National Competition Policy Review of the Legal Profession Act
CHAPTER ONE - INTRODUCTION
I NATIONAL COMPETITION POLICY REVIEW OF THE LEGAL PROFESSION ACT 1987
1.1 The Legal Profession Act 1987 introduced a comprehensive scheme for the regulation of the legal profession.
1.2 The Legal Profession Reform Act 1993 amended the Act to implement reforms to legal practice, costs and the complaints system. It aimed to foster competition within the profession and make the profession more accountable.
1.3 A number of other amendments have been made to the Act but the amendments have been consistent with the broad objects of the 1987 Act, as amended in 1993. References in this paper to the Legal Profession Act 1987 mean the Act as amended up until 1 May 1998.
II. WHAT IS COMPETITION POLICY, AND HOW DOES IT APPLY TO THE LEGAL PROFESSION?
Competition Principles Agreement
1.4 The National Competition Policy review will consider the application of the Competition Principles Agreement to the Legal Profession Act 1987, as amended by the Legal Profession Reform Act 1993, and other amending Acts. The Competition Principles Agreement dictates that legislation should not restrict competition unless it can be demonstrated that the benefits of the restrictions to the community outweigh the costs, and that the objectives of the legislation can only be achieved by restricting competition. The application of competition policy is premised on the view that development and performance of markets is enhanced by the removal of restrictions which affect market performance. Restrictions on markets must be justified by a clear public interest objective.
1.5 The National Competition Policy Review will assess how the current regulation of the legal profession affects the provision of legal services in the marketplace. The review will consider whether current restrictions on legal practice and on the entry of non-lawyers into the legal services market unnecessarily restrict competition or whether there are sufficient public policy reasons for retaining restrictions. The review will also evaluate the objects of competition policy reforms to the profession, implemented by the Legal Profession Reform Act 1993, and the effect of those reforms on the legal services market.
Trade Practices Act 1974 (Commonwealth)
1.6 The review is also required to consider whether any of the provisions of the Act breach the Trade Practices Act 1974 (Commonwealth).
1.7 Part IV of the Trade Practices Act prohibits a corporation from engaging in certain anti-competitive practices. Formerly, the Act did not apply to individuals, or partnerships which trade within State boundaries. For this reason, the activities of many members of the legal profession were not caught by its provisions. However, following the 1995 agreement of the States and Territories that competition laws should apply to State enterprises and the activities of State based businesses, the Competition Code was applied to the States. The Competition Code is in substantially the same terms as Part IV of the Trade Practices Act.
1.8 Part IV of the Trade Practices Act includes the following provisions: Section 45 prohibits the enforcement of exclusionary provisions, whether or not they are anti-competitive, and arrangements which have the effect of substantially lessening competition. Section 45A deems horizontal price fixing to be anti-competitive, subject to some exemptions. Section 45B proscribes covenants which have the effect of substantially lessening competition. In the case of price fixing covenants, these prohibitions are absolute. Currently Part IV does not apply to activities which are authorised by State statutes. However, from 20 July 1998, State statutes will need to expressly authorise any activities which may contravene Part IV, to protect them from challenge.
1.9 The review will examine the implications of the Trade Practices Act for aspects of the legislation which have been identified as requiring assessment for competition policy.
1.10 The aspects of professional regulation set out in the Act which require assessment within the terms of reference are set out below.
III. CHARACTERISTICS OF LEGAL SERVICES AND THEIR SIGNIFICANCE FOR A COMPETITION REVIEW
Characteristics of professional practice
1.11 Legal services comprise a specialised market which differs in significant ways from other kinds of markets. The review must consider whether there are certain characteristics of the legal services market which may warrant special restrictions on services, for the public interest. Characteristics of the legal services market which may be difficult to reconcile with deregulation of the profession include matters set out below.
1.12 Legal practitioners are bound by professional and ethical rules which do not apply to other service providers. Most importantly, they are officers of the Court, and this duty overrides their duty to their client if a conflict between the two duties arises. Legal practitioners also have duties to each other, and in the case of barristers, are bound by the cab-rank rule, which requires them to accept any brief, subject to some exceptions.
1.13 Legal services do not produce defined or predictable outcomes, in the same manner as contracts for the supply of goods or many other kinds of services. Many legal services consist of a process of negotiation and compromise with third parties and the level of satisfaction of a client with the outcome of a legal service may not be related to the degree of expertise of the practitioner or the quality of the service. Clients often cannot identify the benefit obtained from legal services, because legal advice or representation may not achieve the personal or business objectives of the client.
