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Entity regulation - whaaaaat?

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|Written By Yamri Taddese
Entity regulation - whaaaaat?

Most lawyers have likely heard or read the phrase somewhere, and yet to many, “entity regulation” doesn’t really mean much. But as law societies across Canada consider what could be the biggest shift in the regulation of the legal profession in the last century, becoming familiar with entity regulation may no longer be an option.

“I agree it is not the clearest of phrases,” laughs Jill Perry, president of the Nova Scotia Barristers Society.

Perhaps nowhere else in Canada is the phrase better known than in Nova Scotia, which is on the cusp of being the first jurisdiction in the country to reconfigure regulation of the legal profession. When it comes to bold new steps in governing the legal profession, Nova Scotia, it seems, likes to lead the pack. In 2013, the NSBS’ former president Timothy Daley came to Ontario to proudly tell his counterparts at the Law Society of Upper Canada about his province’s unique discipline tribunal for lawyers who suffer from mental illness.

Today, law society executives across the country are again watching Nova Scotia as it paves the way to a new era of regulation for the legal services industry in Canada. After the NSBS council gave the go-ahead to entity regulation, which it now refers to as “legal services regulation,” a plan to implement the idea is expected by next spring.

What exactly is entity regulation?

“At its basic level, the phrase ‘entity regulation’ refers to the fact that it is a shift away from focusing on the individual lawyer. Right now, all legal profession regulation, across the country and in Nova Scotia, focuses on the individual lawyer, whether that individual lawyer is in small practice, on their own, a member of a big organization like legal aid, like I am, or [in] a big firm,” says Perry. “The idea is that it wastes a lot of time and doesn’t achieve a lot of the goals if you focus on all of those individuals who comply individually with certain requirements that may or may not be appropriate for them.”

This new approach would move the focus from the individual lawyer to a group of lawyers in the collective in which they work, whether that’s a law firm, an in-house legal department, or a legal aid organization. “If somebody is a sole practitioner, then the legal entity is that sole practitioner. If somebody is in a legal aid organization with 10 offices, then the legal entity is the legal aid organization, or the entity is the large firm,” explains Perry.

But while provinces like Nova Scotia and Ontario are considering entity regulation, others such as the Law Society of British Columbia are limiting their scope to regulating law firms only. In B.C., the wording was “chosen carefully,” says LSBC spokesman David Jordan. Although the province hasn’t ruled out a broader consideration of regulating entities other than firms in the future, he says its consultation with the profession this fall will focus on regulating just law firms.

Still, in other provinces such as Saskatchewan, there’s no decision yet on how to reform regulation, but entity regulation is being discussed widely. “We certainly have a green light to look at it and talk about a lot more, and I think decide exactly what entity regulation does mean,” says Tom Schonhoffer, executive director of the Law Society of Saskatchewan. Elsewhere in the country — including Alberta, New Brunswick, Prince Edward Island, and Newfoundland and Labrador — entity regulation is in the early days of consideration as law societies monitor developments in jurisdictions like Nova Scotia. At the Law Society of Upper Canada, a working group is busy studying the merits of regulating legal entities alongside individual lawyers.

The biggest driver of change across the country seems to be a collective acknowledgement of just how antiquated, and ineffective, the existing regulatory system is. “I think everybody recognizes that the model of regulation we have now of individual lawyers is kind of this anachronism that goes back 100 years when legal services were all delivered by one- or two-man firms, and I’m going to say ‘man firms’ because that’s what they were,” says Schonhoffer. Lawyers now organize themselves in larger, more complex groups.

But the goal of entity regulation isn’t shifting blame to entities. In fact, a focus away from the individual to the collective by itself “doesn’t tell you very much,” says Perry. “Behind that change of focus away from the individual to the bigger group, there are some other shifts in thinking.”

One of those shifts, and perhaps the biggest one, is a less prescriptive form of regulation that’s starkly different from the current laundry list of rules. “Right now, regulation is based on setting out a whole bunch of different rules lawyers have to adhere to, and we hope, or anticipate, that the goal of lawyers adhering to those individual, very prescriptive rules is the protection of the public and competence and all those good things,” says Perry. “When you shift to a principled approach, it’s about a shift to an outcomes approach. In other words, you tell people where you want them to get . . . but you don’t spell out the path by which people have to get there. So that leaves room for people to reach the principle, or the goal, by whatever path is best suited to them and their unique situation.”

