Who’s looking at you?

There’s a battle brewing between Mario Monti and the CCBE over professional regulation on the Continent. Can European lawyers really face competition?

Just how regulated is the UK legal profession? A recent European Commission initiative has managed to measure the degree of regulation for the key professions in each member state to the nearest decimal point. As one jaded commentator notes, it is the same precision that a Brussels bureaucrat might apply to the ideal curvature of a banana.

Given the UK Government’s constant pressure to deregulate, you might be surprised to hear that we score a reasonably healthy four out of 12. This suggests a happy compromise between the rather too laid-back approach of the ultra-liberalised Finnish lawyers (0.3), but a long way from the manically-regulated Greeks (9.5) (see box).

Just what this all means in practice is a moot point. It will be the subject of a conference next week on the regulation of professional services, organised by the Commission and hosted by Competition Commissioner Mario Monti. It follows on from a hugely controversial report by the Institute for Advanced Studies in Vienna commissioned by the Commission and published earlier in the year, which provided the aforementioned regulation indices. Both projects form part of a Commission ‘stocktaking exercise’, which will look at the regulation of professions such as accountants and architects through to pharmacists and engineers.

European lawyers would not be considered paranoid to imagine that Brussels will be scrutinising their profession most keenly.

For a start, the Vienna report revealed that the various legal professions scored disproportionately highly compared with others. Delegates at next week’s conference, where half of the panel speakers are lawyers, will be looking at the kinds of areas that are already familiar to UK lawyers, thanks to the Office of Fair Trading’s (OFT) ‘Competition in the Professions’ exercise and now David Clementi’s review of legal services. The chairman of the Pru will be in Brussels next week. In particular, the Commission will be looking at multidisciplinary partnerships, restrictions on advertising, fixed fees and the ability of non-lawyers to provide legal advice.

Monti has claimed that the Vienna study provided a “fascinating picture”, one that “advocated” that the public could win “from more freedom being brought into the professions”. Tellingly, he chose to address his own concerns about the professions to a gathering of German lawyers (who scored a not-so-impressive 6.5). “Professionals would also gain from healthy competition,” he told the German Federal Bar Association. “They may be able to better adapt their services and innovate to meet the evolving needs of their users. Having a long, honourable and historic tradition should not be a barrier to modernising, offering new services and to becoming more competitive.”

Unsurprisingly, not all Continental bars are as thrilled with the Commission’s research as Monti. Jonathan Goldsmith, the solicitor secretary-general of the Council of Bars and Law Societies of the European Union (CCBE), has “serious problems” with the Vienna research. “We believe this study was extremely shallow – a quick and dirty study, if you like. We found methodological faults with it and the economic conclusions questionable. Our own conclusion was that it is not a study on which to found serious policy decisions.” The CCBE was so unhappy with the Commission’s research that it commissioned its own report. This found the interpretation the authors put on the results was “highly questionable” and “particularly ambiguous”, given the “lack of any clear theoretical framework”. It concluded: “With no data on quality, the result that higher fees are associated with more regulation could be equally supportive of both pro and contra-regulation theories.”

It is a view shared by a number of individual European bars – the Austrian bar, for example, which scored 7.3, is also “not happy”. “It was the first attempt where the Commission tried to get information about possible restrictions from the profession,” comments Silvia Tsorlinis of the Austrian Bar Association. “And as far as we know, there’s no model for that kind of research and there was no scientific background for the research.”

By marked contrast, Chancery Lane appears unfazed by the findings. “It shows us as having a moderate degree of regulation, which is fine; we believe you can have a regulated profession and still take competition and public interest considerations into account,” reflects the Law Society’s head of international Alison Hook.

Hook does not share the CCBE’s concern with the quality of the Vienna study. “Part of the problem is that there’s very little data about the professional bodies. They were starting from complete scratch. In a sense all the Commission wanted to do was have an excuse to start its own investigations,” she says. “Everyone knows that there’s a case to answer, but the EC was just trying to provide a jumping-off point by commissioning the Vienna study.”

Professor Anthony Ogus, a legal academic based at Manchester University School of Law, is one of the authors of the Vienna report. In general terms, he observes that the northern countries are less regulated than their southern counterparts. “The interesting question that couldn’t be tested in the research undertaken was whether there were differences in quality to the client which would justify such major differences in regulation,” he says. “There’s no clear evidence one way or the other. If there isn’t difference in quality, then how can you justify the much greater regulation in the southern countries?”

Critics of the Vienna research claim that a rather meagre e80,000 (£56,000) was devoted to a project that covered eight professions in 15 member states. “Draw your own conclusions as to how profound a piece of research it’s going to be,” says one.

They also complain that the report takes a simplistic view of regulation (“light in the north and heavy in the south”) with scant regard to cultural differences and a glib acceptance that deregulation is the way forward. Goldsmith points to the judicial line taken in last year’s Wouters judgment, in which the European Court of Justice (ECJ) considered the Dutch bar’s ban on multidisciplinary partnerships (MDPs). The ECJ established that competition law did apply to the professions, but it argued that anticompetitive measures necessary for the proper practice of, in this case, the law, were justified.

“Yes, we should be subject to competition law, but as the Dutch bar case showed, there are other values in relation to the administration of justice, and we felt that the competition directorate in the Commission isn’t taking account of this,” says Goldsmith.