1.14 The market for legal services is diverse. Clients of legal services have differing levels of sophistication and knowledge of available services. The market may operate imperfectly, and a market failure may result, in circumstances where consumers have limited knowledge of the nature and complexity of the service required or its market value. Other legal transactions are characterised by sophisticated clients who are familiar with the work required, who have the ability to choose competent practitioners without the need to rely on statutory recognition and whose market power and knowledge enables them to negotiate a market price for services. The modern legal services market may be local, regional, national or international in scope and the nature of the market affects the style and mode of practice.
1.15 The nature of legal services is not susceptible to simple analysis. Some services are straightforward and the level of training currently required of legal practitioners may not be necessary for the providers of these services. Other services may carry a high degree of complexity and require arcane, specialised knowledge. Moreover, it may be difficult to predict the complexity of a service in a particular case because of the role of third parties, the complexity of legal rules and the expectations of clients.
1.16 Some legal services are discrete while others, such as taxation services, are provided together with other professionals. The demarcation between legal work and other work may be unclear. Professionals whose work overlaps with legal work may not be subject to comparable legislative restrictions and professional rules. This may affect the ability of legal practitioners to compete with other professionals. Conversely, other professionals cannot hold themselves out as having legal knowledge or perform certain work, even though they may have detailed knowledge of legal rules in particular areas.
1.17 The specialised knowledge of legal practitioners may lead to market failure in the provision of legal services. The gap between the knowledge of the practitioners of the work involved and the skill required to deliver a service, and that of the client, may be such that the ability of the client to bargain for the service may be compromised. In these circumstances, regulation of the profession may be justified in the public interest as guaranteeing consumers a minimum standard of service and protecting consumers from incompetence. However, it may not be possible to justify the degree of regulation which is currently set out in the legislative rules on this basis.
1.18 Moreover, such regulation may have limited relevance to corporate clients, whose market power confers advantages in obtaining high quality services and minimising the risk of negligence by practitioners.
Differentiation within the Legal Profession
1.19 Within the limitations of the current legislative scheme, practitioners have chosen to practise in a range of different modes and provide services targeted at different markets. Changes to the profession which have been documented in the United Kingdom appear to be taking place in Australia. Firms are differentiated by market sector, activities and client type. Australia-wide, firms having more than 100 partners represent less than 1% of the total number of practices, but employ 21% of employees and produce 30% of the total income of the profession. Corporate clients are the source of 36% of the income of the profession. While 95% of practices employ fewer than 20 persons, they represent only 54% of total employment and 46% of total income. Lawyers in smaller practices are more likely to conduct consumer transactions, such as conveyancing, and probate and administration of estates while the income of larger firms is more likely to be derived from corporate clients. The response of law firms to changing markets differs, and a key issue for the profession is the role of a professional within a competitive market which demands a strategic approach to obtaining and keeping clients.
1.20 The result of the dichotomy between large and small firms, and the responses of individual firms to competition in legal services markets, is a diversity of opinion within the profession as to the benefits to the community of legislative restrictions and the public benefit which would flow from their removal. Government and corporate lawyers may have different interests arising from their status as employees of large organisations, who compete for business with external lawyers. This diversity of opinion may be reflected within the general public, with corporate clients of large firms, and the government and corporate employers of in-house lawyers having a differing attitude to regulation from individual consumers.
Competition policy and the legal services market
1.21 Competition within the legal services market is affected by the imperfect knowledge of consumers of legal services and the difficulty in identifying and costing components of legal services. The existence of comprehensive regulation of the profession, and professional accreditation schemes, only partially makes up for the inability of consumers to verify the skills and qualifications of solicitors and barristers, and the nature of the tasks which comprise legal work.
1.22 The scheme for the disclosure of costs by solicitors and barristers, implemented in 1994, was intended to promote a more informed market. However, while consumers now have access to information about legal costs, information is not readily available about the value of legal services. However, the complex and variable nature of legal transactions makes it difficult to compare the services of practitioners.
1.23 The Law Society and Bar Association provide on request, general information about the role of solicitors and barristers, common transactions, the areas of practice of practitioners, and have a scheme for the recognition of expert practitioners. These schemes ensure that consumers have access to basic information about solicitors and barristers.
1.24 The competition review comprises both an evaluation of the competition-based reforms made in 1993, and an assessment of what further reforms are needed in order to ensure that any barriers to entry to the legal services market can be justified in the public interest.
IV OBJECTS OF THE LEGAL PROFESSION ACT 1987 AND THE LEGAL PROFESSION REFORM ACT 1993
1.25 The terms of reference of the review require an analysis of the objectives of the legislation and their continuing relevance.
1.26 The objectives of the Legal Profession Act are discussed throughout the Issues Paper. Below is set out a summary of the objects of the legislation.