In Nova Scotia, the barristers’ society has decided on a handful of principles or goals, of which the promotion of access to legal services is one. But the law society will not tell law firms the number of hours of pro bono work their lawyers must do or the fee structures they must build. “We’re talking about that being an overall goal, and lawyers and law firms will be free to explain the way in which their work contributes to that,” says Perry.

A sole practitioner, for example, may say he or she is providing a range of legal services in an underserved area or a rural area facing extreme economic decline. “It’s really about leaving room for people to get to the desired outcome by whatever path suits for them,” adds Perry. For an industry founded upon heeding and translating rules, this sudden flexibility might be daunting. “Some people will find it easier to say, ‘Give me the list of rules; tell me what I have to do.’”

And yet, the success of entity regulation may lie squarely in that uncomfortable space where lawyers will be forced to become innovative in ways that help the industry thrive while improving access to justice.

“When we do this entity regulation stuff, it’s with access to justice at the front of our mind because they have to work together, and entity regulation will only be a success if it contributes to [increased] access to legal services,” says Perry.

Entity regulation will also change what the law society represents in the lives of lawyers, Perry adds.

Right now, lawyers prefer as little interaction with the regulator as possible. A call from the law society is associated with trouble of some kind. But a shift from a solely compliant-based regulatory system to a compliance-based one could modify that relationship as the law society takes on a more supportive role.

The law society would engage with law firms to provide guidance as they build ethical infrastructures their lawyers will work under, says Perry.

Existing structures part of the problem

Part of the problem with the existing structure, of course, is that law societies have little involvement with the way law firms are run unless there is a complaint about the conduct of a specific lawyer. Recently, Ontario lawyer Alan Rachlin informed the law society about a motion he brought in a personal injury matter regarding the issue of lawyers who work independently but also in association using a common business name. Rachlin’s client, Aviva Canada Inc., argued it’s not clear who is legally accountable in those structures. Aviva was questioning the structure of Diamond & Diamond Personal Injury Law Firm, which represented the plaintiff in the matter.

Rachlin told an Ontario Superior Court that when he reached out to the law society, its response was it would not get involved unless he files a complaint. Although the judge ultimately decided Rule 21 of the Rules of Civil Procedure didn’t allow him to make a determination on the issue, he agreed there was “some merit” to Aviva’s question and was taken aback by the law society’s response. “I am surprised they took no position,” said the judge in his ruling. “I don’t think self-governance should be kick-started only by a complaint.”

Part of the idea behind entity regulation is precisely that: Law societies should be more proactive, instead of just reactive. The goal is that more proactive regulation could curb lawyerly transgressions the same way preventive medicine avoids illnesses altogether.

Indeed, Janet Minor, treasurer of the Law Society of Upper Canada, says it is considering entity regulation along with compliance-based regulation to ensure entities have systems in place that would “hopefully reduce complaints and improve services.”

A logical way forward

In its 2014 report “Futures: Transforming the Delivery of Legal Services in Canada,” the Canadian Bar Association cited evidence from Australia that shows the country’s regulatory approach, which places great regulatory obligations on incorporated legal practices or alternative business structures, has resulted in a two-third drop in complaints against legal service providers in New South Wales. That, the CBA said, is “perhaps the most persuasive argument” for compliance-based entity regulation.

But in his 2012 paper “Regulating Law Firms in Canada,” University of Ottawa law professor Adam Dodek writes that when it comes to entity regulation, “the proper question is not ‘Why should law firms be regulated?’ but ‘Why do they largely escape law society regulation?’”

“If you were just an outsider looking at the practice of law today, what you would see is that law firms are an essential feature of the practice of law in Canada in the 21st century,” Dodek tells Canadian Lawyer. “If you look at advertising, if you look at media coverage, if you look at contributions to the economy, [in] all of those sorts of things, law firms are front and centre. They’re the dominant way lawyers now organize and structure the practice of law — in firms of 10 lawyers or more.”

