Technology and Compliance Auditing – The Future of Legal Regulation
Third International Legal Ethics Conference
Gold Coast Australia
13-16 July 2008
The best way to predict the future is to invent it.
Over the past few decades we as a society have witnessed considerable developments in trade,
foreign direct investment, capital flows, migration, andtechnology to the extent that national
boundaries have gradually diminished in importance. The fall of barriers has simulated free
movement of capital and paved the way for companies to set up global businesses resulting in
1entities with profits as large as the gross domestic incomes of third world countries. The incidence of global institutions is not however limited to transnational corporations alone.
Globalisation has also led to significant growth in the legal services marketplace both in
2Australia and overseas. In conjunction with the growth of law firms there has also been a
3strong growth in trade in transnational legal services. The practice of law is today becoming
big business. As a result major structural changes are now occurring within the legal
marketplace. Whilst a number of law firms have expanded establishing offices in more than
one jurisdiction to ensure greater global coverage, a number of other law firms have avidly
taken advantage of recent legislation in jurisdictions that permits incorporation and public
1 In 2001, General Electric for example had revenues of $126 billion, more than the combined national incomes
of sub-Saharan African countries, except the Republic of South Africa see John Madeley, Transnational
Corporations and developing countries: big business, poor peoples, the Courier ACP_EU No. 196, January-
February 2003. 2 A consolidated list of global law firms published annually and based on research survey complied by The
America Lawyer in the U.S. and Legal Week in the U.K. lists 100 law firms as achieving “global status: The Global 100 is a list produced by the American Lawyer which ranks the world‟s highest-grossing firms see „The Global 100‟ list available at www.law.com 3 In Australia legal services are today a significant component in the export of professional and technical
services. Statistics reveal that Australian exports of legal services have grown from $AU 74 million in 1987/88
to about $AU 250 million in 2000/01 See Australian Legal Services Export Development Strategy 2003 to 2006,
ILSAC, March 2003 available at www.law.gov.au/ilsac; Australian Bureau of Statistics, Legal Services Industry.
In NSW for example, there are now more than 800 incorporated legal practices (ILPs). These
4 and comprise of three or ILPs are primarily located in the suburbs of Sydney and in the CBD
less practitioners. In addition to the establishment of these ILPs, one law firm has franchised
5their practice whilst another has adopted a limited partnership model and two law firms have
6already gone public and listed on the Australian Stock Exchange (ASX). Anecdotal evidence
suggests however that this is only the beginning with interest in pursuing alternate business
structures growing by the minute. This wave of change is not without repercussions. As the
legal world aligns itself more closely with the business world cracks have begun to emerge
threatening the ethical obligations of a once solid profession.
Commercialization by its very nature increases the pressure on firms to consider the profit
motive as a superior business objective. This has profound implications for the legal
profession whose duty to the court and the client has always been paramount. Professionalism
speaks of ethically minded conduct and duties to the court, all of which may be antithetical to
business objectives. These completing obligations not only have implications for law firms themselves but also for legal regulators who are charged with regulating the profession. As
the regulator of legal practices in NSW, the OLSC has thus been forced to revise its role to
ensure that its regulatory framework responds effectively to this change.
The OLSC has responded to this challenge by augmenting the traditional complaints-based
paradigm with a new regulatory framework that utilises compliance-based mechanisms such
7as “practice reviews.” These practice reviews are, by and large, audits but unlike traditional audits, the OLSC‟s practice reviews are not focused solely on financial or practice issues, but
can be much broader. They are trigger-based and the triggers are not limited solely to a
formal complaint. The benefit of this approach is that the OLSC can focus on entrenching
4 There are at present 344 ILPs practising in suburban Sydney and 251 ILPs practising in the CBD. Statistics
from the Law Society of NSW, as at 1 April 2008. 5 This law firm operates through a group of independent branch offices throughout New South Wales, the ACT
and Queensland. Each branch office is an ILP and is related to the law firm but not to each other, as is typically
the nature of franchises. The law firm has to date entered into a franchise agreement with over 20 branch offices. 6 On 21 May 2007, Slater & Gordon an ILP made legal and corporate history when it became the first law firm
in the world to list its whole firm on the ASX. Following Slater & Gordon‟s listing, Integrated Legal Holdings
(IHL), a Western Australian based law firm, listed on the ASX on 17 August 2007. Prior to Slater & Gordon‟s
listing in March 2004, Noyce Legal, a Sydney based law firm, listed its banking and finance division of its
practice on the ASX. Noyce Legal did not list the whole firm but incorporated the division which specialised in
residential mortgage processing, into National Lending Services Ltd (NLS) and sold all of its shares to listed
consumer finance website Infochoice. 7 The power to conduct an audit (practice review) is proscribed in the Legal Profession Act 2004: see sections
140(3) and 670 of the LPA 2004.
