UK: END OF THE MEAL TICKET MENTALITY.

UK: END OF THE MEAL TICKET MENTALITY. - The free-market policies of the '80s have forced the professions to act like real business people. Is the public gaining from keener pricing or losing through the blurring of professional ethics?

by Martin Vander Weyer.
Last Updated: 31 Aug 2010

The free-market policies of the '80s have forced the professions to act like real business people. Is the public gaining from keener pricing or losing through the blurring of professional ethics?

'All professions,' said George Bernard Shaw, 'are a conspiracy against the laity.' 'A fatuous remark,' retorted Law Society president Martin Mears, fending off this aphorism during a recent Newsnight interview with Jeremy Paxman. 'As fatuous as its author.'

The leader of the solicitors' body is as combative a performer as Paxman himself, as well he needs to be. For his profession, like so many others, faces a changing combination of economic pressures, social attitudes and business habits which makes life unusually challenging.

Modern professions from accountancy to architecture find themselves at a crossroads. If they run with the crowd, they have to turn themselves into competitive service businesses where the edges of professional exclusivity are increasingly blurred and where different segments of the profession are perpetually trying to grab business from each other. If, on the other hand, they stand too much on their professional dignity, they are accused of maintaining professional cartels and of failing to move with the times.

And when the professional bodies respond to public criticism by placing more emphasis on regulation and consequently less on representation of members' interests, the membership becomes disenchanted with its leaders.

It is a far cry from the days when career advisers used to suggest the professions to those risk-averse types who seemed best-suited to a worthy but unadventurous path, 'a meal-ticket for life' as one struggling sole practitioner wryly observes. Boom, bust and competition policy have changed that forever.

The point at stake in the crossing of swords between Paxman and Mears was the latter's advocacy of minimum fees for conveyancing work, in effect a reversal of the reform which in recent years has allowed flat-rate conveyancing specialists to undercut normal solicitors' fees. Why go to a Dickensian pedant with an expensive letterhead and a panelled office (the free-market argument ran) when what is usually a straightforward transaction could be just as efficiently processed using simple tick-the-boxes questionnaires for a standard fee of £200?

Yet even the most modest property purchase can in practice be far from straightforward, and the Law Society has found that cut-price conveyancing has led to more and more negligence claims impacting on both professional indemnity insurance policies and the society's own compensation fund.

In an increasingly litigious age, banks and building societies faced with mortgage losses tend to claim against conveyancers for the slightest lapse of standards. This (together with increased claims in other areas) means that insurance premiums for the profession as a whole have risen, as have calls for contributions to the compensation fund. The latter saw a 15-fold increase in the seven years between 1987 and 1994 alone.

Accordingly, profitability for smaller partnerships - already squeezed by a series of other factors outlined below - is under ever greater pressure.

In these circumstances, Mears claims that standards must inevitably fall, as solicitors cut costs and give way to the temptation to operate at the fringe of what is professionally acceptable. 'There is no conflict whatever,' he argues, 'between the true interest of the profession and the true interest of the public.'

All of this represents a radical change from the pre-1990s image of the solicitor (similar to the accountant and not far removed from the priest and the doctor) as a figure of reassuring permanence steeped in the mysteries of his - or even her - learned profession, someone for whom it would have been poor form ever to discuss fees or to tout for new business. But clients in those days were more loyal and less demanding. Today's consumers, whether corporate or personal, are price-sensitive and choice-conscious in everything they buy, including legal advice.

When traditional solicitor/client relationships first began to decline in the 1980s, there was always plenty of boom-time conveyancing work to take their place. It was only when the property surge came to a sticky end that many solicitors' firms began to feel dangerously exposed. The number of practitioners in the profession had risen and many firms had taken on expensive new premises. Meanwhile competition had reached other parts of their practice, with an increasing threat from the clearing banks and all manner of financial advisers in the area of wills, trusts and investment work.

The effect was to force solicitors to go hunting for business, to learn the language of niche marketing and corporate communications and even (in the style which has caused US lawyers to sink to an 8% public confidence rating) to chase ambulances. Many found they could prosper by specialising in litigation, be it on behalf of troubled members of the Lloyd's insurance market or by cashing in on a new boom in personal injury claims. Certain lawyers even contracted to buy, for a price of £1 a head, lists of potential personal injury claimants, harvested by random mailshots from a direct marketing company which asked questions such as: 'Have you suffered an accident at your place of work?'.