Regulating firms is the most logical thing to do, according to Dodek, especially given the fact virtually all other professional service firms — such as accounting, architecture, engineering, banking, and medical entities — are regulated extensively. Dodek says not regulating law firms, in fact, threatens the law profession’s claim to self-governance. “The most powerful elements in the legal profession are law firms, and if they’re completely escaping regulation, that could lead [the public] to seek government intervention,” he says.

Law firms generally have policies around ethical issues such as conflicts of interest. For a firm not to have a conflict check system in place is considered extremely reckless, Dodek says, and yet, in Canada, a firm that does not have one will face no consequences.

Kevin Latimer, the managing partner at Cox & Palmer in Halifax, says entity regulation wouldn’t be an entirely new concept for his firm. “In principle, the concept of holding the legal services entity — the law firm — responsible for the activities of its members, and expecting the law firm to regulate those members, is fine. Firms like ours have always done this, and the change of regulatory model should provide efficiencies,” he says.

His firm, for example, regulates its members through a firm-wide system of identifying conflicts of interest, programs for continuing professional education, mentorship of young lawyers, and through specialty practice groups that foster legal knowledge and “lawyering skills,” says Latimer.

But what will entity regulation mean for solo and small practitioners? While there has been talk about the disappearance of the small and solo practitioner for the last several decades, that prediction has not materialized and small and solo practitioners continue to be important members of the legal profession in Canada. “We’re going to be careful, and I say this repeatedly, this cannot be about making life more difficult for small firms or those in rural areas,” says Perry. “That’s where the society would be able to play that more supportive role.”

When it comes to regulating solo and small firms, Perry highlights another important component of the plan underway in Nova Scotia: proportionality. “You don’t get everybody to where you need them to be if you treat all people or groups the same because they’re not the same,” she says. “Different forms of practices carry with them different forms of risk, so it’s about looking at where the risk is [and] having rules or plans in place that are proportionate to that risk.”

Take, for example, a requirement for regular and detailed reports on trust accounts. According to Perry, it makes little sense to make legal aid organizations, whose trust accounts handle maybe a few hundred dollars per year, jump through the same hoops as firms whose trust accounts move millions of dollars annually.

According to Dodek, part of the argument for entity regulation is it will counter the perception that members of large law firms receive favourable treatment from regulators. Law societies in Canada have focused so much of their energies into the disciplining of lawyers, and statistics show that lawyers from large firms rarely get disciplined, says Dodek. He adds this has created a perception that the elite in the profession lie outside of regulation. “Ultimately, law societies should regulate law firms because of the fundamental rule of law idea that no one is above the law and that the law applies equally to the most powerful as well as to the weakest in society,” Dodek writes in “Regulating Law Firms in Canada.”

Lawyer Roger Oatley, a personal injury lawyer at Oatley Vigmond LLP in Barrie, Ont., has practised in small law firms throughout his career. To him, law firm regulation is the only way to put a stop to what he calls “disgraceful” legal advertising in his portion of the bar. “People are advertising in a very misrepresentative way; some law firms are actually going into hospitals and soliciting people who are extremely vulnerable at the time,” he says, adding advertising is a firm activity that should be regulated as such. “I would have to say that in my part of the profession, the behaviour of some lawyers is dragging the reputation of the entire profession into the gutter and the regulation of firms cannot happen soon enough.”

Entity regulation is not only about ABS

Despite some lawyers’ positive view of entity regulation, there are also uncertainties, especially when it comes to what this form of regulation will mean for alternative business structures, a topic that tends to generate a lot of fear and resistance from many in the profession.

The NSBS’ reform initiative has been set out in principle but not yet in detail, says Latimer, who wonders if entities other than those owned by lawyers will be regulated. “This initiative seems to contemplate authorizing entities other than law partnerships to practise law, which might include corporations or other entities, which are not controlled by lawyers,” says Latimer. “This may increase access to legal services, but will undoubtedly raise new issues about effective regulation of the profession. The society is going to have to balance these issues carefully in the public interest.”

In Ontario, the bias against ABS is so strong within the personal injury bar that the Ontario Trial Lawyers Association classified candidates in the recent law society bencher election as pro- or anti-ABS on its web site and encouraged its members to vote for the latter. As far as there is resistance toward entity regulation, it lies in its association with ABS, says Dodek.

