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Executive summary
1. The Working Group on the Legal Services Market in Scotland was established in March 2004 to draw together and analyse the evidence base on the Scottish legal services market. This work was driven by a desire on the part of Scottish Ministers that legal services in Scotland should be regulated in the interests of consumers, by developments at European Commission level (reviewing competition in the liberal professions) and by developments in England and Wales (a report by the Office of Fair Trading in 2001 which led to the independent review of the regulatory framework by Sir David Clementi and latterly to the publication by the Department for Constitutional Affairs of a White Paper "The Future of Legal Services : Putting Consumers First" in October 2005 ).
2. The agreed research aims were to identify, describe and analyse the different legal services markets operating in Scotland; to identify restrictions, whether deriving from statute, professional rules or custom and practice, which might have the effect of preventing, limiting or distorting competition in the different Scottish markets; and to identify access to justice, public interest and consumer protection factors that might justify such restrictions and to evaluate whether the restrictions were proportionate to their purpose. The Group also undertook to examine the evidence on alternative systems and structures across comparable jurisdictions including alternative business structures and the availability of rights of audience and rights to conduct litigation.
3. To address its key aims, the Group agreed that a number of specific issues would be examined, including : entry into legal education and professional training; the supply of legal practitioners; the benefits and drawbacks of different business structures; the extension of rights of audience and rights to conduct litigation; fee competition; the role of auditors of court in relation to taxation of fees/accounts; communication and quality of information flow between legal practitioners and the various users of legal services, including advertising; the roles of lawyers and non-lawyers in providing legal services and advice on legal matters in different markets; the implications of forthcoming EU competition law and policy and (where appropriate) the implications of Scottish policy developments.
4. Numerous sources of data and information were used in the course of this work. These included drawing on existing research, interviews with key parties, a specific research exercise on the practice of the auditor of the court in relation to the taxation of solicitors' accounts, and analysis of data held by the Scottish Executive and the Law Society of Scotland. However, there were areas where the evidence base was poor and where, in the absence of ready remedy, the debate had to be based on a balanced range of opinion rather than objective evidence. In particular there was a lack of evidence on the likely effects of a change in policy or practice on specific issues, including the likely effects on consumers.
The Legal Services Market in Scotland
5. The Group examined the different legal markets in operation in Scotland and assessed the relative degree of competition in each market based on a programme of interviews with key stakeholders. Twelve markets were identified. A grid showing the assessment is presented in Chapter 3 of the report. Levels of competition clearly varied markedly across markets, and across geographical areas. Markets with relatively high levels of competition included commercial law, financial services/tax advice and residential conveyancing. Markets with relatively low levels of competition included the market for executry work, family law, welfare/debt/housing law and consumer law.
6. Further, within some markets there were distinct 'sub-markets' operating. In particular the market for employment law had distinct markets for employers and employees. There were key differences between these markets on sources of funding, levels of consumer information and consumer orientation.
7. Concerns had been expressed about the availability of specialist practitioners in various fields ( e.g. family law, housing, debt, welfare, consumer law) and geographical areas, particularly rural areas. There was also concern about the number of practitioners coming into these areas, as well as criminal law, and the impact that might have on future supply in these markets. There was, however, a lack of firm evidence about either current or future supply. Research is currently being carried out into the recruitment and retention of lawyers in Scotland.
8. Overall, the evidence probably pointed to a case for non-intervention, assuming that market forces would keep supply and demand in alignment, though that might not be entirely satisfactory in some legal markets. Further, regulatory oversight of rules and practices of professional bodies which restricted competition had to ensure that the objectives of consumer protection and the administration of justice were explicitly balanced against those of competition.
