Investors, Fee-Sharing: Changing Business Structures

Photo: Go Ask Alice

Photo: Go Ask Alice

The Law Society of Upper Canada is being asked to “continue exploration” with a view to making substantial changes to the ways Ontario legal firms can offer services, and who can own those firms.

Structure of permitted businesses are among proposals are on the table at tomorrow’s Convocation. The Professional Regulation Committee report recommends options that include allowing firms to be owned in part by non-licensees, and loosening restrictions on the services they can provide.

Four models are proposed by the Alternative Business Structures Working Group:

  • Permitting up to 49 per cent ownership by non-licensees in entities only providing legal services
  • Restricting firms to providing legal services, but with unrestricted ownership;
  • Allowing up to 49 per cent non-licensee ownership and permitting firms to provide legal services and non-legal services except those identified as posing a regulatory risk
  • Permitting unlimited non-licensee ownership and the provision of legal services and any other services, except where there is a sufficient regulatory risk identified.

Licensees will be consulted on these options. Their responses will contribute to a more detailed report. The Paralegal Standing Committee is among the stakeholders to be consulted.

The Working Group report notes that Law Society Rules and By-Laws regarding fee-sharing, referral fees, direct supervision and ownership restrictions should be reviewed, with a view to ensuring that they are “proportionate to the risk they seek to mitigate and, if appropriate, a referral of proposed revisions to the Professional Regulation and Paralegal Standing Committees.”

The report states: “The working group concluded that there are negative consequences inherent in current regulatory limitations on the delivery of legal services in Ontario that could be addressed with the thoughtful liberalization of business structures.”

The group also recommends that the Law Society seek a statutory amendment granting it express authority to regulate firms and other entities providing legal services.

Non-lawyers are currently barred from owning law firms in Ontario and most other provinces in Canada. Other jurisdictions, including Australia and the U.K., allow non-licensee ownership.

Allowing alternative business structures could help to improve access to justice, the report notes. It could encourage innovation, provide access to additional capital, and support better use of technology.

Sole practitioners and small partnerships could benefit from changes to the current restrictions. Protecting the public is still key to any changes, however. The report notes “substantial evidence that business structure liberalization combined with entity regulation is likely to provide greater flexibility and more options for both licensees and the public.”

Clients in Ontario are overwhelmingly served by firms that are 100% licensee-owned, providing only legal services, the report notes.

The Working Group considered extensive research, and information gleaned during a symposium last October. Some proposals may require legislative changes before they could be implemented.

“Alternative business structures” refers to any form of non-traditional business structure, as well as alternative means of delivering legal services. This includes:

  • Alternative ownership structures, such as non-lawyer or non-paralegal investment or firm ownership, including equity financing
  • Firms offering legal services together with other professionals
  • Firms offering an expanded range of products and services, such as “do it yourself” automated legal forms and advanced applications of technology and business processes

The report does not include a time frame for any of the proposed changes, but notes that permitted business structures changes must be updated. It recommends that Convocation authorize the Working Group to continue consideration of the fee-sharing, fee-splitting and referral fees, supervision rules, and ownership restrictions in By-Law 7 and elsewhere.

Convocation established the Alternative Business Structures Working Group in September 2012, pursuant to its strategic priorities approved in December 2011.

Further Information:

First ABS Working Group Report

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