Department of Justice NCP Review of Legal Practitioners Bill by utg65734

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Department of Justice

NCP Review of Legal Practitioners Bill
20 May 2004
                                Executive Summary

                                Introduction
                                This report presents the analysis and recommendations of an
                                assessment of the compliance of relevant State-based provisions of the
                                Legal Practitioners Bill (the Bill) with the National Competition
                                Policy (NCP) conducted by PricewaterhouseCoopers on behalf of the
                                Department of Justice (the Department).

                                While Cabinet approval has been obtained for the State-based
                                provisions of the Bill, the Bill is still a draft and is therefore subject to
                                further changes following the outcome of stakeholder consultations on
                                the national and State-based provisions, this review and the regulatory
                                impact statement of the national provisions. The Terms of Reference
                                for this review are provided in Appendix A.

                                This review covers the provisions of the Bill which deal with:

                                •    governance arrangements;
                                •    delegation of responsibilities and the organisations to which
                                     functions may be delegated;
                                •    the retention of the Legal Practitioners Liability Committee as
                                     the statutory professional indemnity insurance provider to legal
                                     practitioners; and
                                •    the regulation of conveyancing services.

                                Concurrent with the development of a new regulatory model for
                                Victoria, through the National Legal Profession Model Laws Project
                                the Standing Committee of Attorneys-General has developed and
                                agreed a regulatory approach to be adopted by all Australian states
                                and territories for various operational aspects of legal profession
                                regulation to facilitate national legal practice. The regulatory structure
                                proposed to apply to the legal profession in Victoria under the Legal
                                Practitioners Bill complements changes to facilitate national practice,
                                and will be an amalgam of the national model and a new State-based
                                framework.

                                Consultation with stakeholders forms an important part of the
                                legislative review process. In recognition of the public consultation
                                that has already occurred on the proposed Bill, consultation was
                                targeted at those with a specific interest in the regulation of the legal
                                profession. In addition insurance providers were consulted in relation
                                to professional indemnity insurance (PII) to the legal profession. A list


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                                of stakeholders consulted and the format for consultations is included
                                in Appendix B.

                                Legislation review
                                NCP legislation review arises under Clause 5 of the Competition
                                Principles Agreement (CPA), which is one of the inter-governmental
                                agreements underpinning the NCP. Under Clause 5, Australia’s
                                Governments have committed to review, and where appropriate
                                reform, all legislation (including subordinate legislation such as
                                regulations) that restricts competition.

                                The guiding principle underlying legislation review is that legislation
                                should not restrict competition unless it can be shown that the benefits
                                of the restriction to the community as a whole outweigh the costs and
                                that the objectives of the legislation can only be achieved by
                                restricting competition.

                                However, NCP legislation review does not require that the pursuit of
                                competition should take precedence over public policy objectives. An
                                important component of the various processes agreed to under the
                                CPA involves assessing whether existing provisions and proposed
                                reforms will result in a net public benefit.

                                The recommendations developed seek to provide the greatest potential
                                public benefit in accordance with various guidelines for NCP reviews
                                prepared by the Victorian Government, the Council of Australian
                                Governments and the National Competition Council.

                                Analytical process
                                The analytical process followed in this review broadly reflects the five
                                tasks identified in the terms of reference (which in turn reflect
                                clause 5 of the CPA) as outlined below.

                                1. Legislative objectives – Identifying and assessing objectives
                                   assists in understanding the types of outcomes, and hence benefits,
                                   that the legislation is intended to provide. The review provides an
                                   opportunity to examine whether the objectives of the legislation
                                   are clear, relevant and appropriate.

                                2. Identify restrictions on competition – The second stage of the
                                   legislation review process is to identify the nature of any
                                   restrictions on competition which arise in the provisions under
                                   review.

                                3. Effects of restrictions on competition and the economy –
                                   Assessing the benefits and costs of restrictions (and alternatives)

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                                    first requires consideration of their theoretical or in-principle
                                    impacts. This requires consideration of what outcomes are likely
                                    to occur in the absence of the regulation to provide a benchmark
                                    against which to consider the potential impacts of restrictions (that
                                    is, how restrictions affects market structure and market conduct).

                                4. Costs and benefits of restrictions – A public benefit analysis
                                   considers the balance of the costs and benefits created by a
                                   restriction. Where possible, costs and benefits have been assessed
                                   quantitatively. As the costs and benefits of restrictions will affect
                                   individuals and groups in different ways, the parties which incur
                                   the costs or realise the benefits of identified restrictions have been
                                   identified where possible.

                                5. Alternative approaches – Assessment of alternatives recognises
                                   that there may be alternative means to achieve legislative
                                   objectives which do not restrict competition or have lower costs
                                   and/or yield greater benefits than the proposed approach.
                                   Assessment of the benefits and costs of alternative approaches
                                   provides an objective basis for comparison of the merits of the
                                   various alternative courses of action available.

                                6. Recommendations – After assessing and balancing the benefits
                                   and costs of the proposed and alternative approaches, a
                                   recommendation as to the most desirable approach was made.

                                Objectives
                                The first task was to identify/clarify the objectives of the proposed
                                Bill. The outcomes of this task are contained in Chapter 6. The broad
                                policy objectives of the Bill can be summarised as relating to:

                                •    ensuring consumer and community confidence in the justice
                                     system;
                                •    protecting consumers of legal services;
                                •    promoting equity and access to legal services; and
                                •    ensuring that regulation of the legal profession is effective and
                                     efficient.

                                It was found that the overarching legislative objectives of the Bill may
                                not currently be as clearly specified as might be desirable, though this
                                may be due to the fact that the Bill is still being drafted. While the
                                precise wording of the objectives of the Bill is not a matter to be
                                determined in this review, it is recommended that careful
                                consideration be given to the wording of the objectives included in the
                                Bill to ensure that the objectives underlying the legislation are clear


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                                          and provide guidance in interpreting the intent of the provisions of the
                                          Bill.

                                          The broad policy objectives continue to be relevant and appropriate in
                                          the context of contemporary society. The objectives are also consistent
                                          with each other, and in some cases are complementary.

                                          Analysis of restrictions
                                          A number of key restrictions on competition arising from the
                                          provisions of the Bill under review were identified. A public benefit
                                          assessment of each identified restriction on competition was
                                          undertaken, including an assessment of alternative approaches.
                                          Recommendations as to the approach which was considered to result
                                          in the greatest public benefit were then made. Identified restrictions on
                                          competition and recommendations are summarised in the following
                                          table.


         Restriction on Competition                                    Recommendation
         Governance arrangements:

         Identified restrictions on competition are:

          •       the requirement that mediators appointed by the      The eligibility criteria for appointment as a mediator
                 LSC must be or have been legal practitioners in the   should be output-focussed in order to allow anyone who
                 last 10 years                                         can demonstrate their competency to provide mediation
                                                                       services relating to disputes between legal practitioners
                                                                       and their clients to be appointed to the panel of mediators.

          •       the composition of the LSB                           Consideration should be given to altering the proposed
                                                                       composition of the LSB to reduce scope for it to comprise
                                                                       a majority of members of the legal profession, and to
                                                                       provide for an appropriate mix of skills and experience
                                                                       required for the LSB to carry out its range of functions.

                                                                       Appropriate arrangements should be implemented to
                                                                       ensure that the functions of the LSB are carried out
                                                                       effectively and efficiently, and that the operations,
                                                                       processes and decisions of the LSB are transparent and
                                                                       accountable with appropriate governance and public
                                                                       reporting arrangements.




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         Restriction on Competition                                       Recommendation
          •      the definition of the term ‘professional                 Further development of the provisions is required to
                 association’.                                            determine the potential competitive impacts of the
                                                                          definition of the term ‘professional association’. As the
                                                                          provisions are further developed, it is recommended that
                                                                          consideration be given to expanding the definition to
                                                                          include other professional associations which may emerge.
                                                                          Care should also be taken to ensure that the term
                                                                          professional association is not used in a manner that
                                                                          inappropriately restricts competition between professional
                                                                          associations and other organisations.

         Delegation of responsibilities:

         There are no obvious restrictions on competition arising         Further development of the provisions is required to
         from the provisions relating to delegation of powers.            determine whether the delegation of functions is likely to
                                                                          result in competitive restrictions. As the provisions are
         However, as details of the provisions relating to                further developed, it is recommended that consideration be
         delegation of functions have not yet been fully specified,       given to:
         it is possible that restrictions will arise either through the
         detailed arrangements to be included in the Bill or              • further specifying the functions which may or may not
         through the practical implementation of those                      be delegated;
         arrangements.                                                    • in prescribing the organisations to which functions may
                                                                            be delegated, specifying the characteristics of suitable
                                                                            organisations, rather than naming specific
                                                                            organisations; and
                                                                          • putting in place arrangements to help ensure that:
                                                                            − functions are delegated to organisations with the
                                                                                capacity to carry them out;
                                                                            − delegated functions are carried out effectively and
                                                                                efficiently;
                                                                            − organisations to which functions are delegated are
                                                                                accountable to the LSB or LSC as appropriate;
                                                                            − there are appropriate reporting arrangements in
                                                                                place; and
                                                                            − there are not inappropriate conflicts of interests
                                                                                between delegated functions and other activities of
                                                                                delegates.

         Legal Practitioners Liability Committee:

         The identified restriction on competition is the monopoly        It is recommended that, at this point in time, the LPLC be
         provision of primary PII cover for all Victorian legal           maintained as the statutory monopoly provider of
         practitioners by the LPLC                                        compulsory PII for Victorian solicitors, and that the LPLC
                                                                          also be the statutory monopoly provider of compulsory PII
                                                                          for Victorian barristers.

                                                                          However, it is recommended that consideration be given to
                                                                          whether the provisions relating to the operations and
                                                                          regulatory oversight of the LPLC should be strengthened
                                                                          to ensure that there are appropriate legislative
                                                                          arrangements in place to help ensure the LPLC continues
                                                                          to perform its legislative functions be in an appropriate


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         Restriction on Competition                                Recommendation
                                                                   manner and that appropriate outcomes are achieved.

                                                                   The Government should monitor changes in the market for
                                                                   PII insurance for other occupations, and for lawyers in
                                                                   other jurisdictions, arising from the introduction of
                                                                   professional standards legislation and other developments
                                                                   to determine whether the recommended approach
                                                                   continues to be the most appropriate approach in the
                                                                   future.

         Regulation of conveyancing:

         Identified restrictions on competition are:

         • Restrictions on who is able to carry out legal work     There are a number of complex inter-related matters
           associated with conveyancing transactions               associated with regulation of conveyancing services. A full
                                                                   assessment of the benefits and costs of reserving legal
                                                                   work associated with conveyancing services to lawyers
                                                                   would require a comprehensive review of the regulation of
                                                                   conveyancing services, including legal work associated
                                                                   with conveyancing transactions. This is beyond the scope
                                                                   of this review.

                                                                   The Government may wish to consider undertaking a
                                                                   review of the regulation of conveyancing in the future. In
                                                                   the meantime, it is recommended that the proposed
                                                                   regulatory approach, which maintains the reservation of
                                                                   legal work associated with conveyancing to lawyers, be
                                                                   implemented. If a review of regulation of conveyancing is
                                                                   undertaken, the proposed regulatory approach should be
                                                                   reconsidered in the context of the outcomes of the review
                                                                   to determine whether it continues to be appropriate.

         • Restrictions on who is able to carry out conveyancing   On balance, the proposed approach of carrying forward the
           work                                                    provisions of the Act which deal with conveyancing
                                                                   businesses to the Bill is recommended. However, should
                                                                   the government conduct a review of regulation of
                                                                   conveyancers in the future, the current regulatory approach
                                                                   should be reconsidered in the context of that review,
                                                                   including which (if any) aspects of the regulation of
                                                                   conveyancers should be carried out by the LSB.

         • Lawyers are required to have PII while conveyancers     The proposed regulatory approach is recommended.
           are not                                                 Should the Government review the regulation of
                                                                   conveyancers in the future, the appropriateness of current
                                                                   PII arrangements for conveyancers should be examined in
                                                                   the context of that review, particularly should current
                                                                   restrictions on carrying out the legal aspects of
                                                                   conveyancing work be removed, or should regulation of
                                                                   conveyancers be transferred to a body other than the LSB.




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                                Contents

                                    Executive summary                                   i
                                1   Introduction                                        5
                                    1.1 Introduction                                    5
                                    1.2 Scope of the Review                             5
                                    1.3 Structure of this Report                        5
                                2   Legislation Reviews under National Competition
                                    Policy                                              5
                                    2.1 Legislation Reviews and the Competition
                                          Principles Agreement                          5
                                    2.2 Guidelines for Legislation Reviews              5
                                    2.3 What Legislative Reviews Do Not Cover           5
                                3   Review Process                                      5
                                    3.1 Consultation and Participation                  5
                                    3.2 Analytical Process                              5
                                4   Background to the Review                            5
                                    4.1 The Market for Legal Services                   5
                                    4.2 History of Regulation of the Legal Profession
                                          in Victoria                                   5
                                    4.3 Proposed Regulatory Model                       5
                                    4.4 National Legal Profession Model Laws Project    5
                                5   Market Failure and Government Intervention          5
                                    5.1 Market Failure and Government Intervention      5
                                    5.2 Insurance Markets: A Special Case?              5


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                                6   Objectives of the Legislation                 5
                                    6.1 Introduction                              5
                                    6.2 Identifying objectives                    5
                                    6.3 Assessing objectives                      5
                                7   Analysis of Restrictions                      5
                                    7.1 Introduction                              5
                                    7.2 Governance Arrangements                   5
                                    7.3 Delegation of Responsibilities            5
                                    7.4 Legal Practitioners Liability Committee   5
                                    7.5 Regulation of Conveyancing Services       5

                                Appendices
                                A Terms of Reference                              5
                                B Consultation                                    5
                                C Abbreviations                                   5




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          1

Introduction




           1
1.1 Introduction

Legal practitioners in Victoria are currently regulated pursuant to the
Legal Practice Act 1996. However, a number of identified weaknesses
with the current regulatory framework have been identified, including
duplication of functions between various bodies with a role in
regulating the profession, consumer confusion in relation to
complaints handling procedures and escalating regulatory costs. The
Attorney-General therefore announced on 25 July 2003 that this Act is
to be repealed and replaced by a Legal Practitioners Bill (the Bill).

Concurrent with the development of a new regulatory model for
Victoria, through the National Legal Profession Model Laws Project
(the National Project) the Standing Committee of Attorneys-General
(SCAG) has developed and agreed a regulatory approach to be
adopted by all Australian states and territories for various operational
aspects of legal profession regulation to facilitate national legal
practice. The regulatory structure proposed to apply to the legal
profession in Victoria under the Bill complements changes to facilitate
national practice, and will be an amalgam of the national model and a
new State-based framework.

PricewaterhouseCoopers was commissioned by the Department of
Justice (the Department) to conduct this review, which assesses the
compliance of relevant State-based provisions of the Bill with the
National Competition Policy (NCP).




                                                                       2
1.2 Scope of the Review

While Cabinet approval has been obtained for the State-based
provisions of the Bill, the Bill is still a draft and is therefore subject to
further changes following the outcome of stakeholder consultations on
the national and State-based provisions, this review and a regulatory
impact statement of the national provisions top be prepared for the
Council of Australian Governments (COAG). This review assesses the
provisions of the Bill as detailed in the State-based and national
provisions and accompanying explanatory paper that were circulated
to stakeholders for comment on a confidential basis on 1 April 2004.

As outlined in the terms of reference (Appendix A), this review is to
cover the provisions of the Bill which deal with:

•    governance arrangements;
•    delegation of responsibilities and the organisations to which
     functions may be delegated;
•    the retention of the Legal Practitioners Liability Committee as
     the statutory professional indemnity insurance (PII) provider to
     legal practitioners; and
•    the regulation of conveyancing services.

The review does not encompass the provisions of the Bill which are
drawn from the National Project. These provisions are to be the
subject of a regulatory impact statement prepared for COAG.

As the requirement to hold PII arises from the national provisions of
the Bill, this provision is outside the scope of this review. Rather, this
review takes as given the requirement for practising lawyers to hold
PII, and assesses the best way to provide compulsory PII cover by
assessing the benefits and costs of the monopoly provision of primary
PII cover through the LPLC compared to alternative approaches to
providing cover. This assessment includes the proposal that the LPLC
be the monopoly provider of primary PII cover to barristers.

The terms of reference require that the review:

     (a) clarify the objectives of the Bill;
     (b) identify the nature of any restrictions on competition;
     (c) analyse the likely effect of any restrictions on competition
         and on the economy in general;
     (d) assess and balance the costs and benefits of any restrictions;
         and


                                                                             3
     (e) consider alternative means of achieving the same result,
         including non-legislative means.

The terms of reference also require that the review pay particular
regard to the Legal Practitioners Liability Committee (LPLC) which is
established pursuant to the Legal Practice Act 1996. Concerns have
been raised that the existence of the LPLC breaches Victoria’s
commitment under clause 5 of the Competition Principles Agreement
(CPA). Pending the outcome of this review and further consultation, it
is proposed that the LPLC will continue to operate as the statutory
monopoly provider of professional indemnity insurance to legal
practitioners in Victoria.

The terms of reference require that the Legal Practitioners Bill be
assessed against the clause 5 guiding principle that legislation should
not restrict competition unless it can be demonstrated that:

•    the benefits of the restriction to the community as a whole
     outweigh the costs; and
•    the objectives of the legislation can only be achieved by
     restricting competition.




                                                                          4
1.3     Structure of this Report

This report is set out as follows.

The role of and guidelines for legislation reviews under National
Competition Policy are described in Chapter 2.

Chapter 3 describes the review process, including the consultation
process and analytical approach adopted in this review.

Chapter 4 provides background to the review, including an overview
of the market for legal services in Victoria, the history of regulation of
the legal profession in Victoria, an outline of the proposed regulatory
model and an outline of the National Project.

In Chapter 5, the objectives of the proposed legislation are identified
and assessed.

Market failures as a rationale for government intervention in markets,
and special features of insurance markets which may warrant
government intervention, are discussed in Chapter 6.

Chapter 7 identifies the potential restrictions on competition that arise
from the legislation under review and presents an analysis of the costs
and benefits of each restriction. Alternatives to the proposed
regulatory approach are also identified and assessed, and
recommendations on the most desirable approach presented.

The Appendices contain:

•     the terms of reference for the review (Appendix A);
•     the parties consulted during the review (Appendix B); and
•     a list of abbreviations used in this report (Appendix C).




                                                                          5
                                2

Legislation Reviews under National
                Competition Policy




                                 6
2.1     Legislation Reviews and the Competition
        Principles Agreement

In April 1995, the Commonwealth, State and Territory Governments
agreed to implement the National Competition Policy. In practical
terms, this represented a commitment by all Australian Governments
to adopt a consistent national approach to fostering greater economic
efficiency and improving the overall competitiveness of the Australian
economy.

National Competition Policy is being given effect through the
implementation of three intergovernmental agreements signed by
COAG in April 1995:

•     the Conduct Code Agreement, which commits all governments to
      apply uniform competition law;
•     the Competition Principles Agreement, which establishes
      consistent principles governing pro-competitive reform of
      government business enterprises and of government regulation;
      and
•     the Agreement to Implement National Competition Policy and
      Related Reforms, which incorporates a timetable for reform and
      a commitment by the Commonwealth to make additional general
      purpose payments to the states/territories conditional upon their
      compliance with the agreed reform agenda and timetable.

Under the CPA, governments committed themselves to undertaking a
number of competition reform processes. These include:

•     prices oversight of government business enterprises;
•     competitive neutrality between government and private
      businesses;
•     structural reform of public monopolies;
•     legislation review; and
•     access to services provided by significant infrastructure facilities.

In relation to legislation review, the guiding principle is that
legislation should not restrict competition unless it can be
demonstrated that:

•     the benefits of the restriction to the community as a whole
      outweigh the costs; and
•     the objectives of the legislation can only be achieved by
      restricting competition (subclause 5(1)).

                                                                          7
To give effect to this principle, governments have agreed to:

•    review and, where appropriate, reform all existing legislative
     restrictions on competition against the guiding legislative
     principle (subclause 5(3)); and
•    ensure that all new legislative proposals are assessed against the
     principle (subclause 5(5)).

The process of legislation review does not imply that the pursuit of
competition should take precedence over public policy objectives.
Restrictions on competition commonly exist in legislation in order to
achieve aims that are of public benefit. Legislation review provides an
opportunity to examine these restrictions and determine whether they
are the most appropriate means of achieving the intended objectives of
the legislation.

This occurs through the examination of public benefits as part of the
legislation review process and the other processes arising under the
CPA. Subclause 1(3) of the CPA requires that, in assessing public
benefit, a broad range of matters be taken into account where relevant,
including:

•    ecologically sustainable development;
•    social welfare and equity;
•    occupational health and safety;
•    industrial relations;
•    access and equity;
•    economic and regional development;
•    consumer interests;
•    business competitiveness; and
•    the efficient allocation of resources.

Several of these matters are relevant in the case of regulation of the
legal profession.

The CPA provides guidance as to an appropriate terms of reference
for a review, which are reflected in the terms of reference for this
review. Subclause 5(9) provides that a review should:

1    clarify the objectives of the legislation;
2    identify the nature of the restriction on competition;
3    analyse the likely effect of the restriction on competition and on
     the economy generally;
4    assess and balance the costs and benefits of the restriction; and


                                                                          8
5   consider alternative means for achieving the same result
    including non-legislative approaches.




                                                               9
2.2 Guidelines for Legislation Reviews

Several guidelines providing more specific guidance for conducting
legislative reviews are relevant to the conduct of this review. These
guidelines are discussed below.

The National Competition Council (NCC) commissioned the Centre
for International Economics to prepare the report Guidelines for NCP
Legislation Reviews1 (the NCC Guidelines), which sets out a
framework covering the NCP legislation review and reform process.
The NCC Guidelines provide guidance for establishing and
undertaking a review and implementing review recommendations. In
relation to undertaking a review, the NCC Guidelines set out the
following five steps:

•      clarifying objectives:
       − identifying objectives;
       − classifying objectives according to common goals, targets
             and problems;
       − assessing priority, consistency and contemporary relevance;
•      identifying the nature of restrictions to competition:
       − identifying the nature of restrictions and categorising them;
       − describing restrictions;
       − prioritising restrictions;
•      analysing the effects of restrictions:
       − identifying the advantages and disadvantages;
       − considering in detail the impact of removing the legislation;
•      analysing benefits and costs:
       − collecting data, estimating parameters and dealing with key
             uncertainties;
       − adding up benefits and costs;
       − conducting sensitivity tests;
•      considering alternatives:
       − assessing pro-competitive alternatives; and
       − making recommendations and writing up the review.

The Victorian Government’s Guidelines for the Review of Legislative
Restrictions on Competition2 (the Victorian Guidelines) provide
guidance for those conducting legislation reviews in Victoria. The
Victorian Guidelines set out similar steps for undertaking a review to
the NCC Guidelines. The Victorian Guidelines make it clear that there
________________________
1
 Centre for International Economics 1999, Guidelines for NCP Legislation Reviews, Canberra.
2
 Department of Premier and Cabinet and Competition Policy Task Force 1996, National Competition
Policy: Guidelines for the Review of Legislative Restrictions on Competition, Victorian Government,
Melbourne.
                                                                                                      10
should be a presumption against statutory intervention and the onus
should be on the proponent of intervention. However, the Victorian
Guidelines also specify that the recommendations in the report should
relate to the option that provides the greatest potential public benefit.
The clear message is that while the preference should be for
competitive outcomes, it is not intended that public benefits be
sacrificed in the pursuit of competition.

The Guidelines for the Review of Regulation of the Professions under
National Competition Policy3 prepared by the COAG Committee on
Regulatory Reform (1999) (the COAG Guidelines) also provide
guidance for reviews of existing legislation and for formulating new
legislation that regulates the professions. The COAG Guidelines draw
on the CPA and provide a common reference point for reviews to
encourage consistent application of the CPA across reviews of
legislation for different professions and reviews commissioned by
different governments of legislation for the same profession.

The COAG Guidelines can be summarised as follows:

•      understand the context for legislative reviews;
•      overview the professional legislation being reviewed;
•      assess the nature and significance of the market for the
       professional services;
•      assess the nature and significance for competition of the
       legislative restrictions;
•      address the nature and significance of legislative restrictions for
       market failure and other public interest concerns;
•      analyse the costs and benefits of the restrictions on competition;
       and
•      identify alternative means of achieving the policy objective.




________________________
3
  Council of Australian Governments Committee on Regulatory Reform 1999, Guidelines for the Review
of Regulation of the Professions under National Competition Policy.
                                                                                                 11
2.3    What Legislative Reviews Do Not Cover

As outlined above, NCP legislative reviews are designed to assess
provisions contained within legislation that might restrict competition.
Specifically, NCP reviews are designed to identify and describe
legislative restrictions on competition, assess and balance the costs
and benefits of restrictions, and assess alternatives for achieving the
legislative objectives.

Some legislative provisions may restrict competition through
stipulated operational processes of regulatory and other bodies
established under the legislation. However, NCP reviews generally do
not set out to make recommendations in regard to the specific
structure or design of operational processes, except where the
structure or processes restrict competition and the costs of the
restriction are assessed as outweighing the benefits.

Further, an NCP review does not implicitly assess whether the
complete legislative package provides a net public benefit. In the case
of this review, an assessment has not been made as to whether the
Legal Practitioners Bill as a whole provides a net public benefit. Such
an assessment is outside the scope of this review.




                                                                      12
            3

Review Process




            13
3.1 Consultation and Participation

Consultation with stakeholders forms an important part of the
legislative review process. Given that extensive consultations have
already been undertaken over an extended period of time in relation to
the proposed Bill, a public consultation program was not undertaken
as part of this review. Consultation was instead targeted at those with
a specific interest in the regulation of the legal profession.

Preliminary one-on-one meetings were held with several stakeholders
prior to release of the draft Bill for consultation in order to gather
information about the market for legal services in Victoria and the
roles and operations of the bodies established under the 1996 Act.

Following release of the draft Bill for consultation, one-on-one
meetings were held with stakeholders (including those with whom
initial meetings were held) to ascertain stakeholders views on the
provisions of the draft Bill that are the subject of this review.

Telephone discussions were also held with a number of insurance
companies with experience in provision of PII to the legal profession.

A list of stakeholders consulted and the format of consultations is
included in Appendix B.




                                                                      14
3.2 Analytical Process

The analytical process followed in this review broadly reflects the five
tasks identified in the terms of reference (which in turn reflect
clause 5 of the CPA) as outlined below.

Legislative objectives
The objectives of legislation are often found in policy statements and
parliamentary speeches, and are sometimes explicitly stated in
legislation itself. Identifying and assessing objectives assists in
understanding the types of outcomes, and hence benefits, that the
legislation is intended to provide. While it is not the aim to question
the merits of the objectives of the legislation, the review provides an
opportunity to examine whether the objectives of the legislation are
clear, relevant and appropriate.

Identify restrictions on competition
There are many ways in which legislation may restrict competition.
The second stage of the legislation review process is to identify the
nature of any restrictions on competition which arise in the provisions
under review.

Effects of restrictions on competition and the economy
Assessing the benefits and costs of restrictions (and alternatives) first
requires consideration of their theoretical or in-principle impacts. This
requires consideration of what outcomes are likely to occur in the
absence of the regulation to provide a benchmark against which to
consider the potential impacts of restrictions (that is, how restrictions
affects market structure and market conduct).