Legal Profession Act 1987
1.27 The Second Reading Speech for the Legal Profession Bill 1987 indicates that the object of the Act was to implement the recommendations of the Law Reform Commission, which were made in four reports released in 1982 and 1985. The Commission's reports were not directly concerned with ensuring market competition for legal services. Rather, the Commission's object was to ensure the preservation of an independent legal profession that was properly regulated and publicly accountable. The Parliament and Government had a responsibility to ensure that the profession was properly regulated, and that clients of the profession were properly protected.
1.28 The Act substantially preserved and enhanced the power of the Law Society Council and the Bar Council. For the first time, barristers were required to hold practising certificates and the investigative functions of the Law Society Council were extended. The Act also introduced a measure of external scrutiny of the profession with the introduction of a power in the Attorney General to appoint lay members to the disciplinary bodies and the establishment of the Legal Profession Advisory Council. The functions of the Council were to keep under review the structure and functions of the legal profession and report to the Attorney.
1.29 The Act also implemented a stronger regulatory regime for solicitors' trust accounts.
1.30 The disciplinary provisions were substantially amended. For the first time, professional misconduct was defined not only in terms of 'peer review', but as behaviour falling short of the standard of conduct that a member of the public would expect of a legal practitioner. The two categories of conduct which may be subject to disciplinary sanctions are now defined as 'professional misconduct' and 'unsatisfactory professional conduct'.
1.31 Part 11 of the Act preserved the system for the setting of fee scales for non-contentious business and civil litigation.
1.32 The approach of the 1987 Act to regulation of the profession assumed that the provision of legal services was a discrete area of professional activity. Lawyers were not regarded as market players, integrated into other businesses.
The Legal Profession Reform Act 1993
1.33 The Parliamentary debates for the Legal Profession Reform Act 1993 demonstrate that a shift in thinking took place between 1987 and 1993. The object of the 1993 reforms was to create a more competitive market for legal services. The principle that the profession should regulate itself in the public interest was replaced with a co-regulatory scheme, whereby the profession's governance of itself was subject to enhanced independent scrutiny. Legal practice was understood to be both a professional service and a business, and regulatory measures were to be justified, on the basis of the accessibility, cost, speed and quality of legal services.
1.34 For the first time, the Act provided for the review of rules governing practice made by the profession. The rules of the Law Society and the Bar Association were to be reviewed by the Councils themselves and Legal Profession Advisory Council (section 57H), to ensure that they were in the public interest and did not inhibit competition (section 57G).
1.35 Many distinctions between the two branches of the profession were removed, although practitioners were still required to hold separate practising certificates issued either by the Bar Association or the Law Society. Practitioners practising as solicitors and barristers and barristers were still governed by separate Rules, made respectively, by the Law Society Council and Bar Council.
1.36 Section 38I was pivotal to the 1993 reforms. The provision enabled both solicitors and barristers to have direct access to clients. The appointment of Queen's Counsel or any other official schemes for the recognition of seniority, was abolished by section 38U.
1.37 Perhaps the most significant of the reforms for consumers related to costs and advertising. With some exceptions, scales of fees, which had been preserved by the 1987 Act, were abolished. Instead, solicitors and barristers were subject to new duties of disclosure which required them to estimate the total costs in a matter.
1.38 Regulations had been made under the 1987 Act to remove most restrictions on advertising. The 1993 amendments replaced the Regulations with amendments to the Act, which removed restrictions on advertising, except for the restrictions relating to false, misleading or deceptive conduct which are set out in the Trade Practices Act.
1.39 The former system of taxation of costs by the Supreme Court, on the basis of whether the work done had been reasonably necessary, was replaced with a costs assessment scheme.
1.40 The disciplinary system, conducted by the profession through the Law Society and Bar Association, became subject to investigation and external administration through the establishment of the office of the Legal Services Commissioner. The Commissioner's functions were to receive all complaints at first instance, to investigate complaints, mediate small matters, and educate consumers and the profession. The Commissioner was also empowered to conduct investigations, refer conduct matters to the Legal Service Tribunal and review the findings of the professional Councils following their investigations.
1.41 The amendments commenced on 1 July 1994.
1.42 The review will consider the continuing relevance of the regulatory scheme which applies to lawyers, in the context of competition policy.
V RECENT CONSIDERATION OF COMPETITION POLICY AND THE LEGAL PROFESSION
1.43 A number of inquiries have taken place concerning the legal services market and the role of regulators in recent years. The Trade Practices Commission issued its report following an exhaustive, national study of the profession in March 1994. A number of its recommendations had been implemented in New South Wales by the Legal Profession Reform Act. Other more radical proposals by the Commission included proposals to open up legal work to other service providers, the removal of separate practising certificates for solicitors and barristers, the removal of many restrictions on the business structures of lawyers and the introduction of competition in the provision of professional indemnity insurance.