and promoting ethical behaviour and not profit alone while encouraging the profession to
remain a true profession as well performing as a business. In adopting this approach the
OLSC is fostering a positive cultural change, which will in turn hopefully effect a
corresponding positive behavioural change.
Globalisation and structural changes in the Australian legal
8The effects of globalisation on the legal services marketplace have been widely documented.
We are now witnessing the emergence of the “global lawyer.” The global lawyer is no longer confined to the jurisdiction in which he/she had been educated and qualified. This global
lawyer works in many different jurisdictions throughout the world and must understand the
cultural, political and social differences each legal system enjoys. This global lawyer can
provide sophisticated and specialized legal services to individuals and corporate clients of all
sizes anywhere in the world. While still small in number these lawyers are at the forefront of
change that is fundamentally changing the profession, or as some have argued, hastening its
In conjunction with the emergence of the global lawyer we are also witnessing the emergence
9of the “global client” and the growth of client power. The global client is sophisticated, their expectations are immediate and they expect effective results. Global clients demand more
from their lawyer, as their dealings are no longer confined to their home jurisdiction. The
global client thus demands local access to legal solutions in multiple jurisdictions and
practice areas. Today‟s global clients are drawn to providers who offer one-stop shopping
10and often a broad range of professional services. The legal services marketplace is now responding to this demand by enacting legislation in some jurisdictions to permit law firms to
8 Silver, Carole, "Globalization and the U.S. Market in Legal Services: Shifting Identities" . Law and Policy in
International Business, Vol. 31, pp. 1093-1150, 2000; Flood, John A., "The Cultures of Globalization:
Professional Restructuring for the International Market" . PROFESSIONAL COMPETITION AND
PROFESSIONAL POWER: LAWYERS, ACCOUNTANTS AND THE SOCIAL CONSTRUCTION OF
MARKETS, pp. 139-169, Y. Dezalay & D. Sugarman, eds., Routledge 1995 9 B. Cobb, “Are you ready for the Revolution in Legal Services”, The Complete Lawyer, available at
http://www.thecompletelawyer.com/volume3/issue6/ accessed on 26 June 2008. 10 See Dr Martin Henssler and Laurel S. Terry, Lawyers Without Frontiers – a View from Germany, 19(2)
DICKINSON J INT‟L L 269 (2001).
adopt alternate business structures to the traditional partnership model that had dominated yet,
11 in the view of many, restricted legal practice for so long.
In 2001 for example, New South Wales passed legislation permitting the creation of
incorporated legal practices (ILPs), which could also include multidisciplinary practices
12(MDPs). The legislation permitted legal service providers to register as a company with the
Australian Securities and Investments Commission (ASIC), the agency responsible for
ensuring compliance with the Federal Corporations Act 2001 (Cth) (Corporations Act). Once so incorporated, the company was obliged to abide by its constitution, the Act and
Regulations and the Corporations Act. In 2004 the Legal Profession Act 1987 through which
the 2001 amendments permitted incorporation was replaced by the Legal Profession Act 2004
(LPA 2004). The 2004 provisions permitting incorporation remained largely unchanged.