Costs and benefits of restrictions
There are a number of ways in which to assess whether a restriction
on competition produces a net public benefit. The Victorian
Guidelines explain some of the matters to be considered for some
particular circumstances that may be encountered. By its nature, a
public benefit analysis considers the balance of the costs and benefits
created by a restriction. Sometimes these can be estimated
quantitatively, for example in terms of dollars lost or gained.
However, in many cases only some of the costs and benefits can be
measured quantitatively, and it is necessary to estimate impacts in a
qualitative sense.



                                                                          15
Where possible, quantitative assessments of the potential costs and
benefits of the identified restrictions have been undertaken in this
review. Where it was infeasible to quantify the costs and benefits of
restrictions due to a lack of available data or because some costs and
benefits are qualitative in nature and thus not possible to measure,
costs and benefits have been assessed qualitatively.

The benefits and costs of each restriction are then balanced to
determine whether the restriction results in a net benefit or net cost to
the community. Where costs and benefits have been assessed
qualitatively, assessment of the net benefit/cost will of necessity also
be qualitative in nature.

The costs and benefits of restrictions will affect individuals and
groups in different ways. Therefore the parties (lawyers, their
competitors, consumers and the wider community) which incur the
costs or realise the benefits of identified restrictions have been
identified where possible.

Alternative approaches
Even where the benefits of a particular legislative restriction outweigh
its costs, the clause 5 guiding principle of the CPA requires that
alternative means of achieving the legislative objective be explored.
The terms of reference also requires that alternative approaches to
achieving the objectives of the legislation under review, including
non-legislative alternatives, are considered.

Assessment of alternatives recognises that there may be alternative
means to achieve legislative objectives which do not restrict
competition or have lower costs and/or yield greater benefits than the
proposed approach. Assessment of the benefits and costs of alternative
approaches provides an objective basis for comparison of the merits of
the various alternative courses of action available.

Recommendations
After assessing and balancing the benefits and costs of the proposed
and alternative approaches, a recommendation as to the most desirable
approach was made.




                                                                         16
                      4

Background to the Review




                      17
4.1 The Market for Legal Services

This section provides an overview of the market for legal services in
Victoria. A sound understanding of the characteristics of this market is
an essential prerequisite for undertaking further analysis of the effects
of any identified restrictions on competition arising from the
legislation under review.

The main sources of data presented in this section are the Law
Institute of Victoria (LIV), the Victorian Bar (the Bar) and published
data from the Australian Bureau of Statistics (ABS).4

Supply of legal services
Providers of legal services include all practising legal practitioners,
including solicitors and barristers practising in partnerships, as
employees or sole practitioners, and lawyers working in government
solicitors offices, community legal centres, legal aid authorities and
patent attorney practices. Services are also provided by non-lawyers,
including conveyancers, accountants, management consultants,
taxation advisors, mediators and providers of self-help services such
as will kits and community agencies.

The range of legal services provided is diverse and covers fields of
law such as administrative, civil, criminal, family and property law.
While some services provided are relatively simple with little
variation in the services provided to different clients, in other areas
services are much more complex, and the services provided are unique
to each client. Legal services are therefore not homogenous, with
significant variation in client needs, the nature of the service provided
and the skills and experience of the service provider.

In some areas, the provision of services is reserved for lawyers, such
as court work and the provision of legal work associated with property
conveyancing. This means that while there may be competition
between lawyers for work in these areas, lawyers are not subject to
competition from non-lawyers.

However, as noted above, lawyers also compete with non-lawyers in
providing some services. For example, services provided by non-
lawyers, either under the supervision of lawyers or independently,
include non-legal aspects of conveyancing services, taxation and
company structure advice, insolvency, preparation of contracts for the
________________________
4
  While the Legal Practice Board also holds a register containing details of all legal practitioners, firms,
interstate practitioners, registered foreign practitioners and public notaries, the Board reported that the
data is not reliable and is currently under review. As a result, this data is not reported.
                                                                                                               18
sale of land by real estate agents, preparation of wills by trustee
companies, advocacy services in many tribunals, migration advice by
migration agents, amendments to insurance policies and advice on
interpretation of insurance policies by insurance brokers, and advice
on Corporations Law and Securities Law provided by financial
advisors.

Lawyers have also expanded the range of service provided to include
services other than legal services, such as providing advice in areas
such as finance, economics, trade and industry, and therefore compete
with other providers of these services.

Hence, a significant proportion of the market for legal services is
subject to competition between lawyers and non-lawyers, and
competition between lawyers and non-lawyers has also increased in
providing services other than legal services.

Until relatively recently, the industry tended not to compete on the
basis of fees, with fee scales effectively providing a floor price.
However, increased fee-based competition is emerging as a result of
tenders for legal services by public and private organisations, an
increase in the supply of law graduates and reforms of the legal
services sector by governments in certain areas of practice.5

Demand for legal services
Consumers of legal services are diverse, and include private
individuals, small and large businesses, governments and community
organisations. The purchaser of the service is usually the end
consumer, and the frequency of purchase tends to vary depending on
the type of consumer, with purchases by businesses tending to be
more frequent and less discretionary than purchases by individuals.
The extent to which purchase of legal services is discretionary is an
important determinant of demand for legal services, in that it affects
the choice of whether to purchase legal services, the price paid and the
quantity purchased.

Three major areas of demand for legal services accounted for 61.3 per
cent of the total income of solicitor practices nationally in 2001-02 –
commercial (24.7 per cent), conveyancing and other property work
(21.0 per cent) and personal injury (15.6 per cent).6 While no data is
available for 2001-02, in 1998-99 major sources of revenue for
barristers practices nationally were personal injury (27.9 per cent) and
commercial work (27.1 per cent).7 As a result, the legal services sector

________________________
5
    IBISWorld Pty Ltd 2004, Legal Services in Australia, L7841, 11 March.
6
    ABS Cat. no. 8667.0, 2001-02, Tables 2.3 and 2.4.
7
    ABS Cat. no. 8667.0, 1998-99, Table 3.2.
                                                                            19
is sensitive to changes in general economic conditions and the
property market.

On average, the percentage of total income derived from commercial
work increases with solicitor practice size. Nationally, firms with 10
or more principals earned over 38 per cent of their income from
commercial work in 2001-02, while sole practitioners earned 6 per
cent of their income from commercial work. Conversely, the
percentage of total income derived from property work declines as
practice size increases. Sole practitioners earned over 26 per cent of
their income from conveyancing (and over 30 per cent from property
work in total) in 2001-02, while firms with 10 or more principals
earned only 4.8 per cent of their income from conveyancing (and
14.1 per cent from property work in total).8

Practice numbers and employment
The Victorian market for legal services comprises a relatively large
component of the national market. The ABS estimated that as at
30 June 2002, Victorian solicitor and barrister practices represented
32.1 and 32.8 per cent respectively of the total number of practices
nationally.9 At this time, solicitor practices represented 67 per cent of
Victorian legal practices, and barrister practices 33 per cent of
practices.10 Data provided by the LIV and Victorian Bar indicates that
there are currently 2832 solicitor practices and 1511 barrister practices
in Victoria.

Legal practices tend to be predominantly located in the city and
suburbs, with the majority of solicitor practices located in the suburbs
and the majority of barrister practices located in the city11. Growth in
solicitor practice numbers from 2003 to 2004 also tends to have
occurred predominantly in the city and suburbs. A breakdown of the
number of Victorian solicitor practices by location is presented in
Table 4.1.




________________________
8
  ABS Cat. no. 8667.0, 2001-02, Table 2.4.
9
  ABS Cat. no. 8667.0, 2001-02, Tables 2.8 and 3.5.
10
   The total number of practices excludes other legal service organisations such as legal aid authorities
and community legal centres, for which data is not readily available for Victoria (there were 258 other
legal service organisations nationally).
11
   While the Victorian Bar estimates that 95 per cent of barristers practice from the Melbourne legal
precinct centred on the Supreme Court in Williams Street, many barristers also attend suburban and
regional courts to represent their clients.
                                                                                                            20
Table 4.1 Total number of solicitor practices by location, 2003 to
          2004a

Location                 2003                     2004              Change from
                    Number % of              Number % of            2003 to 2004
                              total                    total            (%)
City                  628     23.4             666     23.5              6.1
Suburbs              1626     60.6            1730     61.1              6.4
Provincial            112      4.2             113      4.0              0.9
Country               316     11.8             323     11.4              2.2
Total                2682      100            2832      100              5.6
Source: LIV, pers. comm. 5 April 2004.
a
  Main offices of Victorian law firms in private practice, excluding zero income
firms.

The vast majority of solicitor practices are sole practitioners,
comprising 86.6 per cent of solicitor practices in 2004. Over 96 per
cent of all solicitor practices comprise 1 to 3 partners. Barristers
practice as sole practitioners, and hence the number of barrister
practices is the same as the number of practitioners – 1511. Practices
comprising 1 to 3 partners also accounted for 96 per cent of growth in
solicitor practice numbers from 2003 to 2004. A breakdown of the
number of Victorian solicitor practices by structure is presented in
Table 4.2.

Table 4.2 Structure of solicitor practices, 2003 to 2004

Structure                2003                    2004               Change from
                     Number % of             Number % of            2003 to 2004
                              total                   total             (%)
Sole                  2300    85.8            2578    86.6              12.1
practitioner
2-3 partners            281        10.5        286         9.6             1.8
4-5 partners            38         1.4         47          1.6            23.7
6-10 partners            31         1.2         32         1.1             3.2
11-20 partners           15         0.6         13         0.4           -13.3
21-40 partners           8         0.3         11          0.4            37.5
41+ partners              9         0.3          9         0.3             0.0
Total                  2682a       100        2976a        100            11.1
Source: LIV, pers. comm. 5 April 2004.
a
  Subtotals do not sum to total because some practices may be in more than one
category.

While larger solicitor practices (>10 partners) tend to be located in the
city, a high proportion of smaller firms (part time firms and firms with
1-2 partners) also tend to be located in the city and suburbs. Firms of 3
to 5 partners tend to be relatively more evenly spread geographically.
                                                                                   21
The vast majority of other organisations employing solicitors are
located in the city and suburbs. A breakdown of the number of
Victorian solicitor practices by structure and location is presented in
Table 4.3.

Table 4.3 Number of solicitor practices by structure and
          location, 28 February 2004a

Structure            City      Suburbs Provincial             Country        Total
Part time             69         522      12                    48            651
firms
Sole                  428         1082             74            211         1795
practitioner
2 partners            79           93              12             34         218
3 partners            23           17              6              18          64
4 partners            10           6               2              5           23
5 partners            7            6               1              5           19
6-10 partners         21            3               5              2          31
11-20                 12            1               0              0         13
partners
21-40                  9            0              1               0          10
partners
41+ partners          8             0              0               0           8
Total firms          666          1730            113            323         2832
Other                321           299             2              15          637
organisations
Source: LIV, pers. comm. 5 April 2004.
a
  Other organisations include corporations employing solicitors, legal aid
commission, community legal centres, government & semi-government
organisations with solicitors holding Victorian practising certificates.

Over one third of Victorian solicitors have been practicing for less
than 6 years, while 40 per cent of solicitors have been practicing for
more than 17 years. Of those practising for less than 6 years, 531 (or
14 per cent) are practising in firms with 3 or less partners (this is
equivalent to 4.8 per cent of all Victorian solicitors). Almost 45 per
cent of barristers have 10 or less years experience as a barrister, while
only 8.2 per cent have more than 30 years experience. A breakdown of
the number of Victorian solicitors and barristers by years of practice is
presented in Tables 4.4 and 4.5.




                                                                                   22
Table 4.4 Total number of solicitors by years of practice,
          28 February 2004a

Years of practice                    Number of                      % of total
                                    practitioners
Less than 6 years                       3767                            34.4
6-11 years                              1516                            13.8
12-16 years                             1203                            11.0
17-26 years                             2293                            20.1
More than 27 years                      2176                            19.9
Total                                  10955                            100
Source: LIV, pers. comm. 5 April 2004.
a
  Includes registered interstate practitioners but excludes practitioners with
practicing certificates pending.

Table 4.5 Total number of barristers by years of practice,
          16 April 2004

Years of practice as                 Number of                      % of total
a barrister                         practitioners
10 or less years                        657                             43.5
11-20 years                             459                             30.4
21-30 years                             271                             17.9
31-40 years                             104                              6.9
More than 40 years                       20                              1.3
Total                                   1511                            100
Source: Victorian Bar, pers. comm. 16 April 2004.

Principals in solicitor practices are more likely to be male than female,
with over 80 per cent of holders of ‘principal’ practising certificates
being male. Males comprise 47 per cent of holders of both ‘corporate’
and ‘employee’ practising certificates. Almost 60 per cent of male
solicitors hold principal practising certificates, compared to 22 per
cent of females. Conversely, almost 60 per cent of female solicitors
hold employee practising certificates, compared to 32 per cent of
males.

Of the 213 barristers who are Queens or Senior Counsel, 92 per cent
are male, and of the 1298 Junior Counsel, 80 per cent are male. Only
6 per cent of all women barristers are Queens or Senior Counsel.

A breakdown of the number of Victorian solicitors and barristers by
type of practising certificate and gender is presented in Tables 4.6 and
4.7.




                                                                                 23
Table 4.6 Total number of solicitors by type of practising
          certificate and gender, 31 March 2004a

Practising                    Male                 Female                 Total
certificate type
Principal                     3905                   902                   4807
Corporate                      695                  779                   1474
Employee                      2142                  2420                   4562
Total                         6742                  4101                  10843
Source: LIV, pers. comm. 5 April 2004.
a
  Excludes registered interstate practitioners and practitioners with practicing
certificates pending. For further information on types of practising certificates issued
in Victoria, see http://www.liv.asn.au/standards/standards-Types.html

Table 4.7 Total number of barristers by type of practising
          certificate and gender, 16 April 2004

Practising                    Male                 Female                 Total
certificate type
Queens and                     195                    18                   213
Senior Counsel
Junior Counsel                1036                   262                   1298
Total                         1231                   280                   1511
Source: Victorian Bar, pers. comm. 16 April 2004.

Total employment in Victorian solicitor and barrister practices was
21,698 at 30 June 2002, with solicitor practices employing 1.6 other
staff per solicitor (compared to 1.7 nationally) and barrister practices
employing 0.43 other staff per barrister (compared to 0.6 nationally).
Total employment in Victorian solicitor and barrister practices is
presented in Table 4.8.

Table 4.8 Total employment by Victorian solicitor and barrister
          practices, 30 June 2002

Employment              Solicitor practices      Barrister practices
                      Number         % of       Number       % of
                                 national total          national total
Solicitors/barristers   7678         26.3        1202        32.8
                                                     a
Other staff            12296         24.5        521         23.8
                                                      a
Total                  19974         25.2        1724        29.4
Source: ABS Cat. no 8667.0, 2001-02, Tables 2.8 and 3.5.
a
  These data have a high standard error and should be used with caution.

Financial performance
Wages and salaries paid by and total income received by Victorian
solicitor and barrister practices in 2001-02 is presented in Table 4.9.
                                                                                      24
Table 4.9 Wages and salaries paid and total income received by
          Victorian solicitor and barrister practices, 2001-02

                          Solicitor practices                        Barrister practices
                       $ million % of national                    $ million % of national
                                       total                                      total
                                                                         a
Wages and                722.3         25.5                         12.5          22.0
salaries paid
Total                    2049.3                 24.5                292.4a                 25.5
income
received
Source: ABS Cat. no 8667.0, 2001-02, Tables 2.8 and 3.5.
a
  These data have a high standard error and should be used with caution.

Based on 2001-02 practice numbers of 2430 and 1202 for solicitor and
barrister practices respectively, average total income per practice can
be estimated at $843,333 and $243,261 for solicitor and barrister
practices respectively. While average total income for solicitor
practices is much greater than that for barristers, the range of incomes
for solicitor practices is also likely to vary significantly due to the
large range of practice sizes that exist.

While further data on financial performance is not readily available
for Victorian legal practices, trends can be inferred from national data
for 2001-02 published by the ABS, as follows.

On a national basis, in 2001-02 average operating profit before tax12
per practice was $328,456 and $206,866, and operating profit
margin13 was 29.7 and 66.5 per cent for solicitor and barrister
practices respectively.14 The higher operating profit for barrister
practices reflected low employment of support staff. Nationally,
average return per solicitor/barrister15 was $129,500 for solicitor
practices and $206,900 for barrister practices in 2001-02.16

Financial performance of legal practices nationally also varied with
practice size/years at the Bar, as shown in Table 4.10.


________________________
12
   Operating profit is a measure of profitability of a business, taken before extraordinary items are brought
into account and prior to the deduction of income tax and appropriations to owners (i.e. dividends paid,
drawings). It is generally derived by subtracting total expenses from total income, and adding the
difference between closing inventory and opening inventory for the period.
13
   Operating profit margin represents the percentage of a business' sales of goods and services which
becomes profit after all operating expenses have been deducted. It is derived by expressing total operating
profit before tax as a percentage of total sales of goods and services.
14
   ABS Cat. no. 8667.0 2001-02, Table 1.1.
15
   Return per solicitor/barrister is a measure of the average financial compensation that each
solicitor/barrister receives for their involvement in legal practice activities.
16
   ABS Cat. no. 8667.0 2001-02, Table 1.1.
                                                                                                          25
Table 4.10 Financial performance of legal practices nationally by
           practice size/years at Bar, 2001-02

Practice size/years at                 Operating        Operating        Return per
Bar                                      profit           profit     solicitor/barrister
                                       before tax       margin (%)         ($000)
                                        ($000)
Solicitor practices
1 principal/partner                        59.1a          21.8a             63.0
2 principals/partners                     176.9a          25.8a             93.7
3-5 principals/partners                   573.9a          28.4             121.7
6-9 principals/partners                   1 273a          27.2             122.7
10+                                       14 837          34.3             196.6
principals/partners
Barrister practices
1-9 years at Bar                          112.4a           66.5           112.3a
10-19 years at Bar                        240.0a           66.0           240.1a
20+ years at Bar                          313.6a           66.8           313.7a
Source: ABS Cat. no 8667.0, 2001-02, Tables 2.9 and 3.6.
a
  These data have a high standard error and should be used with caution.

For solicitor practices nationally, 95.3 per cent of income was derived
from legal work, while for barrister practices 99.2% of income was
derived from legal work, and did not change significantly with
practice size or years at the Bar.

Financial performance also varied with geographical location. Capital
city solicitor practices averaged a return per solicitor/barrister of
$134,600 in 2001–02, compared to practices in non-metropolitan
areas, with an average of $102,900. The average operating profit
before tax per capital city solicitor practice was $360,107 compared to
$209,434 for other practices. Average operating profit margin was
30.1 per cent for capital city solicitor practices and 27.5 per cent for
other practices.17

On a national basis, the ABS reported that professional indemnity
insurance comprised 2.6 and 3.1 per cent of total expenses for solicitor
and barrister practices respectively in 2001-02.18




________________________
17
     ABS Cat. no. 8667.0 2001-02, Table 2.2.
18
     ABS Cat. no. 8667.0 2001-02, Tables 2.5 and 3.3.
                                                                                      26
4.2       History of Regulation of the Legal
          Profession in Victoria

Regulation of the legal profession in Victoria has a long history, as
outlined by Sallman and Wright.19

In 1852, Governor La Trobe assented to an Act “to make provision for
better Administration of Justice in the Colony of Victoria”. This Act
established the Colony’s Supreme Court and empowered the Court to
make rules for the conduct of officers and ministers of the Court and
regulating the admission of barristers, attorneys, solicitors and
proctors to practice in the Court.

There was further regulatory activity late in the 1890’s and early in the
20th century. In 1946, the Legal Profession Practice Act gave the LIV
power to make rules regulating conduct and discipline of practitioners,
trust accounts and other regulatory aspects relating to solicitors,
including practising certificates. The 1946 Act also established a
fidelity fund to protect clients’ monies.

The 1946 Act introduced the first formal self-regulating model for the
mainstream Victorian legal profession, and persisted in various forms,
with various minor changes, until the passage of the Legal Practice
Act 1996.

In 1978, PII became compulsory for Victorian legal practitioners, and
a PII scheme was established by the LIV, which operated as a
commercial monopoly insurer through a master policy arranged
principally through Lloyds of London. In the mid 1980s, in response
to a sharp escalation in premiums which raised concerns about the
ability of many suburban and country practitioners to afford PII, the
Solicitors Liability Committee (a committee of the LIV and the
forerunner to the LPLC) was established under the Legal Profession
Practice (Amendment) Act to provide PII to Victorian solicitors.

The 1996 Act
The Legal Practice Act 1996 (the Act) establishes the current
framework for regulation of the legal profession in Victoria. The Act
provided a new system of industry regulation, consumer protection
and redress. Key provisions of the Act which are relevant to this
review are outlined below.


________________________
19
   Sallman, P.A and Wright, R.T 2000, Legal Practice Act Review: Issues Paper, Department of Justice,
Melbourne, October.
                                                                                                    27
The Act is a co-regulatory model involving the profession and
statutory bodies in regulation of the profession.

Regulatory bodies
The key bodies involved in regulation of the profession under the Act,
and their respective roles, are:

•    the Legal Practice Board (LPB) – the peak regulatory body for
     the legal profession, which is largely responsible for
     administering the funding for the system. The LPB acts as the
     bridge between the public and the profession, with the aim of
     providing consumer protection and enhancing the integrity of
     services. The LPB has five main roles:
     − to maintain and keep current a register of all legal
           practitioners in Victoria;
     − to fund and oversee the activities of Recognised
           Professional Associations (RPAs) in their ongoing
           regulation of practitioners in Victoria;
     − to administer the Legal Practitioners’ Fidelity Fund, oversee
           the investigation of claims against the Fund and determine
           whether such claims should be allowed;
     − to maintain the Public Purpose Fund, which involves the
           direct supervision of the management of approximately
           $350 million of funds held by the LPB and distributing
           funds as required by the Legal Practice Act; and
     − to set and oversee budgets for the LPB, the Legal
           Ombudsman and the Legal Profession Tribunal.
•    the Legal Ombudsman (LO) – an independent statutory officer
     responsible for receiving, investigating and prosecuting
     complaints about the professional conduct of lawyers in the
     Legal Profession Tribunal. The LO is required to refer
     complaints about costs or pecuniary loss to the relevant RPA to
     handle. However, the LO may review conduct complaints
     investigated by the RPAs;
•    the Recognised Professional Associations – which regulate
     Victorian solicitors and barristers. The RPAs deal with conduct
     complaints, civil disputes and perform other non-disciplinary
     functions such as the administration of practising certificates and
     the investigation of claims against the Fidelity Fund. The RPAs
     are the Victorian Lawyers RPA Ltd, which was established by
     the LIV, and the Victorian Bar Inc.;
•    the Legal Profession Tribunal (LPT) – which determines both
     civil disputes and conduct matters under the Act;
•    the Council of Legal Education – which determines the
     qualifications required for admission to legal practice; and

                                                                      28
•      the Board of Examiners – which considers applications by
       persons for admission to legal practice and certifies to the
       Supreme Court that an applicant for admission meets all the
       requirements of the admission rules.

Delegation of responsibilities
The Act provides limited scope for the LPB, LO and RPAs to delegate
their powers and functions.

Section 361 provides for the LPB to delegate to a member, an
employee or the members of a committee of the LPB any of its
powers or functions under:
•    section 3(3) (exemption of approved auditors);
•    Division 4 of Part 2 (practising certificates);
•    Part 2A (interstate practice);
•    Part 2B (practice of foreign law);
•    Part 5 (disputes and discipline);
•    Part 6 (client's money and trust accounts) except section 176
     (arrangements with authorised deposit-taking institutions);
•    section 211 (determination of Fidelity Fund claims);
•    Part 9 (receivers and managers); and
•    Part 10 (incorporated practitioners).

Section 425A provides for the LO to delegate any of its powers or
functions under Part 5 (disputes and discipline) to an employee,
provided that employee is eligible to be appointed as the LO.

Section 313 provides for an RPA to delegate specified powers or
functions to an officer, an employee or the members of a committee of
the RPA. The RPA is required to give written notice to the LPB of any
delegation and of any revocation or variation of any delegation.

Professional indemnity insurance
Part 8 of the Act relates to PII. Division 1 covers the requirement for
legal practitioners to hold PII. All firms engaged in legal practice in
Victoria are required to hold professional indemnity insurance.20 The
insurance must be obtained with the LPLC, and must cover the firm
and each partner, former partner, employee and former employee of
the firm in connection with its legal practice and administration of
trusts in Victoria. Similar provisions apply to incorporated
practitioners and sole practitioners. However, if a sole practitioner
intends to practise as a barrister only, the insurance is not required to
be obtained with the Liability Committee but must be obtained on
________________________
20
  Practitioners are required to hold $1.5 million of PII. If they wish to do so, practitioners are able to
purchase top-up insurance cover from private insurers.
                                                                                                             29
terms and conditions approved by the LPB. The LPB also has the
power to exempt legal practitioners, firms or interstate practitioners or
classes of legal practitioners, firms or interstate practitioners from the
requirement to obtain or maintain professional indemnity insurance.

Division 2 relates to the Legal Practitioners’ Liability Fund. It:

•    requires the LPLC to establish the Fund;
•    requires insurance premiums and other funds to be paid into the
     Fund;
•    provides for payments out of the Fund;
•    provides for investment of funds; and
•    provides for the LPLC to require payment of a levy when it
     considers funds are insufficient to meet the Fund’s liabilities.

Division 3 relates to the Legal Practitioners’ Liability Committee. It
establishes the LPLC with the functions of carrying on the business of
providing professional indemnity insurance and undertaking liability
under contracts of professional indemnity insurance, and covers
various other matters relevant to the operations of the LPLC.

The Act originally provided for the LPLC to provide PII to solicitors
for a transitional period, after which there would be no restriction as to
with whom solicitors could take out insurance. However, the Act also
required the LPB to review the functions and operations of the LPLC
and report to the government as to what the future of the LPLC should
be.

The LPB strongly recommended that the LPLC should be maintained
as the PII insurer for solicitors, and the government subsequently
amended the Act to require solicitors to obtain PII from the LPLC and
the LPB to approve terms and conditions for barristers’ insurance. The
amended Act commenced operation on 15 December 1998.

Conveyancing
Under the Act, only persons admitted to legal practice and holding a
practising certificate are able to engage in legal practice
(section 314(1)). The common law definition of legal practice has the
effect of prohibiting those not permitted to engage in legal practice
(that is, non-lawyers) from carrying out legal work in relation to
conveyancing services.




                                                                        30
Part 13 of the Act relates to conveyancing businesses. It prohibits the
following persons from being involved in conveyancing work21:

•      struck off legal practitioners;
•      persons suspended, disqualified or otherwise prohibited from
       engaging in legal practice;
•      persons who are insolvent;
•      persons who are prohibited under the Corporations Act from
       managing a corporation; and
•      persons who are convicted of an offence involving fraud,
       dishonesty, drug trafficking or violence.

The Act requires that conveyancers must not perform legal work22. If
the conveyancer intends to retain a legal practitioner or firm to
perform legal work in connection with a transaction, they must
indicate the name and address of that practitioner or firm, and if not,
they must indicate that they are not authorised to perform legal work.

There is no requirement for conveyancers to be licensed or hold PII.
However, conveyancers are required to disclose whether or not they
hold insurance that covers them against civil liability in connection
with conveyancing work carried on in the course of their business, the
amount of that cover and any relevant exclusions or limitations on the
cover.

