Clause 18
Legal Services Bill [Lords]
12:00 pm
Jonathan Djanogly (Shadow Solicitor General (Also Shadow Minister for Trade and Industry), Law Officers (Assist the Home Affairs Team); Huntingdon, Conservative)
Certain amendments in this group have been proposed by the Institute of Chartered Accountants in England and Wales and, because we are dealing with business organisations, I want to declare that I am a member of the corporate finance faculty of the ICAEW as a qualified corporate financier, although I am neither an accountant nor a member of the full institute. The amendments cover legal disciplinary partnerships and legal practice plus, and tie in closely with part 5, which deals with alternative business structures. I should say at the outset that amendment No. 256 should refer to “individuals who are authorised persons” rather than “authorised persons” and I apologise for any resulting confusion.
The amendments have been tabled on a probing basis, not least because many of them cover the same point in a slightly different way, although the principle is the same. Amendment No. 256 is required as a consequence of new clause 14, which was suggested to us by the ICAEW. The new clause enables
“practices to have 25 per cent. or less on a head count of managers who are not lawyers and who are not providing services to clients (so called Legal Practice Plus.)”
It would become operational on enactment alongside other forms of legal disciplinary partnerships, which are partnerships between different types of lawyers.
I have received a lot of feedback on the issue from the commercial law and accounting practitioners, and I am aware of a huge gap in expectations that needs to be filled. We need to address the issue of non-executive directors and other employees such as accountants, economists and tax advisers and those who deal with administration and back-up in servicing clients. For those people, the current system is unrealistic. They may come from merchant banks in the City, where they are among some of the highest earners, yet they are effectively second-class citizens in law practices because they cannot take part in the ownership of the firm.
Today, law firms realise the benefits of bringing skilled outsiders into their organisations. There was an interesting account earlier this month in an edition of the Law SocietyGazette. A non-lawyer, William Arthur, former director of professional practices at Barclays bank, was recruited as a non-executive director by a Kent firm, Cripps Harries Hall. His brief was comprehensive and demanding—to use his 30 years of top-end commercial experience to steer his firm through the challenges facing the legal profession today. Mr. Arthur observed:
“Law firms are getting bigger and bigger and are not small businesses anymore. The market place is changing rapidly and they need to apply the best business principles to everything they do. Many firms are acknowledging that while they have exceptional professional skills, they don’t always have the full suite of business skills and experience to bring them to the front of the field”.
Law firms have employed non-lawyers in senior roles, such as directors of IT or human resources, for many years. The appointment of non-executive directors is a relatively new phenomenon, but one that should be encouraged. We should assist that process, and ensure that people in senior positions within law firms are not stigmatised or penalised merely because they are not qualified lawyers. As I have shown, they are often people of great experience with good skill sets, and are an asset to law firms. The question is how those good intentions are to be translated into the Bill. I accept that it is not a straightforward issue.
Amendment No. 268, which deals with the licensing of alternative business structures, was suggested by the City of London Law Society. The amendment would ensure that a law firm, or a limited liability partnership, would not become an alternative business structure solely because it wished to appoint as managers non-lawyer professionals. It is already clear that that is no longer a rare phenomenon, but an increasing occurrence. The amendment would apply if those appointees provided only internal services to their firms and did not directly provide services to clients of the firm.
Amendment No. 257, which was suggested by the Institute of Chartered Accountants, would have a similar effect to that of amendment No. 268, from which it is clear that accountants and lawyers are moving in the same direction.
On Report in the other place, Lord Hunt returned to concerns expressed in Committee and tabled a similar amendment designed to enable legal disciplinary practices to exist without having to be licensed if three quarters of the partners were lawyers and there was no external ownership. He envisaged that the Law Society would need a power to establish a register of permitted non-lawyer partner-managers of firms and to set requirements for eligibility to register.
Baroness Ashton resisted the amendment, saying that the Government wished, as far as possible, to create a level playing field between regulators, offering all the potential to become licensing authorities. She would not want to give one regulator a potential competitive advantage, first, by virtue of reaching part of the alternative business structure market before other regulators and, secondly, by avoiding the additional statutory requirements that would otherwise apply to such practices. She went on to say that if a body had non-lawyers in positions of control it would be a licensable body. The framework is already provided for low-risk bodies but the Government have set the maximum limit for non-lawyer ownership at 10 per cent., and anything above that would need full scrutiny. The amendment was withdrawn.
Looking at the matter now, I have to say that Baroness Ashton’s position was somewhat regressive, and failed to understand how legal firms work now, let alone how we should enable them to adapt and continue to compete and excel in a competitive national and international marketplace. That is the view of most people, including the Law Society and the Conservative party.
Yesterday, I received a joint statement on the Bill from the Institute of Chartered Accountants, the Chartered Institute of Patent Attorneys, the Institute of Trade Mark Attorneys and the Royal Institution of Chartered Surveyors. I will not quote it all, but in particular it states:
“There should be immediate introduction of Clementi’s definition of Legal Disciplinary Practices with minority non-client facing, non-lawyer managers, helping enhance the service to consumers. This would enable earlier, effective regulatory oversight of arrangements already in place in all but name.”
The fact that non-legally qualified people who play a significant part in the running of a legal practice cannot be a partner without invoking the licensing provisions is a problem.