Legal education and training
9. The legal profession had undergone significant change in recent decades and had been affected by globalisation, changes in business practice and technology, increased competition, greater specialisation and increasing numbers of women qualifying. The numbers entering undergraduate law courses in Scotland would continue to rise, in most part due to the accreditation of new LLB courses at Scottish Universities. There was some evidence of social barriers to entry into the legal profession; in particular there seemed to be little evidence of an increase in the proportion of students from lower socio-economic groups, who remained significantly under-represented on law courses. That was a concern for higher education generally. Increasingly women were pursuing the study of law. However, despite the increasing number of females entering the legal profession, much lower proportions of females than males were partners in firms.
10. Historically, the principal bottleneck in entering the profession had been in securing an apprenticeship or traineeship. Currently there were signs that another bottleneck might be emerging at the stage before entering the diploma. Demand for places was beginning to outstrip supply and competition for places would become fiercer as the new LLB students graduated. There were signs that the number of diploma places would increase. Limiting the number of diploma places could be construed as an anti-competitive practice. The data showed that there were slightly fewer registered training places than diploma places, but the gap was relatively small. However, with an increase in diploma places, and graduates, training places could become the main 'bottleneck' in the education and training process, since the number of training places available depended to a large extent on market forces.
11. The majority of trainees were working in firms with 11 or more partners. That impacted upon the training and experiences of trainees. There were concerns that relatively few trainees would be experiencing work in firms which relied on legally aided work, and in particular areas of law such as family law (which tended to be the domain of smaller firms). Ultimately that would affect the supply of legal professionals to undertake that work.
12. Reform of the Faculty's entrance requirements was under active consideration. A period of pupillage of at least 6 months was required and a master did not make any payment to his pupil. The absence of remuneration during a period of up to 9 months unpaid devilling might be construed as anti-competitive practice insofar as it might act as a barrier to entry to the profession for those of limited means. The Faculty argued however that the nature of pupillage was different from an employment relationship, and that the start-up costs of practice as an advocate were low compared with other forms of self-employment.
13. Solicitors who wished to acquire extended rights of audience as solicitor advocates had to satisfy the Council of the Law Society of Scotland about both their professional conduct and reputation and their competency in the practice and procedure of the Supreme Courts. In addition they required to pass an examination. Whilst it was expected at present that applicants would have 5 years experience, that bar was due to be removed.
14. The Office of Fair Trading emphasised the continuing need to ensure that entry and qualification requirements to the profession were transparent, proportionate, non-discriminatory and based on objective standards.
Professional Rules and Practice :
15. Professional rules and practices were examined to establish whether or not they were restrictive of competition, to identify relevant public interest objectives which might justify any such restriction, and to assess whether the rules and practices represented the mechanism least restrictive of competition to achieve that objective.
(i) Restriction on practising as a principal of a law firm
16. One of the professional rules of the Law Society of Scotland 1 restricted a solicitor from practising as a principal in a law firm unless he had been employed as a solicitor for a cumulative period of three years. That rule might be challenged as having an anti-competitive effect by imposing an unnecessary restraint on able, newly qualified solicitors who might wish to practise as a principal without first having acquired three years experience. The Group found no evidence however that the rule was unnecessarily restrictive, taking account of the public interest considerations identified by the Society's experience prior to the introduction of the rule and the flexibility that the Society's power of waiver provided to deal with exceptional cases.
(ii) Restriction on receiving a payment for referring a client
17. Solicitors were not permitted at present to pay referral fees to third parties, such as estate agents or mortgage providers, who introduced business to them. The Law Society of Scotland believed that it was prejudicial to the independence of the solicitor to pay for referral business and that the disclosure of the payment of such a fee was not a protection for the client. The Office of Fair Trading took the view on the other hand that referral fees could enhance competition amongst solicitors and that referrals could benefit clients by putting them in touch with high quality legal services at a reasonable price. No evidence was available on the impact of such fees on clients, though recent experience of the impact of introducing referral fees in comparable jurisdictions would be informative.
(iii) Professional indemnity insurance
18. Law Society of Scotland rules required Scottish solicitors to purchase professional indemnity insurance though a Master Policy which the Society maintained on their behalf. In 2004 the Office of Fair Trading reviewed whether these rules might have the effect of restricting or distorting competition in the market for solicitors services, but concluded after investigation that it was unlikely that there was strong and compelling evidence to that effect. The Office of Fair Trading observed that difficulties reported by some legal services clients in obtaining representation should be considered as an access to justice issue, and not a competition issue.