Identical legislation has also been adopted in a number of other jurisdictions across
Pursuant to the LPA 2004 a legal service provider may incorporate and provide legal services
either alone or alongside other service providers who may, or may not be “legal
14practitioners.” The legislation however provides that at least one legal practitioner director
15(LPD) must be appointed. The LPD is responsible for the management of the legal services
16provided in NSW by the ILP. Such management, which is discussed later in the paper
includes, inter alia, a requirement that the LPD implement and maintain “appropriate
management systems.” According to the legislation it is an offence if an incorporated legal
11 New South Wales has openly embraced the right of law firms to establish multidisciplinary partnerships and
incorporated legal practices. This has been made possible by amendments to he Legal Profession Act 1987
(NSW), the Legal Profession Amendment (Incorporated Legal Practices) Act No.73 (NSW) and the Legal
Profession Amendment (Incorporated Legal Practices) Regulations (NSW). Incorporated legal practices are also
permitted in Victoria, Tasmania, South Australia and the Northern Territory. 12 The Legal Profession (Incorporated Legal Practices) Act 2000 (the Act) and the Legal Profession (Incorporated Legal Practices) Regulations 2001 (the Regulations) entered into force on 1 July 2001. 13 At present Victoria, Queensland and Western Australia all have identical legislation to that in NSW
permitting incorporation. South Australia, Tasmania and the Australian Capital Territory have not yet enacted
legislation permitting the incorporation of law firms but have undertaken to do so by the end of this year. The
adoption by all jurisdictions of the NSW model will ensure harmonisation of practices and procedures and
represents an important step towards the establishment of a national legal profession, which the OLSC as well as
other regulators across Australia are working tirelessly to achieve. 14 A legal practitioner director is defined as a director of an incorporated legal practice who is an Australian
legal practitioner holding an unrestricted practicing certificate. 15 Section 140(1) of the LPA 2004. 16 Section 140(2) of the LPA 2004.
practice does not have any LPDs for a period exceeding seven days and the practice may be
17 forced into administration.
There has been a growing interest by law firms in New South Wales of the prospect of following the path to incorporation and beyond. However the implications of the introduction of such legislation are considerable. Incorporation brings with it both benefits and challenges to law firms. By contrast to partnerships, incorporation is seen to protect directors of a firm through the benefit of limited liability. Incorporation can also provide taxation benefits, grants the drafters of the company constitution flexibility regarding ownership, control and distribution of profits and can constitute a profitable investment for shareholders. Share transferability gives owners and other shareholders, who may be non-lawyers, greater flexibility by comparison with partnerships in their financial relationship to the firm. Non-lawyer directors may make valuable contributions to the operations of a company, providing speciality expertise. Incorporated legal practices avoid the requirement of partnerships to reconstitute themselves on the death, retirement or withdrawal of a partner. In addition, whereas non-performing partners may have only been exorcised from a practice through litigation, in an ILP they need only be voted off the board. Incorporation provides for greater flexibility in how employees are rewarded for productivity and that may contribute to a greater corporate camaraderie.
Law firms considering the shift to incorporation must however also consider the impact of the relatively rigorous reporting requirements of the Corporations Act and in the case of listing, the rules of the Australian Stock Exchange (ASX). Law firms must also consider that a breakout of increased industrial democracy, which may result from the creation of a more vertical structure, may diffuse decision-making and that remuneration may follow merit, rather than disproportionately reward seniority. Law firms must also consider that through the process of incorporation - they may cede authority for the ownership and management of the practice. The competing obligations of a listed legal practice to its clients and to shareholders presents a tension that will test the sufficiency of the legal regime. This tension is made more apparent if we consider the distinct financial advantages that incorporation has for potential
17 Section 142(1) of the LPA 2004.
shareholders and directors through more favourable taxation, superannuation and redundancy
18 pay arrangements.
These challenges can have a profound effect on professionalism. Commercialised
professionalism to which the business world adheres to and which the legal services
marketplace has in effect moved towards, dictates that services should be tailored to meet the
needs of the client or shareholder. Commercialised professionalism therefore emphasises the
necessity of completing a task even if it violates traditional professional criteria stipulated in
19regulations. With the rise of the global client, lawyers are experiencing this tension more frequently than ever before. Consequently, the OLSC, as the regulator of legal practices in
NSW, has thus been forced to reconsider and revise its role in the legal services marketplace
and accordingly adjust its regulatory approach.
Complaint based regulation
The Office of the Legal Services Commissioner (“OLSC”) receives complaints about
solicitors and barristers in NSW. The OLSC works as part of a co-regulatory system, together
with the Law Society of NSW and the NSW Bar Association to resolve disputes and
investigate complaints about professional conduct. The primary function of the OLSC is,
inter alia, “to regulate” the legal profession. The Oxford Dictionary defines the phrase “to
regulate” as follows:
“1. Control, govern, or direct by rule or regulations; subject to guidance or restrictions;
adapt to circumstances or surroundings…b. Bring or reduce (a person or group) to
order …2. Alter or control with reference to some standard or purpose; adjust (a clock or 20other machine) so that the working may be accurate…3. …Exhibit regulation…”
Historically regulators of the legal profession have adopted the “control and govern
approach” and in fact this was the approach that was taken in NSW when the OLSC was first
established in 1994. This approach traditionally categorised as a “complaints-based
approach” focused setting high ethical standards by holding practitioners against these
18 Mark, S., ”A short paper and notes on the issue of listing of law firms in New South Wales‟, presented to the
Joint NOBC, APRL and ABA Centre for Professional Responsibility Panel, pp. 9-10, 2007. 19 A. M. Francis (2005) “Legal ethics, the marketplace and the fragmentation of legal professionalism”,
International Journal of the Legal Profession, 12:2, 173-200. 20 The New Shorter Oxford English Dictionary, Clarendon Press, Oxford, 1993 at p. 2530.
