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Hook Tangaza: Does regulation hinder the take-up of technology in the legal sector?

Does regulation hinder the take-up of technology in the legal sector?

The idea that technology might have a disruptive impact on the provision of legal services is not new. Concerns were raised about the impact on legal practice of fax machines in the 1980s, the internet in the 1990s and the Cloud in the 2000s. Technology offers the potential to crack seemingly intractable problems in the legal sector and although Professor Richard Susskind’s seminal work “The End of Lawyers: Rethinking the Nature of Legal Services” published in 2008 began to focus minds in earnest; technology has so far had an uneven impact on the legal sector.

As the application of technology to legal services processes and to service delivery increases, so too do new and perceived regulatory risks. This coupled with the development of an increasing range of tools, underlines the need for regulators to keep an open mind on technology. It is, however, apparent that one of the main impediments to the uptake of technology in the legal sector is, in fact, the regulatory frameworks underpinning the provision of legal services.

Most jurisdictions restrict the growth of legal technology through rules that prohibit non-lawyer investment in law firms and even in some cases, lawyer involvement in non-legal businesses. This means that a lawyer who wishes to use legal tech to solve a problem for their poor clients may not be able to raise the capital to invest in an idea, and even if they have the money, they may be prevented from partnering with others to deliver on their ideas. With the sole exception of England and Wales, which passed legislation in 2007 to permit non-lawyers to invest in and manage businesses in the legal sector, most consumer and SME driven tech developments in law in most parts of the world are happening outside of the regulated legal sector.

In a recent consultation, the oversight legal services regulator for England and Wales, the Legal Services Board, proposed that technology neutral regulation was a concept worth exploring. This is a useful starting point, since regulators should be encouraged to ensure that their rules do not hinder innovation and the development of technologically driven solutions. There is much to be learnt on this topic from other sectors, notably the financial services sector, which has attempted to address some of the risks of regulatory neutrality through the introduction of sandboxes.

However, the sandbox approach only deals with circumstances in which innovators have a proposition which needs to be tested against the existing rulebook. It does not help regulators to positively encourage innovation at a conceptual stage. There are even risks in a ‘neutral’ approach, in that it can promote inaction as an antidote to making the wrong choices.

Regulators therefore have a role to play in setting positive innovation challenges for the sector, which will encourage more radical thinking over a longer period of time than permitted by, for example, the current vogue for legal hackathons.

So how are the regulators of the legal profession responding to the challenge of technology? There are four generic types of response:

Hands-Off – do nothing. This is probably the most common approach. There are plenty of other pressing tasks for regulators and knowing little of technology, they are often a bit scared by it. So, this is the easy option. But doing nothing allows the prevailing professional code of conduct to have a chilling effect.

Resistance. Some bar associations have been actively obstructive to the entry of new technology-based service providers into the market. Between 2016-18, for example, the Bar Associations of eight US states issued ethics opinions which determined that participation by lawyers in the services of the online legal services provider, Avvo, represented an ethics violation. As a result, Avvo ceased providing legal services in July 2018 and relaunched purely as a lawyer search and ranking service.

In April 2016, the French Conseil National des Barreaux and the Montpellier bar association obtained a judgement from the Court of Appeal in Aix-en-Provence against the online legal service provider, for having provided unauthorised legal advice. This led to the closure of the site. It had offered a fixed price for an uncontested divorce of €300, compared to €2000 on average charged by licensed lawyers.

Control. This school of thought can broadly be categorised as “if you can’t beat them, join them”. The regulators adopting this approach are attempting to find ways to adapt new technology to fit existing rules. For example, the Dutch supervisor of lawyers issued a notice in 2016, informing lawyers of their intention to act on breaches of the referral fees provision in the lawyers’ code of conduct. The College of Supervisors permits lawyers to be involved in online platforms which have fee arrangements that are based on reasonable fixed fees paid by the lawyers or payment per click, but prohibits participation in online services which are based on payment by referral, payment per case or payment as a percentage of the fee.

Enabling. Lastly, there are a very few examples where the legal regulator has taken an enabling approach. The Solicitors Regulation Authority in England and Wales has set up a kind of sandbox, whilst the Singaporean Authorities have indicated their willingness to discuss any new business model in the legal sector that an entrepreneur might wish to put forward. These are the exception rather than the rule, however.

These examples further demonstrate how counterproductive it is to attempt to pour new business models driven by technology into old regulatory structures. The challenge for regulators is to understand the changing environment, ensure regulation keeps pace and effectively manages these risks without stifling innovation.  Regulators should cast their net widely when looking at other sectors which may offer insights for the legal market. There are a wide range of other sectors which are heavily influenced by technology, so tracking developments in regtech, insurtech, healthtech and proptech, as well as fintech, may well offer lessons in how legal tech can be supported and propagated appropriately by regulators.

Regulators should start thinking about other areas of technology which could impact on their internal functions, such as enforcement, credentialing etc. Whilst some technologies are already being experimented with by regulators (e.g. the Solicitors Regulation Authority’s experiments with neural networks), others may not yet have appeared on the horizon (e.g. quantum key distribution) but may offer significant long-term potential for regulatory activity.

There are also applications which could promote the take-up of technology in the legal sector once they are further developed because they could potentially overcome a regulatory/insurance concern – for example, who is liable for AI advice? More research on these topics both by universities and practical research organisations is required and there is much to be learnt from other sectors on these topics.

Regulators must also consider the client perspective and changing consumer preferences for obtaining information and advice. On the supply side, tech is likely to drive a growing need for different types of legal professionals who are able to accommodate the need for new STEM related skills in the legal sector and to diversify the means by which they deliver services to their clients.

The legal sector is not alone in adjusting to the world of technology. There are therefore many opportunities for legal regulators to learn from other sectors. This may, however, require regulators to take a much wider view of the market for policy ideas than they traditionally might have done.

Regulation is not only about managing market failure and securing the public interest and other public policy goals. Industries will often autonomously seek to establish rules to help them function and develop their markets. At their best, such industry-driven rules create clarity, interoperability between players, standards to guide choices by customers and a reduction of duplicated effort. On the negative side, they can be used to distort competition and create barriers to entry which then requires public policy intervention.

Finally, legal regulators should not assume that standing aside from legaltech to avoid interfering unhelpfully in a world of which they are uncertain, is necessarily the right answer. Be brave, be bold!

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