Can regulation boost legal innovation?
With the introduction of the Legal Services Act, the UK became one of the most deregulated legal markets in the world. Judges warned that consumerism could overshadow the “wider public interest in the rule of law” while the Justice Minister Jonathan Djanogly called it "a milestone for UK legal services” because it could secure more “competitive pricing, higher standards of products and more choice for the consumer.” In short, the Act enables UK law firms to raise capital by floating on the stock market, creating new business structures and bringing in non-lawyers as partners. With that law, you could buy legal services as you would buy goods in the supermarket, some claimed, thus giving it the nickname the “Tesco Law”.
Those in favour of deregulation mentions that it removes entry barriers for innovative actors, increases consumer power and improves the economy, while those against points out that it jeopardizes consumer protection and undermines the legal system. No matter what, the so-called Tesco law had a great effect as we see alternative legal service providers taking significant shares of the market. A few years after, The Solicitors Regulation Authority had approved 300 applications for alternative business structures with many new actors entering a market to offer high volumes/low-value legal services in client-centric ways. Because of the legislative changes and support from the SRAs promotion of accessibility, affordability and transparency, the UK is outpacing the rest of the world in most areas of legal tech ‘innovation’ and adaption.
Is legislation an overlooked factor when it comes to legal innovation and the development of a full-flourishing legal tech industry? And if so, could regulation be the conclusive boost to legal innovation? This week, Legal Tech Weekly has talked to Nicolas Torrent from The Swiss Legal Tech Association to hear the story of his own experience as a legal tech entrepreneur in multiple countries, and to learn more about what regulators could do to boost legal innovation. Either by supporting tech entrepreneurs or creating incentives for firms to produce innovations.
E-Tribunals and Swiss Cartels
Nicolas Torrent heads the Geneva Chapter of the Swiss Legal Tech Association (SLTA) - an independent organisation that aims to unite the Swiss legal tech community and create awareness about all the benefits of legal innovation. He explains that the association seeks to inform the Swiss legal communities about the benefits that all can derive from combining law and technology:
“The global legal market has been shrinking since 2010-11, and it's not like people are eager to see their lawyer. They want to avoid lawyers. So we, at the SLTA, are making the argument that if we make the law more accessible, with digital tools, consumers might start using legal services again. The consumers need those services, but they are reluctant to visit their lawyers or enforce their rights because it's too complicated, too expensive, too slow or a combination of all three. And it makes things worse when they pay substantial amounts without getting anything in return because they lost their case.
We want to show that using technologies can make legal services cheaper and intuitive for consumers. We can create a legal market, not of hostages, but of actual consumers. Lawyers don't need to limit their market to the few people who have the money, who don't have a choice to enforce their rights and who don’t have a choice to visit a lawyer. Lawyers can also create new services to serve the people who need a legal service and would be happy to pay for it: this would create a new healthier market of active consumers.” Torrent explains.
Besides creating awareness, the Swiss Legal Tech Association also coaches legal tech providers, produces content, maps the market and functions as a hub where stakeholders can meet and exchange ideas.
So basically you want to innovate the legal industry and democratise access to legal services?
“Yes. But there is also the aspect of informing regulators of what would be useful and efficient in terms of regulation to help the economy. It's a good thing that people consume more and to force firms to stay competitive. That is going to be a big challenge if we don't have the right regulations.”
Torrent knows from his own experience that the right regulations and official programs can both block and boost innovation in a market. After studying law in Geneva and working a few years as a lawyer in Switzerland, Torrent became involved in a legal tech project in 2014 where he could apply his interest in coding and web-development as well as his knowledge of legal matters. The project was to build a completely digital tribunal where people could litigate claims in acceptable time-frames and get real-time assistance at predictable prices.
They launched their eTribunal eJust in Switzerland in 2015 but the market was unresponsive and businesses showed no marked interest in changing their practices. So instead, the company decided to move to France where they could benefit from a larger market, a better framework for startups and a more competitive environment where their clients were interested in the added value in digital products. When he left the company and moved back to Geneva in 2018, the eTribunal had some high-profile clients among France’s CAC40 and was actively working with lawyers to make its software available to other institutions.
Torrent believes that the Swiss legal industry's the lack of willingness to bet on digital technologies like this eTribunal is partly due to the lack of competition between companies on the market. Switzerland is infamous for its cartel culture which is caused by certain restrictions to competition where companies are prevented from procuring services and products abroad at a lower price. According to the Swiss Government, the comparative index for private consumer expenditures is 41% higher than the average of the EU-15 and 29% higher for corporate investment costs. The government has acknowledged that this allows companies to make significantly higher profits.
Torrent believes that this does not create an incentive for Swiss large companies to be aggressively competitive, compared to other European countries such as France: “You are not going to be as responsive to new ideas and solutions if you already have comfortable margins. But if the competition is intense and you need to make sure that your product stands out and that your margins are increased, you will have an interest in hearing about new products and services,” he explains.
The current cartel act is currently under review with the next consultation falling in June 2019, so there is a fair chance that new regulations will increase competition and consequently make the Swiss legal market more innovative in the near future.
Regulation and legal innovation
Despite the current situation, Torrent does not believe in a total liberalisation of the legal market. He mentions the monopoly of courtroom representation as an important factor: “We don't want people losing their rights or their case because they were not represented by someone who knows how the law and the courts work. You want a certified doctor to take care of you just as you also want a certified lawyer to represent you in court,” he says.
But a real problem is the criterion of independence of law firms as applied by the Federal Supreme Court. The fact that only lawyers can be shareholders of law firms likely prevents innovation and the arrival of creative solutions for the clients.
So what do you think regulators could do to boost legal innovation?
“The number one thing is to make sure entrepreneurs can create businesses easily, hire people easily and get access to funding easily. You need some encouragement and incentives for entrepreneurship. Maybe some state sponsorships, some low-rent premises or tech-centres available,” Torrent answers.
He then takes a moment to think and elaborates: “We should make sure things are easier for entrepreneurs the first years - until they start making a profit. New business models in the technology industry require R&D so you will lose money for a certain period of time until can you finally start selling. In France, they have a good system for it – although it needs to be simplified like most administrative matters in France.”
What about the regulation of law firms?
”I don't think that there is that much to change. Lawyers must have a monopoly on representation of clients in front of state courts. If you want a non-lawyer to assist you, you can always use an alternative way to settle your dispute such as negotiation, mediation, conciliation and arbitration. But it would be useful to encourage lawyers to take interest in new products and services and to perhaps give them some tax incentive if they decide to invest part of their profits in new technologies” says Torrent.
Torrent nevertheless believes that legal innovation could bring considerable benefits to the legal market, with or without government support and new legislation: “Sure, you are not going to make millions just because you are now using a legal tech product. But you get people interested in legal services again, you show consumers that they are being heard and that you are striving to help them. You show them that there are legal options available for them, that they have clear prices and that they can visit their lawyer before the issue arises, instead of when it’s already too late. If people can easily access justice, if they can have trust in the justice system and its actors, then you will have a globally improved society, and this means more work for all. This has much value and it is embedded in the oath lawyers take; you just don't see it immediately, you see it in the long run. Technologies and the modernizing of our ways can set us on the right path. I think this is something that States recognize and will want to encourage through adequate initiatives and programs” he concludes.