The LPB may require a conveyancer to provide evidence to allow it to
determine whether the conveyancer has complied with the disclosure
requirements relating to performance of legal work and PII.




________________________
21
   Conveyancing work is defined as work, other than legal work, carried out in connection with the
transfer or conveyance of a freehold or leasehold interest in land.
22
   Legal work is defined as (a) the preparation of any document that creates, varies, transfers or
extinguishes an interest in land; or (b) the giving of legal advice.
                                                                                                     31
4.3        Proposed Regulatory Model

As a result of perceived weaknesses with the current regulatory
framework, in 1999 the Attorney-General commissioned a review of
various aspects of the Act. The review was to have regard to:

•      the need to strengthen consumer and community confidence in
       the system;
•      providing an efficient and effective regulatory regime for the
       legal profession; and
•      ensuring the best possible use is made of the funds available for
       regulation of the profession.

In 2001, the final report of the review23 was delivered to the Attorney-
General and released for public consultation. The review found that
there are significant weaknesses in the current regulatory system:

     The present form of regulation is largely dependent on the particular
     approaches adopted by the legal profession associations; there are
     multiple paths for issues to be resolved, and the complaints system, in
     particular, needs to be simplified and to be more attuned to the needs of
     the consumers of legal services; and urgent action is required to reduce
     the substantial and rising cost of legal profession regulation.24

The key recommendations of the review were:

•      regulation of the legal profession should be conducted by an
       Office of the Legal Services Commissioner (OLSC), headed by a
       Legal Services Commissioner (LSC) who would be accountable
       to an independent Legal Services Board. The Board would have
       general policy making and governance role, while the OLSC
       would have overall functional responsibility for the range of
       regulatory activities currently performed by the LPB, RPAs and
       LO;
•      the OLSC would be the single point of entry for the dispute
       resolution system, and would receive all complaints. Consumer
       (cost and loss) type disputes should be dealt with by the OLSC
       and most conduct complaints would be referred for investigation
       to the professional associations. The LSC would have power to
       take over an investigation being conducted by the professional
       associations and review complaints dealt with by the professional
       associations as a result of referral by the LSC;

________________________
23
   Sallman, P.A and Wright, R.T 2001, Regulation of the Victorian Legal Profession: Report of the
Review of the Legal Practice Act 1996, Department of Justice, Melbourne, November.
24
   ibid, p. 5.
                                                                                                    32
•      the LPT should be retained to deal with conduct or disciplinary
       cases. However, for consumer type disputes which cannot be
       resolved under the auspices of the OLSC, recourse should be
       available to the Civil List at the Victorian Civil and
       Administrative Tribunal (VCAT); and
•      RPAs should be abolished as the adoption of the recommended
       regulatory regime would make them obsolete.

An audit of the regulatory system was also undertaken by an
independent consultant, Ms Jane Tongs. The Tongs report recognised
there were a number of inefficiencies in the regulatory system due to
duplication of functions and the requirements of the Act. The report
assessed the costs of two regulatory frameworks involving:

•      a single regulator independent of the legal profession; and
•      a co-regulatory model where the profession assumes most of the
       regulatory functions with the oversight of an independent
       regulator.

After considering the various models for regulation of the profession,
on 25 July 2003 the Attorney-General announced a new regulatory
model which adopts some of the key recommendations of the 2001
review.

The key features of the new regulatory model are outlined below.25

Regulatory bodies

Legal Services Board
The Legal Services Board (LSB) will replace the LPB as the peak
body in the regulatory system. The legislative objectives of the LSB
are:

       (a) to ensure the effective regulation of the legal profession and
           the maintenance of professional standards;
       (b) to address the concerns of clients of law practices and legal
           practitioners through the regulatory system and provide for
           the protection of consumers of legal services;
       (c) to ensure that the Victorian system is at the forefront of
           regulation of legal practitioners.




________________________
25
  The provisions outlined are those circulated to stakeholders for comment on a confidential basis on
1 April 2004.
                                                                                                        33
The explanatory paper suggests the LSB will be responsible for
administering funding for the bodies within the system, policy setting
and all non-disciplinary regulatory functions, including:

•    controlling and administering the funds set up under the Act;
•    conducting elections for legal representatives on the LSB;
•    authorising banks to maintain trust accounts and obtaining
     various trust account information;
•    authorising courses of education for auditors and making rules
     for the qualification of trust account inspectors;
•    management of the Fidelity Fund and investigation of Fidelity
     Fund claims;
•    setting PII requirements for the profession, including policy
     terms and conditions and appointing members of the LPLC;
•    approving and disallowing practice rules for the profession;
•    regulating some aspects of conveyancing businesses;
•    consulting over amendments to the Practitioner’s Remuneration
     Order;
•    consulting with the Council of Legal Education over appointment
     of members of the Board of Examiners;
•    making ex gratia payments to persons for pecuniary loss suffered
     due to an act or omission by a legal practitioner;
•    administration of practising certificates;
•    trust account administration;
•    management of the register of practitioners; and
•    appointment of receivers and managers.

The LSB is to comprise:

•    a chairperson;
•    three elected members who are legal practitioner members of at
     least 5 years’ standing, one of whom who practices solely as a
     barrister and two of whom do not; and
•    three appointed members who are not, have not been, and are not
     qualified to be admitted as, Australian legal practitioners. At least
     one appointed member must have financial or prudential
     management experience, and at least one must represent the
     interests of consumers of legal services.

The chairperson and appointed members are to be appointed by the
Governor in Council on the recommendation of the Attorney-General.
All members are to hold office for 4 years, and are eligible for re-
appointment/re-election.



                                                                        34
The LSB will not have a staff of its own, with secretariat and
resources to perform the LSB’s functions provided by the LSC (see
below), at the request and direction of the LSB.

Legal Services Commissioner
The legislative objectives of the LSC are:

     (a) to ensure that complaints against law practices or legal
         practitioners and disputes between law practices or legal
         practitioners and clients are dealt with in a timely and
         effective manner;
     (b) to educate the legal profession about issues of concern to the
         profession and to consumers of legal services;
     (c) to educate the community about legal issues and the rights
         and obligations that flow from the client-practitioner
         relationship.

The LSC will take on the functions currently carried out by the LO. It
is proposed that the LSC will perform a dual role, being:

•    the single entry point for complaints and responsible for all
     conduct complaints and civil disputes concerning legal
     practitioners; and
•    responsible for resourcing the LSB’s functions, at the LSB’s
     request and direction.

It is proposed that the LSC be able, at his or her discretion, to delegate
handling of conduct complaints, but will retain the power to review
these investigations at the request of the complainant or of its own
motion. The LSC will also be able to dismiss disputes it considers are
without merit or are frivolous, vexatious or lacking in substance. The
LSC may also set guidelines for investigating conduct complaints
which are required to be followed. It is proposed that conduct
complaints will be prosecuted in the Legal Practice List of VCAT (see
below).

The LSC will also be able to delegate civil disputes, and will be able
to issue complaint handling guidelines to assist legal practitioners to
attempt to resolve complaints with complainants without immediate
recourse to the LSC. If the matter is not resolved, the LSC is able to
require parties to produce documents or files or to attend a mediation,
and where the dispute is in relation to costs, refer it for independent
costs assessment.

The initial appointment of the LSC will be made by the Attorney-
General, with subsequent appointments to be made by the Governor in
                                                                        35
Council on the recommendation of the Attorney-General. The LSC
will hold office for a term of 5 years.

The Attorney-General may initially appoint, or subsequently
recommend appointment, as LSC a person he or she considers has
sufficient knowledge of legal practice and the legal system to be able
to perform the functions of the LSC. For subsequent appointments, the
Attorney-General can only recommend a person for appointment if
they have also been approved by the LSB for recommendation for
appointment.

The LSC is required to appoint a panel of mediators to assist in
resolving disputes. Mediators are required to be, or have been within
the 10 years prior to their appointment, an Australian legal
practitioner. Mediators serve a term of 5 years and are eligible for re-
appointment.

The LSC will also be the Chief Executive Officer of the LSB, and as
such will be responsible for the day to day management of the affairs
of the LSB, subject to the direction of the LSB.

Legal Practice List of VCAT
While the key functions of the LPT will be transferred to the newly
established Legal Practice List (LPL) of VCAT, there will be some
key changes compared to the jurisdiction of the LPT:

•    the LPL will have an exclusive jurisdiction in relation to civil
     disputes – that is, all civil disputes arising under the Act will be
     heard and determined by VCAT;
•    the jurisdiction will be unlimited (the LPT’s jurisdiction is
     limited to disputes up to $15,000); and
•    the internal review process within the LPT for civil disputes will
     be removed, for consistency with other lists within VCAT.
     Internal appeal rights will be preserved in relation to conduct
     matters. As at VCAT, appeals on a question of law from an order
     of VCAT in the LPL will go to the Court of Appeal (where the
     Tribunal was constituted by a Presidential member) or the
     Supreme Court (in any other case).

The proposed arrangements mean that VCAT will hear and determine
the following matters under the proposed regulatory model (or refer
them to another forum where appropriate):

•    unresolved consumer type disputes, including loss disputes
     arising from practitioner negligence;
•    conduct complaints; and
                                                                        36
•    unresolved disputes in relation to costs agreements between legal
     practitioners and their clients, subject to any additional
     jurisdiction in the Supreme Court.

Generally speaking, this means all matters that cannot be resolved by
the LSC can be heard and determined by VCAT.

The funding for the LPL of VCAT will be drawn from the Public
Purpose Fund.

Other regulatory bodies
The LPB, LO, LPT and RPAs will be abolished as their current
functions are to be carried out by other bodies under the proposed
regulatory model. The functions of the LPB will be carried out by the
LSB, the LO by the LSC and the LPT by the LPL of VCAT.

The professional associations (the LIV and the Bar) will continue to
be involved in the drafting of conduct rules for the profession and in
making ethics rulings, but will no longer have the status of RPAs. Any
further involvement of the professional associations will be at the
discretion of the LSB and LSC. As discussed above, the LSC will
have discretion to delegate its functions, and may therefore delegate
conduct complaints to the professional associations where he or she
considers it appropriate to do so. The LSB will also have power to
delegate some of its functions to other organisations, and may
therefore delegate functions to the professional associations
(delegation of functions by the LSB and LSC is discussed below).

It is proposed that the Council of Legal Education and Board of
Examiners will be carried forward with minimal changes to their
composition and functions.

In relation to the Board of Examiners, it is proposed that the Solicitor-
General be replaced by a retired judge.

It is not proposed to change the composition of the Council of Legal
Education at this stage. A review of education and admission bodies is
proposed as part of a separate project considering legal education
issues generally, which will be conducted following passage of the
Bill.




                                                                       37
Delegation of responsibilities

Legal Services Board
It is proposed that the LSB be able to delegate any of its functions to
the LSC, including its power of delegation (s. 23). While the precise
approach is yet to be determined, it is also proposed that the LSB will
have unfettered discretion to delegate certain functions (excluding its
power of delegation) to other suitable organisations, including:

•    administration of practising certificates;
•    trust account inspections;
•    investigation of Fidelity Fund claims;
•    management of the register of practitioners; and
•    appointment of receivers and managers.

It is proposed that the LSB will not be able to delegate high level
governance functions, other than to the LSC, including:

•    controlling and administering the funds set up under the Act;
•    conducting elections for legal representatives on the LSB;
•    authorising banks to maintain trust accounts and obtaining
     various trust account information;
•    authorising courses of education for auditors and making rules
     for the qualification of trust account inspectors;
•    setting Fidelity Fund contribution and levy rates and practising
     certificate fees;
•    setting PII requirements for the profession, including policy
     terms and conditions and appointing members of the LPLC;
•    approving and disallowing practice rules for the profession;
•    regulating some aspects of conveyancing businesses;
•    consulting with the Legal Costs Committee over amendments to
     the Practitioner’s Remuneration Order;
•    consulting with the Council of Legal Education over appointment
     of members of the Board of Examiners; and
•    making ex gratia payments to persons for pecuniary loss suffered
     due to an act or omission by a legal practitioner.

The LSB is required to keep a register of delegations, and to perform
an audit of its delegations every 12 months to determine whether each
delegation is still appropriate.

The LSB is also required to include in its annual report a list of all
delegations in force at the end of the year, the functions delegated,
date of delegation and the name, office or position of the delegate. It is

                                                                        38
also required to list any delegations revoked during the year and the
reasons for their revocation (s. 24(a) and (b)).

Legal Services Commissioner
The LSC is able to delegate any of its functions except its power of
delegation to an employee, or to other suitable delegates, though the
precise approach is yet to be finalised (s. 43). While it is not
specifically stated, it is not intended that the LSC would be able to
delegate functions that have been delegated to the LSC by the LSB.

The LSC is also required to include in its annual report a list of all
delegations in force at the end of the year, the functions delegated,
date of delegation and the name, office or position of the delegate. It is
also required to list any delegations revoked during the year and the
reasons for their revocation (s. 44(h) and (i)).

Professional indemnity insurance
Development of provisions relating to PII that will facilitate interstate
practice is continuing under the auspices of the National Project. In
the interim, it is proposed that PII arrangements generally remain the
same as those that apply under the current Act (discussed above).
While there may be some revisions to Part 8, Division 1 (Professional
indemnity insurance) as a result of the National Project, Divisions 2
(Legal Practitioners' Liability Fund) and 3 (Legal Practitioners'
Liability Committee) are to be adopted under the new regulatory
model.

A key change, however, is that it is proposed that barristers be
required to obtain PII through the LPLC. As noted previously, under
the current Act, barristers must obtain PII, but not through the LPLC.

It is also proposed that the liability of members of the LPLC will no
longer transfer to the LPLC. This means that members of the LPLC
will be required to obtain appropriate insurance cover, or will be
personally liable for anything done or not done in performing
functions under the Act.

Conveyancing
It is proposed that the provisions of the current Act (discussed above)
which deal with conveyancing businesses will be carried over to the
Bill, with minor amendments to reflect the definition of legal services
and provisions in relation to reservation of legal work and titles as
provided in the National Project provisions.



                                                                        39
4.4     National Legal Profession Model Laws
        Project

As discussed in Chapter 1, a regulatory approach to be adopted by all
Australian states and territories for various operational aspects of legal
profession regulation is currently being developed in order to facilitate
national legal practice.

The national regulatory model seeks to remove barriers to national
legal practice through the development of uniform or consistent
standards for the regulation of the legal profession, with particular
regard to the principles underlying legal profession regulation and the
operational aspects of legal practice. The national model laws have
been designed to take into account the regulatory needs and structures
of individual states and territories.

While the focus of the national model laws is on consistency of
regulations to apply to the legal profession, the regulatory structure
proposed to apply to the legal profession in Victoria under the Legal
Practitioners Bill establishes the bodies which are to administer the
regulation of the profession and apply those laws. The proposed
regulatory structure in Victoria therefore complements changes to
facilitate national legal practice, and will be an amalgam of the
national model and a new State-based framework.

The operational matters covered by the national model provisions are:

•     reservation of legal work and titles;
•     admission of legal practitioners;
•     legal practice;
•     trust money and trust accounts;
•     costs disclosure and review;
•     fidelity cover;
•     PII;
•     complaints and discipline;
•     external intervention;
•     incorporated legal practice and multi-disciplinary partnerships;
•     foreign lawyers; and
•     associated provisions dealing with investigatory powers, legal
      profession rules and other miscellaneous matters.

The provisions in the model national bill have been classified as core
uniform (provisions intended to be included in each jurisdiction’s
legislation that require textual uniformity), core not uniform

                                                                         40
(provisions intended to be included in each jurisdiction’s legislation
that do not require textual uniformity) and not core (provisions that
jurisdictions have discretion as to whether they are included in
legislation, and if so, the content of the provisions). Further, some
parts of the model bill contain core principles, which provides
jurisdictions with flexibility in the regulatory approach adopted
provided these principles are satisfied.

As noted previously, this review does not encompass the provisions of
the Bill which are drawn from the National Project. These provisions
are to be the subject of a regulatory impact statement being prepared
for COAG. However, to the extent that there is overlap between the
relevant provisions to be encompassed in this review, as specified in
the terms of reference, and the provisions drawn from the National
Project, this review may assess the competition implications of
National Project provisions.




                                                                         41
                             5

Market Failure and Government
                   Intervention




                             42
5.1 Market Failure and Government
    Intervention

The CPA is based on the principle that competition promotes
outcomes in markets (in terms of prices, quality, efficiency,
innovation and consumer choice) which maximise the net benefits to
society. However, in some cases markets may not generate optimal
outcomes. This is termed ‘market failure’, and includes:

•    monopoly or market power;
•    information asymmetries or deficiencies; and
•    externalities or spillovers.

Where market failure exists, there may be a case for government
intervention to remedy the market failure in the public interest, with
the aim of enhancing efficiency or equity. Legislation may seek to
protect consumers from problems arising from market failure in a
market for professional services.

The COAG Guidelines suggest that government intervention may also
be justified on non-market public interest criteria, including equity,
access, social welfare and public safety – for example, the high costs
of professional expertise may otherwise preclude disadvantaged
groups from obtaining necessary services.

However, the existence of market failure or other public interest
criteria is not of itself a sufficient justification for government
intervention. Government intervention imposes its own costs, and may
be subject to regulatory failure. The socially optimal approach
therefore requires a careful evaluation of the merits of government
intervention.

Market power
Market power exists where a provider/s of a particular good or service
is able to obtain returns on a sustained basis that exceed rates of return
to be found in markets more generally. The implications of the
existence of market power reflect the fact that the provider has no
threat of effective competition. Providers of goods and services which
have market power tend to display the following characteristics,
unless appropriate controls or incentives are in place:

•    inflated costs;
•    high prices;
•    limited incentives to innovate;
                                                                         43
•    reduced service standards; and
•    profit maximising behaviour or budget expansion.

Market power can arise through uncompetitive market structures, anti-
competitive conduct or the presence of a natural monopoly (where one
firm can provide a good or service more efficiently than two or more
smaller firms). While uncompetitive market structures and anti-
competitive conduct are best dealt with through general competition
laws and changes to promote market contestability, these options will
not address problems arising from natural monopoly. The government
might therefore intervene to prevent abuse of market power where a
natural monopoly exists.

The market for legal services does not exhibit the characteristics of a
natural monopoly, and it is unlikely that, if unregulated, legal
practitioners or firms would have scope to exert market power. There
is therefore not a rationale for regulation of the legal services market
on the basis of the existence of a natural monopoly or market power.

In the case of insurance markets, the existence of a monopoly provider
usually reflects that a legislative monopoly has been created by
government on the basis that insurance may not be adequately
provided by the market. Victorian examples include the Transport
Accident Commission (TAC) (which manages the transport accident
compensation scheme), the Victorian WorkCover Authority (VWA)
(which manages the workplace accident compensation scheme) and
the LPLC.

That insurance may not be adequately provided by the market
suggests that markets for some types of insurance may exhibit
characteristics which make it a candidate for effective regulation
(these characteristics are discussed in more detail in the following
section). The inherent risk, however, is that a statutory monopoly may
act in a similar manner to a private monopolist – that is, because their
market position is assured and re-enforced by legislation, there may be
little incentive to improve processes or act in a manner that reflects
competitive conditions.

It is important to note that a statutory monopoly is not the only means
to deal with the failure of the market to adequately provide insurance
services. Other avenues for the government to ensure that these
services are provided are explored in Chapter 7 of this report.

Information asymmetry
In most economic transactions, consumers do not have complete
information about the good or service they are purchasing, and have
                                                                       44
less information than the seller. This is known as information
asymmetry, and raises potential for consumers to experience problems
due to the incompetence or impropriety of sellers, or through a
breakdown in communication. Problems may also arise because the
costs for consumers to locate a competent service provider with the
appropriate skills and experience (termed transaction costs) may be
significant. This can result in consumers abandoning the search or
making a sub-optimal decision.

Problems may arise because consumers lack the expertise to
effectively judge the quality of the good or service provided. They
may be unable to identify the attributes of the good or service before
purchase (for example, where a large amount of technical knowledge
is required), or may be unable to assess the attributes until after
purchase (through experience). In some cases, it may be difficult to
assess attributes even after purchase as problems may only become
apparent over time.

A high degree of information asymmetry can exist in relation to the
provision of professional services. Consumers rely on service
providers to identify the precise nature of the service required and the
best way to provide that service, as well as providing the required
service. This can give rise to potential for misunderstandings and/or
unethical behaviour. Further, the difficulty of accurately specifying
quality means that not all aspects of the service can be contracted, and
hence an implicit contract exists between professional and client. This
means trust is an important aspect of the client–professional
relationship.

Further, many legal services consist of a process of negotiation and
compromise with third parties, and hence a client’s satisfaction with
the outcome may be unrelated to the competency of the practitioner or
quality of the service provided. The client may be dissatisfied with the
outcome due to its impact on personal or business objectives, even
though the service was provided with competency.26

The diversity of services and consumers in the market for legal
services may exacerbate problems arising from information
asymmetry. As discussed in Chapter 4, the range of legal services is
broad, with some services being relatively simple while others are
very complex and require specialised knowledge. For some services,
the nature of the service will vary on a client by client basis. Further,
while some legal services are discrete, others are provided in


________________________
26
   Review Panel 2000, National Competition Policy Legislation Review: Legal Practitioners Act 1981
[South Australia], Final Report, October, p. 10.
                                                                                                     45
conjunction with services provide by other professionals. The
demarcation between legal work and non-legal work may be unclear.

Consumers of legal services also have differing levels of
sophistication and knowledge of available services. While some
consumers are sophisticated with a detailed understanding of the
services required and the value of those services, others are likely to
have limited knowledge of the nature, complexity and value of
services required. This means that though some consumers will be
able to choose a practitioner with suitable skills and experience to
provide the services required at an appropriate price without reliance
on statutory regulation, others will be less able to do so. It may also be
difficult to gauge the precise nature of the services required and the
expectations of the client.

Information asymmetry can also be a problem in insurance markets.
This is discussed in the following section.

While information asymmetry can distort market outcomes, this does
not automatically justify government intervention, since the
consequences of information asymmetry may not be significant. Even
where they are significant, market solutions to problems associated
with information asymmetry can emerge. Examples include
reputation, warranties or guarantees, independent certification of
service providers, and signalling of quality through membership of a
professional association with a role in setting and maintaining the
standards of its members. The professional association can also form
the basis of self-regulation as an alternative to statutory regulation.

Government intervention to address information asymmetry can be
justified where non-statutory measures will not adequately address the
problem, and the risk of harm is significant.

Externalities
In making decisions, consumers and producers tend to consider their
personal costs and benefits, not the costs or benefits to others.
However, many consumption or production decisions affect people
who are not direct parties to the transaction. These are known as
externality or spillover effects.27

Externalities can be positive (where they benefit those who are not
parties to the transaction – for example, a parent immunising his child,
reducing risks to other children) or negative (where they impose costs

________________________
27
 Productivity Commission 2000, Review of Legislation Regulating the Architectural Profession, Inquiry
Report No. 13, 4 August, p. 76.
                                                                                                   46
on those who are not parties to the transaction – for example, a factory
owner discharging pollution into a river).

Externalities can result in the underprovision (in the case of positive
externalities) or overprovision (in the case of negative externalities) of
goods, services or actions compared to the social optimum. However,
the existence of externalities does not of itself justify government
intervention. Non-statutory mechanisms can develop to address
problems associated with externalities (for example, customs) or
where the number of parties involved is not large, consultation and
negotiation may resolve the problem.

Examples of potential externalities in the case of the market for legal
services include practitioners creating legal precedents and
information which benefit other practitioners and the broader
community (a positive externality), risks to public safety arising
through provision of incompetent criminal law services, and a
conveyancing transaction which has not been competently completed
which may have implications for a subsequent purchaser of a property
(negative externalities).

Externalities are also relevant in insurance markets. There may be a
reduced incentive for an insurance company to invest in measures that
reduce the riskiness of its policyholders (for example, providing
advice on emerging legal issues which have potential to impact on the
number or size of claims), since there is a risk that competing insurers
will enjoy the benefits at no cost and thus compete more vigorously on
premiums. This is discussed further in the following section.

Other public interest criteria
The CPA identifies other public interest criteria which may be an
appropriate rationale for a legislative restriction on competition. The
most relevant of these criteria in the context of this review are equity
and access considerations (which seek to ensure fair market
involvement for individuals and groups in terms of their personal or
socio-demographic characteristics), and social welfare and equity
considerations (which seek to ensure fair outcomes in service
provision, especially for the disadvantaged).

In the case of legal services, matters of access and equity are an
important public interest concern. At the heart of this matter is the
importance of ensuring that fair opportunities for individuals and
groups within disadvantaged socio-economic groups are able to gain
access to justice and to legal services of appropriate quality.



                                                                           47
Social welfare and equity considerations are an extension of access
and equity. Because competitive markets operate primarily on the
basis of capacity to pay, society may wish to intervene in market
outcomes to ensure fairer availability of services than would occur on
the basis of income alone.

Another important public interest criteria relevant to legal services is
the maintenance of a robust justice system, which is an important
social institution.

Another characteristic of the market for legal services which differs
from markets for other services which may warrant regulation is that
legal practitioners are considered to be officers of the Court. This
means their duty to the Court overrides their duty to their client where
a conflict between the two arises.




                                                                           48
5.2 Insurance Markets: A Special Case?

Parties take out insurance to provide protection from losses arising
from a particular adverse event, usually on a voluntary basis. While
the risk of such events occurring may be low, the private costs are
substantial. Insurance helps defray the costs of these adverse events.

Insurance markets are based on the principles of pooling and risk
sharing. By pooling premiums paid by individuals and spreading risk
across a large number of individuals, the insurer is able to cover the
costs incurred by those who experience the insured event.

For many areas of insurance, cover is voluntary and consumers have a
choice of insurance providers offering different premiums and terms
and conditions. Professional indemnity insurance cover, on the other
hand, is mandatory for some professions, including the legal
profession, and is often only available through a private or statutory
monopoly provider, reflecting government concerns that the private
market would not provide adequate cover, and that as a result
government objectives of consumer protection may not be met.

Characteristics of insurance markets, and in particular PII markets,
which make them a candidate for effective regulation are discussed
below.

Insurance markets are subject to particular types of information
asymmetry, termed adverse selection and moral hazard, which arise
because insurance providers cannot easily observe the actions of
consumers.

Adverse selection arises because insurance companies cannot directly
observe the true riskiness of those they insure, and hence may not be
able to effectively separate high risk and low risk individuals.
Premiums are therefore set on the basis of average risk within the pool
of those insured rather than setting premiums for each member of the
pool. As a result, low risk persons may decide not to insure as they
consider the premium to be too high compared to their estimate of the
risks faced. This means the insurer ends up insuring a greater
proportion of high risk individuals, resulting in higher premiums and
further discouragement of low risk individuals from purchasing
insurance.

Problems of adverse selection can be reduced through insurers better
targeting premiums to high and low risk individuals, for example
through proxies such as experience, area of practice and claims

                                                                         49
history. Where adverse selection is a serious threat to the stability of a
particular insurance market, it can be eliminated by making insurance
compulsory.

Moral hazard refers to the risk that, once insured, an individual may
engage in actions which increase the insurer’s risk exposure, either by
engaging in risky activities or by not taking precautions to reduce the
likelihood that the event insured against will occur. This can mean that
insurers systematically underestimate risk, which can place pressure
on the premium pool and, in extreme cases, lead to the pool becoming
unstable. Responses to moral hazard include providing an incentive
for the insured to share the costs of loss through an excess and
limiting the amount of benefits payable and the circumstances under
which they will be paid.

