Intricacies of a Borderless World – Part IV

In March and November 2019 and November 2020, under the title of “Intricacies of a Borderless World”, I have shared how the world has become more interconnected as a result of globalisation, using how the wave of alternative business structures (“ABSs”) swept across the legal community around the world as an example of how it is difficult, if not impossible, to insulate the changes made in one jurisdiction from affecting others.  

Particularly with Hong Kong, as an international legal service hub, the legal profession maintains close connection and frequent interaction with providers around the world. 85 registered foreign firms from 22 overseas jurisdictions have established a presence in Hong Kong.  Changes in the structure of overseas legal service providers are bound to impact Hong Kong. We have been keeping a close watch on the development of ABSs in other jurisdictions.  

To recap, 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. 

As a sequel to the three earlier articles, this article shares further development on ABSs.  

In general, the US prohibitions in legal practice designed to preserve professional independence of lawyers are similar to those in Hong Kong. The American Bar Association Model Rule of Professional Conduct 5.4 prohibits a lawyer or law firm from sharing legal fees with a non-lawyer, forming a partnership with a nonlawyer (if any of the activities of the partnership consist of the practice of law), and practising in a business structure in which a non-lawyer owns any interest in the business or serves as a corporate director or officer. Model Rule 5.4 or its close equivalent has been adopted in nearly every U.S. jurisdiction until recently. As reported in my earlier article,  Arizona, the District of Columbia, and Utah have modified their own jurisdiction’s Rule 5.4 to permit business structures that allow non-lawyer ownership of law firms and the sharing of legal fees with non-lawyers. Incidentally, the Supreme Court in Utah has recently extended the regulatory sandbox programme, which I explained earlier, from the initial two-year period to seven years. The California State Bar Board of Trustees has likewise voted to initiate a temporary regulatory sandbox to explore non-lawyer law firm investment and ownership. 

A number of other US States are actively considering the pros and cons of ABSs. In Illinois, a joint task force of the Chicago Bar Association and Bar Foundation recommended in September 2020 that the court launch a committee to study the benefits and potential harms of eliminating the prohibition on non-lawyer investment in law firms. 

The gradual softening of the resistance to ABSs in the US was further demonstrated by a recent Formal Opinion issued by ABA on 8 September 2021. The Formal Opinion was titled “Passive Investment in Alternative Business Structures”. It opines that a lawyer may passively invest in an ABS operating in a jurisdiction that permits ABS entities (like Arizona and Utah) even if the lawyer is admitted to practise in a jurisdiction that prohibits non-lawyer ownership of law firms. Lawyers can contribute money to an ABS with the goal of receiving a monetary return on that investment.

Some states are however more cautious and prefer to “wait and see”. The Working Group on Regulatory Innovation of the Commission to reimagine the future of New York Courts issued its report in December 2020 and concluded that ABSs for law firms should not be permitted in New York at the present time, but current experiments under way in Arizona, Utah, and California should be followed carefully and, if they are successful, the creation of an ABS model in New York State with the use of a “sandbox” should be reconsidered. 

In England and Wales, ABSs have come into operation since 2011 and there are now nearly 1,300 ABSs. The Solicitors Regulation Authority commissioned an impact evaluation of SRA’s regulatory reforms and issued a report in April 2018. With respect to ABSs, it is interesting to note that the report concluded, among other matters, that  for many existing law firms, conversion to ABS has meant business as usual except that some non-lawyer employees have been brought into partnership or allowed to own shares. It further noted that the influence of ABS has been less than expected and the “Tesco Law” phenomenon has not appeared. The impact of ABS varies with different types of firms. In some cases, traditional law firms may have lost market share to new ABSs or to existing firms that have converted to ABS status. Examples given in the report included instances of solicitor firms that previously received referrals from non-solicitors (e.g. accountants, financial service providers and debt collection firms) that are losing out because the non-solicitors have either become multi-disciplinary practices and thus keep the work in house or have set up new ABSs (to which they refer clients).  

These are very useful analyses which we will keep monitoring. The experience of overseas jurisdictions in this area will all be invaluable to us in reflecting upon the future direction of the local legal landscape.

Monthly Statistics on the Profession
(updated as of 30 September 2021):

Members (with or without Practising Certificate)12,630

Members with Practising Certificate11,066(out of whom 7,909 (72%) are in private practice)

Trainee Solicitors800

Registered Foreign Lawyers1,468

(from 33 jurisdictions)

Hong Kong Law Firms940 (47% are sole proprietorships and

42% are firms with 2 to 5 partners, 52 are limited liability

partnerships formed pursuant to the Legal Practitioners Ordinance)

Registered Foreign Law Firms85 (from 22 jurisdictions, 15 are limited liability partnerships formed pursuant to the
Legal Practitioners Ordinance)

Civil Celebrants of Marriages2,144

Reverse Mortgage Counsellors404

 

news

 

Jurisdictions

Secretary-General, Law Society of Hong Kong