Of legal aid and lemonade

Legal aid and hard facts

As we wait for the Government’s response to the consultation on its proposals for legal aid, it might be worth reminding ourselves of some salient facts:

(1)  This country cannot afford publicly funded legal advice and representation for all citizens on all legal issues that will face them in their lifetimes: difficult choices therefore have to be made about what falls within the scope of legal aid and what does not.

(2)  The ‘right’ choices about scope need to be made, otherwise there will be vulnerable people without legal advice and representation in circumstances where the common consensus in any decent society would be that it should be available.  The wrong choices could also result in the total bill to society increasing, if the absence of legal advice and representation leads to greater costs to healthcare, housing, unemployment, family breakdown or welfare benefits.  These are policy decisions.

(3)  The Government and other public authorities could bring down the demand for legal aid (even in circumstances where everyone thinks it should be available) by taking steps to ensure that front-line staff perform their duties competently and make the right decisions first time so that claims and appeals against actions and decisions by public servants are reduced.  The public purse might still end up paying, but it’s important that the costs of quality, incentives for good performance, and ‘polluter payment’ for poor performance, are allocated to the proper budgets.

(4)  The legal aid bill will be reduced by around £350 million: except to the extent that any of this reduction is achieved by the reduction of the Legal Services Commission’s administrative costs, of course the turnover of legal aid providers in the aggregate will go down.  It is not the job of the Government, the LSC, regulators or taxpayers to keep law firms in business (or profitable).

The market for lemons

If consumers find it difficult to assess the quality of the service being provided to them, they will only be prepared to pay an average price for the uncertain (and therefore presumed average) service.  Over time, this will cause providers of a high-quality service to leave the market because they will be unable to achieve a fair price for what they offer.  This will, in turn, lead to a further reduction in the average quality of service available.  A 2001 report for the OFT noted that, in this situation, if a firm providing a high-quality service cuts its prices to compete with cheaper rivals, and consumers interpret this as evidence that the firm is now providing lower quality, the firm may even hasten its own demise.

Consumers might, therefore, consciously choose not to instruct high-quality providers because they find it difficult to assess the true quality of what they are being asked to pay for.  Rather than risk being ‘ripped off’, they decide not to pay a higher price (for what might well be better quality) and instead opt for cheaper providers.  This creates a downward spiral of consumers paying cheaper prices to lower-price competitors who stay in the market as higher-quality and higher-priced businesses leave it.  The result of this ‘adverse selection’ leads to a market that has generally reducing quality and price – Akerlof’s (1970) so-called ‘market for lemons’.

A number of reasons have been put forward to support the argument that adverse selection would have little effect in the market for legal services.  Most obviously, all lawyers must meet minimum educational standards, which automatically deselect those without that education from the consumer’s range of choices.  The availability of a forum for complaints from consumers (the Legal Ombudsman) should also have a disciplinary effect on the profession and encourage non-hazardous behaviour, as will the possible use of conditional and damages-based fee arrangements – particularly where the risk is not all borne by the opposing party.

The high level of importance placed on a good reputation for lawyers is also thought to act as a strong tool in reducing adverse selection problems.  In addition, the nature of the legal services market itself solves some of its information asymmetry, in that at least in contentious matters quality issues do not solely concern the practitioner representing a given client, but are comparative to those representing the opposing party and are potentially subject to judicial comment.

However, all of these reasons can be said to apply already within the legal aid market, and therefore can no longer act to curtail the development of the market for lemons.  Indeed, in the context of legal aid, the ‘lemons’ issue could be compounded.  It is not so much that the client might engage in adverse selection, but that a monopsony buyer (the LSC) chooses not to pay for high-quality providers.  It does this not because it finds quality difficult to assess, but because it can – and, by some views, must – drive down the cost of legal aid.  There is a public interest tension at the heart of this choice.  If we accept (as I believe we must) that the total legal aid bill must be reduced, there will be an inevitable trade-off between the scope of legal aid and the risk to quality.

Even if scope is cut back, the broader the scope of advice and representation remaining available, the higher the demand will be (relative to even narrower scope).  To the extent that any removal from scope or of eligibility does not achieve the desired reduction in the aggregate cost of legal aid, cuts in the cost of provision within scope will have to be imposed.  It would be idle to pretend that this would not reduce providers’ income.  (Whether it also reduces providers’ profit will depend on the responses of providers to consolidation, restructuring. and the use of technology and processes to deliver economies of scale that could maintain prior levels of profit.  For the LSC to use fee levels to drive such changes in behaviour is not unreasonable, and I remain to be convinced that quality and access to justice would inevitably be compromised by such changes – though there is clearly a risk that they might.)

So, the risk for Government is that scope and fee reductions will drive high-quality providers away from the provision of legally aided advice and representation.  This creates a serious possibility that legal aid will become a market for lemons with generally reducing price and quality, and fewer high-quality providers choosing to remain in it.

If life hands you lemons …

Some years ago, a friend of my wife gave her a kitchen plaque which said: ‘If life hands you lemons … make lemonade’.  I take this to be an exhortation to seek something palatable out of inherently bitter or unwelcome ingredients.

If legal aid is (or becomes even more of) a market for lemons, the challenge is to find the equivalent of lemonade.  It might not be your preferred drink; there might even be different varieties (traditional, cloudy, and so on); and there will also be different perceptions of the quality of various brands.  There is not necessarily a single, homogenous result; but there is the prospect of something passable.

What might the legal aid equivalent of lemonade be?  At the heart of the dilemma, it seems to me, is a questionable assumption that quality and cost are inseparably linked – or, to put it another way, that any reduction in price must lead to a reduction in quality.  Other industries have had to grapple with this apparent conundrum.  Quality is not a singular concept but a variable one (see my views on this in Quality, values and standards: the future legal landscape).  So the inevitability of the link is not apparent to me.

The solutions must suggest gaining scale that can produce economies of scale through consolidation and acquisition (or possibly cooperation through joint ventures and the like), and to innovate delivery through new processes and technologies.  The restructuring of firms to reinvent the delivery and staffing of legal aid provision must follow, as night follows day.

What is absolutely clear is that simply expecting to carry out legal aid work in the same way as before – with the same people, structures, and costs – cannot survive a new approach in which the aggregate income available to legal aid providers is less than before.  Something has to give.  Income will reduce in the aggregate: but any given firm’s income will not go down if it can increase market share (hence the need for scale and consolidation).  If the income for each unit of provision (act of advice or assistance) goes down, profit does not inevitably reduce if the firm’s cost base is restructured (hence the need for innovation in delivery, process and staffing).

The flavour of this legal aid lemonade is not difficult to guess.  It’s not really a question of whether one likes it; it’s also no longer a question about whether or not it’s ‘right’.  It is going to happen.  (I have written above and elsewhere about the Government’s obligation to address the systemic issues of matching rights and funding, and the need to remove hurdles from the courts and from public authorities’ decision-making processes: see Civil legal aid: squaring the (vicious) circle.)

I sympathise with legal aid providers.  Life is tough, and it’s about to become even tougher.  I regret that my sympathy will do nothing to generate income or profits for legal aid lawyers.  But against this backdrop, it would be better to start making lemonade than staring at a pile of lemons wondering what to do with them.

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