A peculiar feature of insurance markets is that the cash flows of
insurance companies are reversed compared to many other companies.
Rather than paying the costs associated with providing a product up
front before selling its product, an insurance company first collects
premiums, sometimes years in advance of servicing any associated
claims. Because the cost of these claims is not known in advance,
insurance companies must rely on actuarial projections of future costs
to set current premiums and appropriate levels of reserves.

This is an information constraint on market efficiency. Thus, while for
a manufacturing or retail goods company the main balance sheet risk
is the value of assets (inventory), the balance sheet risk for an insurer
is mainly the value of liabilities (claim reserves), and is much larger.
There may be a case for regulatory intervention in the form of
specialised insurance capital and solvency regulation to help ensure
that the cost of future claims by consumers can be met, by ensuring
that while private insurers may compete on price, they would not be
able to do so to the extent that their financial position is undermined.

The uncertainty of future unit costs for insurance led to the unique
regulatory treatment of insurance in the United States, where
insurance is the only industry which is exempt from particular aspects
of federal competition laws. This exemption was provided by the
McCarren-Ferguson Act, which exempts insurance from the Sherman
Anti-trust Act provided that it is specially regulated by the individual
states. This exemption recognised the need for insurers to pool claims
information in order to generate class rates, as individual insurers
could not at that time develop enough claims experience to rate on the
basis of their own portfolios. The individual states must ensure that
this pooling of data does not result in price-fixing or other unfair trade
practices.

                                                                         50
The variability of unit production costs results in an important feature
of private insurance markets, that of competitive underwriting
selection. Many insurance companies achieve success by underwriting
risk portfolios which, on average, are of better quality than is
generally recognised in market pricing. They do this by carefully
evaluating and selecting each risk in their portfolio. This behaviour
can lead to availability problems in some segments and may raise
concerns of social equity, especially considering the compulsory
nature of PII insurance.

Difficulties encountered by insurance companies in accurately
identifying high and low risk individuals can also mean that some
persons may be unable to obtain insurance who do not pose a
significant risk, and where it would be socially optimal that they be
able to obtain cover. Where concern exists in this regard, government
may regulate to require insurers to provide cover.

Where insurance cover is required to gain entry to a market, such as
where PII insurance cover is a pre-requisite to obtaining a practising
certificate to practice as a lawyer or other professional, this may also
raise concerns that a private insurance company, by declining to
provide cover to individuals it considers high risk, may effectively
determine who is able to practice, even though the bodies with legal
responsibility for determining who is able to practice may have no
concerns about a practitioner’s competence.

Many purchasers of PII never have a claim, and thus may never need
the fundamental service they are purchasing. This is a peculiar
information deficiency in that consumers cannot know first hand what
they are buying with their premiums, and may serve to prevent
insurers from competing on service. The government may have a role
to ensure that purchased potential claims service conforms to a
reasonable standard, in its role of protecting consumers of professional
services.

Private insurance companies usually offer a range of insurance
products, which allows them to capture the benefits associated with
economies of scope. Legislated monopoly insurance providers, on the
other hand, often offer only one insurance product, which can limit
their ability to reduce costs and provide innovative services through
economies of scope (though they may be able to capture some of the
benefits of competitive markets if they contract out certain functions).

PII markets typically consist of a much smaller pool than many other
types of insurance. The small pool size can limit the capacity for
insurers to spread risk adequately across a sufficiently large number of
individuals to provide appropriate assurance that it can meet the cost
                                                                           51
of claims. This can result in volatile premiums and reduce the
attractiveness of PII as a commercial proposition. Of course, these
problems can also apply to monopoly providers of PII, though the fact
that all individuals are required to insure with a single provider can
offset these problems to some extent.

PII markets typically also have a long tail of liabilities arising from
claims for services provided in the past. The long tail nature of
liabilities arises due to problems associated with information
asymmetry discussed in the section above – that is, because problems
arising from services provided may only become apparent over time.
This may affect the willingness of private insurers to provide cover, or
mean that private insurers need to build a significant risk premium
into prices charged for cover.

The long tail nature of liabilities makes run-off cover an important
component of PII cover. Run-off cover provides cover for
professionals who are no longer practising, and hence ensures that
funds continue to be available to pay for claims which arise after a
professional ceases to practice.

As noted previously, externalities can also be a problem in insurance
markets. Insurance companies have an incentive to invest in activities
that reduce the risks within their portfolio. However, there is no
incentive to minimise risk in the broader market due to the risk that
others will free-ride on this investment. In fact, there is a disincentive
to minimise risk outside their portfolio, as higher risk will increase the
overall market size and potentially damage competitors. Monopoly
providers are likely to have an increased incentive to invest in risk
management activities.




                                                                        52
                           6

Objectives of the Legislation




                           53
6.1 Introduction

An important first step in assessing the competitive impacts of
legislation is to clarify the purpose of the legislation. This assists in
assessing the extent to which the legislation:

•    effectively and efficiently addresses the problems to be solved
     and therefore improves upon the outcomes of a competitive
     market; or
•    puts in place arrangements which restrict competition and yet
     produces outcomes which do not adequately address the defined
     problems.

It also assists in determining whether there are other approaches which
would achieve the objectives of the legislation.

The steps involved are:

•    identifying/clarifying the objectives of the legislation; and
•    assessing whether the objectives are clear, relevant and
     appropriate.




                                                                            54
6.2 Identifying objectives

While objectives may be explicitly stated in legislation, they are often
found in policy statements and parliamentary speeches, and may also
be implied by the impacts of restrictions to competition.

The purposes contained in the National Project provisions, which are
‘not core’ provisions and therefore subject to each jurisdiction’s
discretion as to their inclusion and wording in legislation (see
Chapter 4), are as follows:

       (a)    to provide for the regulation of legal practice in this jurisdiction in the
              interests of the administration of justice and for the protection of
              consumers of the services of the legal profession and the public
              generally;
       (b)    to facilitate the regulation of legal practice on a national basis across
              State and Territory borders. (Section 103)

Overarching objectives have not yet been included in the State-based
provisions. Further, as the Bill has not yet been introduced to
Parliament, there is no second reading speech from which to infer its
objectives.

However, the objectives can be inferred from the Attorney-General’s
announcement of the reforms to be introduced by the Bill. The
Attorney-General stated the new system:

    ... would operate independently from the legal profession and
    government, delivering the community a simpler, more cost effective and
    consumer-friendly complaints system.28

and

    These reforms will provide a ‘one stop shop’ for the investigation of
    complaints and, by being more efficient, ensure that more resources are
    available to promote access to justice.29

The Attorney-General’s statement suggests underlying objectives of
independence, cost effectiveness, efficiency and access.

Legislative objectives can also be inferred from an article by the
Attorney-General in The Age, in which he stated:

    The Government has unashamedly put the needs of consumers first in its
    proposed reforms to the regulation of the legal profession …
________________________
28
   Attorney-General Rob Hulls, New Legal Complaints System Puts Consumers First, Media Release, 25
July 2003, p. 1.
29
   ibid, p. 2.
                                                                                                 55
       As Attorney-General, I am interested in cost efficiencies in any new
       system, especially since improved efficiencies may lead to the freeing up
       of funds for access to justice initiatives such as the funding of legal aid.
       But the drivers of my reforms must be the needs of consumers and the
       maintenance of an accessible and robust justice system.

       … the new legal regulatory system has been carefully crafted to give
       Victorians confidence in a system that will be transparent, accountable,
       efficient, and address the alleged conflicts of interest.

       … our new system will make an important contribution to reform of the
       legal profession at the national level and, in this way, will contribute to
       national consistency 30

This suggests objectives of consumer confidence and protection,
efficiency, access, accountability and national consistency of
regulation.

The objectives of the various bodies established by the Bill, which are
stated in the State-based provisions, can also assist in inferring the
objectives of the Bill. The objectives of the LSB are:

          (a)    to ensure the effective regulation of the legal profession and the
                 maintenance of professional standards;
          (b)    to address the concerns of clients of law practices and legal practitioners
                 through the regulatory system and provide for the protection of
                 consumers of legal services;
          (c)    to ensure that the Victorian system is at the forefront of regulation of
                 legal practitioners. (Section 6)

The objectives of the LSC are:

          (a)    to ensure that complaints against law practices or legal practitioners and
                 disputes between law practices or legal practitioners and clients are dealt
                 with in a timely and effective manner;
          (b)    to educate the legal profession about issues of concern to the profession
                 and to consumers of legal services;
          (c)    to educate the community about legal issues and the rights and
                 obligations that flow from the client-practitioner relationship.
                 (Section 32)

These objectives suggest objectives of consumer protection, effective
regulation and education of the profession and the public.

The objectives of the 1996 Act can also help inform the objectives of
regulation of the legal profession in Victoria. The purposes of the Act
are:

          (a)    to improve the regulation of legal practice in Victoria;

________________________
30
     Attorney-General Rob Hulls, In law reform, consumers come first, The Age, 30 August 2003.
                                                                                                 56
       (b)    to repeal the Legal Profession Practice Act 1958;
       (c)    to amend the Partnership Act 1958. (Section 1)

The second reading speech provides an indication of the underlying
objectives of the Act. This speech reveals motives of accountability,
independence of the profession from government and serving the
public interest.

In moving the second reading of the Act, the Attorney-General, Mrs
Wade, stated:

     … the bill provides for a new regulatory structure built upon two great
     liberal principles: public accountability of powerful private institutions
     and freedom of association …

     This bill ensures that the profession will remain properly independent of
     the executive government while at the same time truly serving the public
     interest.31

The objectives of the Bill can also be inferred from the review of the
Act commissioned by the Attorney-General in 1999, which was
undertaken in response to perceived weaknesses with the current
regulatory framework. The review was to have regard to:

•      the need to strengthen consumer and community confidence in
       the system;
•      providing an efficient and effective regulatory regime for the
       legal profession; and
•      ensuring the best possible use is made of the funds available for
       regulation of the profession.

The final report of the review suggested the:

     … broad policy objective of the 1996 changes was to introduce
     substantial new elements of independence and accountability into the
     regulatory system, while retaining significant doses of self-regulation in
     the areas of prudential and financial regulation, as well as in dealing with
     complaints.32

The objectives outlined in this section include a number of items that
could be considered as means of achieving broader policy objectives,
rather than as objectives in their own right. Taking this into account,
the broad policy objectives of the Bill can be summarised as relating
to:


________________________
31
  Hansard, Legislative Assembly, Victoria, 1996, p. 983.
32
  Sallman, P.A and Wright, R.T 2001, Regulation of the Victorian Legal Profession: Report of the
Review of the Legal Practice Act 1996, Department of Justice, Melbourne, November, p. 46.
                                                                                                   57
•   ensuring consumer and community confidence in the justice
    system;
•   protecting consumers of legal services;
•   promoting equity and access to legal services; and
•   ensuring that regulation of the legal profession is effective and
    efficient.




                                                                        58
6.3 Assessing objectives

As noted above, assessing legislative objectives requires consideration
of whether the identified objectives of the legislation under review are
clear, relevant and appropriate.

Are the objectives clear?
The discussion in the preceding section suggests that the overarching
legislative objectives may not currently be as clearly specified in the
Bill as might be desirable. However, this may be due to the fact that
the Bill is still being drafted and the interaction between the national
and State-based provisions.

While the precise wording of the objectives of the Bill is not a matter
to be determined in this review, it is recommended that careful
consideration be given to the wording of the objectives included in the
Bill to ensure that the objectives underlying the legislation are clear
and provide guidance in interpreting the intent of the provisions of the
Bill.

The overarching objectives of the Bill might include wording along
the lines of the purposes specified in the national provisions, which
refer to administration of justice, protection of consumers and the
public, and facilitating regulation of practice on a national basis.

As outlined above, that these are not core provisions means there is
scope to modify or add to the national provisions. Consideration
should be given to amending these objectives to specifically reflect
objectives such as promoting consumer and public confidence in the
justice system, equity and access to justice and efficient and effective
regulation of the legal profession.

For example, the overarching objectives of the Bill could be drafted
along the following lines:

   To provide for the regulation of legal practice in Victoria in order
   to:

   (a) promote the effective and efficient administration of justice;
   (b) ensure consumer and community confidence in the justice
       system;
   (c) protect consumers of the services of the legal profession and
       the public generally;
   (d) promote equity and access to legal services; and

                                                                           59
   (e) facilitate the regulation of legal practice on a national basis
       across State and Territory borders.

Are the objectives relevant and appropriate?
The broad policy objectives outlined in the preceding section aim to
facilitate the administration of justice by providing a regulatory
environment in which the profession can provide effective and
efficient services to the public, to address problems arising due to
failures in the market for legal services and to meet other non-market
public interest criteria such as equity and access (discussed in
Chapter 5).

These broad policy objectives continue to be relevant and appropriate
in the context of contemporary society, particularly as society
becomes more technically and legally complex.

The objectives also appear to be consistent with each other, and in
some cases are complementary – for example, improved efficiency of
regulation has potential to free up funds for access to justice initiatives
such as legal aid. The objectives are also consistent with broader
government objectives such as protecting the public interest and
ensuring regulation is efficient and effective.




                                                                         60
                      7

Analysis of Restrictions




                      61
7.1 Introduction

In this chapter, restrictions on competition arising from the relevant
provisions of the Bill under review are analysed. The discussion is
structured around the four areas identified in the terms of reference.
For each of these areas, the nature of any restrictions on competition is
identified, the likely effect of restrictions on competition and on the
economy in general discussed, benefits and costs are assessed and
balanced, alternative means of achieving the legislative objectives
(including non-legislative means) are identified and assessed, and
recommendations presented.

In relation to restrictions on competition, while the provision itself
may not restrict competition, the practical implementation of the
provision may result in a restriction. Where possible, such restrictions
are identified and discussed in this review.

As noted in Chapter 1, provisions of the Bill which are drawn from the
National Project are to be the subject of a regulatory impact statement
prepared for COAG. Restrictions arising from the national provisions
are therefore beyond the scope of this review, and are considered only
to the extent that they interact with the relevant State-based provisions
under review.




                                                                       62
7.2 Governance Arrangements

Governance arrangements potentially cover a broad range of
provisions in the Bill. As noted previously, the focus of this review is
on potential restrictions on competition arising from the State-based
provisions. The focus in this section is therefore on aspects of the
governance arrangements contained in the draft State-based provisions
which have give rise to potential competitive restrictions.

The potential restrictions on competition identified as arising from the
governance arrangements contained in the State-based provisions are:

•    the requirement that mediators appointed by the LSC must be or
     have been legal practitioners in last 10 years;
•    the composition of the LSB; and
•    the definition of the term ‘professional association’.

However, as details of the State-based provisions relating to
governance arrangements are yet to be fully specified, it is possible
that further restrictions will arise either through the detailed
arrangements yet to be specified in the Bill or through the practical
implementation of governance arrangements in the Bill.

Requirement that mediators appointed by the LSC must
be or have been legal practitioners in last 10 years

Nature of restriction
As discussed in Chapter 4, section 48 of the State-based provisions
requires the LSC to appoint a panel of mediators. Each mediator must
be, or have been within 10 years before their appointment, an
Australian legal practitioner. This requirement has potential to restrict
competition in the provision of mediation services by excluding those
that do not meet the criteria from being appointed to the panel of
mediators, including those who have appropriate skills and experience
to mediate disputes.

Impact on competition and the economy
By restricting competition in the provision of mediation services, this
restriction has potential to increase the price of mediation services
provided to the LSC. It also limits the pool of mediators available to
the LSC for appointment, and hence may reduce the overall quality of
mediation services available to the LSC.


                                                                        63
Benefits
The main benefits of the proposed approach are that, as matters being
mediated by the LSC relate to disputes between legal practitioners and
their clients over the provision of legal services, mediators who are or
have recently been practitioners may be more likely to have sufficient
knowledge of legal practice and the legal system to effectively and
efficiently conduct mediations than may be the case for non-
practitioners.

Some stakeholders have also suggested that a benefit of using a
lawyer as a mediator is that lawyers who are a party in the mediation
are more likely to respect a lawyer mediator than a mediator who is
not a lawyer, and hence that the mediation is more likely to be
successful.

Costs
There are a range of costs that are likely to arise through reduced
competition in the provision of mediation services to the LSC,
including:

•    increased prices of mediation services provided to the LSC – the
     restriction on those who can be appointed to the panel of
     mediators means that lawyers must be used for all mediations,
     even though relatively simple complaints may be effectively
     mediated by a non-lawyer mediator;
•    preventing the LSC from appointing mediators with suitable
     skills and experience to the panel who do not meet the eligibility
     criteria. This includes both non-lawyer mediators and mediators
     who are lawyers that have not practised within the last 10 years.
     It may be appropriate that the LSC be able to draw mediators
     from a panel with a broader range of skills and experience than is
     possible under the current eligibility criteria, to reflect the range
     of complaints mediated by the LSC – for example, for relatively
     simple disputes (such as minor cost disputes), it may not be
     necessary to be a current or recently practicing lawyer in order to
     effectively mediate the dispute;
•    potential for the effectiveness and efficiency of mediation
     processes and/or the quality of mediation outcomes to be reduced
     through limiting the range of skills and experience of mediators
     appointed to the panel; and
•    increased potential (real or perceived) for the interests of the
     practitioner against whom the complaint has been made to be
     favoured over those of the client.



                                                                        64
Discussions with stakeholders suggest that exclusion of those who do
not meet the proposed eligibility criteria from being appointed to the
panel of mediators is inappropriate, as it excludes some persons who
are obviously competent to mediate at least some of the disputes that
arise between lawyers and their clients.

Discussions with some stakeholders also indicate that some clients
making complaints against a lawyer perceive that the interests of the
lawyer will be favoured over their own interests, due to the fact that
mediators (and members of the LPT) are members of the legal
profession.

Net benefit/cost
On balance, it is considered that the benefits of the restriction are
outweighed by its costs, and hence the restriction results in a net cost
to society.

Alternatives
The main alternatives to the proposed regulatory approach involve
relaxing the requirement that mediators must be, or have been within
10 years before their appointment, an Australian legal practitioner.
The criteria for appointment could specify alternative input-focussed
criteria (such as qualifications and/or years of experience) or could be
made more output-focussed, so that anyone who can demonstrate their
competency can be appointed to the panel of mediators.

Depending on the criteria specified, the former approach could
provide for appointment of lawyers that do not meet the current
criteria (for example, those who are eligible to obtain a practising
certificate, regardless of whether they have practised within the last
10 years), or could provide for different qualifications (for example,
by specifying membership of a particular professional association/s
representing mediators). However, depending on the criteria specified,
either of these approaches has potential to raise competition concerns
by restricting other competent providers from eligibility for
appointment to the panel of mediators.

The latter, output-focussed approach, on the other hand, could provide
for anyone who can demonstrate their competency to be appointed to
the panel of mediators. Criteria for appointment might be along the
lines ‘sufficient knowledge and experience to be able to provide
mediation services relating to disputes between legal practitioners and
their clients’. Such an approach would be unlikely to raise competition
concerns.


                                                                           65
Discussions with stakeholders suggest that there are persons who have
a broad range of qualifications, skills and experience (both lawyers
who do not meet the proposed eligibility criteria and non-lawyers with
experience in mediation) who could competently mediate at least
some of the disputes that arise between lawyers and their clients.

Further, as appointment is to a panel of mediators from which the LSC
would appoint mediators to individual disputes, the LSC could
exercise discretion in appointing mediators to ensure that the
appointed mediator has skills and experience appropriate to the
dispute in question. It would also provide scope for the LSC, where he
or she considered it appropriate, to appoint more than one mediator to
a mediation where a range of skills and experience might be required
or to help overcome a perception that a lawyer mediator would be
biased in favour of the practitioner against whom a claim has been
made.

Relaxing the eligibility criteria for appointment to the panel of
mediators allows the LSC discretion in who is appointed to the panel.
He or she may consider it is appropriate to only appoint lawyers, and
would have the discretion to do so. However, relaxing the criteria
would provide the LSC with discretion to assess potential panel
members on a case-by-case basis and ensure that suitable persons are
not excluded solely on the basis of not having been a practitioner
within the last 10 years.

Therefore, while an approach involving alternative input-focussed
criteria has potential to reduce the costs associated with the proposed
approach, the specification of output-focussed criteria is likely to
generate a greater net benefit to society than either the proposed
approach or an approach involving specification of alternative input-
focussed criteria.

Recommendation
It is recommended that the eligibility criteria for appointment as a
mediator be output-focussed in order to allow anyone who can
demonstrate their competency to provide mediation services relating
to disputes between legal practitioners and their clients to be
appointed to the panel of mediators.

The composition of the LSB
As discussed in Chapter 4, it is proposed that the LSB have
7 members, comprising:

•    a chairperson;

                                                                          66
•      three elected members who are legal practitioner members of at
       least 5 years’ standing, one of whom who practices solely as a
       barrister and two of whom do not; and
•      three appointed members who are not, have not been, and are not
       qualified to be admitted as, Australian legal practitioners. At least
       one appointed member must have financial or prudential
       management experience, and at least one must represent the
       interests of consumers of legal services.

As there are no restrictions on who may be appointed as chairperson,
the chairperson may be a lawyer or a non-lawyer. This means that the
balance of legal and non-legal representatives on the LSB will be
determined through the appointment of the chairperson – if a lawyer is
appointed chairperson, there will be a majority of legal representatives
on the LSB, while if a non-lawyer is appointed chairperson there will
be a majority of non-lawyers.

While the composition of the LSB does not of itself constitute a
restriction on competition, the scope for the LSB to comprise a
majority of legal members creates the potential for the interests of the
profession to be pursued above those of consumers of legal services
and the broader community. Given the legislative objectives of the
LSB relate to addressing concerns of clients of lawyers and consumer
protection, as well as regulation of the profession and maintenance of
professional standards, clearly it would be inappropriate for this
potential to be realised.

The potential for the LSB to comprise a majority of legal members
also creates the potential for restrictions on competition which might
arise through the practical implementation of the powers and functions
of the LSB – for example, in setting Fidelity Fund contribution and
levy rates and practising certificate fees, setting professional
indemnity insurance requirements for the profession, approving or
disallowing practice rules for the profession and through the
delegation of functions.

It is difficult to determine the likely impact (if any) on competition
that the proposed composition of the Board might have, given that the
LSB will not necessarily comprise a majority of legal members.
Further, not all powers and functions of the LSB have yet been fully
specified in the Bill,33 and hence the scope for restrictions to arise
through their practical implementation is unclear.



________________________
33
  For example, as discussed in chapter 4, jurisdictions have discretion in relation to the content of some
of the national provisions.
                                                                                                         67
Of course, the discussion above does not intend to suggest that a LSB
with a majority of legal members will pursue professional interests
above those of clients and the community. As in any organisation, the
quality of outcomes is determined in large part by the quality of the
people involved, rather than by qualifications alone. Nevertheless,
unless appropriate checks and balances are in place, there is potential
for a perception that this is the case.

It would be possible to alter the composition of the LSB such that it
would always comprise a majority of non-legal members. This could
be achieved in a number of ways, including increasing the number of
appointed (non-legal) representatives, reducing the number of elected
(lawyer) members, and/or requiring that the chairperson be a non-
lawyer. However, these options may also have other implications,
such as limiting the scope for the Attorney-General to appoint the
most appropriate person as chairperson or increasing the size (and
costs) of the LSB. On the other hand, increasing the number of
appointed members may increase scope to ensure there is an
appropriate mix of skills and experience on the LSB to carry out its
broad range of functions. Given the LSB’s legislative objective in
relation to consumer protection, and that the LSB will be responsible
for the direct supervision of the management of approximately
$350 million of funds (as at today’s holdings) held in the Public
Purpose Fund34, it may be appropriate to increase the number of
appointed members to provide increased consumer representation and
financial/prudential expertise on the LSB.

Another alternative is to replace the proposed provisions relating to
composition of the Board and replace them with more generic
provisions, such as that the LSB will comprise 7 members, comprising
a chairperson and 6 other members, such that there is a minority of
lawyers on the LSB. However, this approach provides little guidance
as to the appropriate mix of skills and experience that is required for
the LSB to carry out its range of functions.

That appointed members cannot be lawyers may also restrict scope to
appoint the most appropriate persons to the LSB. For example, a
person with a law degree who has never practised, or who has
practised law in the past but has significant experience relevant to the
LSB’s functions, could not be appointed to the LSB. On the other
hand, if appointed members were also able to be lawyers, this could
increase the potential for the LSB to be (or be seen to be) dominated
by lawyers.



________________________
34
     This is in addition to Public Purpose Fund monies held in bank accounts and the Fidelity Fund.
                                                                                                      68
The potential for the LSB to comprise a majority of legal members
increases the importance of having appropriate checks and balances in
place to ensure that its powers and functions are implemented in a
manner that achieves the LSB’s legislative objectives and the
Government’s broader policy objectives for regulation of the legal
profession. This is particularly the case given the LSB’s central role in
regulation of the profession and consumer protection, and that its
powers and functions are extensive (including approval of candidates
for recommendation for subsequent appointment as the LSC,
appointment of LPLC members, approval of PII terms and conditions,
approval of practice rules developed by professional associations, and
the delegation of its functions).

Appropriate arrangements should be implemented to ensure
appropriate consultation with the profession, consumers and the
community, that the functions of the LSB are carried out effectively
and efficiently, and that the operations, processes and decisions of the
LSB are transparent and accountable with appropriate public reporting
arrangements. Where appropriate, these arrangements could be set out
in the Bill or regulations to impose a legal requirement on the LSB to
comply. Sections 23 (Delegation), 24 (Annual report) and 25 (Other
reports) of the State-based provisions contain various requirements
that are relevant in this context, including requiring the LSB to include
any information required by the Attorney-General in its annual report,
and providing for the Attorney-General to request the LSB to report to
the Attorney-General on any matter relevant to the performance of the
LSB’s functions or the achievement of its objectives. However, it may
be appropriate that additional requirements be included in these or
other sections of the Bill. (Requirements relating to the delegation of
functions and approval of PII terms and conditions are discussed in
Sections 7.3 and 7.4 respectively.)

Recommendation
Consideration should be given to altering the proposed composition of
the LSB to reduce scope for it to comprise a majority of members of
the legal profession, and to provide for an appropriate mix of skills
and experience required for the LSB to carry out its range of
functions.

Appropriate arrangements should be implemented to ensure that the
functions of the LSB are carried out effectively and efficiently, and
that the operations, processes and decisions of the LSB are transparent
and accountable with appropriate governance and public reporting
arrangements.



                                                                       69
Definition of the term ‘professional association’
The term ‘professional association’ is defined in the draft State-based
provisions to mean:

(a)   the Law Institute;
(b)   the Victorian Bar (s. 3).

This definition is based on the current professional associations
representing Victorian lawyers. However, given that membership of
the professional associations is voluntary, and that not all Victorian
lawyers are members of the associations, this has potential to restrict
competition by conferring an advantage through legislation on the
incumbent professional associations compared to other associations
that might emerge in the future, and reducing scope for new
associations to emerge.

It is difficult to determine the likely impact on competition that the
proposed definition is likely to have, given that not all provisions of
the Bill have yet been specified, and the impact of restricting the
definition of professional association to the two incumbent
associations will depend on the specific provisions of the Bill which
include the term.

