Nuno Garoupa on Reforming Legal Professions in Europe

totmauthor —  20 September 2011

The European Commission, in particular the Directorate-General for Competition, has shown interest in promoting competition in the market for legal services since the early 2000s.

Some countries such as the United Kingdom have taken this matter seriously. After a long review process, the British government has recently implemented a new regulatory set-up for legal services in order to foster competition, innovation, consumer protection as well as a so-called accountable regulatory enforcement (under the Legal Services Act 2007).  These reforms were prepared by the Clementi report (published by December 2004) which argued for alternative business structures (allowing nonlawyers to go into business with lawyers as well as nonlawyer’s ownership of law firms including the possibility of public trading of shares in law firms), an independent agency to deal with disciplinary complaints (rather than leaving it to self-regulation; currently the Legal Ombudsman and the Office for Legal Complaints), and greater freedom for legal service providers to compete (under the supervision of the Legal Services Board operational since 2010). The reform failed to suppress the distinction between solicitors and barristers, but the new alternative business structures could in the future further contribute to blur this distinction. It is probably too early for a full-fledged assessment of the impact of these legal reforms on the market for legal services in the United Kingdom, but the general sense seems to be that they have modernized the institutional framework in the right direction while making the market more competitive just in time for the 2008 recession. I do not know of any empirical study on the effect of these reforms on legal fees but it would be important to know whether or not more competition and plausibly a better regulatory setup have reduced average fees.

Not all countries have moved in the direction of deregulation. Until recently Spain had no bar exam. Law graduates simply needed to register with the local bar at the end of their degree (of five years in the past, now four years). The consequence is that Spain has currently one of the highest numbers of lawyers in per capita terms (slightly behind the United States). However, a large proportion of these “lawyers” are actually not practicing law, but merely registered with the local bar. With the excuse that Spain was different from the other EU Member States, the Spanish government has introduced a bar exam in 2007, effective from 2011. At this stage, we do not know what the passing rates will be, but we can easily see the new bar exam being used to reduce entry to the profession under the pretense of improving quality.

Another example is Portugal. Law graduates are accepted for a training period at the end of which there is a (national) bar exam with a significantly high passing rate. Due to an expansion of legal education in the mid 1990s, the number of lawyers has increased considerably in the last decade or so. As a consequence there has been a pressure for more competition in a market traditionally characterized by strong cartelization and considerable rent-seeking. The response from the national bar was simple: introduce a new (national) bar exam to enter the training period with a passing rate of less than 10%. There is no doubt that such change has satisfied the “incumbents.”!

3 responses to Nuno Garoupa on Reforming Legal Professions in Europe

  1. 

    Eric: if I can get the data!

  2. 

    I look forward to seeing an article comparing Japan and Portugal, with special attention to the price and quality of legal services. Maybe you could write it?

  3. 

    Alternative Business Structures – or sometimes called the Tesco models in which non-lawyers will be permitted to invest in and become owners of law firms are not in my view a panacea. We’ve been watching these events from afar and, frankly, we just don’t think ABS or Tesco models work for modern commercial law firms. There just does not seem to be a reasonable return available nor do existing ethical strictures make ABS models viable – either for the investors or for the law firm.

    Thus far private equity investment in law firms by non-lawyers, which becomes permissible in the UK on October 11, 2011, has attracted a great deal of media attention and much brouhaha. Private equity investors seem to be thinking there’s a huge pot of gold here. Law firm managers are already trying to figure out how to spend the millions of pounds that they believe will come pouring through their doors. Why, even the American Bar Association (the sloth-bound 20/20 Commission) is beginning to eye the concept with some jealousy and trying to figure out how to join the gravy train.

    But in my opinion there’s no gravy train here for full service commercial law firm. The economics just don’t seem to work and the ethical hurdles seem insurmountable.

    We just don’t see that the ABS/Tesco model works or even makes any sense for large commercial law firms. But, non lawyer investment in the delivery of some legal services has the potential for bringing on the next revolution in the profession, with ripple effects in every direction. For more, see http://kowalskiandassociatesblog.com/2011/04/27/alternative-business-structures-here%e2%80%99s-a-great-idea-let%e2%80%99s-get-some-private-equity-funds-to-invest-in-large-commercial-law-firms-and-we%e2%80%99ll-all-make-a-ton-of-money/