Independent regulation the key to a modern legal market

An independent review into regulating lawyers in Aotearoa New Zealand has recommended the establishment of a new independent regulator to regulate lawyers. The review was commissioned by the New Zealand Law Society and the panel was led by Professor Ron Paterson, aided by Jane Meares and Professor Jacinta Ruru.

The review records the diminished trust in the Law Society’s ability to regulate in the public interest while also acting in the interests of its lawyer membership. In particular it focuses on the public perception that the regulatory system is ‘lawyers looking after other lawyers’. The report highlights that the current structure and system is expensive, inflexible, cumbersome, reactive, and rooted in the past.  A changing population, growing focus on equity and access, and increasing awareness of what effective regulation looks like leads to overwhelming pressure for change. The report sets out a way forward.

The primary focus of the recommendations is the establishment of a new independent legal regulator. It would be independent from the State and Ministers as well as from lawyers. Modern governance, including a lay chair and no lawyer majority on the Board, strong te ao Māori insights and an independent appointments process. Clear regulatory objectives, with the public interest at the pinnacle and Te Tiriti incorporated would be aligned with updated fundamental obligations of lawyers. It is a strong recipe for modern regulation that could set lawyers and the legal market free.

The report proposes various liberalising measures:

-       No extension to the scope of regulation beyond the narrow scope of reservation that exists at present

-       A new freelance model of practice (similar to that now in place in England & Wales)

-       Permitting employed lawyers to provide pro bono services

-       Allowing new business structures and non-lawyer ownership

-       Introducing entity regulation

And goes on to propose improvements to the mechanics of regulation:

-       New powers for the regulator

-       More proportionate and targeted CPD obligations

-       Better complaints handling systems and structures

-       Faster and more effective investigation and disciplinary processes

A strong focus on diversity, in its widest senses, is present throughout the report and in particular recommendations. The report finishes with a short governance review for the rump Law Society to allow it to better focus on representing its members effectively – and I would infer making it less prone to capture by particular sections of the profession.

What interests me is that the Paterson Review leads with independence. It says ‘the single most important issue for the regulation of lawyers in New Zealand [is] whether there should be a new independent regulator.’

Why does independence matter so much? The review heard from a broad range of citizens, lawyers and institutions. It struck me that there appears to be near universal support for reform other than among lawyers. Even among lawyers, there was some support. It reminds me of a Milton Friedman line that you can tell who benefits from regulation by who argues for it. When arguing that the dual functions of the Law Society (regulating and representing its members) are incompatible, the review is simply making Friedman’s point. Monopoly power is against the public interest.  And Friedman was not the first to think like this. Adam Smith said, 250 years ago in The Wealth of Nations, that “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

Leaving the power to regulate with the Law Society is simply incompatible with the public interest. Observing self-regulation around the world tells us that when lawyers control entry to their market, define allowable business structures, set standards for how services should be delivered, define who lawyers can collaborate with and how, and decide when clients and public complaints are valid, we end up with a sclerotic market that doesn’t deliver for most small businesses and ordinary citizens and makes super profits at the expense of large clients, and in the end their customers. Economics tells us that an independent regulator is much more likely to seek to grow the legal market through innovation and competition, compared to monopoly control that leads to high margins and low volumes.

Many of the other recommendations are likely to be heavily contested and it would have been easy to get into the detail of them to make the case. But such a debate would motivate incumbents, likely exclude the public and be extraordinarily slow. Innovators and disruptors would shrug their shoulders, unwilling to wait while ancient institutions grapple with the 20^th century.

We have seen in California, Florida, New York and elsewhere in the US what happens when lawyers control the debate about specific reforms. Little happens. Where progress in the US has been made, such as in Utah and Arizona, it has relied upon extraordinary leadership from a robustly independent State Supreme Court fed up with picking up the pieces of market failures.

Similarly, we can see in in the UK the importance of independent regulation. England & Wales has delivered perhaps the most liberal and forward-thinking legal market with its (far from perfect) shift towards independent regulation. In the decade since the creation of the SRA the rule book for lawyers has shrunk by about 80% and new forms of business structure and external investment have flourished. Whereas in Scotland, the liberalising debates go round in circles while proposals for independent regulation are fought tooth and nail by incumbent professional bodies and their elite members.

What the review has achieved is a strong focus on the path to a better regulated legal market. All of its secondary recommendations are hugely important. But the best chance of them being delivered quickly is via the first. Now it is in the hands of Ministers and The Law Society. The Law Society has shown courage and leadership in getting to this stage and has the perfect CEO to deliver all of this. Will its members now be brave enough to urge Ministers to provide legislative time. Or will they use their influence in politics, have dinner with MPs and Ministers and turn the conversation to a conspiracy against the public?