Legal consultant Jordan Furlong, a proponent of both ABS and entity regulation, says the consideration of entity regulation is indeed “a recognition that legal services will be provided by more than just lawyers and more than just law firms. If we are going to define our mandate as regulators as the regulation of legal services by anybody, not just by lawyers, then entity regulation is a step in the right direction.”

But law societies in Canada are reluctant to draw a link between ABS and entity regulation. “I see [ABS] as a separate consideration,” says Minor. “Compliance-based regulation is something that could be . . . introduced whether or not further steps are taken with respect to alternate business structures.” The NSBS says it is not currently considering ABS. “Our view is that any move to approve this model ought to occur with a national initiative or in a larger jurisdiction, but certainly not Nova Scotia,” says executive director Darrel Pink.

In the United Kingdom and Australia, rules have now changed so the providers of legal services — law firms and, in some cases, alternative business structures — not just individual lawyers are regulated.

Dodek, for his part, puts it like this: “If you have ABS, you absolutely need entity regulation, but you can and should have entity regulation without ABS.”

Even in Australia, where law firms are allowed to welcome outside investment, entity regulation existed without ABS for a long time, said Andrew Grech, group managing director at Slater and Gordon, an Australian firm that listed publically in 2007. “In Australia, lawyers and law firms are regulated under the Legal Profession Act, and regulations and professional rules that apply in each state or territory. This has been the case for a very long time. For example, the first act in Victoria to regulate the practice of the legal profession was in 1891,” says Grech.

About a decade ago, when Australia permitted incorporated legal practice or alternative business structures, it required that one member of the board of directors at such practices be designated as a “legal practitioner director” whose responsibility includes maintaining professional conduct at the firm.

Incorporated legal practices are also required to have appropriate management systems for conflicts of interest, records management, communication, file transfers, billing practices, termination of retainers, undertakings, supervision of practice and staff, and trust accounts.

Clients in Australia still make complaints against individual lawyers instead of the law firm, said Grech, because practice certificates are attached to individual lawyers and not law firms. Ultimately, sanctions that follow a disciplinary action result in lawyers losing their practice certificate, he says. “In regards to regulation of the entity, there are additional responsibilities and obligations that legal practitioner directors have under the laws, and sanctions as well. It is multilayered. Having said that, my own view is that given the significance of the operational setting [or the entity] on the behaviour of lawyers, entity regulation has broadly been a force for good.”

A better way to monitor ethics and practice

Even without the introduction of ABS, the legal profession is dealing with new questions around ethics and what constitutes the practice of law that may be best monitored or aided by entity regulation. Take, for example, the debate around whether e-discovery and document review constitutes legal work. In the case of Deloitte, which acquired e-discovery services provider ADT Legal Services, the Law Society of Upper Canada has found professionals other than lawyers can undertake the work. The law society’s position is that whether document review services constitute legal services depends on the specific nature of the review being done.

While there are existing rules about delegation and supervision of work under the Rules of Professional Conduct, there is currently no requirement that law firms enact policies and procedures to ensure effective supervision, says Dodek. “One of the positive aspects of entity regulation would hopefully see the law society produce model policies and procedures for law firms to assist them.”

In the face of so many changes in the profession, bringing about entity regulation is no longer a matter of choice, says Perry. “I’d say get out ahead of this before it gets out ahead of you. It’s not something that’s kind of optional,” she continues. “Legal service delivery and legal regulation and what’s happening globally is just changing so much that I think all law societies are going to have to deal with this.”

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  • Compliance Based Regulation A Bad Idea

    Michael Lesage
    I have no desire to see LSUC impose Compliance Based Regulations. Under Compliance Based Regulation, LSUC (much like a boss, or your clients) would set (additional) mandatory standards for lawyers and firms to follow. Envisioned standards seem to include timelines for responding to client communications (say 24 hours?), new rules governing confidentiality (perhaps an expensive, non-user friendly computer system), avoiding conflicts of interest (I think we have a rule on that already…) and a commitment to improve access to justice, perhaps by requiring lawyers to provide even more unpaid services to the public. Other areas LSUC seeks to manage include management of staff, file maintenance and standards, financial management and sustainability, equity, diversity and inclusion in the workplace and ‘cultural competency in the delivery of legal services.’ Perhaps LSUC will apply these directives to LSUC, and leave Ontario's lawyers alone?

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