Intricacies of a “Borderless” World

The legal profession is constantly evolving with the changing social and economic environment. However, the impact of the changes to the global legal services market in the last 20 years is probably much more extensive and far reaching than the total effect of the changes that took place in the last two hundred years.

The impact is compounded by the fact that the world has become more interconnected with globalisation. It is difficult, if not impossible, to insulate the changes made in one jurisdiction from affecting others.

A very good example is the fundamental change to the business structure of law firms by permitting non-lawyer management, ownership and control of the legal practice in some jurisdictions. Let us take a quick global overview of how it all started and the reactions to it.

It is often mistakenly stated that England and Wales were the global trailblazers in respect of allowing non-lawyer ownership, management and control of law firms. In fact, New South Wales in Australia first permitted limited forms of multi disciplinary practices (“MDPs”) in 1994 when law firms were allowed to form MDPs, as long as lawyers retained at least 51 percent of the net income of the MDP and the majority of voting rights. These restrictions were lifted in December 1999, following pressure from the Competition Authority, which deemed that they were anti-competitive. Subsequently in 2001, relevant legislations were amended to enable law firms to incorporate and to permit legal practitioners to practise as Incorporated Legal Practices (“ILPs”). An ILP is a corporation which engages in legal practice whether or not it also provides services that are not legal services, but it must appoint at least one lawyer as a legal practice director, who is responsible for both managing legal services and ensuring those services comply with the professional obligations of lawyers under the law. Therefore, law firms are able to establish an ILP or an MDP; obtain external investment or have non-lawyer staff participate in the ownership of the firm.

For England and Wales, alternative business structures (“ABSs”) became a reality in October 2011. The definition of an ABS is broad. In a nutshell, an ABS is a type of law firm, which enables lawyers and non-lawyers to share the management and control of a business, which provides reserved legal, and other services, to the public, as well as allowing 100 percent external (that is non-lawyer) investment and ownership of law firms. In England and Wales, it is important to understand that the decision to introduce ABSs was part of an overall package of regulatory reform, the objective of which was to permit greater freedom for regulated entities to organise the delivery of legal services and business models to permit flexibility to enhance competition.

Australia and England and Wales are not alone in embracing ABSs with external investors. Singapore also allows non-lawyers to have 25 percent external ownership in legal entities. Singapore’s decision seems to have been motivated by the desire to evolve to meet the changing and increasingly varied needs of international trade and business, and to ensure that Singapore’s regulatory regime keeps pace with the changes that have happened to the legal services markets in Australia and England and Wales. The relevant Committee’s report noted that the new ABS models in Australia and England and Wales had caused ‘pressure’ on Singapore’s regulatory structure, with firms from those jurisdictions seeking to register in a similar form to their head offices. The Committee also pointed out that Singapore could be adversely affected if it excluded alternative foreign business structures and subsequently found that competing jurisdictions decided to take a more liberal approach. This best illustrates the intricacies of an increasingly borderless world.

Further, in Denmark, lawyers may take advantage of limited co-operation with chartered accountants, tax advisors, auditors, patent agents and financial advisers; while in the Netherlands, lawyers may form MDPs with notaries, tax advisers and patent agents. In Brussels, MDPs can only be formed with accountants. The situation in Spain is slightly different, with lawyers being permitted to form an MDP with any member of a compatible, liberal profession. Spain also permits external capital in law firms, allowing up to 25 percent of external investment. However, significant opposition to this trend also exists. US, Canada, Germany, Austria, France and the Council of Bars and Law Societies in Europe (CCBE) have voiced their resistance to outside investors in law firms.

The responses vary from jurisdiction to jurisdiction, but a global primary concern in all considerations is protecting the core values of the legal profession.

Any jurisdiction contemplating such a change must first be satisfied that sufficient safeguards have been introduced to provide assurances that a legal practice operating in the new structure will maintain a high ethical standard with proper client care. The introduction of ABSs in England and Wales involved simultaneously a historical transition from an individual-based prescriptive regulatory model to an entity-based and outcome-focused regulatory regime to facilitate the operation of the new structure.

Being an international legal service hub with close connection and frequent interaction with providers around the world, the Hong Kong legal profession is acutely aware of the challenges of a borderless environment. All these experiences will be invaluable to us in reflecting upon the future direction of the local legal landscape.

Jurisdictions: 

Secretary-General, Law Society of Hong Kong