Others crossed the line of propriety altogether by offering inducements to bogus clients to sign Legal Aid forms which enabled the solicitors to claim £43 per hour from the state for advice never given.

All of the above has tended to lower the esteem of the profession in the eyes of the public while causing fierce internal ructions. It is intriguing to map the strata of the profession and to observe, as each level reacts to circumstances, how market behaviour takes over.

At the very top, impervious to recession, the big City firms such as Allen & Overy and Slaughter & May have prospered mightily from their corporate and financial client base, and from high-profile litigation, all charged up at £300 per hour of partners' time. Just below them, however, is a layer of ambitious firms whose most active corporate clients during the boom years tended to be the thrusting newcomers, often most active in the property sector. Since those clients came to grief, their lawyers have felt the pinch acutely.

One rung below them are the well-established old-fashioned firms (in the £150-per-hour range) which specialise in the top end of the private client market: these are doing well, not least because some of them have picked up valuable private portfolios which the top City firms no longer want. Larger firms in Leeds and Bristol, for example, are flourishing in both private and corporate work. But among small firms on the high streets of Britain, according to David O'Hagan of Barry & Blott at Westbury-on-Trym, 'the situation is acute, there's erosion of business in all directions'.

Overheads are rising, scope for diversification is limited and competition is severe - from solicitors shed by larger firms and setting up as sole practitioners as well as from banks and other non-legal competitors.

Similar tensions can be seen in the accounting profession. The complaint most commonly heard is of strong-arm tactics from the Big Six (Price Waterhouse, Coopers & Lybrand, KPMG, Ernst & Young, Arthur Andersen and Deloitte & Touche). They have been accused of a tacit conspiracy to keep the most lucrative business to themselves, sometimes through the much frowned-upon practice of 'low-balling', that is, offering some services for free in order to win a wider account (a practice not so different from the loss leading so prevalent in so many other areas of the business world). Currently 98% of public companies are audited by one of the six, with the cliche 'You can never be fired for buying IBM' no doubt uppermost in many clients' minds - even if some of the six, just like IBM, have lost the impeccable reputation they once enjoyed.

Tim Roberts of KPMG refutes any talk of protectionism: 'To call us a cartel is just pub talk. We all compete against each other, and against medium-sized firms. We can't dictate who gets invited to bid. It's a matter of who offers the widest range of services, the international coverage, the internal quality controls. Of course the largest firms win a lot of the business but there are well cited cases where they haven't.' Price Waterhouse partner Graham Ward and Chris Swinson of BDO Stoy Hayward both agree. The cartel accusation 'sounds like nonsense to me,' says Ward.

'Competition between us is very fierce indeed.' Swinson thinks that conspiracy theories are 'a complete misreading of the situation: competition between the big firms has been stripping away the cartel features for some years now'. Ward recalls how commercially minded the profession has become.

It used to be 'slightly discourteous' to discuss fees with clients. But he also observes the limits of commercialism which have to be observed, even when accounting firms are competing in some areas with merchant banks and management consultancies. 'It would not be right to take a success fee, for example, for work which is essentially an attestation assignment.'

Yet it was the urge to demonstrate an entrepreneurial spirit to match their clients' which, in the late 1980s, led some firms into severe embarrassments and has taken the profession into a heated debate about standards and regulation. Creative accounting was all about designing sets of accounts which flattered or disguised the client's true position, making debt disappear off the balance sheet or appear akin to permanent capital, and playing games with stock and property valuations to create profits which did not exist. It was the kind of work which made businesses like Tiphook, the trailer-leasing group, continue to look smart when the real story was one of imminent disaster.

A case in point is Binder Hamlyn's 1990 audit of Britannia Securities where certified profits of £9 million supported a price of £105 million in the subsequent acquisition by ADT. But ADT found the real profits to have been only £5 million, reducing the value of the company to £40 million. A judge recently awarded the difference of £65 million against the Binder Hamlyn partnership - a £225,000 penalty for each individual partner. Cases like this one (and the much larger settlements likely to emerge eventually against Price Waterhouse and Ernst & Young in relation to the collapse of the Bank of Credit & Commerce International) have made it difficult for accountants to obtain adequate indemnity insurance (and, unsurprisingly, has caused the profession to look at ways of limiting partners' liability). The insurance problem has focused the mind of the profession on a return to whiter-than-white, belt-and-braces standards of practice. But heavier regulation in itself has unwelcome cost implications in terms of the overheads it is likely to create.