For example, section 14(2), which refers to acting appointments to the
LSB, requires that each professional association be consulted before a
person is appointed to act in the place of an elected member. While
this does not of itself constitute a restriction, if associations other than
the LIV and Bar were to emerge it would be appropriate that these
associations also be consulted.

While provisions relating to election of members to the LSB are yet to
be drafted, it is desirable that these provisions allow for members of
other professional associations which may emerge to be elected to the
LSB.

Similarly, while the organisations to which the LSC and LSB can
delegate functions is yet to be defined, to the extent that it is
appropriate that some functions be delegated to the professional
associations, there should be scope for functions to be delegated to
other associations which may emerge, rather than restricting
delegations to the incumbent associations. (Delegation of functions
and the organisations to which functions can be delegated is discussed
further in the following section.) Hence, care should be taken to
ensure that the term professional association is not used in such a way
that it restricts competition between professional associations and
other organisations.
                                                                          70
                               Recommendation
                               Further development of the provisions is required to determine the
                               potential competitive impacts of the definition of the term
                               ‘professional association’. As the provisions are further developed, it
                               is recommended that consideration be given to expanding the
                               definition to include other professional associations which may
                               emerge. Care should also be taken to ensure that the term professional
                               association is not used in a manner that inappropriately restricts
                               competition between professional associations and other
                               organisations.

                               Summary

Restriction on                Benefits                    Costs                        Recommendation
competition
Requirement that              • May be more likely to     • Increased prices of        The eligibility criteria for
mediators appointed by          have sufficient             mediation services         appointment as a mediator
the LSC must be or have         knowledge of legal          provided to the LSC        should be output-focussed
been legal practitioners in     practice and the legal    • Preventing the LSC         in order to allow anyone
last 10 years                   system to effectively       from appointing            who can demonstrate their
                                and efficiently conduct     mediators with suitable    competency to provide
                                mediations                  skills and experience to   mediation services relating
                              • Lawyers who are a           the panel who do not       to disputes between legal
                                party in the mediation      meet the eligibility       practitioners and their
                                are more likely to          criteria                   clients to be appointed to
                                respect a lawyer          • Potential for the          the panel of mediators.
                                mediator                    effectiveness and
                                                            efficiency of mediation
                                                            processes and/or the
                                                            quality of mediation
                                                            outcomes to be reduced
                                                          • Increased potential
                                                            (real or perceived) for
                                                            the interests of the
                                                            practitioner against
                                                            whom the complaint
                                                            has been made to be
                                                            favoured over those of
                                                            the client
Composition of the LSB        • Ensures range of          • Potential for interests    Consideration should be
                                experience, skills and      of the profession to be    given to altering the
                                qualifications on the       pursued above those of     proposed composition of
                                LSB                         consumers and the          the LSB to reduce scope
                                                            broader community          for it to comprise a
                                                          • Potential for              majority of members of
                                                            restrictions through       the legal profession, and to
                                                            practical                  provide for an appropriate
                                                            implementation of the      mix of skills and
                                                            powers and functions       experience required for the
                                                            of the LSB                 LSB to carry out its range
                                                                                       of functions.

                                                                                                                 71
Restriction on               Benefits   Costs                       Recommendation
competition

                                                                    Appropriate arrangements
                                                                    should be implemented to
                                                                    ensure that the functions
                                                                    of the LSB are carried out
                                                                    effectively and efficiently,
                                                                    and that the operations,
                                                                    processes and decisions of
                                                                    the LSB are transparent
                                                                    and accountable with
                                                                    appropriate governance
                                                                    and public reporting
                                                                    arrangements.
Definition of the term                  Potential to restrict       Further development of
‘professional association’              emergence of other          the provisions is required
                                        associations, or emerging   to determine the potential
                                        associations ability to     competitive impacts of the
                                        compete with incumbent      definition of the term
                                        associations                ‘professional association’.
                                                                    As the provisions are
                                                                    further developed, it is
                                                                    recommended that
                                                                    consideration be given to
                                                                    expanding the definition to
                                                                    include other professional
                                                                    associations which may
                                                                    emerge. Care should also
                                                                    be taken to ensure that the
                                                                    term professional
                                                                    association is not used in a
                                                                    manner that
                                                                    inappropriately restricts
                                                                    competition between
                                                                    professional associations
                                                                    and other organisations.




                                                                                              72
7.3 Delegation of Responsibilities

There do not appear to be any obvious restrictions on competition
which arise from the arrangements currently specified in the
provisions relating to delegation of responsibilities and the
organisations to which functions may be delegated. However, as
details of the provisions relating to delegation of functions have not
yet been fully specified, it is possible that restrictions will arise either
through the detailed arrangements to be included in the Bill or through
the practical implementation of those arrangements. The discussion in
this section therefore aims to provide guidance on appropriate
arrangements relating to delegation of responsibilities.

Functions which can be delegated
As discussed in Chapter 4, the draft provisions provide that the LSC
may delegate any of its functions to an employee or other delegates
(s. 43), and that the LSB may delegate any of its functions to the LSC,
and may delegate certain functions to other delegates (s. 23), though
the precise definition of these ‘other delegates’ is yet to be
determined. As the draft provisions do not currently contain final
details of the functions of the LSB, the following discussion is
premised on the assumption that the LSB will have the functions
discussed in the explanatory paper.

There are some functions of the LSB that it would obviously not be
appropriate for the LSB to delegate to other organisations on the basis
that they are core functions involving high level governance issues –
for example, controlling and administering funds set up under the
legislation, its functions in relation to appointment of members of the
LPLC and the Board of Examiners, setting PII requirements for the
profession and setting Fidelity Fund contribution and levy rates and
practising certificate fees.35

Some other functions of the LSB, on the other hand, could potentially
be delegated to other organisations with the appropriate skills,
experience and resources (that is, capacity) to perform those functions,
provided arrangements were in place to ensure appropriate
accountability, transparency and independence of delegated functions
________________________
35
   It is important to note the distinction between delegation and contracting out of functions. While it may
not be appropriate to delegate some functions, and the LSB and LSC may choose not to delegate
functions even where they have the discretion to do so, this does not preclude them from contracting out
or seeking external advice in relation to these functions where appropriate. For example, the LSB may
seek actuarial or financial advice in undertaking its roles of setting PII requirements and administering
funds, though it may not be appropriate that these functions are delegated. Similarly, the LSB may choose
not to delegate the administration of practising certificates, but may contract this function out to an
organisation with specialist expertise in this area. The key distinction is that delegation involves decision
making in relation to regulatory functions, whereas contracting out relates to processing of functions.
                                                                                                          73
(discussed further below). Functions which may be appropriately
delegated to suitable organisations include administration of practising
certificates, management of the register of practitioners and trust
account inspections. The LSC and LSB should be able to exercise
discretion as to whether these functions are delegated.

Consideration should be given to whether further details of the
functions which may or may not be delegated should be enshrined in
legislation.

Organisations to which functions can be delegated
The organisations to which functions can be delegated have not yet
been specified. The explanatory paper circulated to stakeholders
indicates the proposed approach is that:

        the organisations to which functions may be delegated by the LSC and
        LSB will be defined as a class of “suitable organisations” or the specific
        organisations prescribed in the regulations (this definition is likely to be
        broad enough to include the Law Institute and the Victorian Bar and other
        appropriate organisations).36

In prescribing the organisations to which functions may be delegated,
it is suggested that the characteristics of suitable organisations be
specified, rather than naming specific organisations. Such an approach
provides scope for competition to emerge between alternative
providers of delegated functions, and allows the LSC and LSB the
flexibility to adapt to different circumstances. It also avoids
competition concerns that might arise if an approach involving
naming of specific organisations were adopted.

The broad range of functions of the LSB means there may be a range
of organisations which have the capacity to perform its various
functions, including the professional associations and other
organisations which have expertise in provision of services such as
maintenance of databases and administration of licenses. It may not be
desirable to restrict scope for competition in the provision of delegated
functions or reduce economic efficiency by excluding competent
service providers from being eligible to perform those functions.

Framework for delegation of functions
The framework for delegation of functions should aim to ensure an
appropriate balance is achieved between providing the LSB and LSC
with discretion and flexibility to adjust to different circumstances, and
providing comfort that the functions which may be delegated and the
performance of those functions is appropriate. ‘Appropriate’ in this
________________________
36
     Department of Justice 2004, Legal Practitioners Bill 2004: Explanatory Paper, 1 April, p. 3.
                                                                                                    74
context means that functions are delegated to organisations with the
capacity to perform them, and that there are arrangements in place to
help ensure that delegated functions are carried out effectively and
efficiently, that organisations to which functions are delegated are
accountable to the LSB or LSC, that there are appropriate reporting
arrangements in place and that there are not inappropriate conflicts of
interests between delegated functions and other activities of delegates.

The following factors should be considered in relation to the
organisations to which functions are delegated by the LSC and LSB:

•    the organisation to which functions are delegated should have the
     capacity to perform the function effectively and efficiently;
•    scope for potential conflicts of interest to emerge on the part of a
     delegate between the delegated function and other activities of
     the organisation should be minimised by implementing
     arrangements to ensure that delegated functions are carried out
     appropriately (see below);
•    the LSC and LSB should consider the range of organisations
     which have the capacity to perform a function when determining
     the organisation to which a function will be delegated and, where
     practical, seek to capture the benefits of competition between
     organisations that have the capacity to perform delegated
     functions – for example, through public or targeted tender
     processes; and
•    LSC and LSB decisions in relation to delegation of functions
     should be transparent and accountable, with appropriate public
     reporting arrangements.

It is appropriate that arrangements be put in place which ensure the
LSB and LSC retain responsibility for and control of delegated
functions, and that delegated functions are carried out appropriately.
These arrangements could include:

•    the LSC and LSB issuing binding guidelines, including reporting
     requirements and relevant performance standards, for the conduct
     of functions that delegates are required to comply with;
•    requiring the LSC and LSB to conduct periodic reviews of
     delegated functions. Section 23(4) requires that the LSB must
     perform an audit of its delegations to determine whether each
     delegation is still appropriate at least once every 12 months.
     Consideration could be given to strengthening this requirement
     by specifying the matters the audit is to consider (such as
     whether delegated functions are being carried out in an effective
     and efficient manner, in compliance with any guidelines issued,


                                                                         75
     and that outcomes are of an appropriate standard). Consideration
     could also be given to extending such a requirement to the LSC;
•    implementing arrangements for complaints by members of the
     profession or the public in relation to the conduct of delegated
     functions to be received by the LSB or LSC, to ensure that these
     bodies are aware of potential problems arising in relation to
     delegated functions;
•    providing for the LSC and LSB to specify the period for which a
     function is to be delegated, and providing the LSB and LSC with
     the power to revoke a delegation before the end of the period
     where it considers the delegated function is not being
     appropriately carried out or that a conflict of interest has arisen;
     and
•    requiring the LSC and LSB to publicly report on the delegation
     of functions. Sections 24 and 44 require the LSB and LSC
     respectively to include in their annual report a list of any
     functions delegated as at the end of the year, and any delegations
     revoked during the year. Section 24 also provides for the
     Attorney-General to require the LSB to report on any matter
     relevant to the performance of its functions or achievement of it
     objectives, and for the LSB to make any other reports it considers
     desirable to the Attorney-General. Similarly, section 45 provides
     for the LSC to make any reports it considers desirable to the
     Attorney-General. Consideration could be given to strengthening
     these provisions by specifying further matters relating to
     delegation of functions to be disclosed in annual reports, such as
     compliance with requirements to conduct audits of delegations,
     the findings of such audits, any guidelines issued, and details of
     any complaints received and the outcomes of investigation of
     complaints.

Recommendation
Further development of the provisions is required to determine
whether the delegation of functions is likely to result in competitive
restrictions. As the provisions are further developed, it is
recommended that consideration be given to:

•    further specifying the functions which may or may not be
     delegated;
•    in prescribing the organisations to which functions may be
     delegated, specifying the characteristics of suitable organisations,
     rather than naming specific organisations; and
•    putting in place arrangements to help ensure that:
     − functions are delegated to organisations with the capacity to
          carry them out;

                                                                         76
                                      −     delegated functions are carried out effectively and
                                            efficiently;
                                      −     organisations to which functions are delegated are
                                            accountable to the LSB or LSC as appropriate;
                                      −     there are appropriate reporting arrangements in place; and
                                      −     there are not inappropriate conflicts of interests between
                                            delegated functions and other activities of delegates.

                                Summary

Restriction on competition                      Recommendation
There are no obvious restrictions on            Further development of the provisions is required to determine
competition arising from the provisions         whether the delegation of functions is likely to result in competitive
relating to delegation of powers.               restrictions. As the provisions are further developed, it is
                                                recommended that consideration be given to:
However, as details of the provisions
relating to delegation of functions have not    • further specifying the functions which may or may not be
yet been fully specified, it is possible that     delegated;
restrictions will arise either through the      • in prescribing the organisations to which functions may be
detailed arrangements to be included in the       delegated, specifying the characteristics of suitable organisations,
Bill or through the practical implementation      rather than naming specific organisations; and
of those arrangements.                          • putting in place arrangements to help ensure that:
                                                  − functions are delegated to organisations with the capacity to
                                                      carry them out;
                                                  − delegated functions are carried out effectively and efficiently;
                                                  − organisations to which functions are delegated are accountable
                                                      to the LSB or LSC as appropriate;
                                                  − there are appropriate reporting arrangements in place; and
                                                  − there are not inappropriate conflicts of interests between
                                                      delegated functions and other activities of delegates.




                                                                                                                    77
7.4 Legal Practitioners Liability Committee

As discussed in Chapter 4, Victorian solicitors are currently required
to hold a minimum level of PII cover ($1.5 million) in order to obtain
a practicing certificate, and this insurance is required to be obtained
through a statutory monopoly insurer, the LPLC. While Victorian
barristers are also currently required to hold a minimum level of PII
cover, barristers are required to obtain that insurance through the
private insurance market. It is proposed that the current arrangements
for solicitors be carried forward to the Bill, and that barristers also be
required to obtain primary PII cover through the LPLC.

The primary restriction on competition arising from the proposed PII
provisions contained in the State-based provisions of the Bill is that
the primary level of PII cover for Victorian solicitors and barristers
must be obtained from the statutory monopoly insurer, the LPLC.

As noted in Chapter 1, the requirement to hold PII arises from the
national provisions of the Bill. This provision will therefore be
assessed as part of the review to be prepared for COAG, and is outside
the scope of this review. Rather, this review takes as given the
requirement for practising lawyers to hold PII, and assesses the best
way to provide compulsory PII cover by assessing the benefits and
costs of the monopoly provision of primary PII cover through the
LPLC compared to alternative approaches to providing cover. This
assessment includes the proposal that the LPLC be the monopoly
provider of primary PII cover to barristers.

Monopoly provision of PII by the LPLC

Nature of restriction
The proposal that Victorian legal practitioners be required to obtain a
minimum level of compulsory PII cover through a statutory monopoly
provider, the LPLC, restricts competition in the market for PII
insurance by preventing other potential providers of primary PII
insurance from competing to provide the primary level of PII cover.

The impacts of the restriction are likely to be borne by commercial
providers of PII, who would be prevented from entering the market to
provide primary PII for Victorian practitioners, by Victorian legal
practitioners, who are the consumers of PII cover, and by consumers
of legal services provided by Victorian practitioners. To the extent
that the restriction has flow-on effects to upstream and downstream
markets, participants in those markets are also potentially affected.

                                                                         78
This restriction can be regarded as promoting the legislative objective
of consumer protection, by addressing problems associated with
information asymmetry and ensuring that cover is available to meet
claims arising through disputes between practitioners and their clients.

Effect on competition and the economy
The effects of restricting competition in the market for PII provision
to Victorian legal practitioners are of both a theoretical and a practical
nature.

In theory, because a monopoly provider of insurance has no threat of
effective competition, monopoly provision of PII may result in:

•    increased costs of providing PII, because competitive pressure to
     achieve efficient production costs is lacking;
•    increased prices to practitioners for PII cover, due to higher
     production costs and an absence of competition for market share;
•    lower service standards; and
•    reduced innovation, resulting in a reduced choice of PII products
     available to practitioners.

Increased prices to practitioners for PII cover has potential to increase
the price of legal services provided to consumers. This in turn can
result in a reduction in the overall consumption of legal services in the
Victorian market. To the extent that it results in higher prices for
services than is incurred by consumers in other jurisdictions, increased
prices for PII cover can also result in increased provision of services
in the Victorian market by interstate lawyers.

The restriction may also have impacts in upstream and downstream
markets, such as reduced competitiveness of Victorian businesses
which consume legal services and reduced demand for legal education
services in Victoria through its impact on the costs and overall level of
consumption of legal services. Increased prices for legal services may
also reduce the accessibility to legal services for those with limited
capacity to pay.

As discussed in Chapter 5, the existence of a monopoly insurance
provider usually reflects that a legislative monopoly has been created
by government on the basis that insurance may not be adequately
provided by the market. The inherent risk, however, is that a statutory
monopoly may act in a similar manner to a private monopolist – that
is, because their market position is assured and re-enforced by
legislation, there may be little incentive to improve processes or act in
a manner that reflects competitive conditions.

                                                                        79
The extent to which these theoretical impacts are borne out in practice
depends on the extent to which outcomes under a monopoly insurer
diverge from those that would occur in the market. The experience of
Victorian barristers in obtaining primary PII cover in the market can
help inform an assessment of the likely outcomes that would occur
were all Victorian legal practitioners required to obtain primary PII
cover in the market.

It appears that there are a number of practical considerations in the
market for PII for legal practitioners that mean that to a large extent
the theoretical costs of a statutory monopoly provider of PII are not
borne out in practice.

The benefits and costs of the proposed regulatory approach are
discussed in more detail below.

Benefits
Provision of the primary level of PII cover to Victorian lawyers
through the LPLC appears to have a number of practical benefits,
including:

•    the provision of high quality, comprehensive cover;
•    the provision of universal cover;
•    lower and more stable premiums;
•    availability of run-off cover to retired, deceased and disgraced
     firms or firms that have ceased to practice;
•    lower administrative and management costs;
•    increased transparency of premiums and financial performance;
•    improved information from which to assess risks and inform risk
     management requirements;
•    increased incentives to invest in risk management programs;
•    improved consumer protection due to:
     − the universal coverage of all practitioners on the same terms
           and conditions; and
     − guaranteed provision of runoff cover for lawyers who are no
           longer practising;
•    reduced search costs for consumers to find a practitioner with
     suitable terms and conditions of coverage;
•    financial stability due to the ability to increase premiums to cover
     risks and to levy practitioners where it considers reserves are
     likely to be insufficient to meet liabilities;
•    reduced transaction costs to lawyers of arranging PII cover;
•    reduced likelihood of disputes between insurers; and
•    reduced regulatory costs associated with ensuring that minimum
     terms and conditions of cover are met.
                                                                          80
High quality, comprehensive cover
It appears the LPLC is able to offer higher quality, more
comprehensive cover than would be available in the market. This is
supported by the experience of the Bar, solicitor PII schemes in other
states, and overseas. For example, commercial insurers generally
include a non-disclosure clause in their policy wording, which means
they do not provide cover for liabilities where the insured has not
disclosed, or has misrepresented, certain information. The LPLC does
provide this ‘non-avoidance’ cover, which means that consumers are
not denied redress for actions of the lawyer over which the client has
no control. Similarly, the private market is unlikely to provide cover
where the insured has been dishonest. The LPLC does provide
dishonesty cover. While it could be argued it is not unreasonable that
insurers provide an exclusion for dishonesty, ultimately it is the
consumer who bears the cost if redress is unavailable on the basis that
his lawyer has been dishonest.

The experience of the Bar in seeking insurance in the market provides
evidence that commercial insurers are unwilling, or unable, to offer
terms and conditions of cover which match those provided by the
LPLC, including the provision of non-avoidance and dishonesty
cover. In both 2003-04 and 2004-05, the Bar received only one
complying response to its tender seeking cover. In both cases the
terms and condition were inferior to those of the LPLC policy for
solicitors and was from an overseas insurer not authorised in
Australia, Great Lakes Reinsurance. This means it is not regulated by
the Australian Prudential Regulation Authority (APRA), and should
problems arise could not be pursued through the Australian legal
system. It could also increase the difficulty resolving claims which
arise after it ceases to provide insurance.

Universal cover
By providing universal PII cover across the profession, a monopoly
insurer ensures that practitioners who may be unable to obtain
insurance in the market are able to obtain cover. Given that PII cover
is required in order to practice law in Victoria, this means that
practitioners are not excluded from practice on the basis they are
unable to obtain cover.

While it can be argued that it may be appropriate that not all
practitioners are able to obtain cover (for example, those who are
assessed as being high risk on the basis of claims history), as
discussed in Chapter 5, difficulties that insurers have in accurately
identifying high and low risk individuals can mean that some
practitioners may be unable to obtain insurance who do not pose a
significant risk, and where it would be socially optimal that they be
                                                                         81
able to obtain cover, and where the bodies with legal responsibility for
determining who is able to practice have no concerns about a
practitioner’s competence.

Private insurers attempt to underwrite a profitable portfolio by
carefully evaluating and selecting each risk in their portfolio. This
behaviour can lead to availability problems in some segments. For
example, a sole practitioner or small firm may find it difficult to
obtain PII because they can’t afford a high premium, and it is not
worth the insurance company’s effort to invest in evaluating the risk
they pose. Large firms, on the other hand, may be a more profitable
proposition for insurers, even if they have had claims, because they
can afford to pay high premiums and it is worth the insurer’s while to
invest in effort to evaluate their risk. The experience of the LPLC
suggests that competent practitioners and firms can incur claims for a
variety of reasons, such as an incompetent employee, troublesome
client, a difficult or controversial matter etc. Given the large
proportion of Victorian firms that comprise sole practitioners or a
small number of partners (see Chapter 4), this may raise significant
equity concerns, particularly in rural and regional areas, especially
considering the compulsory nature of PII insurance. This has been the
case in some other professions, including the architectural profession.

It is consumers of legal services who are the ultimate beneficiaries of
PII cover. Universal cover on consistent terms and conditions ensures
that all consumers are afforded protection. The importance of this is
illustrated by the high proportion of practitioners who operate in small
practices, have limited years of experience, and are located in
suburban or regional areas (see Chapter 4).

A further example is conveyancing. As noted in Chapter 4, ABS data
suggests that smaller firms receive a much greater proportion of their
income from conveyancing than large firms. In 2002-03, 121 of a total
555 claims incurred by the LPLC related to conveyancing. The value
of these claims was $4.6 million (of a total cost of claims of
$20.4 million). Of these, 79 claims (with a value of $2.9 million) were
incurred by firms with 2 or less partners. These smaller firms are also
more likely to have difficulty obtaining affordable PII cover in a
commercial market. Given that property represents a large investment
for many people, in the absence of universal cover on consistent terms
and conditions, there is considerable scope for these consumers to be
left without means for redress.

The problem outlined above could be addressed through an ‘assigned
risks pool’, whereby those who are unable to obtain insurance are
provided insurance from an ‘insurer of last resort’. The cost of claims
are allocated across providers according to market share. Such an
                                                                      82
approach has been adopted in the UK in combination with a multiple
provider model. However, the size of the pool in the UK is much
greater than that in Victoria, and therefore there is greater scope to
spread the risks. The feasibility of such an approach in Victoria is
unclear. If the LPLC were to become the insurer of last resort, this
may jeopardise its financial viability.

Lower and more stable premiums
While it may appear at odds with the theory of the behaviour of a
monopoly, there appear to be sound practical reasons that a statutory
monopoly insurer is able to offer lower, more stable premiums (for
cover of equivalent or better quality) than would be offered by
multiple competing providers or a monopoly private provider.

While a change to a multiple provider model may initially result in
reduced premiums in order to gain market share, in the long term
these costs would need to be recouped in order to ensure the financial
viability of providing insurance.

Recent experience in the PII market in Australia and overseas has seen
premiums increase dramatically, with further increases forecast. The
LPLC, on the other hand, has been able to offer insurance for
premiums which are not only lower than those available to solicitors
in other jurisdictions, but have declined in real terms since 1993, as
Figures 7.1 and 7.2 illustrate.

The primary reasons for this appear to be that:

•    as a statutory monopoly the LPLC is not required to make a
     profit;
•    the guaranteed right to provide cover means that it does not have
     to build a significant risk premium into its prices in order to
     provide for the cost of claims which may arise after it ceases to
     collect premiums (due to the long tail nature of claims – see
     below);
•    its administrative and management costs are relatively low due to
     the fact it does not incur brokerage, commission, advertising or
     other such costs; and
•    its monopoly status means it has good quality information to use
     as a basis for setting premiums and identifying areas where
     investment in risk management programs may reduce the cost of
     claims (see below).




                                                                         83
                   Figure 7.1 Premiums per practitioner for PII insurance in
                              Australian states and territories, 2004 ($2004)

    12,000




    10,000




     8,000




     6,000
$




     4,000




     2,000




        0
             ACT        NSW         NT        QLD               SA   TAS   VIC   WA
                                                State or Territory




                   Source: LPLC, pers.comm., 26 April 2004.




                                                                                      84
                           Figure 7.2 LPLC premiums per practitioner for PII insurance,
                                      1993 to 2003 ($2004)


            6,000




            5,000




            4,000
$Thousand




            3,000




            2,000




            1,000




               0
                    1993        1994      1995       1996      1997      1998       1999     2000      2001      2002       2003
                                                                      Policy year


                           Source: LPLC, pers.comm., 26 April 2004.



                           A report by Trowbridge Consulting prepared for the 1998 review of
                           PII arrangements by the LPB (the Trowbridge report)37 illustrated the
                           reasons underlying the LPLC’s ability to provide cover for lower
                           premiums than commercial insurers using the example in Table 7.1:

                           Table 7.1         Premium comparison between the LPLC and
                                             commercial insurers ($)

                                                                          LPLC                      Commercial insurer
                           Net claims cost                                  116                                116
                           Expenses                                          5                                 13
                           Commission                                         -                                13
                           Reinsurance                                       8                                  8
                           Profit margin                                      -                                 9
                                                                            129                                159
                           Less investment return                            29                                29
                           Required premium                                 100                                130


                           ________________________
                           37
                             Trowbridge Consulting, Actuarial Review of Cases for Retaining LPLC as Monopoly Insurer, in Legal
                           Practice Board, 1998, Review of Professional Indemnity Insurance Arrangements for Solicitors in
                           Victoria: the Role of the Legal Practitioners Liability Committee, A Report and Recommendations to the
                           Honourable Jan Wade, MP, Attorney-General for the State of Victoria, June, Volume 3, p. 5.
                                                                                                                               85
A monopoly provider of insurance is more likely to be able to offer
stable premiums over time due to the fact it is shielded from
competitive pressures that may otherwise result in fluctuating
premiums that are not related to risk. Because a monopoly provider
has a guaranteed right to provide cover in the future, it is able to
smooth fluctuations in premiums over time that occur due to year to
year changes in claims outcomes and investment returns. Competing
commercial providers may be less able to do this.

The Trowbridge report found that a monopoly provider can reduce
premium instability compared to the market due to the fact that it is
not subject to the ‘underwriting cycles’ that insurance markets are
prone to. Key drivers of these cycles are changes in claims and
investment returns and competition for market share.

