South Wales. They have had their own
version, called Incorporated Legal Practices, since the first half of the last decade.

Since incorporation became possible in 2004, the great majority of firms who have
chosen to incorporate have been SMEs, who did so in order to limit liability or share
equity with family members for tax purposes.

Nowadays, virtually all new firms choose ILP status. It reduces PII costs as well as
liability. Pre-existing firms have been more cautious, both for tax reasons and
because they were already gaining the benefit of reduced PII through other means.

Amongst ILPs, there is only a handful of multi-disciplinary practices – 17 out of

around 900 – largely because the obligations of lawyers are applied to everyone in
the partnership, whilst the main benefit, Legal Professional Privilege, applies only to
lawyers.

What was most startling from my conversations in Australia was the utter lack of
concern about the listing of law firms. Since incorporation became possible, only two
firms have listed on the Australian Stock Exchange, for fairly specific reasons
associated with their individual business models.

The big questions which have troubled many people in England and Wales have
been easily over-come. The firms in question held extensive discussions with the
legal authorities about their ethical obligations and settled fairly quickly on an
agreement which ranked the firms’ duties in the prospectus documents. This clearly
indicated to shareholders that as far as the firms’ duties are concerned, they are at
the bottom of the heap, below duties to the court and duties to clients.

The main concern was voiced by the Stock Exchange – about whether a firm would
be able to disclose market sensitive information. As it turns out, recent events over
the Vioxx case have quelled their worries. Overall, they do not believe that there is a
single issue which is unique to a law firm which cannot be dealt with.

This isn’t to say that we have nothing to worry about. Part of the reason that listing
and other forms of incorporation have proven so uncontentious is that control over
access to the profession is much tighter than in England and Wales, and that there
are countervailing restrictions on advertising and referral fees.

It was also suggested that we are doing things the wrong way round by allowing
external investment first and only then, possibly, listing. Steve Mark, the Legal
Services Commissioner of New South Wales, holds the view that the only law firms
which would be able to list would be those with a brand name, which would provide
some protection against unethical conduct or other wrongdoing.

There are clearly issues that need resolution with ABS and whilst I understand the
LSB’s desire to move quickly, it must also be realistic about the need to overcome as
many potential problems in advance as possible in advance of granting the first
licenses. The LSB’s timetable is unhelpfully restrictive in this regard.

At the same time though, I am convinced that we have nothing to fear from ABS. As
President, I have spent a great deal of time in conversations with other Bar
Association Presidents encouraging them to liberalise their markets and to open up
to foreign competition. We do this because there are advantages to competition, but

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also because we have absolute faith in our ability to compete. As a profession, we
have never feared competition and we should not start now.

I understand that many are worried about the impact upon access to justice,
especially in rural areas. We have to build safeguards to defend against this, but we
shouldn’t rush to judgement on the back of an apocalyptic worst case scenario. As
we have already seen in Australia, things don’t always work out how we expect. In
fact, it is arguable that access to justice in rural areas has been improved in Australia
due to the expansion into the country of Slater and Gordon – funded by the fruits of
having listed on the Australian stock exchange.

The Legal Services Act has created some threats for those businesses with a static
business model – but we far too easily overlook the opportunities that it has
presented. The ability to partner with other professions isn’t something to be scared
of – it’s something to be embraced. It presents new opportunities where they did not
hitherto exist.

Ultimately, we should not and we cannot deny our clients the choice of whether to
use an LDP or an ABS if there is no evidence that they threaten justice.

IDENTITY

My final question is more fundamental and relates to the legal profession as a whole
– are we losing our identity?

By opening up the legal services, by allowing barristers direct access to the public,
by allowing partnerships between different types of lawyers, by encouraging
regulatory competition – are we losing the distinct character which has marked out
our profession as a model for others?

This isn’t a question of not wanting to compete. It’s a question of whether in the rush
to change and to become more commercial, we are in danger of destroying the
system and the structure on which our success and our influence have been built.

Many nations look up to the English profession for guidance on ethics and procedure
– particularly to the Bar, which continues to be a model for advocates across the
world. Some who have always looked to the Bar for advice have suggested that it no
longer become relevant if barristers and solicitors were able to go into partnership
together.

Who really gains from partnership? Is it the profession, who risks diluting the impact
of their brand abroad? Is it the consumer, who under the current system has the
option of hiring the best barrister that they can, because barristers are not bound to a
particular firm?

Do we in fact reduce choice in an attempt by regulators to steal ground from each

other and to expand their own influence?

There is another lingering question, which many seek to avoid.

If barristers begin to see clients more directly;

If licensed conveyancers are one day able to perform advocacy;

Why will we need four or five separate regulators each with their own individual

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identity?

One thing alone is for certain – however logical it might appear, the impact of the
destruction of the separate brands that form our profession would be huge and any
so-called victory for a particular regulator would by pyrrhic in the extreme. It risks
destroying the ecosystem altogether.

CONCLUSION

The strength of the common law is that it is clear enough to provide predictability, yet
adaptable enough to move with modernity.

The legal profession is cast in a similar mould. We are not and have not ever been
afraid to change, but we must also pay heed to the value of what we have previously
had.

The Legal Services Act was passed with good intentions, but those intentions have
not always been borne out by results. If the legal profession is a delicate and
complex ecosystem, this is the “Inconvenient Truth”.

The Act was designed to simplify a system of regulatory oversight which was over-
complex and inconsistent. Instead, it has maintained a profusion of separate
regulators and blurred many of the boundaries between them. Chris Kenny is quite
wrong to suggest that “adding complexity can create simplification”.

The Act was designed to provide common standards for professional practice. We
are certainly moving forward with Outcomes Focussed Regulation, but at what
ultimate cost?

The Act was designed to increase competition, flexibility and choice. So is the
consumer going to get a good deal? Not if the profession is forced to pass on the
inflated cost of an increasingly unwieldy regulatory system, and not if the means of
delivering justice have been compromised as a consequence.

In the rush to build a new world, we have lost our independence and it will take a
great effort to recover. It requires cooperation between solicitors, barristers, legal
executives, legal educators and, yes, judges – and it needs government to use the
opportunity of a new start to look afresh at the arrangements which govern the
profession.

We cannot continue with a situation where the previous government brought in an

extra layer of oversight without actually determining what value it brings. And what
value does it bring?

No regulator can regulate without the consent of the regulated, and right now the
Legal Services Board is failing to carry the profession with it. It must slow down, look
around and take stock of all that has happened before heading full tilt into a future
that none of us can predict.

The solicitors’ profession must also protect itself from the forces around it. It must
renew its ethical commitment and reassess the educational needs of the future.
Nothing less than a comprehensive review of the needs of the domestic and global
markets will do.

And on ABS, I say this. We have nothing to fear provided that there is a level-playing

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field for all firms.

Over the last few years, the profession has been swept along by the tide of reform,
yet we find ourselves facing a new set of problems, every bit as potent as those that
we have been trying to cure.

We cannot and should not attempt to roll back the years, but it is time that we took
another look at where we are and where we want to be.

Thank you for listening.