(iv) Legal professional privilege
19. The Group considered whether legal professional privilege, whereby lawyers could not be compelled to disclose in court legal advice they had given their clients, might disadvantage other professions which did not enjoy such a privilege and present a future obstacle to the formation of multi-disciplinary practices. Except for the Office of Fair Trading which reserved its position, the Group concluded that the competition argument for abolishing legal professional privilege was not particularly strong and that legal professional privilege seemed necessary for the adversarial system to work.
(v) Restriction on solicitor advocates appearing with advocates
20. Solicitor advocates were not permitted to appear in the same case as advocates because of professional rules which prohibited such "mixed doubles". The effect of those rules was to prevent collaboration in court between two branches of the profession whose expertise was very similar. The justifications advanced for the rules were (a) that advocates and solicitor advocates were regulated by different professional bodies and complications could arise if for example a mixed team were to be the subject of a complaint; and (b) that abolishing the rule could in the long run adversely affect the choice of representation available to litigants. Except for the Faculty of Advocates, the Group believed there was a case for solicitor advocates to be able to appear with advocates.
(vi) The 'cab rank' rule
21. The Faculty's "cab rank" rule provided that advocates were not at liberty to choose their clients or to refuse to do work sent to them, except in circumstances defined in the Guide to Professional Conduct of Advocates (paragraphs 4.3.5 to 4.3.15). The Group recognised that the rule was designed to protect the public interest by ensuring clients were legally represented. Evidence was gathered from advocates as to how the rule applied in practice and the circumstances under which they might refuse to take on cases. No evidence was gathered from other sources. There was some disagreement between advocates as to whether the rule inhibited the development of specialist expertise, with some maintaining that it encouraged a generalist orientation and others reporting that it promoted the drive towards increasing specialisation.
22. No evidence was available however on how the rule was applied in practice and whether in practice it worked in the way it was supposed to. Some members of the Group thought that the rule might inhibit the development of specialist expertise by requiring advocates to cover a wide number of areas of the law.
(vii) Restrictions on advertising
23. Some advertising by solicitors and advocates was permitted. Solicitors directed their advertising widely to the users of legal services whereas advertising by advocates was aimed mainly at solicitors who advised clients on a suitable choice of advocate. It was recognised that comparative advertising by solicitors could assist consumers to evaluate relative value for money in legal services and help them to choose a suitable provider of legal services by giving relevant information. Following consultation with its members, the Law Society of Scotland would be bringing forward changes to its advertising rules to the Society's next Annual General meeting in March 2006. The OFT identified aspects of the Faculty of Advocates' advertising rules which it considered to be unnecessarily restrictive.
(viii) Restriction on direct access to advocates
24. Advocates might appear in Scottish legal proceedings only on the instruction of a Scottish solicitor, subject to limited exceptions. As the need for clients to engage the services of both a solicitor and an advocate would in some circumstances result in additional costs for clients, the Group examined the arguments for and against the restriction, together with the implications of its removal for business structure and the regulation of advocates.
(ix) Restrictions on business structures
25. A range of restrictions existed which prevented the use of alternative business structures for the provision of legal services. These included a restriction on partnerships between advocates; restrictions which had the effect that non lawyers could not own law firms and that solicitors employed by an organisation in non-lawyer ownership could not offer services to the public; restrictions which meant that different branches of the legal profession could not work together in legal disciplinary practices ( LDPs); and restrictions which meant that lawyers could not combine with members of other professions to form multi-disciplinary practices ( MDPs).
26. The advantages and disadvantages of alternative business structures were explored by the Working Group, taking account of the interests of the users of legal services and the implications of change for existing regulatory arrangements. The issue of alternative business structures appeared to be likely to stay on the agenda and policy development work would be required to establish the extent to which they suited Scottish circumstances and how they might best be regulated if they were to become a reality in Scotland.