In its report, Trowbridge Consulting expressed the view that:

       There are a number of good reasons why the LPLC is in a better position
       to provide greater stability in premium rates than the commercial
       insurance market –

       •    it does not need to cut premium rates in response to increases in
            competitive pressures which are driven solely by market share
            aspirations
       •    it can afford to take a longer term approach to returning premium
            rates to a break-even level when claims or investment experience
            deteriorates
       •    it has flexibility as to how to distribute accumulated surpluses
            through reduced premiums when claims or investment experience is
            more favourable than expected
       •    it does not have to comply with the rigid ISC solvency requirements
            imposed on private insurers and can therefore operate at a low or
            negative surplus38, 39

Discussions held with insurers in the market for PII supported the
suggestion that private insurers may experience competitive pressures
driven by market share considerations.

There is a degree of competition between the PII schemes in Victoria,
NSW, Queensland, the ACT and the Northern Territory to provide
cover to national firms, as these jurisdictions exempt firms from
obtaining cover in each jurisdiction if they have cover in one of these
jurisdictions. That the LPLC is able to offer lower and more stable
premiums than insurers in these other jurisdictions is supported by the
fact that the LPLC now provides cover to 36 of the 39 national firms
(and 95 per cent of the solicitors practising in national firms).
However, while this may be evidence that a national market for PII for
________________________
38
     Ibid, p. 7.
39
     The LPLC comfortably meets APRA’s minimum capital requirements.
                                                                                  86
legal practitioners is emerging, it is impossible to say at this point in
time whether this is the case.

Affordable and stable premiums, as well as providing obvious benefits
to practitioners, also result in benefits to consumers of legal services
by ensuring that practitioners are able to afford cover (and hence
practice, which may have implications for access to legal services,
particularly in rural and regional areas) and that the costs of providing
services are lower and more stable.

Run-off cover
PII cover is provided on a claims made basis, and there is frequently a
period of some years between providing a legal service and a claim
arising from it being made (reflecting that it can be difficult to judge
the quality of legal services provided until some time after the service
is provided, as discussed in Chapter 5). This means that PII cover is
required for many years after a practitioner or firm has ceased to
practice, and that while a claim may relate to a period when a
practitioner was insured with an insurer, the claim itself may not be
made until after the insurer has ceased to provide the practitioner with
cover. The long-tail nature of claims is illustrated by Figure 7.3, which
shows the number of years between a service being provided and a
claim being notified for all LPLC claims over the period 1998 to
2003.




                                                                            87
                                  Figure 7.3 Years between provision of service and notification of
                                             claim, 1998 to 2003
                  1,600



                  1,400



                  1,200



                  1,000
Number of files




                   800



                   600



                   400



                   200



                     0
                          1 or less        2 to 3      4 to 6            7 to 10           11 to 15   16 to 20   20 plus
                                                        years between occurrence and notification


                                  Source: LPLC, pers.comm., 26 April 2004.

                                  Run-off cover is provided by the LPLC on the same terms as for
                                  current practitioners, and the costs spread across all insured
                                  practitioners. However, the experience of the Bar suggests that
                                  commercial insurers can be reluctant to provide run-off cover. In
                                  2001, Suncorp Metway offered runoff cover for barristers who were
                                  insured with them at the time they ceased to practice, on the basis that
                                  the cover continued only while the insurer continued to provide cover
                                  to practising Victorian barristers. Suncorp Metway subsequently
                                  ceased to provide this cover. Run-off cover was then only available to
                                  some barristers, on the basis they apply and pay an annual premium.

                                  In 2003-04 and 2004-05, the LPB made it a preferred term of the
                                  tender to the market that the successful tenderer provide automatic
                                  run-off insurance for all former barristers, ideally at no cost to former
                                  barristers. The successful tenderer provided this cover, however no
                                  other insurer which responded to the tender in either year provided
                                  this benefit. While all former barristers currently have run-off cover, it
                                  is not clear that this cover would be provided in a competitive market.
                                  This potentially would leave consumers without redress in the event of
                                  a claim. Further, it may increase the likelihood of disputes between
                                  insurers regarding who is responsible for the claim (this is discussed
                                  in more detail below).


                                                                                                                       88
                        Lower administrative and management costs
                        While in theory monopoly service providers are likely to be less
                        efficient and incur greater costs of service delivery than would be the
                        case in a competitive market, there is practical evidence to suggest
                        that the LPLC is able to deliver services at lower cost than would be
                        the case in a competitive market. The Trowbridge report suggested
                        that the operational costs of a monopoly provider would be lower than
                        those of a commercial insurer for reasons including lower expenses
                        for commissions and brokerage, and reduced advertising, marketing
                        and underwriting costs.

                        Data on general and administration expenses from the financial
                        statements in LPLC and LawCover (a company owned and controlled
                        by the New South Wales Law Society) annual reports provided by the
                        LPLC suggests that the LPLC’s administrative costs are significantly
                        lower than those of LawCover in NSW, both in total and on a per
                        practitioner basis, as shown in Figures 7.4 and 7.5.

                        Figure 7.4 Administration expenses for the LPLC and LawCover,
                                   1994 to 2004 ($ million)
            10


            9


            8


            7


            6
$ million




            5
                                                                                          Lawcover administration expense
                                                                                          LPLC administration expense
            4


            3


            2


            1


            0
                 1994    1995    1996    1997      1998       1999   2000   2001   2002
                                                Policy year


                        Source: LPLC, pers.comm., 26 April 2004.




                                                                                                              89
                        Figure 7.5 Administration expense per practitioner insured for
                                   the LPLC and LawCover, 1994 to 2003 ($)
         1,000


          900


          800


          700


          600
$ cost




                                                                                         per practitioner admin cost Lawcover
          500
                                                                                         per practitioner cost LPLC


          400


          300


          200


          100


            0
                   1
                 1994     2
                        1995     3
                               1996     4
                                      1997     5
                                             1998       6
                                                     1999       7
                                                             2000      8
                                                                    2001      9
                                                                           2002     10
                                                                                  2003

                                               Policy year



                        Source: LPLC, pers.comm., 26 April 2004.



                        While it is difficult to be definitive about the reasons for this because
                        detailed information on Lawcover’s administrative costs is not
                        publicly available, the difference is likely to be due at least in part to
                        the costs incurred in outsourcing to the market and assessment of
                        premiums for individual practitioners and firms in NSW which arise
                        due to the differences in the models under which the two organisations
                        provide PII.

                        PII for solicitors in NSW had a similar history to Victoria in the
                        1980’s, with a mutual fund monopoly introduced in the mid 1980s in
                        response to poor availability of cover with commercial insurers and
                        steep premium rises. In 1998, LawCover changed to a commercial
                        insurer monopoly with HIH, which was the sole provider of insurance
                        until its collapse in 2001. Since then, Great Lakes Reinsurance has
                        provided cover. Examination of the organisational charts of Lawcover
                        and the LPLC indicates that the difference in costs is also likely to be
                        due to differences in staff costs – in 2003 LawCover had
                        38 employees (including several claims solicitors and underwriters)
                        while the LPLC had 12 employees.



                                                                                                                     90
                              As discussed in Chapter 5, monopoly insurance providers may be able
                              to capture some of the benefits of competitive markets if they contract
                              out certain functions. In the case of the LPLC, limited functions are
                              undertaken ‘in-house’, with activities outsourced where it is efficient
                              to do so, including funds management, defence panel legal services
                              and actuarial services.

                              Information provided by the LPLC suggests it has been able to
                              provide cover at a high loss ratio, representing premium value for
                              policy holders. The value provided by the LPLC compared to
                              commercial insurers can be at least partly explained by the fact it does
                              not incur expenses associated with advertising, underwriting,
                              brokerage etc.

                              Figure 7.6 shows the LPLC’s expense ratios40 compared to general
                              insurers.

                              Figure 7.6 LPLC and general insurer expense ratio to premium
                                         (net of reinsurance), 1997 to 2002 (%)

                  35




                  30




                  25
% expense ratio




                  20
                                                                                                                   LPLC expense ratio
                                                                                                                   General insurance ratio*
                  15




                  10




                  5




                  0
                       1997                 1998            1999                 2000        2001           2002
                                                                   Policy year



                              Source: LPLC, pers.comm., 26 April 2004.
                              * APRA 2004, General Insurance Trends: September Quarter 2002 (Updated
                              24 February 2004)

                              Data provided by the LPLC also suggests it has a good record in terms
                              of estimating its claims exposure (in contrast with some commercial
                              insurers), as shown in Figure 7.7.
                              ________________________
                              40
                                   The expense ratio is ratio of underwriting expense to premium revenue.
                                                                                                                                91
          Figure 7.7 LPLC incurred estimates as a percentage of ultimate
          expenses incurred, 1986 to 2003 (%)

200%




150%




100%




50%




 0%
   1986    1988     1990      1992     1994      1996   1998       2000         2002         2004

                                         Policy year     Incurred at end policy year as % of ultimate

                                                         Incurred one year later as % ultimate

          Source: LPLC, pers.comm., 26 April 2004.

          Increased transparency
          The level of transparency of LPLC premiums and financial
          performance is high compared to a competitive market. This is
          because the LPLC has no incentive to hide this information from
          competitors.

          Through its annual report, statutory accounts and website, the LPLC
          reports extensive information about its operations and financial
          position, including the dollar amount of premiums and claims,
          operational costs, investment returns etc. By contrast, the annual cost
          of claims, premium pool and formula for allocating the premium pool
          across the profession are not made publicly available by private
          insurers and providers in other jurisdictions such as LawCover in
          NSW. This limits scrutiny of these insurers’ operations by the
          profession and the public.




                                                                                             92
Improved information from which to assess risks and inform risk
management requirements
Because it insures all Victorian legal practitioners, and has a
guaranteed right to do so in the future, a statutory monopoly provider
of PII cover has better quality information to assist it to accurately
assess the risk in relation to a particular firm or practitioner than
would be the case in the market, where there is a commercial
incentive not to disclose claims history and other relevant information
to competitors. As the sole provider of PII cover to solicitors in the
past, the LPLC has an extensive claims history database on which to
base its assessment of risk in relation to a particular firm or
practitioner.

Access to up-to-date information on the whole of the profession,
particularly in relation to claims history, is important in order to make
sound actuarial projections and for effective risk management
programs. In turn, this enables premiums to be set with a greater
degree of accuracy, which helps to ensure the stability of the scheme
and prevent under or over pricing.

As discussed in Chapter 5, regulation of the insurance industry in the
United States recognises the problem that commercial insurers have
obtaining appropriate information by providing for insurers to pool
claims information in order to generate class rates, as individual
insurers could not develop enough claims experience to rate on the
basis of their own portfolios.

While commercial insurers in Victoria could be required to report PII
claims and underwriting statistics for legal practitioners to a central
regulator, this would be likely to impose significant regulatory costs.

The reluctance of commercial insurers to disclose claims and
underwriting statistics is demonstrated by the experience of the Bar,
which has had significant problems obtaining claims history
information from previous insurers (most recently, Suncorp Metway
refused to provide claims information) in order to construct a claims
database for use in the tender process. This means that other insurers
do not have access to the same information as Suncorp Metway when
formulating their offer of insurance and thus must be more
conservative in setting their premiums (that is, build in a great risk
factor, resulting in higher premiums). Similarly, Zurich Professional
has recently refused to reveal the number of claims made under
policies it has written in the UK solicitors insurance scheme.




                                                                         93
Incentives to invest in risk management programs
Effective risk management can reduce the amount and number of
losses incurred as a result of a practitioner’s negligence or
incompetence. This is clearly in the interests of practitioners, their
clients, and PII providers.

As discussed in Chapter 5, while insurance companies have an
incentive to invest in activities that reduce the risks within their
portfolio, there is no incentive to minimise risk in the broader market
due to the risk that others will free-ride on this investment. In fact,
there is a disincentive to minimise risk outside their portfolio, as
higher risk will increase the overall market size and potentially
damage competitors. This is likely to be particularly the case where an
insurer has no guarantee it will provide cover the following year,
especially given that benefits arising from risk management activities
are likely to accrue over a period of time. Monopoly providers are
likely to have an increased incentive to invest in risk management
activities.

The LPLC has engaged in extensive risk management programs, and
is widely recognised as being very proactive and professional in its
activities in this area.41 The areas targeted by risk management
programs are identified through information in the LPLC’s claims
database and through monitoring of changes which may affect the
conduct of legal practice. Recent examples are the LPLC ‘s risk
management programs on the GST, VWA42 and ‘Armadio’43 claims.

While there are likely to be a range of factors at work, data provided
by the LPLC suggests that its risk management activities have resulted
in tangible benefits in the form of a lower incidence of claims, as
illustrated in Figures 7.8 to 7.11.




________________________
41
   The risk management activities of the LPLC complement the risk management and educational
activities undertaken by the professional associations and Legal Ombudsman.
42
   Changes to accident compensation laws in 1999 imposed a deadline for the notification of existing
rights, which were potentially confusing to practitioners and consumers.
43
   Claims relating to third party guarantors and mortgagors who were seeking to avoid their obligations to
lending institutions on the basis that they did not understand their obligations and the nature of the
transaction at the time they signed the relevant documentation.
                                                                                                        94
                        Figure 7.8 LPLC annual cost of claims, 1993 to 2004
                                   ($2004 million)

           25




           20




           15
$Million




           10




           5




           0
                1993   1994   1995     1996    1997      1998       1999   2000-01   2001-02   2002-03   2003-4
                                                      Policy year




                        Source: LPLC, pers.comm., 26 April 2004.




                                                                                                              95
                                Figure 7.9 Number of GST-related claims incurred by the LPLC,
                                           2000 to 2003

                   14




                   12




                   10
number of claims




                   8




                   6




                   4




                   2




                   0
                        2000/2001               2001/2002                 2002/2003   2003/2004
                                                            policy year


                                Source: LPLC, pers.comm., 26 April 2004.




                                                                                                  96
          Figure 7.10 Number of VWA-related claims incurred by the
                     LPLC, 2000 to 2003
25




20




15




10




5




0
     2000/2001               2001/2002                         2002/2003   2003/2004
                                     Policy yearnumber of claims




          Source: LPLC, pers.comm., 26 April 2004.




                                                                                       97
                           Figure 7.11 Number of Armadio claims incurred by the LPLC,
                                      1993 to 2003

                   40



                   35



                   30



                   25
number of claims




                   20



                   15



                   10



                   5



                   0
                        1993    1994   1995    1996    1997       1998   1999   2000-01   2001-02   2002-03   2003-04
                                                         Policy year


                           Source: LPLC, pers.comm., 26 April 2004.

                           The risk management activities undertaken by the LPLC contrast with
                           the experience of the Bar in seeking the collaboration of private
                           insurers of its members in risk management activities. The Bar has
                           suggested that its insurers do not actively engage in risk management
                           activities among its members. When approached by the Bar to
                           collaborate on a particular risk management program, a previous
                           insurer was willing to do so only for a significant fee.

                           Improved consumer protection
                           Provision of PII through a statutory monopoly is likely to result in
                           improved consumer protection compared to the competitive market,
                           primarily through the provision of universal cover on consistent terms
                           and conditions, and ensuring run-off cover is available to cover claims
                           which arise after a firm or practitioner has ceased to practice. These
                           issues are discussed in more detail above.

                           The importance of providing consumer protection through the
                           provision of PII is illustrated by data presented in Chapter 4, which
                           shows that a significant proportion of Victorian legal practitioners are
                           in small firms and/or have less than 6 years experience. If these
                           practitioners were unable to obtain affordable cover on consistent


                                                                                                                   98
terms and conditions, the extent to which redress is available to
consumer would be reduced.

While legal practitioners are the direct consumers of PII, ultimately, it
is consumers of legal services that are the beneficiaries. It is therefore
in the interests of consumers that practitioners are able to obtain
affordable coverage on consistent terms and conditions that is stable,
secure and ongoing. If such cover is not available, ultimately, it is the
consumer that will pay, either in the form of higher prices for legal
services, or through lack of redress in the event of a claim.

In recent years, the Bar has witnessed the collapse of HIH as its
insurer in March 2001, the announcement by Suncorp Metway in
February 2002 of its withdrawal from the PII market followed by a
reversal of that position in May 2002, the withdrawal of St Paul from
the Australian market, and the failure of QBE both last year and the
previous year to bid for the primary layer of insurance for Victorian
barristers.

The Bar’s experience in recent years indicates that a very limited
number of commercial insurers are interested in providing cover, and
that only Great Lakes Reinsurance has been willing to do so on the
terms and conditions required by the LPB.

In 2002-03, only AmRe met the terms required by the LPB – neither
Suncorp Metway nor Ace Insurance were able to do so. In 2003-04,
only Suncorp Metway and Great Lakes Reinsurance expressed interest
in providing cover, and only Great Lakes Reinsurance offered cover
that met the terms and conditions required by the LPB. In 2004-05,
only two tenders were received – from Great Lakes Reinsurance and
AIG. Great Lakes Reinsurance again offered cover that meets the
terms and conditions required by the LPB, however AIG’s terms do
not comply. Suncorp Metway has not offered any terms for approval
to the LSB, and neither Ace Insurance, QBE nor Vero expressed
interest in providing the primary layer of cover to Victorian barristers.

The LPB has again approved Great Lakes Reinsurance as the insurer
of Victorian barristers for 2004-05. However, Great Lakes
Reinsurance is not an authorised insurer in Australia, and hence not
subject to APRA regulation or the Australian courts. Should it
withdraw from the Australian market, it would be significantly more
difficult to pursue claims that arise in the future that relate to the
period during which it provided cover than if it were an authorised
insurer.




                                                                         99
The experience of the Bar suggests that the commercial market is
unwilling to provide PII cover that is stable, secure and on-going.
Clearly, this is not in the interests of consumers.

Reduced search costs for consumers
By ensuring that PII cover is universally available on consistent terms
and conditions, the search costs incurred by consumers to find a
practitioner with suitable terms and conditions of insurance cover to
provide the required services is reduced compared to those likely to be
incurred in a competitive market.

Financial stability
The financial stability of the LPLC is enhanced by the fact it is able to
make up any shortfall in premiums in a given year in the following
year. This is not necessarily the case in the market, given there is no
guarantee that an insurer will be able to provide cover in subsequent
years.

The financial security of the LPLC is also enhanced by its ability to
levy practitioners in the event that it considers its reserves are unlikely
to be adequate to meet it liabilities. This also ensures there is no
financial risk to the Government arising from the statutory monopoly
provision of insurance.

Reduced transaction costs to lawyers
Statutory monopoly provision of PII cover to all Victorian legal
practitioners is likely to result in significantly reduced transaction
costs for practitioners compared to those likely to be incurred in a
competitive market or a commercial monopoly provider.

The experience of the Bar is that significant transaction costs are
incurred each year in its tender for the provision of PII. Large amounts
of the time of its CEO and several senior barristers are devoted each
year to putting the tender to the market, assessment of tenders and
liasing with the LPB in relation to the tender. The LPB also incurs
significant transaction costs.

While allowing individual practitioners to arrange their own PII cover
would reduce the transaction costs incurred by the professional
associations compared to market provision, the costs incurred by
individual practitioners (and, depending on its role in approving terms
and conditions, the LSB) would be significant.




                                                                         100
Reduced likelihood of disputes between insurers
Provision of PII insurance by a single statutory provider reduces the
likelihood of disputes between insurers (either between successive
insurers or between the LPLC and insurers of barristers). When
insurance is provided by multiple providers (either at the one time, or
over time), there are inevitably disputes about who is responsible for a
claim. This incurs significant costs and delays in the handling of
claims. While clauses relating to arbitration and mediation of disputes
between insurers could be included in minimum terms and conditions
of insurance (as is the case in the UK), this imposes additional
regulatory costs.

Disputes between insurers can also occur when a firm splits or
merges. While under a statutory monopoly there is only one affected
insurer, this is often not the case where there are multiple providers.
This is an emerging issue in the UK market.

Reduced regulatory costs
Regulatory costs can be reduced through a statutory monopoly
provider of PII. While regulation is required to ensure that the
monopoly does not abuse its monopoly status, these costs are likely to
be less than the significant costs incurred in developing, approving,
and enforcing minimum terms of coverage. This is supported by the
experience of the LSB in its role in approving the terms and
conditions of insurance for the Bar.

Costs
The potential costs associated with provision of the primary level of
PII cover to Victorian lawyers through a statutory monopoly are of
both a theoretical and a practical nature, and include:

•    a reduction in the choice of PII products available to Victorian
     lawyers;
•    reduced incentives for innovation;
•    theoretically higher premiums;
•    a reduced ability for the insurance provider to spread risk across
     a range of services provided; and
•    less potential for cost reductions due to economies of scope.

Reduction in the choice of PII products
Provision of PII cover through the market could allow practitioners a
greater choice of policy terms and conditions and premiums to meet
their particular circumstances than is available under the LPLC.
However, as discussed above, it is in the interests of consumers that a
                                                                        101
minimum standard of terms and conditions is met. Ensuring that this
occurred would increase regulatory costs (for example, if the LPB was
required to approve terms and conditions of a range of policies
available). Differences in the terms and conditions of cover is also
likely to increase the transaction costs incurred by practitioners in
obtaining cover, and consumers in finding a practitioner with
appropriate insurance to provide the services required.

Reduced incentives for innovation
In theory, monopoly provision of PII through the LPLC reduces the
incentives for innovation in relation to the services offered and their
delivery. In this way, the market may be able to deliver a broader
range of services or deliver services at lower cost than is the case
under the LPLC. However, as discussed above, there appear to be
practical reasons why the scope for these outcomes to occur is limited,
including the need for regulatory intervention to ensure that minimum
terms and conditions of cover are met, and that the LPLC appears to
be able to deliver services at a lower cost than would commercial
insurers.

Higher premiums
In theory, the absence of competitive pressures is likely to result in
increased prices of services. However, practical experience suggests
that this is not the case for provision of PII for Victorian legal
practitioners (this is discussed in more detail above).

Reduced ability for the insurance provider to spread risk across a
range of services provided
Commercial insurers usually offer a range of insurance products (both
PII provided to other occupational groups, and the broader range of
insurance products provided), which allows them to spread risk across
the range of services provided. The LPLC, on the other hand, offers
only PII for legal practitioners, and hence has less scope to spread risk
across a broad range of services.

Less potential for cost reductions due to economies of scope
That commercial insurers usually offer a range of insurance products
also allows them to capture the benefits associated with economies of
scope. The scope for the LPLC to reduce costs and provide innovative
services through economies of scope is limited by the fact that it
providers a much narrower range of services (though, as discussed
above, the LPLC may be able to capture some of the benefits of
competitive markets by contracting out certain functions). While this
may be the case, practical evidence suggests that the costs incurred by

                                                                         102
the LPLC are low compared to commercial insurers. This is discussed
in more detail above.

Net benefit/cost
On balance, it is considered that the provision of the primary level of
PII cover to Victorian solicitors and barristers through the statutory
monopoly provider, the LPLC, results in a net benefit to society.

Alternatives
The alternatives to providing the primary level of PII cover to
Victorian solicitors and barristers through the LPLC can be grouped
into four broad alternatives, which can be further broken down into
various sub-options, as follows:

1. provision of cover through competing commercial insurers:
   • abolish the LPLC and allow individual practitioners to obtain
      compulsory PII through private insurance providers;
   • maintain the LPLC but remove its monopoly status and allow
      practitioners to choose whether to obtain compulsory PII
      through the LPLC or private insurance providers;
2. provision of cover through a statutory monopoly insurer:
   • maintain the LPLC as the statutory monopoly provider of
      compulsory PII, and strengthen the provisions relating to the
      operations and regulatory oversight of the LPLC;
   • maintain the LPLC as the statutory monopoly provider of
      compulsory PII to solicitors, but maintain current
      arrangements for PII for barristers (ie. maintain the status
      quo);
3. provision of cover through a commercial monopoly insurer:
   • abolish the LPLC and require practitioners to obtain primary
      PII through a commercial monopoly insurance provider;
   • abolish the LPLC and require practitioners to obtain primary
      PII through a managed general agency scheme with two or
      three providers;
4. provision of cover through a hybrid model:
   • introduce a hybrid model comprising elements of a mutual
      fund and competitive provision of PII.

Each of these four broad alternatives is discussed in more detail
below. In the interests of brevity and to avoid extensive repetition of
the discussion relating to the proposed regulatory approach, these
alternatives are discussed briefly, with reference to the discussion
above where appropriate. Any differences in the benefits and costs of
each sub-option are drawn out where relevant. The magnitude of


                                                                      103
benefits and costs are discussed relative to the proposed regulatory
approach.

Alternative 1:   Provision of cover through competing commercial
                 insurers

This alternative could involve either:

•    abolishing the LPLC and allowing individual solicitors and
     barristers to obtain compulsory PII through private insurers; or
•    maintaining the LPLC but removing its monopoly status and
     allowing practitioners to choose whether to obtain compulsory
     PII through the LPLC or private insurance providers.

Benefits

The main benefits of this alternative relative to the proposed approach
are:

•    increased choice for consumers of PII;
•    increased incentives for innovation; and
•    in theory, reduced premiums, and hence prices for legal services
     to consumers.

However, as discussed previously, these benefits tend to be theoretical
in nature, and may not be realised in practice.

Costs

The costs associated with this alternative relative to the proposed
approach relate to:

•    reduced consumer protection due to the fact the market is
     unlikely to provide universal cover to all practitioners on the
     same terms and conditions, and provide an appropriate standard
     of run-off cover;
•    that some lawyers may be unable to obtain insurance, and hence
     practice law – while this may be appropriate for incompetent
     practitioners, it is likely some competent practitioners would be
     unable to obtain affordable cover even though they do not pose a
     significant risk;
•    in practice, increased premiums, and hence prices for legal
     services to consumers;
•    reduced incentives to invest in risk management programs, to the
     ultimate detriment of consumers;


                                                                        104
•    reduced transparency of premiums and financial performance
     (though financial performance of authorised insurers is
     monitored by APRA);
•    increased search costs for consumers to find a practitioner with
     suitable skills, experience and insurance to provide the required
     services;
•    increased transaction costs for lawyers to arrange cover; and
•    potentially increased regulatory costs to the LSB (if it were to
     have a role in approving minimum terms and conditions of
     cover).

A potentially significant additional cost associated with allowing
practitioners to choose whether to obtain compulsory PII through the
LPLC or private insurance providers is that the financial viability of
the LPLC is likely to be jeopardised if it was required to provide
insurance to those who were unable to obtain insurance from private
insurers (that is, if it were an insurer of last resort). This is because
commercial insurers are likely to ‘cherry pick’ low risk practitioners
and firms and those who have the capacity to pay high premiums. This
would leave the LPLC to insure those who are higher risk or have
limited capacity to pay for insurance. As the claims liability associated
with these practitioners is not likely to be lower than those insured by
the commercial market, it is likely that the financial viability of the
LPLC would be jeopardised.

While the fact that the LPLC competes with insurers in other
jurisdictions to provide PII for national firms could indicate that a
national market for PII is emerging, it is impossible to say at this point
in time whether this is the case. Therefore, on balance, this alternative
does not appear to be a viable alternative to the proposed approach at
this point in time.

Alternative 2:   Provision of cover through a statutory monopoly
                 insurer

This alternative would involve maintaining the LPLC as the statutory
monopoly provider of compulsory PII and either:

•    strengthening the provisions relating to the operations and
     oversight of the LPLC; or
•    requiring that barristers continue to obtain PII cover in the
     market (ie. maintaining the status quo).