standards and disciplining or removing those that failed. The approach is thus by and large a pass/fail system: either the rules are found to have been broken or they are not. Consequently, in the approximately 95 per cent of cases where there was insufficient evidence that a genuine breach of the conduct rules had occurred, the complaint was dismissed without any real attempt at problem solving or systemic improvement. This was one of the greatest problems of this approach.
Additionally this approach did not satisfy consumers of legal services. The overwhelming majority of people who lodge complaints against legal practitioners in NSW are simply not interested in a result whereby most complaints are dismissed or the legal practitioner gets
21 What consumers are after is the outcome they originally went to their disciplined.
practitioner for and failed to get. They want the conveyance to go through, the personal injuries action to finally get listed, the estimate for settlement to be in accordance with what they were originally told, they want the kids from the marriage, they want to get out of jail. In short, they want "justice" as they see it.
The second problem with this approach is that it was ad hoc and reactive, and thus triggered only in response to problems that have already occurred. So a practitioner who had overcharged a complainant in a particular matter was only reprimanded in respect of that particular matter even though that practitioner may have engaged in a practice of overcharging. Similarly, a practitioner who had failed to disclose his/her costs in relation to one matter would be reprimanded in that particular matter even if that practitioner had continually failed to disclose his costs in other matters he had acted for that particular complainant.
Third, the approach is narrow and secretive and is incapable of bringing about systematic change. The limitations of the disciplinary process meant that the practitioner would be disciplined only and there would be no guidance or assistance to educate the practitioner about not making the same mistake again.
Fourth, the traditional complaint-based regulatory regime focuses solely on individual conduct, that is conduct by an individual practitioner in a firm, not conduct by the firm itself.
21 NSW Law Reform Commission, Complaints Against Lawyers: an interim report, Report 99, 2000 at 7.16.
Law firms could not therefore be held to be vicariously liable for the actions of their
employees. Critics have argued that sanctions against a law firm are possible and necessary to
“encourage partners to invest in structural controls, such as conflicts checking procedures, to
22 promote firm-wide compliance with professional regulation.”
These limitations appeared to be in stark contrast with the objectives of the regulatory system,
which is to redress consumer complaints by users of legal services; ensure that individual
practitioners comply with professional standards, and maintain the standards of the profession
as a whole. The limitations similarly appeared to be in stark contrast with the vision and
mission statement of the OLSC to “lead in the development of an ethical legal services
market which is fairer, more accessible and responsive”, and reduce complaints by:
? Developing and maintaining appropriate complaints handling processes
? Promoting compliance with high ethical standards
? Encouraging an improved consumer focus in the profession;
? Developing realistic expectations by the community of the legal system.
The OLSC thus enhanced its complaint handling approach. The approach taken was that
embodied in the second part of the definition of “to regulate” – being “to bring to order.”
The “bring to order” approach recognises that there are multiple aims to an effective regulatory system. These aims include a consumer dimension, with the consequent need to
redress the complaints of dissatisfied users of legal services, a practitioner dimension,
ensuring the diligence and competence of individual practitioners and a profession dimension,
maintaining high standards of ethics and practice for the profession generally.
The “bring to order” approach to regulation is by contrast to the “control and govern
approach” proactive, public and positive. It involves continually building, evaluating and
improving our activities. The philosophy behind this approach is formulated on ensuring that
the OLSC will make a lasting and significant contribution to raising standards in the legal
22 Quote by Professor Ted Schneyer, “Professional Discipline for Law Firms (1991) 77 Cornell Law Review 1
2236, cited by E. Chambliss & D. E. Wilkins, “A New Framework for Law Firm Discipline” (2003) 16
Georgetown Journal of Legal Ethics 335; C. Parker, A. Evans, L. Haller, S. LeMire, R. Mortensen, “The Ethical Infrastructure of Legal Practice in Larger Law Firms: Values, Policy and Behaviour”, 31(1) NSW Law Journal
services industry – to put the profession in better order so to speak – and ultimately to
improve the satisfaction with the services delivered by legal practitioners to the community.