Swinson has been chairing a working party on behalf of the Institute of Chartered Accountants on this thorny topic. 'We can't allow cynicism to develop about our professional role,' he says. 'But it's a question of balance: how much can you achieve by regulation? It's clearly in the public interest that we should always provide reliable advice. On the other hand, professional mistakes will always occur, however tight the system. To what extent is legislation necessary to be sure of quality?'

As with solicitors, these processes of change have an impact all the way down the line to the sole practitioners. Mark Spofforth runs his own firm in Worthing. 'Some of the monitoring now is far too pernickety,' he says. 'It goes into points of detail where there's no question of a loss of clients' money. The institute has to get the balance right between regulation and providing support for members.' Spofforth also talks of high-street competition, and of the need 'to teach smaller accounting firms to be business advisers rather than bean counters, to learn some marketing skills'. But he sees some light at the end of the recessionary tunnel. 'Accountants are like farmers,' he says, 'it's always doom and gloom. But the recovery is coming through for small businesses and the self-employed who make up our client base, so things are actually looking up.'

Not yet, perhaps, for those of his clients who happen to be architects or surveyors. The building-related professions had a terrible time in the property slump, and are still recuperating. 'There are just too many of us,' says Jeremy Bayliss, a partner of surveying firm Gerald Eve and senior vice president of the Royal Institution of Chartered Surveyors (RICS). 'We abandoned fixed fee scales 10 years ago - if we hadn't, the Office of Fair Trading would be after us - and there's now completely open competition. We're different from other professions in the sense that we don't have statutory protection to keep other people off our patch and we don't often have loyal clients: they tend to use different firms for different tasks. There's just so much fee cutting going on.' Brian Kneeshaw, a sole practitioner quantity surveyor in Stokesley, Cleveland, quotes an example: 'I bid a standard 2.5% for some Housing Association work recently, but a bigger firm got the business at 0.9%. That's practically unheard of.'

Professions have traditionally protected their interests by limiting entry to prevent overcrowding. Surveyors, for example, have to be employed to qualify, a rule which ought to provide a safety valve. But the real effect of the recession was that middle-aged surveyors who lost their jobs found they had little prospect of working again, having been replaced by cheaper-to-run graduate entrants.

Among architects the situation is even worse as the housing market is picking up very slowly and many late-1980s office developments have yet to be let. One third of the profession was made redundant in the latest slump and workloads halved; there are now 50,000 Royal Institute of British Architects (RIBA) members and 10,000 students, but only 20,000 working architects in the UK.

High-profile award winners such as Sir Richard Rogers and Sir Michael Hopkins may be thriving, but the long tail of the profession is desperate for work. Against such a backdrop, charges of protectionism are dismissed.

'If we are acting as cartels, we certainly haven't done it very well,' says RIBA spokesman Chris Palmer. 'We haven't published fee scales since the early 1980s. We publish guidance for clients as to what is a fair rate but every fee is negotiable. Our code of conduct specifies that one architect should not supplant another on an existing project by underbidding but in general we operate as a normal marketplace.'

No doubt all manner of other professions have similar stories to tell.

The free-market mood encouraged by the Thatcher government during the 1980s forced solicitors, accountants and the rest to behave like real business people. That will be good for the client if it provides more choice and more efficient service at keener prices, but bad if it leads to slippages of standards and a blurring of professional ethics. A market mechanism which creates large numbers of unemployed professionals is not good for anyone, but a process of supply-and-demand adjustment will gradually take hold.

Yet if the accusation that the professions are still trying to protect themselves by acting as cartels cannot be made to stick, this does not necessarily mean there is 'no conflict whatever' (to return to Mears) between members' interests and the interests of the public. It's all a question of balance, and in these unfamiliar, turbulent circumstances, the professions have been struggling to find their feet. l

Martin Vander Weyer is an associate editor of the Spectator.

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