As discussed above, there is general agreement that the LPLC has
been able to provide high quality PII cover at relatively low cost to
Victorian solicitors over an extended period of time. The scheme has

                                                                       105
built up significant capital reserves, comfortably meeting APRA’s
minimum capital requirements, which means it is highly likely that it
will be able to meet future liabilities. It also takes out reinsurance
cover to enable it to meet claims arising from catastrophic events.

However, it could be argued that the proposed regulatory provisions
relating to the manner in which the operations of the LPLC are carried
out and regulatory oversight of the LPLC could be further
strengthened to provide comfort that the LPLC will continue to
operate in a manner that results in appropriate outcomes. There was
general support among stakeholders, including the LPLC, for this
approach.

The State-based provisions do not contain specific requirements
relating to the information to be contained in the LPLC’s annual
report. As discussed previously, the LPLC currently reports extensive
information about its operations and financial position in its annual
report. Its financial statements are also audited by the Auditor-
General. Consideration could be given to specifying the content of the
annual report in order to entrench this transparency. This is discussed
further below.

Consideration could also be given to diversifying the membership of
the LPLC, which currently comprises a majority of members from the
profession, to provide reassurance that the LPLC will continue to
operate in a manner that results in appropriate outcomes.
Section 54(2) of the State-based provisions requires that at least one
member of the LPLC must be a person who has knowledge of or
experience in the insurance industry. The provisions contain no other
requirements relating to the skills and experience of members of the
LPLC. While the LPLC currently has a member who represents
consumers of legal services, there is no requirement that it do so under
either the Act or the Bill. Reassurance that the interests of consumers
are represented could be provided by including a specific statutory
requirement that the LPLC contain a member who represents the
interests of consumers of legal services. Should the LPLC also
become the insurer of Victorian barristers, it may also be desirable to
require that one member of the LPLC represent the interests of
solicitors and that one member represent the interests of barristers.
Given that the LPLC is responsible for management of a significant
amount of funds, it may also be appropriate to require that one
member have financial knowledge or experience.

As noted in Chapter 4, development of provisions relating to PII is
continuing under the National Project. In the interim, it is proposed
that PII arrangements in Divisions 1 and 2 of Part 8 of the Act are
carried forward to the Bill.
                                                                        106
Section 228(5) of the Act requires that:

   In determining premiums and excesses in relation to contracts of
   professional indemnity insurance, the Liability Committee must take into
   account the following —

   (a) any significant differences in risk attaching to —
       (i) the different types of legal practices of practitioners or firms;
       (ii) the different types of matters handled by practitioners or firms;
   (b) the number of other practitioners employed by practitioners and the
       number of partners of, and practitioners employed by, firms;
   (c) the need to encourage proper management of risk;
   (d) the past claims records of practitioners or firms;
   (e) the cost and difficulty of differentiating between different classes of
       legal practitioners and firms;
   (f) whether the amount standing to the credit of the Liability Fund is
       likely to be sufficient to meet the liabilities to which it is subject.

Inclusion of such a provision in the Bill would help ensure that the
LPLC takes into account appropriate considerations when setting
premiums. Consideration could also be given to requiring the LPLC to
obtain actuarial advice in determining premiums, and disclosing
whether, why and the extent to which it adopted that advice, either in
its annual report or a report to the body with ultimate responsibility for
approving or determining premiums, terms and conditions (discussed
further below).

The LPB is required under section 228(4) of the Act to approve the
arrangements for, including the terms of contracts of, PII determined
by the LPLC, though no guidance is provided on how the LPB is to
undertake this approval process. It could also be argued that it is
unclear whether the ultimate responsibility for the terms and
conditions (including premiums) of PII rests with the LPLC or the
LPB. This raises the potential for a ‘stalemate’ to occur should the
LPB and LPLC disagree on the terms and conditions of PII.

This potential could be eliminated by making it clear in the provisions
with whom the ultimate responsibility for determining terms and
conditions of PII rests – the LPLC, LSB or another party.

Conferring ultimate responsibility on the LPLC has the advantage that
the LPLC has the skills, experience and detailed information
necessary to determine appropriate terms and conditions. However,
the LPLC is not required under the proposed provisions to have regard
to the interests of consumers, who are the ultimate beneficiaries of a
PII scheme. Further, the current predominance of representatives of
the profession on the LPLC at least in theory raises potential for the
interests of the profession (in the form of low premiums) to be

                                                                                 107
favoured over the interests of consumers of legal services or the
community in general. These concerns could be alleviated by
diversifying the membership of the LPLC as discussed above.

If ultimate responsibility for determining terms and conditions were
conferred on the LPLC, consideration could be given to amending the
provisions relating to the role of the LSB in approving terms and
conditions. For example, the LSB could be given the power to
‘review’ terms and conditions, along with the power to make
recommendations to the LPLC. The LPLC could also be required to
take any such recommendations into account in determining terms and
conditions. To provide transparency, the LSB could be required to
publish any recommendations in its annual report, and the LPLC also
required to publish these recommendations, along with whether, why
and the extent to which it adopted the LSB’s recommendations.

Concerns relating to the potential for the interests of the profession to
override consumer or public interests could be overcome by
conferring the ultimate responsibility for determining terms and
conditions on the LSB, which has a legislative objective relating to the
protection of consumers of legal services.

As outlined in Chapter 4, it is proposed that the LSB will comprise
members of the profession, at least one member with experience in
financial or prudential management, and at least one member who
represents the interests of consumers of legal services. These
requirements, in addition to its ability to seek external advice, provide
reassurance that the LSB has access to the range of skills and
experience necessary to determine the terms and conditions of PII.
Consideration could be given to whether the LSB be required to have
one member with prudential experience (rather than financial or
prudential experience) to further strengthen this assurance.

However, the role of the LPB in approving terms and conditions of PII
provided by the LPLC has not been rigorously tested in the past due to
the fact that premiums have been adequate to cover the cost of claims
without the need for significant changes in premiums from year to
year or imposing a levy on practitioners to make up any shortfall.

If ultimate responsibility for determining terms and conditions of PII
were to rest with the LSB, consideration could be given to making it
explicit in the Bill that the ultimate responsibility for determining
terms and conditions rests with the LSB, and providing further
guidance on how the LSB is to implement its powers in this respect.
For example, the LPLC could be required to recommend terms and
conditions (including premiums), and the reasons underlying its
recommendation (including whether, why and the extent to which it
                                                                       108
adopted actuarial advice) to the LSB. The LSB could then be required
to make a determination on the terms and conditions of PII and
provide reasons for its determination (including whether, why and the
extent to which it adopted the LPLC’s recommendation).

It could also be made explicit in the Bill that the LSB is able to obtain
actuarial, economic, legal or other advice for the purposes of this
function. While it would be possible to require the LSB to obtain such
advice, this may result in unnecessary costs in some years. An
alternative approach would be to provide for the LSB to appoint or
approve the actuaries to be used by the LPLC, and for actuarial reports
to be provided to both the LPLC and LSB. This approach has the
advantages that it eliminates the cost associated with the LSB
obtaining additional actuarial advice and ensures the LSB has access
to appropriate information in making its determination.

While it is current practice that the LPLC provides detailed
information to the LPB on the reasons underlying its decision in
relation to terms and conditions (including providing copies of
actuarial advice received), it does so on a voluntary basis. Enshrining
the requirement in the Bill would ensure that this practice continued.

The LSB could also be required to report on its determination of terms
and conditions in its annual report, including whether, why and the
extent to which it accepted the recommendation of the LPLC on the
terms and conditions of PII, the reasons underlying its determination
and whether it sought actuarial, economic, legal or other advice for the
purposes of its determination.

Ultimate responsibility for determining terms and conditions could
also be conferred on the Government, as is the case for both the VWA
and the TAC. Under these schemes, the Government has the ultimate
power to determine premiums or charges, and the Minister may
request the Essential Services Commission to review premiums or
charges and provide advice or make recommendations to the Minister
in relation to those premiums or charges.

Conferring responsibility for determining terms and conditions on the
Minister or the Government would, however, increase scope for
political intervention and reduce the independence of the profession
from the executive arm of Government. It may also be a time
consuming and costly process, which could raise practical problems
given that PII is a pre-requisite to obtaining a practising certificate.
Further, while in the case of the TAC and VWA the Government
bears a risk if a scheme becomes financially unstable, in the case of


                                                                      109
the LPLC the risk is borne by the profession44 rather than the
Government.

Consideration could also be given to whether requirements relating to
the provision of insurance to barristers be made explicit in the
provisions of the Bill – for example, whether barristers should be
required to be insured through a separate pool in order to reduce scope
for cross-subsidisation (or make transparent any cross-subsidisation
that would occur). The LPLC has indicated that it would seek to set up
a separate pool for barristers.

Benefits

The benefits of the proposed regulatory approach discussed above also
apply to this alternative.

Amending the provisions relating to the operations and oversight of
the LPLC has some additional benefits compared to the proposed
approach in terms of ensuring there are appropriate checks and
balances in place to help ensure the LPLC continues to be well
managed, has adequate capital reserves to meet the cost of claims,
invests funds appropriately, has suitable policy terms and conditions,
charges appropriate premiums, operates in transparent manner etc.

On the other hand, the benefits of maintaining the status quo are likely
to be smaller in magnitude than the proposed regulatory approach due
to the exclusion of barristers from the LPLC scheme.

Costs

The costs associated with the proposed regulatory approach also apply
to this alternative.

However, providing for additional requirements in relation to the
operations and oversight of the LPLC is likely to result in some
additional regulatory costs compared to the proposed approach
(though to the extent that these measures are currently implemented
on a voluntary basis these additional costs will be minimised).

Maintaining the status quo would also result in additional costs
compared to the proposed approach due to:

•      reduced consumer protection to the extent that the terms and
       conditions of cover are lower than those offered by the LPLC;

________________________
44
  Though this is likely to be passed on, at least in part, to consumers of legal services, who are the
ultimate consumers of PII.
                                                                                                         110
•    transaction costs incurred by the Bar in arranging PII cover for
     barristers; and
•    regulatory costs incurred by the LSB in relation to barristers PII.

On balance, this alternative appears to be a viable alternative to the
proposed regulatory approach. Amending the provisions relating to
the operations and oversight of the LPLC is likely to result in greater
net benefits than the proposed regulatory approach. However, the net
benefits of maintaining the status quo are likely to be of a lower
magnitude than those of the proposed regulatory approach.

Alternative 3:   Provision of cover through a commercial monopoly
                 insurance provider

This alternative would involve abolishing the LPLC and requiring
practitioners to obtain primary PII cover through either:

•    a commercial monopoly insurance provider; or
•    a managed general agency scheme with two or three providers.

Benefits

The main benefit of this alternative compared to the proposed
regulatory approach is that it would remove the costs associated with
the existence of the LPLC, including operational, overhead and
regulatory costs.

It would also provide increased scope for the insurance provider/s to
spread risk across a range of services provided, and for cost reductions
due to economies of scope.

Requiring practitioners to obtain primary PII cover through a managed
general agency scheme with two or three providers would also offer
the additional benefits of:

•    increased choice for consumers of PII; and
•    increased incentives for innovation.

Costs

The costs associated with this alternative include:

•    increased costs of providing services, due to the fact that a
     commercial insurer is required to make a profit, and the costs
     associated with outsourcing to the market and assessing
     premiums for individual practitioners and firms;

                                                                      111
•    reduced consumer protection if terms and conditions are reduced
     relative to those provided by the LPLC;
•    in practice, increased premiums, and hence prices for legal
     services to consumers;
•    limited incentives to invest in risk management activities given
     there is no guarantee that insurers will provide cover in the
     future, to the ultimate detriment of consumers;
•    increased transaction costs associated with the tender process;
•    increased regulatory costs associated with approval of the
     winning tender, oversight and monitoring of the incumbent
     insurer, and ensuring minimum terms and conditions are met;
•    the likely short-term focus of commercial providers who have no
     guarantee that they will provide cover in the future;
•    the limited number of firms in the market for PII has potential to
     limit any benefits associated with a competitive tender process;
•    the commercial disincentive to disclose information relating to
     claims history etc, which may reduce the number of firms willing
     to provide insurance due to the limited nature of the information
     available to assess risks;
•    reduced transparency of premiums and financial performance
     (though financial performance of authorised insurers is
     monitored by APRA);
•    increased likelihood of disputes between successive insurers; and
•    where the insurance provider is not an authorised insurer in
     Australia (and hence not subject to APRA regulation) increased
     transaction costs associated with ensuring they have sufficient
     financial standing to provide cover, and potential problems which
     may arise if they cease to provide cover and it becomes necessary
     to seek redress for subsequent claims.

An additional cost associated with the provision of PII through a
commercial monopoly insurance provider is the uncertainty about
whether the incumbent will withdraw from the market – decisions to
provide PII are often driven by profit considerations, and there have
been a number of firms withdraw from the market in recent years.

Requiring practitioners to obtain primary PII cover through a managed
general agency scheme with two or three providers would also result
in increased transaction costs for lawyers to arrange cover.

In summary, the benefits of this alternative are likely to be
significantly less and the costs significantly greater than those
associated with the proposed regulatory approach.




                                                                    112
Alternative 4:   Provision of cover through a hybrid model

This alternative involves provision of a base level of cover through a
mutual fund, with the balance of cover provided through a commercial
insurer/s acting in conjunction. Such a model has been adopted in
South Australia and Western Australia. In South Australia, solicitors
and barristers are covered by a scheme providing cover partly from a
mutual fund (up to $200,000), with the balance of cover provided
through a master policy negotiated by the Law Society with
commercial insurers (up to $750,000). In Western Australia, while the
Act does not stipulate the form of insurance scheme, under current
regulations practitioners must be insured under an arrangement
between the Law Society and one or more commercial insurers.
Currently, the first $100,000 of cover is provided through a mutual
fund and the balance (up to $1.5 million) is provided through a master
policy negotiated by the Law Society with commercial insurers.

Benefits

The mutual fund component of this alternative could confer many of
the advantages associated with a statutory monopoly insurer, in
particular lower and more stable premiums, lower administrative
costs, increased transparency, increased incentives for risk
management, improved consumer protection and financial stability.
However, it is likely that these advantages would be of a lesser
magnitude than those associated with a statutory monopoly, largely
due to the fact that only a base level of cover is provided through the
mutual fund.

The commercial component of this alternative could confer similar
advantages to those of Alternative 3 (Provision of cover through a
commercial monopoly insurance provider). These benefits include
increased scope for the insurance provider/s to spread risk across a
range of services, and for economies of scope. Multiple commercial
insurers would have the additional benefits of increased choice for
consumers of PII and increased incentives for innovation.

Costs

The practical costs of this alternative would also be likely to be similar
to those for Alternative 3 – that is, increased costs of providing
services, potentially higher and less stable premiums, reduced
consumer protection (if commercial terms and conditions of cover are
lower), increased regulatory costs, reduced transparency and increased
likelihood of disputes between insurers. It would also be likely to
incur greater administrative costs, due to the fact that both the costs
associated with the mutual fund and those associated with the tender
                                                                       113
                             process to arrange the commercial component of the cover would be
                             incurred, and because for claims which exceed the level of cover
                             provided through the mutual fund, it would be necessary for both
                             insurers to be involved in the claims handling process.

                             In summary, this alternative does not capture the full extent of the
                             benefits of the proposed regulatory approach, and is likely to incur
                             significant costs compared to the proposed approach.

                             Recommendation
                             After considering the benefits and costs of the proposed regulatory
                             approach and alternatives, it is recommended that, at this point in
                             time, the LPLC be maintained as the statutory monopoly provider of
                             compulsory PII for Victorian solicitors, and that the LPLC also be the
                             statutory monopoly provider of compulsory PII for Victorian
                             barristers.

                             However, it is recommended that consideration be given to whether
                             the provisions relating to the operations and regulatory oversight of
                             the LPLC should be strengthened to ensure that appropriate legislative
                             arrangements are in place to help ensure the LPLC continues to
                             perform its legislative functions in an appropriate manner and that
                             appropriate outcomes are achieved.

                             It is considered that this approach best achieves an appropriate balance
                             between providing adequate consumer protection and ensuring stable
                             and affordable PII cover for legal practitioners, while minimising any
                             potential costs associated with a statutory monopoly insurance
                             provider.

                             The Government should monitor changes in the market for PII
                             insurance for other occupations, and for lawyers in other jurisdictions,
                             arising from the introduction of professional standards legislation and
                             other developments to determine whether the recommended approach
                             continues to be the most appropriate approach in the future.

                             Summary

Restriction on              Benefits                    Costs                       Recommendation
competition
Monopoly provision of       • High quality,             • Reduction in the choice   It is recommended that, at
primary PII cover for all     comprehensive cover         of PII products           this point in time, the
Victorian legal             • Universal cover             available                 LPLC be maintained as
practitioners by the LPLC   • Lower, more stable        • Reduced incentives for    the statutory monopoly
                              premiums                    innovation                provider of compulsory
                            • Availability of run-off   • Higher premiums (in       PII for Victorian solicitors,

                                                                                                             114
Restriction on   Benefits                    Costs                       Recommendation
competition
                   cover                       theory)                   and that the LPLC also be
                 • Lower administrative      • Reduced ability to        the statutory monopoly
                   and management costs        spread risk across a      provider of compulsory
                 • Increased transparency      range of services         PII for Victorian
                   of premiums and             provided                  barristers.
                   financial performance     • Less potential for cost
                 • Improved information        reductions due to         However, it is
                   from which to assess        economies of scope        recommended that
                   risks and inform risk                                 consideration be given to
                   management                                            whether the provisions
                   requirements                                          relating to the operations
                 • Increased incentives to                               and regulatory oversight
                   invest in risk                                        of the LPLC should be
                   management programs                                   strengthened to ensure that
                 • Improved consumer                                     appropriate legislative
                   protection due to:                                    arrangements are in place
                   − universal coverage                                  to help ensure the LPLC
                       on the same terms                                 continues to perform its
                       and conditions                                    legislative functions in an
                                                                         appropriate manner and
                   − guaranteed
                       provision of runoff                               that appropriate outcomes
                                                                         are achieved.
                       cover
                 • Reduced search costs
                                                                         The Government should
                   for consumers
                                                                         monitor changes in the
                 • Financial stability
                                                                         market for PII insurance
                 • Reduced transaction                                   for other occupations, and
                   costs to lawyers                                      for lawyers in other
                 • Reduced likelihood of                                 jurisdictions, arising from
                   disputes between                                      the introduction of
                   insurers                                              professional standards
                 • Reduced regulatory                                    legislation and other
                   costs associated with                                 developments to determine
                   ensuring minimum                                      whether the recommended
                   terms and conditions of                               approach continues to be
                   cover are met                                         the most appropriate
                                                                         approach in the future.




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7.5     Regulation of Conveyancing Services

Conveyancers are currently not regulated in Victoria, apart from the
requirements contained in the Act. As noted in Chapter 4, it is
proposed that the current provisions relating to regulation of
conveyancing be carried forward to the Bill.

The main restrictions on competition arising from the State-based
provisions relating to the regulation of conveyancing services are:

•     reservation of the carrying out of legal work in relation to
      conveyancing to lawyers;
•     restrictions on who is able to carry out conveyancing work; and
•     that lawyers are required to hold PII while conveyancers are not.

Reservation of legal work in relation to conveyancing
The national provisions prohibit those who are not legal practitioners
from engaging in legal practice, subject to any law which authorises a
person to engage in legal practice, and provide for jurisdictions to
include exceptions to this prohibition (s. 202).

As noted in Chapter 4, it is proposed to carry forward under the Bill
the arrangements in the Act which prohibit those not permitted to
engage in legal practice from carrying out legal work in relation to
conveyancing services.

Nature of restriction
While non-lawyers are able to engage in conveyancing work (that is,
the non-legal aspects of work associated with conveyancing
transactions), legal work associated with conveyancing is only able to
be carried out by lawyers.

This means that lawyers can be engaged by a seller to prepare all the
required documentation including the vendor’s statement and the
contract of sale. They can also be engaged by a buyer to:

•     conduct relevant searches and make requisitions;
•     ensure that the transfer of title is done correctly; and
•     advise on how different types of title may affect their ownership
      rights and responsibilities.

Non-lawyers can be engaged by a seller to prepare the vendor’s
statement but not other legal documentation such as the contract of

                                                                        116
sale. They can also be engaged by a buyer to conduct searches on title
and check the vendor's statement.

This restricts competition by preventing non-lawyers from competing
with lawyers to provide legal services in relation to conveyancing.
This restriction can be regarded as promoting the legislative objective
of protecting consumers of legal services, by addressing problems
associated with information asymmetry and externalities.

Effect on competition and the economy
By restricting competition between lawyers and non-lawyer
conveyancers, this restriction is likely to reduce demand for
conveyancing services conducted by non-lawyers, and may also result
in higher prices for conveyancing services to consumers. This may in
turn reduce the overall consumption of conveyancing services
(provided by both lawyers and non-lawyers). Because conveyancing
services are an input into property transactions, there may be flow-on
effects in the market for property transactions which arise due to the
increased total cost to consumers of a property transaction (though
conveyancing costs are likely to comprise a relatively small
proportion of many property transactions). There may also be impacts
on the upstream market offering education services to conveyancers.

Benefits
Reservation of legal work in relation to conveyancing to lawyers has a
number of potential benefits, including:

•    protecting consumers by minimising the risk that consumers will
     receive legal services of inadequate quality;
•    minimising the flow-on risk to third parties due to low quality
     legal services; and
•    reduced transaction costs for consumers to find a service provider
     with appropriate skills, experience and insurance as to pose
     minimal risk in service delivery.

Costs
The costs associated with reserving legal work in relation to
conveyancing to lawyers are likely to include:

•    higher prices for consumers;
•    reduced demand for conveyancing services offered by non-
     lawyers by creating potential for the perception that lawyers are
     best equipped to provide legal services in relation to
     conveyancing;

                                                                     117
•    reduced overall consumption of conveyancing services;
•    reduced incentives for innovation (and hence reduced quality of
     services provided); and
•    reduced choice of service providers for consumers.

Net benefit/cost
There are a number of complex, inter-related matters involved in the
regulation of conveyancing. A full assessment of the benefits and
costs of reserving legal work associated with conveyancing services to
lawyers would require a comprehensive review of the regulation of
conveyancing services, including legal work associated with
conveyancing transactions. Such a review is beyond the scope of this
review.

The Government may wish to consider undertaking a review of the
regulation of conveyancing in the future. Should it do so, issues which
arose during the course of this review which might be considered
include that:

•    while some conveyancing transactions are complex, many are
     straightforward and may be able to be carried out by non-lawyers
     with appropriate training;
•    Victorian consumers of conveyancing services currently have a
     broader choice of service providers than in some other
     jurisdictions. This choice includes legal practitioners (who hold
     PII, are required to meet certain educational criteria in order to
     practice, and are subject to the complaints and disciplinary
     provisions of the Act), members of the Victorian Conveyancers’
     Association (VCA) (who are required to hold PII, meet certain
     educational criteria, undertake continuing professional
     development and comply with a code of conduct in order to
     maintain their membership), and other non-lawyer providers of
     conveyancing services (though the latter two are unable to
     undertake the legal aspects of conveyancing transactions);
•    additional regulation of conveyancing (such as introduction of a
     licensing scheme for conveyancers) may in itself constitute a
     restriction on competition by limiting who is able to provide
     conveyancing services (including non-legal aspects of
     conveyancing services);
•    as noted previously, in 2002-03, 121 of a total 555 claims
     incurred by the LPLC related to conveyancing. The value of
     these claims was $4.6 million (of a total cost of claims of $20.4
     million), which indicates there is considerable scope for
     provision of poor quality conveyancing services. Given that
     property represents a large investment for many people, that
     consumers are often not in a position to judge the quality of
                                                                    118
     services provided, and that consumers who buy and sell property
     infrequently are not in a position to learn about the process
     through repeated consumption, changes to the regulation of legal
     and non-legal aspects of conveyancing require careful
     consideration;
•    conveyancers are currently not required to hold PII (this is
     discussed in more detail below); and
•    there is currently no avenue for consumers to seek redress for
     losses arising from negligent or dishonest provision of services
     by non-lawyer conveyancers except through the courts. (While
     not all conveyancers are members, the VCA is able to handle
     complaints relating to its members. However, its powers to
     discipline its members are limited to withdrawal of membership,
     which does not provide for redress or prevent conveyancers from
     continuing to practice.)

Alternatives
The alternatives to restricting legal work to legal practitioners are all
variations of allowing non-lawyers to provide legal services related to
conveyancing, including:

•    removing all restrictions on who can conduct legal work
     associated with conveyancing;
•    reducing the restrictions to allow non-lawyers to perform some
     types of legal services associated with conveyancing; and
•    restricting the conduct of legal work associated with
     conveyancing to lawyers and licensed conveyancers.

Alternative 1:   No restriction on who can conduct legal work
                 associated with conveyancing

Under this alternative, anyone wishing to perform legal work
associated with conveyancing transactions would be able to do so,
regardless of their qualifications, skills and experience.

Given that the current restriction on who can carry out legal work
relies on a common law definition of legal practice, implementing this
alternative would require legislation providing for non-lawyers to
undertake legal aspects of conveyancing to be passed, or modification
of section 202(2) of the national provisions to include a specific
exception to the prohibition on those who are not legal practitioners
from engaging in legal practice.




                                                                       119
Benefits

The benefits of this alternative relative to the proposed regulatory
approach are likely to include:

•    reduced prices to consumers for legal work associated with
     conveyancing services;
•    increased competition in the market for the legal aspects of
     conveyancing services;
•    increased overall demand for conveyancing services; and
•    increased choice of service provider for consumers.

Costs

The costs associated with this alternative are likely to include:

•    an increased risk that consumers will receive poor quality legal
     advice in relation to conveyancing transactions;
•    increased flow-on risks to third parties arising from poor quality
     conveyancing transactions; and
•    increased transaction costs for consumers to find a service
     provider with appropriate skills, experience and insurance as to
     pose minimal risk in service delivery.

A significant number of conveyancing transactions relate to residential
property transactions. Further, the magnitude of funds invested in
property (either the home or investment property) for many consumers
is likely to represent a considerable investment. These consumers are
also more likely to suffer problems associated with information
asymmetry due to the infrequent nature of the purchase and difficulty
gauging the quality of services.

However, it is possible that market solutions to problems associated
with information asymmetry would emerge, including reputation,
independent certification of service providers, and signalling of
quality through membership of a professional association with a role
in setting and maintaining the standards of its members (such as the
VCA). The professional association/s could also form the basis of
self-regulation as an alternative to statutory regulation.

Alternative 2:   Reduce restrictions to allow non-lawyers to perform
                 some types of legal services

This alternative would involve either:



                                                                       120
•    allowing anyone to perform certain types of legal work
     associated with conveyancing , regardless of qualifications, skills
     or experience; or
•    allowing those who meet specified criteria (such as qualifications
     and/or experience) to perform certain aspects of legal work.

As for Alternative 1, implementing this alternative would require
legislation providing for non-lawyers to undertake legal aspects of
conveyancing to be passed, or modification of section 202(2) of the
national provisions.

Benefits

The benefits of this alternative relative to the proposed regulatory
approach are likely to be similar to those of Alternative 1 – that is:

•    reduced prices to consumers;
•    increased competition in the market for the legal aspects of
     conveyancing services;
•    increased overall demand for conveyancing services; and
•    increased choice of service provider for consumers.

However, these benefits may be smaller in magnitude than those of
Alternative 1.