Chancery Lane is relatively relaxed about the possibility of Commission reform. “We don’t see this as an unwelcome development at all,” says Hook. “There’s a challenge here, as there is in the UK, to make sure people aren’t throwing the baby out with the bathwater. Those conducting the review must understand why the fact that lawyers regulate themselves might be important. They must also ensure that competition and public interest considerations are taken into account.”

So what are the aims of the Monti review? In his speech to the German bar, he flagged up the Wouters judgment and another recent ruling, Arduino, which concerned obligatory fee scales for Italian lawyers. In that case, the ECJ ruled that a state could have a professional body regulating the profession as long as the government retains the ultimate decision-making power.

Referring to the accountancy profession, Monti said it was the Commission’s intention not to go after those rules that are inherent to particular professions and which give them their essential characters. “However, other regulatory rules, ones that are not inherent to the profession, could be subject to the application of the competition rules,” he said. “Any rule that’s restrictive of competitionand is not reasonably necessary to guarantee the proper practice of the profession could be analysed by the Commission or the courts.”

So how do you decide which rules should be covered by the competition rules? “Well, I’m afraid this has to be decided on a case-by-case basis or, more to the point, rule-by-rule, profession-by-profession,” he said.

While the pro-MDP lobby might have lost ground in the post-Enron climate, it is definitely high on the agenda for next week’s conference. One of the panel speakers next week is Hans Gilliams, a partner at the firm that took on the Dutch bar in the Wouters case. Will the Commission project pave the way for European MDPs? “We shouldn’t overstate the importance of competition law,” says Gilliams. “But it can certainly be a driving factor. However, I think deregulation is going to be much more the result of pressure from the public authorities. If the government and public opinion thinks it would be a good thing, that’s going to be the main push.” Nevertheless, so far as the European courts are concerned, it is still a live issue. At the end of last month the Belgian Supreme Court struck down an anti-MDP provision of the Flemish bar.

Goldsmith says that the CCBE line on the Commission project is that the European bars are “monitoring the position with concern”. “We’re confident that there’s plenty of competition in the legal services sector,” he says. “In those countries where there isn’t a fixed-fee scale, there’s fierce competition on price and there’s an extremely liberal regime in terms of cross-border practice at a European level.”

The Vienna study was based upon a fundamental misunderstanding, Goldsmith argues. “The administration of justice isn’t something that’s governed by economic criteria alone,” he continues. “You aren’t going to stop putting people into prison because you’ve run out of money. It’s a mistake to look at us through a lens composed entirely of economic criteria.”

However, things are tightening up. It used to be that anyone could represent another person before the court. But as of 18 months ago, they now need a law degree.

The relative lack of state or professional control even applies to public money. Two years ago, there was a Legal Aid reform bill to ensure quality advice was given under the scheme in the parliament. The government proposed that those persons giving legally-aided advice to consumers should be mainly advocates or working in legal aid offices, but parliament disagreed. According to Ylönen: “They said there was a Finnish tradition that a neighbour can assist his neighbour and they turned it down.” What does he think of the 0.4 score ranking? “Perhaps,” he adds, “we could do with a little bit more regulation.”

Finland: where anyone can be a lawyer (Vienna score: 0.3/12)

“In Finland almost anyone can give legal advice to the public,” declares Markku Ylönen, secretary of the Finnish Bar Association. “And so, for example, l can come here and establish a law firm and start practising law.” The one ‘limitation’ is that, if a lawyer wants to be a member of the Finnish Bar Association (or an advocate) then they have to have a legal degree plus four years’ experience. “But we don’t have any monopoly and you’re free to practise here if you don’t want to be an attorney,” he continues. “Nor do we have any obligatory use of an advocate in the courts. Everyone can represent himself.”

Greece: the most over-regulated profession on the continent (Vienna score: nine out of 12)

“Yes, there’s a lot of regulation,” comments Dmitri Georgacopoulos, a partner at leading Greek firm M&P Bernitsas. “But to what extent it impedes business and to what extent it’s even followed in practice I don’t know.”

Greece can put a tick next to most, if not all, ‘restrictive practices’ identified by the Commission. Outside firms have long complained about its strict rules on establishment. But there are also fee scales, heavy advertising restrictions and exclusive rights reserved to lawyers. But Georgacopoulos reckons the Vienna study mischaracterises his profession.

In particular, he questions the extent to which the hefty professional code of lawyers, which deals with everything from payment to ethics, is applied in practice. He says that lawyers largely overlooked a ban on hourly rates because the fee scales suggested in the code fell out of synch with market standards. He also says that sole practitioners, which make up most of the profession in Athens, are not interested in advertising, while the larger firms bypass it by using international media.

One Greek lawyer at a UK City firm in Athens takes a more cynical view. Price restrictions are there to keep the huge number of lawyers in business. There are some 30,000 lawyers in the country’s capital alone. “If the law is to be upgraded as a profession, there needs to be some reforms,” she says. “For example, there are restrictions on how you found and form legal practices. My view is that the bar associations and regulators just don’t want to incentivise the bigger firms or even allow them to exist.” She says every foreign firm has a problem coming into Greece.

Both lawyers agree that the special business vehicle for law firms is overly burdensome. It allows legal practices to be taxed at 25 per cent on their profits, as opposed to around 40 per cent for private individuals. But other rules require associates to become partners automatically after three years, for example.

Georgacopoulos predicts a huge backlash if the Commission was to act to increase the access of non-Greek-qualified lawyers to the local market. “We should admit there’s a lot of regulation, but as to how much it’s followed in practice I just don’t know,” he says. “But I’d say there’s barely enough. If you ask me, there should be more.”