Disruptive innovation in legal services – promising for consumers and challenging for regulators
James Mancini, Competition Division, OECD Directorate for Financial and Enterprise Affairs
Legal professionals[i] are present during some of the most important events in our lives, such as setting up a business, buying a house, writing a will or navigating a divorce. Recent developments in legal services markets suggest that this may not be the case forever. Consumers have increasingly turned to online platforms and automated technologies to obtain services that were delivered by legal professionals in the past. In the process, traditional business models and regulatory frameworks are being called into question. What should policymakers, regulators and competition authorities know about changes in legal services markets?
The scope of current and potential innovation in legal services is substantial
Legal services that have changed little over generations are now being transformed thanks to several enabling factors. Communications technology permits lawyers to interact with clients, outsource work and share documents with colleagues seamlessly. The “democratisation of knowledge” via the internet is allowing consumers to better understand their legal needs, and the nature of the services that legal professionals provide. Further, concerns about fee levels generally, and the financial accessibility of legal services for low income individuals in particular, is putting pressure on legal professionals to justify or reduce their charges.
These factors are giving rise to the entry of new competitors into legal services markets (where permitted by regulation) and, in fewer cases, the adaptation of legal professionals to current realities. In particular:
- Online service delivery is allowing both legal professionals and unlicensed providers to serve clients remotely while taking advantage of the scalability of digital platforms.
- Ranking and review information regarding legal professionals is becoming increasingly accessible, and is allowing clients to assess the quality of professionals before retaining them – a previously difficult proposition
- The unbundling of services, partially driven by increasing client awareness and fee pressure, is transforming the distribution of tasks in legal services and ending traditional “black box” models of service delivery. As a result, standardised activities are being outsourced to low-cost providers (including unlicensed ones), and new billing models are being introduced.
- Automation is changing the nature, and volume, of tasks that legal professionals perform. Although the extent to which the work of legal professions can be automated is subject to debate, automated systems have been introduced which offer new capabilities and even, in at least some instances, improved performance compared to legal professionals.
So innovations are not simply minor process improvements that increase legal professional efficiency. Rather, they have the potential to fundamentally redefine the practice of law, as well as the other professions associated with it, such as notaries.
The regulatory frameworks of legal professions should be assessed in light of recent innovation
Legal professions are heavily regulated across the OECD, with a range of restrictions on who can provide legal services, the fees they can charge, and other aspects of their behaviour (including restrictions on advertising, ownership restrictions and requirements to provide legal aid). These restrictions are an effort to correct market failures implicit in the traditional provision of legal services, which stem from information asymmetries and externalities. Other measures reflect broader policy objectives.
However, there are indications that some of these measures are becoming unnecessary or, worse, harmful to competition and innovation in legal services markets. Increased commoditisation of legal services and improved consumer information could eliminate the need for certain regulations altogether, by addressing the concerns that underpin these regulations. At the same time, the precise scope and enforceability of the exclusivity granted to legal professionals in their activities is under pressure. Limits on the number of legal professionals in a jurisdiction and advertising restrictions hinder innovation and put professionals at a disadvantage compared to disruptive firms. The reliance on self-regulation in legal services may result in conflicts of interest when new disruptive entrants begin to challenge incumbents.
As a result, the regulatory status quo may be difficult to maintain, and policymakers should not attempt to do so by blocking innovation. Rather, careful consideration must be given to how the scope and specific provisions of legal professional regulations should be modified. Should a supervisory body oversee the activities of self-regulators, as is the case in the UK with the Legal Services Board? Should the reserved activities of legal professionals be narrowed and clarified? Should different levels of professional certification, and greater reliance on para-professionals, be promoted? These questions must all be tackled during the process of modernising legal services regulation. Further, new concerns regarding innovative service offerings and delivery models may arise, potentially requiring regulatory measures in areas such as data protection, privacy, consumer awareness and lawyer-client confidentiality.
Policymakers would therefore be well-advised to assess current regulatory frameworks in light of current and future innovations. The OECD Competition Assessment Toolkit can help.
Competition authorities are well-positioned to promote pro-competitive regulatory outcomes
Competition authorities are likely to have little experience in legal services markets given that enforcement issues in these markets have been rare. There is a role for them, however, in helping to respond to the challenges described above. They can promote competition assessments of existing regulations to enable a better understanding of the trade-offs implicit in current regulatory frameworks. Authorities can also help facilitate productive interactions between disruptive innovators and policymakers as well as regulators. These efforts could avoid enduring conflicts between regulators and established disruptive firms, which can engender great controversy and leave everyone worse-off.
This post is based on a background paper for a session on disruptive innovations in legal services discussed in Working Party No. 2 of the OECD Competition Committee on June 13, 2016. More details on the session are available here.
Ministers, the business community, civil society, labour and the Internet technical community will gather in Cancún, Mexico on 21-23 June for an OECD Ministerial Meeting on the Digital Economy: Innovation, Growth and Social Prosperity.
Disruptive innovation and competition in Latin America and the Caribbean James Mancini on OECD Insights
[i] The composition of legal professions vary significantly between different countries, legal disciplines and regulatory frameworks. The core of the legal professions considered here consists of lawyers and notaries as well as other licensed, regulated professionals in some jurisdictions that provide services with respect to court proceedings and other legal processes (e.g. bailiffs, commercial court clerks and judicial commissioners in France).