The OLSC has sought over the years to invoke this approach in three ways; the capture and
publication of knowledge, the education of practitioners and would-be practitioners, and the
education of consumers and their representatives/agencies.
The “bring to order” approach has proven to be an undeniable success. This success is clearly
reflected in the OLSC complaint statistics. During the first year of operation in 1994 the
OLSC received 2,801 written complaints and 6,700 inquiry calls. In 2007-2008 the OLSC
received 2742 written complaints and 9694 inquiry calls. Notwithstanding the increase in the
number of inquiries received, the number of written complaints has remained virtually static.
This is particularly impressive when we consider the increase in the number of the members
of the legal profession from about 12,000 to about 25,000 for that period. Despite this success
recent structural changes to the legal marketplace have once again forced the OLSC to
reassess the dynamics of the “bring to order” approach.
Compliance based regulation
With the enactment of the 1987 and ensuing 2004 legislation permitting ILPs came a new
range of additional responsibilities for legal practitioners who sought to incorporate. The
usual professional obligations that complement the privileges enjoyed by Australian legal
practitioners bound those practitioner employees and officers delivering legal services on
23behalf of an ILP. However these responsibilities were extended in the case of legal practitioner directors of an ILP to include obligations under the Corporations Act as well as:
(i) A general responsibility on the solicitor director for management of the legal services
provided by the incorporated legal practice - this responsibility probably does not extend
beyond those general responsibilities that partners have to the general management of
(ii) The implementation and maintenance of “appropriate management systems” to enable the
provision of legal services in accordance with the professional obligations of solicitors
and the other obligations imposed by or under section 140(2) and (3) of the LPA 2004.
Failure to implement and maintain “appropriate management systems” is declared to be
23 Section 143 of the LPA 2004
(iii) A responsibility to report to the Law Society any conduct of another director of the
practice that has resulted in or is likely to result in a contravention of that person‟s 24professional obligations or other obligations imposed by or under the Act.
(iv) Report to the Law Society any professional misconduct of a solicitor employed by the
(v) An obligation to take all action reasonably available to deal with any professional
misconduct or unsatisfactory professional conduct of a solicitor employed by the 25practice.
In order to effectively comply with these additional responsibilities the OLSC together with
Law Society, LawCover (the provider of professional indemnity insurance in New South
Wales), and the College of Law, the largest provider of continuing legal education in New
South Wales developed an educational program which by and large puts in place a quasi
“ethical infrastructure” – that is, formal and informal management policies, procedures and controls, work team cultures, and habits of interaction and practice that support and
26encourage ethical behaviour – for ILPs.
The ethical infrastructure is put in place by the requirement under section 140(3) of the LPA
2004 that a legal practitioner director must ensure that “appropriate management systems” are
implemented and maintained by the ILP. Failure to implement an appropriate management
system pursuant to the LPA 2004 may pursuant to the 2004 Act constitute professional
misconduct. “Appropriate management systems” are not defined in the LPA 2004. The
OLSC has however in collaboration with the Law Society of NSW, the College of Law and
LawCover developed key criteria to ascertain whether an ILP has “appropriate management
systems” in place. These key criteria set out below are what the OLSC considers to be the
ten objectives of a sound legal practice:
1. Competent work practices to avoid negligence.
2. Effective, timely and courteous communication.
3. Timely delivery, review and follow up of legal services to avoid instances of delay
4. Acceptable processes for liens and file transfers.
5. Shared understanding and appropriate documentation from commencement through
24 Section 140(4) of the LPA 2004. 25 Section 141 of the LPA 2004. 26 The term “ethical infrastructures” was developed by Prof Ted Schneyer. See “T. Schneyer, “A tale of Four
Systems: Reflections on How Law Influences the “Ethical Infrastructure of Law Firms” (1998) 39 South Texas
Law Review 245. It was developed further by Elizabeth Chambliss and David Wilkins in “Promoting Effective Ethical Infrastructure in Large Law Firms: A Call for Research and Reporting” (2002) 30 Hofstra Law Review
691 and “A New Framework for Law Firm Discipline” (2003) 16 Georgetown Journal of Legal Ethics 335