1.44 In the early 1990s, the Victorian Law Reform Commission conducted a study of the profession and made similar recommendations to those later adopted by the Trade Practices Commission. Many of the recommendations were implemented in the Legal Practice Act 1996 (Vic). Many of the reforms contained in the 1996 Victorian Act were similar to those made by the 1993 NSW Act.
1.45 In 1994 the Access to Justice Advisory Committee, chaired by Ronald Sackville QC, advocated a national reform of the legal profession. It proposed that the Trade Practices Act should be applied to the legal profession. The proposed reforms were designed to ensure the minimum restriction of competition 'consistent with protecting consumers and the public interest'. The Committee proposed a number of substantive changes, including the creation of independent regulatory bodies, allowing non-lawyers to practise in specific areas of the law, removal of the distinction between barristers and solicitors, removal of restrictions on lawyers' business arrangements and advertising and the imposition of mandatory costs agreements between lawyers and clients at the commencement of a matter.
1.46 In July 1996, an officers' working party reported to the Council of Australian Governments, setting out the principles which should apply to the regulation of a competitive profession. The COAG Working Party Report proposed the implementation of reforms on a national basis to ensure that the profession was subject to market forces, while preserving consumer protection.
1.47 The Legal Profession Act 1987 and the amendments made by the Legal Profession Reform Act 1993 reflected many of the recommendations of the Trade Practices Commission and the Access to Justice Advisory Committee. The review will evaluate the operation of those reforms and consider whether further reform is warranted, to further apply competition policy to the profession.
1.48 This review is the first broad evaluation of the implementation of competition policy to the profession in Australia. The review will also examine whether the remaining matters considered by the COAG Working Party and the Trade Practices Commission, should be implemented in the public interest.
 Section 51(1) (b) of the Trade Practices Act; transitional arrangements are set out in Competition Policy Reform Act 1995 (Cth), section 33; Competition Policy Reform Act 1995 (NSW) section 42.
 David B Wilkins, 'Who should regulate lawyers?', (1992) 105 Harvard Law Review 799 816-819; 824-830.
 Abels, R, The Decline of Professionalism (1986) 49 MLR 1, cited in Bollard A and Scott P, (1996) NZLJ 275.
 Gerard Hanlon, 'A Profession in Transition? - Lawyers, Markets and Significant Others', (1997) 60 MLR 798.
 Australian Bureau of Statistics, Legal and Accounting Services - Australia 1995-96 (Melbourne, 1997), 7.
 ibid, 15.
 Practising Certificate Survey 1996/97 Report, prepared for Law Society of New South Wales, by Keys Young, 29 August 1996 p.9
 John Gray, Philip King and Robin Woellner, 'Facing up to Change', Law Society Journal, March 1998, 44-49.
 Legislative Assembly April 1987 The Hon TJ Sheahan, Attorney-General and Minister Assisting the Premier. 10752
 The Professional Conduct Review Panel [s 126(2)(c)&(3)], the Professional Standards Board [s 127(2)(c)] and the Disciplinary Tribunal [s 128(2)(d)]. These bodies were subsequently abolished by the 1993 Act.
 Second Reading Speech (n 9 above) , 10754.
 Second Reading Speech for the Legal Profession Reform Act 1993, the Honourable JP Hannaford, Attorney General, Minister for Justice and Vice-President of the Executive Council, 16 September 1993, Legislative Council 3269.
 Practitioners holding practising certificates issued by the Law Society were able to use the title 'solicitor' until 1996. The Legal Profession Amendment Act 1996 provided for those practitioners to use the title 'solicitor and barrister', but not 'barrister' alone, which is reserved to practitioners holding a practising certificate issued by the Bar Association: section 26(1). In this paper, practitioners holding practising certificates issued by the Law Society are referred to as 'solicitor and barrister'. A practitioner cannot but may not hold concurrent practising certificates as a 'barrister' and a 'barrister and solicitor' [section 38D].
 Trade Practices Commission, Study of the Professions - Legal; Final Report, Commonwealth of Australia, March 1994
 ibid., p.79
 ibid., p.107
 ibid., pp.133-134
 ibid., pp.204-206
 Access to the Law: Restrictions on Legal Practice, Victorian Law Reform Commission Report No 47 (1992); Access to the Law: Accountability of the Legal Profession Victorian Law Reform Commission Report No 48 (1992).
 Access to Justice Advisory Committee, Access to Justice; an Action Plan, Commonwealth of Australia, 1994, p.123
 Legal Profession Reform Working Group, Reform of the Legal Profession in Australia: Report to the Council of Australian Goverments, July 1996