Rules of Court : Curators and Reporters
27. The Group's scrutiny of rules of court identified an issue of transparency relating to the appointment of curators and reporters by the Court; and an issue of consumer protection which arose from inconsistency in the prices charged for their reports.
Legal Fees and the Taxation of Costs
28. The Group reviewed how the fees of solicitors and advocates were determined; and how litigation and legal aid cases were funded. Scale fees for solicitors (ie fixed prices) were abolished in Scotland in 1984. In February 2005 the Law Society of Scotland decided to withdraw its annual table of recommended fees for solicitors services, having considered the views expressed by the European Commission in its report 2 on the negative effect of such guidance on competition. To improve information for clients the Society also decided to introduce a practice rule requiring solicitors to send clients a letter of engagement setting out how much the solicitor would charge or what the charging rate would be.
29. The Group undertook research to examine the practice of auditors of court in relation to complaints about lawyers fees. Auditing involved "taxing" or checking the account of a solicitor or advocate's fees and outlays against a particular standard. The main findings from that exercise suggested there were problems of transparency in recruitment of auditors, a lack of continuing professional development and formal procedures for the development and appraisal of auditors, a lack of clear consensus as to the role and status of the auditor (ie judicial/quasi judicial or public official) and a wide range of different standards which were applied by auditors.
30. The application of different standards was thought to exacerbate the potential for inconsistency in decisions by auditors of court. Moreover, there was no consensus between auditors on how to apportion liability for auditors' fees after taxation, which led to a lack of transparency for the paying parties and the public, and a lack of consistency over who paid for taxations. Finally, the client's right to insist on a taxation of solicitors' fees appeared to have been substantially eroded by Act of Sederunt and judicial interpretation without public discussion or awareness. The Group recommended to Scottish Ministers that the arrangements for the taxation of solicitors' fees should be reformed and modernised in the light of the research findings.
Rights of audience and rights to conduct litigation
31. There was variation in restrictions on rights of audience and rights to conduct litigation across Europe and internationally. With the exception of Sweden and Finland (which are considered among the most liberal systems), all of the jurisdictions covered by this exercise had experienced change in the structure of their legal professions in recent years, mostly in the late eighties and early nineties. More detailed descriptions are available in the full report. Overall there had been a general extension of rights of audience in the jurisdictions examined , most notably to members of other professional bodies .
32. In England and Wales the provisions of the Courts and Legal Services Act 1990 which permitted rights of audience and rights to conduct litigation to be extended to non-lawyer members of authorised professional or other bodies had been commenced. Applications had been made for such rights by a number of bodies outwith the legal profession. Interested bodies had to apply to the Lord Chancellor and applications were assessed on the basis of the prospective training regime being offered to members, the existence of complaints handling procedures, standards of professional conduct and a number of other factors. So far three such bodies had been granted permission to appear in the higher courts and then only subject to very specific requirements set by the Lord Chancellor such as those outlined above. The bodies which had been granted those rights were the Institute of Legal Executives ( ILEX), the Chartered Institute of Patent Agents ( CIPA) and most recently the Institute of Trade Mark Attorneys ( ITMA).
33. The Law Reform (Miscellaneous Provisions) (Scotland) Act 1990 introduced solicitor advocates in Scotland. The Act also contained provisions that allowed the extension of rights of audience and rights to conduct litigation to members of 'any professional or other body' through a process of application. These provisions, sections 25 to 29 of the 1990 Act, had yet to be commenced. Two UK professional bodies and a Scottish professional body had been lobbying for their commencement. In their view, consumers were not being well served by the current system. In assessing whether those provisions should be commenced, the Group recognised that it would be necessary to consider both the need to protect the interests of clients and the impact which extending such rights could have on the work of the Courts. The Group concluded however that commencement could be in the interests of the users of legal services and recommended to Scottish Ministers that sections 25 to 29 of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1990 be commenced.
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