Costs

The costs associated with this alternative are also likely to be similar
to those of Alternative 1:

•    an increased risk that consumers will receive poor quality legal
     advice in relation to conveyancing transactions;
•    increased flow-on risks to third parties arising from poor quality
     conveyancing transactions; and
•    increased transaction costs for consumers to find a service
     provider with appropriate skills, experience and insurance as to
     pose minimal risk in service delivery.

However, the magnitude of the costs may be smaller than those of
Alternative 1.

Alternative 3:   Restrict the conduct of legal work associated with
                 conveyancing to lawyers and licensed conveyancers

This alternative would involve implementing legislation to license
conveyancers and restricting the conduct of legal work (or certain

                                                                         121
aspects of legal work) associated with conveyancing to legal
practitioners and licensed conveyancers. While it is possible that
introducing such legislation may be justified on consumer protection
grounds, it would also be likely to result in a restriction on
competition by excluding potential service providers from competing
in the market to undertake the legal and non-legal aspects of
conveyancing services (whether competition would be restricted to a
lesser extent than under the proposed regulatory approach would
depend on the precise model adopted).

In NSW and other jurisdictions including South Australia, Western
Australia and the Northern Territory, conveyancers are regulated,
though the scope of work that conveyancers are able to undertake
varies.

In NSW, the Conveyancers Licensing Act 1992 recognised there was a
role for non-lawyers in conveyancing, and allowed conveyancers to
perform conveyancing of small residential properties. The regulation
and control of licensed conveyancers came under the Law Society of
NSW.

The Conveyancers Licensing Act 1995 expanded the work that could
be performed by licensed conveyancers in NSW. Licensed
conveyancers are able to perform conveyancing work in relation to
residential, commercial and rural property and the transfer of
goodwill, stock-in-trade and other personal property (whether or not
connected to a land transaction). The Act defines conveyancing work
as legal work involved in preparing any document (such as, an
agreement, conveyance, transfer, lease or mortgage) that is necessary
to give effect to any conveyancing transaction.45 However, a
conveyancer must not do any other legal work, such as commencing
or maintaining legal proceedings, preparing a testamentary instrument,
giving investment or financial advice, or creating, varying or
extinguishing a trust.

To obtain a conveyancer’s licence in NSW, applicants must be at least
18 years of age, and have completed an approved conveyancing
course or completed a law degree/diploma that is recognised by the
NSW Law Society and gained 2 years relevant practical experience to
gain an unrestricted conveyancer’s licence.46



________________________
45
   Note that this definition differs from that under the Legal Practitioners Bill, which defines
conveyancing work as work, other than legal work, carried out in connection with the transfer or
conveyance of a freehold or leasehold interest in land.
46
   NSW Office of Fair Trading, Conveyancers Licensing Act 1995: Information Sheet for Licence
Applicants.
                                                                                                   122
The 1995 Act also passed control of the profession from the Law
Society in NSW to the Department of Fair Trading, which controls the
licensing of conveyancers and handles all matters under the Act. Some
aspects such as the conduct of conveyancers are regulated under the
Legal Professions Act and overseen by the Legal Services
Commissioner.

The 1995 Act is to be repealed and replaced with the Conveyancers
Licensing Act 2003. The Act maintains the current boundaries for the
legal work a conveyancer may undertake, but will make changes
relating to licensing requirements and general conduct of licensees,
and discipline and enforcement.

By excluding non-licensed conveyancers from providing
conveyancing services, the NSW licensing regime appears to restrict
competition by preventing those who are not legal practitioners or
licensed conveyancers from providing conveyancing services
(including non-legal aspects of conveyancing).

In South Australia, the Office of Consumer and Business Affairs
administers licensing, registration and disciplinary processes for a
number of occupations – including conveyancers – under occupational
licensing legislation, while the individual associations set professional
standards and operate complaints resolution processes. Conveyancers
are regulated under the Conveyancers Licensing Act 1994. Applicants
for registration are required to meet education and reputation criteria.
Conveyancers are able to prepare all instruments under the Real
Property Act 1886 that create, transfer, modify or extinguish any
interest in real or personal property. However they are not able to
provide legal advice on conveyancing transactions generally, such as
the preparation of contracts or on the legal effect of certain
transactions.

In Western Australia, real estate settlement agents are able to effect
settlement of land transactions. Business settlement agents are able to
effect settlements of business transactions. Settlement agents are
required to be licensed and obtain a certificate which allows them to
practice. Most of the documents used in these transactions are in a
prescribed form. Settlement agents are able to prepare some legal
documents, such as some caveats, but are not able to give advice on a
matter of law.

In the Northern Territory, conveyancing agents facilitate the
transaction of real property by providing services such as title
searches, preparation and exchange of sale contracts, arrangement of
settlement and document lodging. Conveyancers are able to prepare
some legal documents, such as some caveats. However, there is no
                                                                      123
specific authorisation to prepare documents which are not in a
prescribed form or give legal advice in relation to transactions.

Benefits

The benefits of this alternative relative to the proposed regulatory
approach are likely to be similar to those of Alternatives 1 and 2,
though they may be smaller in magnitude due to the fact that there
would still be restrictions on who is able to carry out legal work
associated with conveyancing. Depending on the model adopted, it
could also improve consumer protection by ensuring, for example,
that all service providers hold appropriate insurance and that avenues
for handling complaints other than the courts are available (which may
improve access for consumers to complaints mechanisms and reduce
the costs of resolving complaints).

Costs

The main costs associated with this alternative relative to the proposed
regulatory approach are likely to be increased regulatory costs, and
costs arising from restrictions on competition which may arise through
imposing restrictions on who can provide conveyancing services. For
example, as noted above, in some other jurisdictions only legal
practitioners and licensed conveyancers are able to provide
conveyancing services (including non-legal aspects of conveyancing
transactions). This has the effect of precluding those who are not
licensed from competing in this market. While the magnitude of these
costs would depend on the precise model adopted, careful
consideration would need to be given to any proposal to license
conveyancers to ensure it did not result in unjustified restrictions on
who can provide the non-legal aspects of conveyancing services.

Recommendation
There are a number of complex inter-related matters associated with
regulation of conveyancing services. A full assessment of the benefits
and costs of reserving legal work associated with conveyancing
services to lawyers would require a comprehensive review of the
regulation of conveyancing services, including legal work associated
with conveyancing transactions. This is beyond the scope of this
review.

The Government may wish to consider undertaking a review of the
regulation of conveyancing in the future. In the meantime, it is
recommended that the proposed regulatory approach, which maintains
the reservation of legal work associated with conveyancing to lawyers,
be implemented. If a review of regulation of conveyancing is
                                                                     124
undertaken, the proposed regulatory approach should be reconsidered
in the context of the outcomes of the review to determine whether it
continues to be appropriate.

Restrictions on carrying out conveyancing work

Nature of restriction
As outlined in Chapter 4, it is proposed that the provisions of the Act
which deal with conveyancing businesses will be carried over to the
Bill. This includes provisions which prohibit struck off legal
practitioners and persons who are suspended, disqualified or otherwise
prohibited from engaging in legal practice, insolvent, prohibited from
managing a corporation or convicted of certain offences from being
involved in conveyancing work. These provisions restrict competition
by placing restrictions on those who are able to engage in
conveyancing work. The objective of this restriction can be regarded
as promoting consumer protection, by restricting conveyancing work
to those who are in effect ‘fit and proper’.

Effect on competition and the economy
By restricting those who are able to provide conveyancing services,
this restriction theoretically has potential to restrict competition in the
market for conveyancing, and hence result in higher prices to
consumers and reduce overall demand for conveyancing services.
However, given the number of persons likely to wish to offer
conveyancing services who meet the specified criteria, and that the
LSB has the power to authorise a conveyancer to employ or engage a
person that meets the criteria, the impact of this restriction on
competition and the economy generally is likely to be relatively
minor.

Benefits
The benefits of this restriction relate primarily to:

•    protecting consumers by minimising the risk that consumers will
     engage a person who is not competent to provide conveyancing
     services; and
•    minimising the flow-on risk to third parties associated with poor
     quality conveyancing services.

Costs
As noted above, while this restriction has potential to restrict the
supply of conveyancing services, and hence increase prices and reduce
demand for these services, the number of potential conveyancers
                                                                         125
excluded from the market is likely to be relatively small, and hence
the costs associated with the restriction are likely to be relatively
minor.

Net benefit/cost
On balance, it is considered that the benefits of this restriction
outweigh its costs.

Alternatives
The main alternatives to this restriction are to:

•    remove the restriction and allow anyone who wishes to do so to
     provide conveyancing services; and
•    modify the criteria specifying who is prohibited from providing
     conveyancing services.

Alternative 1:     Remove restrictions on who is able to offer
                   conveyancing services

Benefits

The benefits of this alternative relate to increased competition in the
market for conveyancing services, reduced prices and increased
demand for conveyancing services, and increased choice of service
provider for consumers. However, given the number of persons likely
to be affected, these benefits are likely to be relatively small.

Costs

The costs associated with this alternative are likely to include:

•    increased risk that consumers will receive poor quality
     conveyancing services;
•    increased flow-on risks to third parties arising from poor quality
     conveyancing transactions; and
•    increased transaction costs for consumers to find a service
     provider with appropriate skills, experience and insurance as to
     pose minimal risk in service delivery.

A significant number of conveyancing transactions relate to residential
property transactions. Further, the magnitude of funds invested in
property (either the home or investment property) for many consumers
is likely to represent a considerable investment. These consumers are
also more likely to suffer problems associated with information
asymmetry due to the infrequent nature of the purchase and difficulty

                                                                        126
gauging the quality of services. As a result, the costs associated with
this alternative are potentially significant, and are likely to outweigh
the benefits.

Alternative 2:   Modify the criteria specifying who is prohibited
                 from offering conveyancing services

While it may be possible to improve targeting of persons considered
fit and proper to offer conveyancing services by altering the criteria
specifying who is able to offer conveyancing services (for example,
by including a less specific criteria such as a requirement that persons
offering services are fit and proper), it is considered that the current
criteria appear reasonable, and hence that the net benefits of altering
the criteria are likely to be negligible.

Recommendation
On balance, the proposed approach of carrying forward the provisions
of the Act which deal with conveyancing businesses to the Bill is
recommended.

However, should the government conduct a review of regulation of
conveyancers in the future, the current regulatory approach should be
reconsidered in the context of that review, including which (if any)
aspects of the regulation of conveyancers should be carried out by the
LSB.

Requirement that lawyers hold PII while conveyancers
do not
While strictly speaking the requirement that lawyers hold PII while
conveyancers do not is not within the scope of this review given the
requirement for lawyers to hold PII arises from the national
provisions, it has been considered in this review for completeness.

Nature of restriction
The national provisions require that all legal practitioners hold PII in
order to obtain a practising certificate, and hence practice law.
Conveyancers, on the other hand, are not required to hold PII (while
the VCA requires that its members hold PII, membership is not
compulsory). This has potential to restrict lawyer’s ability to compete
with conveyancers in the market for conveyancing services by
increasing the costs of service delivery incurred by lawyers relative to
conveyancers.




                                                                       127
Effect on competition and the economy
By restricting competition between lawyers and conveyancers, this
restriction has potential to result in higher prices to consumers and
reduce overall demand for conveyancing services. However, it has
been suggested that lawyers use this point of difference as a marketing
tool to promote the benefits of using a lawyer to conduct
conveyancing transactions (similarly, the VCA uses the requirement
that members hold PII as a tool to promote the services offered by its
members over non-members). This is likely to limit the impact of this
restriction on competition and the economy generally.

Benefits
The main benefits associated with this restriction are:

•    increased choice of services for consumers;
•    reduced prices for consumers;
•    increased overall demand for conveyancing services; and
•    minimises regulatory costs.

Costs
The main costs associated with this restriction are:

•    reduced consumer protection;
•    increased costs of providing services for legal practitioners
     relative to conveyancers, and hence reduced ability to compete
     (though some stakeholders have suggested that legal practitioners
     use PII as a marketing tool to compete with conveyancers); and
•    increased transaction costs for consumers to find a service
     provider with appropriate skills, experience and insurance to
     provide the required service.

Net benefit/cost
The primary source of risk in conveyancing transactions relates to the
legal aspects of the transaction. As Victorian conveyancers are
currently prohibited from carrying out the legal aspects of
conveyancing transactions, the costs associated with this restriction
are unlikely to outweigh the benefits at the current time, and hence
requiring that conveyancers hold PII is unlikely to be justified on
public interest grounds.

Alternatives
The alternatives to the proposed regulatory approach include:


                                                                    128
•    removing the disclosure requirements relating to PII insurance
     and/or legal work;
•    maintaining the disclosure requirements but transferring
     responsibility for monitoring compliance to a body other than the
     LSB; and
•    requiring conveyancers to obtain PII, through either the private
     market or the LPLC.

Alternative 1:   Removing disclosure requirements

This alternative would involve removing the requirement that
conveyancers disclose whether or not they hold insurance that covers
them against civil liability in connection with conveyancing work
carried on in the course of their business, the amount of that cover and
any relevant exclusions or limitations on the cover. In addition or
alternatively, it would involve removing the requirement that a
conveyancer to indicate the name and address of a legal practitioner or
firm it intends to retain to perform legal work in connection with a
transaction, or that they are not authorised to perform legal work.

Benefits

The benefits of this alternative relative to the proposed regulatory
approach are:

•    reduced regulatory compliance costs for conveyancers; and
•    reduced regulatory costs for the LSB in relation to its role in
     monitoring compliance with these requirements.

Costs

The costs of this alternative relative to the proposed regulatory
approach are:

•    reduced transparency of information available to consumers;
•    increased transaction costs for consumers to find a service
     provider with appropriate skills, experience and insurance as to
     pose minimal risk in service delivery; and
•    reduced demand for conveyancing services offered by non-
     lawyers through creating potential for the perception that lawyers
     are best equipped to provide conveyancing services.




                                                                       129
Alternative 2:   Transferring responsibility for monitoring
                 compliance with disclosure requirements to another
                 body

Benefits

The benefits of this alternative are likely to be generally similar to
those of the proposed regulatory approach. However, it also has the
potential benefit that another body may be able to monitor compliance
more effectively, more efficiently or more independently due to the
existence of synergies with their other compliance monitoring or
consumer protection activities, or because they do not contain
representatives of the legal profession as the LSB is proposed to do.
There may also be benefits in terms of handling consumer complaints
against conveyancers.

Costs

The costs of this alternative relative to the proposed regulatory
approach are likely to relate to transitional costs associated with the
transfer of regulation, though these costs are not likely to be
significant.

Alternative 3:   Requiring conveyancers to take out PII

Benefits

The benefits of this alternative relative to the proposed approach are
that it would:

•    ensure that redress is available to consumers of all conveyancing
     services; and
•    reduce transaction costs for consumers to find a service provider
     with appropriate skills, experience and insurance as to pose
     minimal risk in service delivery.

Costs

The costs of this alternative relative to the proposed regulatory
approach are:

•    increased regulatory compliance costs for conveyancers;
•    increased prices to consumers as a result of increased costs to
     conveyancers of providing services;
•    reduced consumer choice in terms of being able to engage a
     conveyancer without PII; and

                                                                          130
                              •     increased regulatory costs incurred by the regulator.

                              Recommendation
                              On balance, it is considered that the proposed approach to regulation
                              of conveyancers – that is, that conveyancers not be required to hold
                              PII, but are required to disclose whether they hold PII – results in the
                              greatest public benefit. Therefore, it is recommended that the
                              proposed regulatory approach be implemented.

                              However, this recommendation is premised on the fact that Victorian
                              conveyancers are currently unable to carry out legal aspects of
                              conveyancing transactions. Should the Government review the
                              regulation of conveyancers in the future, the appropriateness of
                              current PII arrangements for conveyancers should be examined in the
                              context of that review, particularly should current restrictions on
                              carrying out the legal aspects of conveyancing work be removed, or
                              should regulation of conveyancers be transferred to a body other than
                              the LSB.

                              Summary

Restriction on               Benefits                     Costs                      Recommendation
competition
Reservation of the           • Protecting consumer        • Higher prices for        There are a number of
carrying out of legal work     by minimising the risk       consumers                complex inter-related
in relation to                 that consumers will        • Reduced demand for       matters associated with
conveyancing to lawyers        receive legal services       conveyancing services    regulation of
                               of inadequate quality        offered by non-lawyers   conveyancing services. A
                             • Minimising the flow-       • Reduced overall          full assessment of the
                               on risk to third parties     consumption of           benefits and costs of
                               due to low quality legal     conveyancing services    reserving legal work
                               services                   • Reduced incentives for   associated with
                             • Reduced transaction          innovation               conveyancing services to
                               costs for consumers to     • Reduced choice of        lawyers would require a
                               find a service provider      service providers for    comprehensive review of
                               with appropriate skills,     consumers                the regulation of
                               experience and                                        conveyancing services,
                               insurance as to pose                                  including legal work
                               minimal risk in service                               associated with
                               delivery                                              conveyancing transactions.
                                                                                     This is beyond the scope
                                                                                     of this review.

                                                                                     The Government may
                                                                                     wish to consider
                                                                                     undertaking a review of
                                                                                     the regulation of
                                                                                     conveyancing in the
                                                                                     future. In the meantime, it
                                                                                     is recommended that the
                                                                                                             131
Restriction on                Benefits                     Costs                         Recommendation
competition
                                                                                         proposed regulatory
                                                                                         approach, which maintains
                                                                                         the reservation of legal
                                                                                         work associated with
                                                                                         conveyancing to lawyers,
                                                                                         be implemented. If a
                                                                                         review of regulation of
                                                                                         conveyancing is
                                                                                         undertaken, the proposed
                                                                                         regulatory approach
                                                                                         should be reconsidered in
                                                                                         the context of the
                                                                                         outcomes of the review to
                                                                                         determine whether it
                                                                                         continues to be
                                                                                         appropriate.
Restrictions on who is able   • Protecting consumers       • While this restriction      On balance, the proposed
to carry out conveyancing       by minimising the risk       has potential to restrict   approach of carrying
work                            that consumers will          the supply of               forward the provisions of
                                engage a person who is       conveyancing services,      the Act which deal with
                                not competent to             and hence increase          conveyancing businesses
                                provide conveyancing         prices and reduce           to the Bill is
                                services                     demand for these            recommended.
                              • Minimising the flow-         services, the number of     However, should the
                                on risk to third parties     potential conveyancers      government conduct a
                                associated with poor         excluded from the           review of regulation of
                                quality conveyancing         market is likely to be      conveyancers in the future,
                                services                     relatively small, and       the current regulatory
                                                             hence the costs             approach should be
                                                             associated with the         reconsidered in the context
                                                             restriction are likely to   of that review, including
                                                             be relatively minor.        which (if any) aspects of
                                                                                         the regulation of
                                                                                         conveyancers should be
                                                                                         carried out by the LSB.
Lawyers are required to       • increased choice of        • Reduced consumer            The proposed regulatory
have PII while                  services for consumers       protection                  approach is recommended.
conveyancers are not          • Reduced prices for         • Increased transaction       Should the Government
                                consumers                    costs for consumers to      review the regulation of
                              • Increased overall            find a service provider     conveyancers in the future,
                                demand for                   with appropriate skills,    the appropriateness of
                                conveyancing services        experience and              current PII arrangements
                              • Minimises regulatory         insurance to provide        for conveyancers should
                                costs                        the required service        be examined in the context
                                                                                         of that review, particularly
                                                                                         should current restrictions
                                                                                         on carrying out the legal
                                                                                         aspects of conveyancing
                                                                                         work be removed, or
                                                                                         should regulation of
                                                                                         conveyancers be
                                                                                         transferred to a body other
                                                                                                                 132
Restriction on   Benefits   Costs   Recommendation
competition
                                    than the LSB.




                                                     133
     Appendix A

Terms of Reference




                134
                   NATIONAL COMPETITION POLICY REVIEW

                              Legal Practitioners Bill

1.    Background

Legal practitioners in Victoria are regulated pursuant to the Legal Practice Act 1996.
Due to increasing cost of the system and inefficiency, the Attorney-General has
announced that this Act is to be repealed and replaced by a Legal Practitioners Bill.

Pursuant to clause 5 of the Competition Principles Agreement, all proposals for new
legislation that may restrict competition are to be accompanied by evidence that the
legislation is consistent with the clause 5 guiding principle. In this case, the Legal
Practitioners Bill is intended to continue the monopoly of the Legal Practitioners
Liability Committee in relation to the provision of professional indemnity insurance
for legal practitioners. The Bill will also prohibit non-lawyers from providing legal
advice in the context of conveyancing services.

Various aspects of the current Legal Practice Act 1996 have been the subject of
reviews to assess its compliance with competition policy. The following material
will be available in the course of the review:
•     Victoria's responses to the National Competition Council;
•     Comments and extracts of reports from the National Competition Council; and
•     Recent correspondence from the National Competition Council.

In relation to the proposed Legal Practitioners Bill (which is to be introduced and
passed in 2004), drafting instructions and, where possible, drafts of the Bill will be
provided on a confidential basis. The aspects of the Bill which are to be reviewed in
the context of this review include the following:
•      Governance arrangements;
•      Delegation of responsibilities and the organisations to which functions may be
       delegated;
•      The retention of the Legal Practitioners Liability Committee as the statutory
       professional indemnity insurance provider to legal practitioners;
•      The regulation of conveyancing services.

2.    Scope of Review

The review should cover the provisions of the Bill which deal with:
•     Governance arrangements;
•     Delegation of responsibilities and the organisations to which functions may be
      delegated;
•     The retention of the Legal Practitioners Liability Committee as the statutory
      professional indemnity insurance provider to legal practitioners;
•     The regulation of conveyancing services.

The review will not encompass the provisions of the Bill which are drawn from the
National Legal Profession Model Laws Project developed by the Standing
Committee of Attorneys-General. These provisions are to be the subject of a
regulatory impact statement being prepared for the Council of Australian
Governments. The regulatory impact statement will assess the provisions for their
impact on the Competition Principles Agreement. Instead, the Victorian review will
focus on the bodies to be established in the Bill and the division of functions and
responsibilities between these bodies.

                                                                                   135
3.    Terms of Reference

The review of the Legal Practitioners Bill has been commissioned by the
Department of Justice after consultation with the Department of Treasury and
Finance. The terms of reference of the review are to:

      (a)   clarify the objectives of the Bill;
      (b)   identify the nature of any restrictions on competition;
      (c)   analyse the likely effect of any restrictions on competition and on the
            economy in general;
      (d)   assess and balance the costs and benefits of any restrictions; and
      (e)   consider alternative means of achieving the same result, including non-
            legislative means.

The review is to pay particular regard to the Legal Practitioners Liability Committee
(the LPLC) which is established pursuant to the Legal Practice Act 1996. Concerns
have been raised that the existence of the LPLC breaches Victoria's commitment
under clause 5 of the Competition Principles Agreement. Pending the outcome of
this review and further consultation, it is proposed that the LPLC will continue to
operate as the statutory monopoly provider of professional indemnity insurance to
legal practitioners in Victoria.

4.    Methodology

The review is being undertaken in accordance with the Victorian Government's
Timetable for the Review of Legislative Restrictions on Competition, determined in
accordance with the National Competition Policy. The review should assess the
Legal Practitioners Bill against the clause 5 guiding principle that legislation should
not restrict competition unless it can be demonstrated that:
•     the benefits of the restriction to the community as a whole outweigh the costs;
      and
•     the objectives of the legislation can only be achieved by restricting
      competition.

Given the amount of consultation which has already been undertaken in relation to
the proposed Bill, it is not intended to conduct a public consultation as part of the
review. Consultation will instead be targeted at those with a specific interest in the
regulation of the legal profession. Those consulted are likely to include:
•     the Law Institute of Victoria and the Victorian Bar;
•     Consumers of legal services via the Federation of Community Legal Centres
      and the Consumer Law Centre;
•     The Legal Practitioners Liability Committee; and
•     The Legal Practice Board and the Legal Profession Tribunal.

The review is to have regard to the following:
•     previous reports reviewing the Legal Practitioners Liability Committee;
•     responses of the National Competition Council; and
•     Victoria's responses to the National Competition Council.

5.    Output

A report addressing the above terms of reference.

6.    Timelines

The report is to be delivered by 30 April 2004.
                                                                                    136
7.     Steering Committee

A Steering Committee will be formed to oversee the appointment of a consultant
and the conduct of the review. It will consist of:

Chairperson            Elizabeth Eldridge, Executive Director, Legal and Equity,
                       Department of Justice

Members                Ms Marlo Baragwanath, Legal Officer, Department of Justice47
                       Mr Vin Martin, Department of Treasury and Finance
                       Ms Geraldine Anthony, Department of Treasury and Finance
                       Ms Sue Walpole, CEO, Legal Practice Board

8.     Resources

•     Reviews of aspects of the current Act;
•     Victoria's responses to the National Competition Council;
•     Comments and extracts of reports from the National Competition Council;
•     Recent correspondence from the National Competition Council;
•     The proposed Legal Practitioners Bill, drafting instructions and, where
      possible, drafts of the Bill will be provided on a confidential basis;
•     Discussion and consultation with the Departments of Justice and Treasury and
      Finance;
•     Discussion and consultation with the Legal Practice Board and the Legal
      Practitioners Liability Committee.




________________________
47
 Ms Baragwanath was replaced on the Steering Committee by Ms Katie Howie following Ms
Baragwanath’s resignation from the Department of Justice.
                                                                                        137
Appendix B

Consultation




          138
The following interested parties were consulted as part of this review:

Meetings prior to release of draft Bill
•   Legal Practitioners Liability Committee
•   Legal Ombudsman
•   Legal Practice Board

Meetings following release of draft Bill
•   Legal Ombudsman
•   Legal Practice Board
•   Legal Profession Tribunal
•   Law Institute of Victoria
•   Legal Practitioners Liability Committee
•   Community and Public Sector Union
•   Victorian Civil and Administrative Tribunal
•   The Victorian Bar
•   Consumer Affairs Victoria

Telephone discussions
•   Promina
•   Suncorp Metway

Written submissions received from:
•   Legal Practitioners Liability Committee
•   The Victorian Bar




                                                                     139
Appendix C

Abbreviations




           140
ABS                    Australian Bureau of Statistics
the Act                Legal Practice Act 1996
APRA                   Australian Prudential Regulation Authority
the Bar                Victorian Bar
the Bill               Legal Practitioners Bill
COAG                   Council of Australian Governments
COAG Guidelines        Guidelines for the Review of Regulation of the
                       Professions under National Competition
                       Policy
CPA                    Competition Principles Agreement
the Department         Department of Justice
LIV                    Law Institute of Victoria
LO                     Legal Ombudsman
LPB                    Legal Practice Board
LPL                    Legal Practice List (within VCAT)
LPLC                   Legal Practitioners Liability Committee
LPT                    Legal Profession Tribunal
LSB                    Legal Services Board
LSC                    Legal Services Commissioner
National Project       National Legal Profession Model Laws
                       Project
NCC                    National Competition Council
NCC Guidelines         Guidelines for NCP Legislation Reviews
NCP                    National Competition Policy
OLSC                   Office of the Legal Services Commissioner
PII                    professional indemnity insurance
RPA                    Recognised Professional Association
SCAG                   Standing Committee of Attorneys-General
TAC                    Transport Accident Commission
VCA                    Victorian Conveyancers’ Association
VCAT                   Victorian Civil and Administrative Tribunal
Victorian Guidelines   Guidelines for the Review of Legislative
                       Restrictions on Competition
VWA                    Victorian WorkCover Authority




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