Tag Archives: legal services

Of legal aid and lemonade

Posted on by

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.

Anti-lock braking system on the ABS juggernaut?

Posted on by

The Law Society council has at last decided to approve the SRA applying to become a licensing authority for ABSs (see http://www.legalfutures.co.uk/latest-news/law-society-council-gives-green-light-to-sra-regulating-abss).  But we might still see moves to derail the application – the Sole Practitioners Group or others could yet press for a special general meeting (see http://www.legalfutures.co.uk/latest-news/anti-abs-group-could-decide-as-soon-as-tomorrow-on-calling-law-society-sgm).  So let me get a few things off my chest…

I am broadly supportive of ABSs, though not uncritically so.  We have had more than six years since Sir David Clementi first proposed them.  They are not a new idea; and it’s not as if no-one has spent any time thinking about both the principles and the detail since then.  It’s therefore disturbing to hear a suggestion that a special general meeting vote would ensure that “those members of the profession who up to now have little knowledge of ABS will be made aware of its implications”.

Where have these members been for the past six years?  Do they not read the national and legal press?  What message does such a claim send to the public and clients about the regulatory and commercial awareness of their advisers if supposedly well-informed and up-to-date professionals have missed (or not yet started thinking seriously about) something so fundamental to their businesses?

Such gaps in knowledge or appreciation do not, of course, make the policy behind the introduction of ABSs inherently right.  There are certainly risks with ABSs: the Legal Services Act and the licensing rules recognise and address them.  ABSs will not be an unalloyed blessing for consumers, either.  But that does not make them inherently wrong.  The Legal Services Act was not party political legislation, so trying to persuade the new Government or MPs to stop the introduction of ABSs might not garner much political support.  It’s also difficult to see votes or further savings to the public purse from such a move.  Personally, I don’t think we’ll hear the screech of tyres as the juggernaut is brought to a halt.

Generally, protestations by lawyers trying to stop developments that would encourage or force them to act differently are met with (at best) wry smiles.  Too few people outside the rarefied atmosphere of legal practice believe that only lawyers can be trusted with legal issues.  Lawyers might be right in suggesting that their input would be better for the client.  But that argument is far from being taken for granted by anyone else.

It also flies somewhat in the face of other evidence that lawyers are not as good or as accessible as they think they are – such as the volume of unresolved legal needs of clients who are not aware they have a legal problem, or who are but choose not to take it to a lawyer; the number of complaints against a supposedly high-quality and ethical profession; and the views of professional indemnity insurers.  Each of these suggests that competition has a role to play in improving the accessibility, efficiency and value (and even, dare I say it, the quality) of legal services for the ordinary consumer.

It is not the job of regulation or regulators to protect providers from competition.  It is their job to provide an effective regulatory framework that supports fair competition.  Parliament has decided that ABSs are to be part of this regulatory and competitive landscape.

So it’s unlikely that the juggernaut can be stopped.  Could it be slowed down?  I’m all for having a better system than a rushed one.  But, to repeat, the ABS framework has been worked on for six years.  Spending more time and more resource will not make it perfect – that’s an ideal that will never be attained, as we know from every other regulatory system.  Nor will any framework, however robust, prevent unethical, inefficient or anti-competitive behaviour.  Not all solicitors are ethical and high quality; not all owners or managers of ABSs will be unethical and poor quality.  So, yes, it could be slowed down; but it shouldn’t be.

Subject the necessary Parliamentary timetable to complete the process for licensing ABSs, it’s now difficult to see great benefit in seeking to delay their introduction.  Indeed, many would-be entrants (and even, to be fair, a good number of lawyers who relish the opportunity to be in business in a different way) could argue that they have already waited long enough.  Everyone has had enough time to prepare.  Some have taken advantage of the six-years’ notice; others have not.  If that time was wasted, it’s hardly appealing to ask politicians to intervene or regulators to think again.

With the Law Society’s decision to allow the SRA to seek licensing approval for ABSs, the momentum is likely to gather pace.  Now is not the time for the drivers to hit the brakes … or the detractors to lie in the road.

Sole practitioners and regulation

Posted on by

I was interested in a piece in this week’s Law Society Gazette (see http://www.lawgazette.co.uk/news/compliance-rules-may-hit-sole-practitioners).  The Sole Practitioners Group has warned that treating sole practitioner firms (SPFs) in the same way as other firms could lead to many of them no longer practising.

The SRA wants to simplify the regulatory framework, and therefore SPFs would have to appoint a compliance officer for legal practice (CoLP) and a compliance officer for finance and administration (CoFA) – in the same way that other firms and ABSs will be required to do.  The SRA recognises that the same person might be appointed to both roles (although the CoLP must be legally qualified).  But the SPG claims that individuals within SPFs would not have the time to perform both roles effectively.

Now, I have a good deal of sympathy for sole practitioners having to cope with an ever-increasing compliance burden.  It is much the same for many small businesses.  But I have to say that, if a sole practitioner wants the privilege of providing legal services protected by statute (the reserved activities), surely they can’t complain if they are required to be accountable to the regulator for those services through an individual who carries the responsibility?

It is undoubtedly relatively more burdensome for one individual in a sole practice or small firm to discharge compliance functions.  However, it seems to me that clients and the public have a legitimate expectation that those who are regulated will be properly supervised by the regulator.  If SPFs and other small firms cannot do this effectively (apparently on their own admission – or, at least, the SPG’s), this does rather support the argument that they are too small to be economically viable and present too great a risk to the public and the reputation of the profession.

Was that the conclusion the SPG intended us to draw?  Does the Law Society agree?  Does the SRA know?  Are the professional indemnity insurers watching?