The Legal Services Act 2015 – A Case of Regulatory Capture?

The outgoing Government has been heavily criticised in the media of late, notably in the Irish Times, over its alleged failure to introduce meaningful reform of the legal profession. Writing in today’s edition, John McManus claimed that the Legal Services Act “was undoubtedly the source of much satisfaction in Blackhall Place and Henrietta Street, the respective homes of the Law Society and the Bar Council which retained much of their hegemony.” A couple of weeks back the paper ran an article by Arthur Beesley describing how the legal profession had lobbied strenuously against the legislation. The main gist of these articles was how the legal profession had obstructed necessary reforms. Beesley’s article, based on records of correspondence obtained under the Freedom of Information Act, claimed that the Legal Services Bill, which was originally published by then Minister for Justice, Alan Shatter T.D. in October 2011, “was cast to reduce legal costs and modernise the professions”. McManus describes Shatter “as a practicing solicitor who seemed genuinely committed to reform of his profession.” The implication is clear: necessary reforms which would have reduced the cost of legal services were stymied by lobbying by vested interests. Unfortunately such claims don’t stack up.

We will put our hands up at the outset and put on the record the fact that Compecon prepared a number of reports for the Bar Council in relation to the Legal Services Bill.

In order to assess whether the Legal Services Act which was finally enacted in December 2015 represents a capitulation to vested interests, it is necessary to have some understanding of the background to its passage. Back in 2006, the Competition Authority 2006 recommended a number of reforms in the way the legal profession operated. Many of these were adopted by the legal profession itself following the report’s publication. The Memorandum of Understanding between the Government and the ECB/EU Commission/IMF Troika provided inter alia that the Government would introduce legislation to give effect to any of the Competition Authority’s recommendations which had not yet been implemented. The Legal Services Regulation Bill published by Minister Shatter in October 2011 contained a number of proposals which were at odds with the Competition Authority recommendations.

First the Authority recommended that a new State regulatory body should be established to oversee the regulation of the legal profession. Crucially the Authority recommended that day to day responsibility for regulation should remain with the existing self-regulatory bodies – the Bar Council and the Law Society – but that such regulation would be subject to oversight by the proposed new State regulator. The original version of the 2011 Bill, however, proposed removing virtually all regulatory functions from the respective professional bodies and assigning them to the proposed regulator. There are certain benefits to self-regulation, namely such a regulator has a detailed knowledge of the activity being regulated which reduces the cost of regulation. An external regulator must incur quite significant costs in order to obtain the necessary information to regulate effectively. Of course self regulation carries a series risk that the regulator will act in the interests of the profession rather than in the public interest. The Competition Authority proposal can therefore be seen as a sensible compromise which seeks to reduce the cost of regulation while preventing the abuse of regulatory powers. Minister Shatter’s proposed regulatory regime represented a far more costly option.

Another crucial flaw in the original Bill was that it would have given the Minister a significant role in the regulatory regime, raising serious questions about the independence of the proposed regulator and threatening to undermine the independence of the legal profession. When the Competition Authority recommended that an independent legal services regulator should be established they meant one was that independent of Government as well as independent of the legal profession. Shortly after the Bill was published the Authority Chairperson said in a speech that the Bill “certainly raises questions about its [the regulator’s] independence”. She went on to point out that the Bill provided for a much higher level of Ministerial involvement in the operations of the regulator than in other regulatory agencies where the case for independence of the regulated profession was less important.

EU Commissioner Viviane Reding also criticised the original Bill for undermining the independence of the legal system.

“It was indeed a disturbing trend when, in the wake of the economic crisis, the IMF, in 2011, asked Ireland to propose radical reforms to the organisation of the legal profession. The representation of the legal profession was to be abolished and replaced by a ‘Legal Regulator’ appointed by and integrated into the Irish Ministry for Justice, Equality and Defense. Certainly a cost-saving measure but let’s be clear: measures to achieve fiscal consolidation cannot come at the price of undermining the independence of the judiciary and the independence of the legal profession.” (Emphasis in original).

The IMF, who according to McManus in his Irish Times piece have long called for reform of the Irish legal profession, denied that it had requested the introduction of such provisions in the legislation following Reding’s speech and indicated that the Irish Government was responsible for such proposals.

The other major issue of contention related to proposals for alternative business structures (ABSs) for the profession. These involved possible partnerships between barristers and between barristers and solicitors, known as legal disciplinary partnerships (LDPs), and partnerships between lawyers and other professions such as accountants, known as multi-disciplinary partnerships (MDPs). The Competition Authority’s Final Report concluded that there were problems involved with LDPs and MDPs not least with regard to the regulation of such entities. Consequently the Authority did not recommend that either LDPs or MDPs should be permitted. Rather it suggested that this issue should be examined in more detail by the proposed new legal regulator. The reasons for this are straightforward. ABSs and, in particular, MDPs give rise to serious potential conflicts of interest. We have seen over the past decade how ignoring such conflicts can result in major financial collapses. Complex questions also arise as to how such multi-disciplinary business structures should be regulated. Again the Authority’s recommendations were ignored in the original 2011 Bill, which proposed that LDPs and MDPs would be permitted without further analysis.

A further major problem with the 2011 Bill was that no regulatory impact analysis (RIA) of the proposals was published until two years after the Bill was published. The purpose of an RIA is to allow for a detailed analysis of policy options in advance of any decisions being taken. Clearly in this case most of the key decisions were taken in advance of any RIA being carried. At the time it was explained that the need to enact the legislation urgently to satisfy the Troika’s demands had meant that there had not been time to carry out an RIA. As TDs debated the proposed, Minister Shatter re-assured them that it was hoped the RIA would be soon available. This is clearly not a sensible way to legislate.

While the Competition Authority argued that reforms were necessary to reduce excessive legal costs, it produced little actual evidence to support the claim that costs were excessive. The Authority noted that legal costs in Ireland were equivalent to approximately 0.8% of GDP. The RIA when it was eventually published noted that costs in Ireland “compares favourably to the UK situation where Legal services accounted for around 1.7% of GDP”. In other words Irish legal costs, as a proportion of GDP, are approximately half the UK level which does not suggest that Irish costs are excessive. Paragraph 19 of the RIA cited a survey by the National Consumer Agency which found that Irish consumers could save substantial amounts of money in respect of three commonly purchased legal services by shopping around. Again such evidence is inconsistent with claims that there is a lack of competition or that legal fees are excessive.

It is certainly true that the Legal Services Act as finally enacted differs significantly in a number of respects from Minister Shatter’s original 2011 Bill. The professional bodies have retained responsibility for many day to day regulatory functions subject to oversight by a new regulator. However, this is in line with what was proposed by the Competition Authority. In addition proposals to permit LDPs and MDPs have been significantly watered down and the Bar Council has been permitted to retain its rule requiring barristers to operate as sole traders which precludes its members from participating in LDPs and MDPs. Again, however, the Competition Authority never recommended that LDPs and MDPs should be permitted. Thus the final legislation is largely in line with what was recommended by the Competition Authority.

So claims that the legal profession effectively blocked desirable reforms and that the final legislation represents a case of regulatory capture are somewhat wide of the mark. What was ultimately dropped from the legislation were proposals that would have increased regulatory costs, potentially undermined the independence of the legal profession and permitted new forms of business structure without any adequate evaluation of their potential costs and benefits. Had Minister Shatter followed the recommendations of the Competition Authority, maybe it would not have taken four years to enact the legislation. Then again why let the facts spoil a good story?