Disruptive innovation in legal services

Presentation of the OECD Background paperJames ManciniOECD Competition Division

Working Party No. 2 on Competition and Regulation13 June 2016 Roundtable

The Background note together will all materials related to the discussion can be found at:

www.oecd.org/daf/competition/disruptive-innovations-in-legal-services.htm

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Despite traditional resistance to change in legal professions, pro-competitive “disruptive” innovations are beginning to transform legal services and the manner in which they are delivered.

• Online service delivery is allowing both legal professionals and unlicensed providers to serve clients remotely;

• Ranking and review information regarding legal professionals is allowing clients to assess the quality of professionals before retaining them – a previously difficult proposition;

• The unbundling of services, is transforming the distribution of tasks in legal services and ending traditional “black box” models of service delivery; and

• Automation is changing the nature, and volume, of tasks that legal professionals perform.

Abstract

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As a result of these innovations and the new competition they bring, the regulatory framework in which legal professionals operate is under pressure. The exclusivity enjoyed by legal professionals, and the precise scope of activities to which it applies, is becoming unclear as unlicensed entrants offer a widening range of services. Restrictions on the quantity of professionals that can operate in specified regions are being questioned at a time where the services they provide could easily be made available online. Further, legal professional self-regulators may be unable, or ill-suited, to identify accommodations that permit innovative entrants to serve consumers.

Competition authorities, which may have limited experience in legal services markets given that enforcement issues have been rare, should be aware of the challenges described above. Authorities can play a role in advocating for regulatory systems that reflect current market realities and ensure market access for pro-competitive disruptive innovations. Such a role could include advising policymakers who may be seeking to balance the benefits of competition with other policy objectives such as consumer protection. This process will require consideration of the objectives of legal professional regulations, particularly those addressing market failure, as well as the current design of those regulations.

Abstract

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Defining disruptive innovation

• New products, processes or business models that redefine a market and displace incumbent firms.

• Come from outside a market’s value network

LEGAL SERVICES REGULATIONS: RATIONALE

AND SCOPE

Why are legal professions regulated?

Information asymmetries

• Inability to assess quality (credence/experience good)

• Use of alternative indicators of quality• Moral hazard

Externalities• Imposition of additional costs due to poor

quality• Positive externalities from good quality

Other policy objectives

• Regional fairness• Accessibility of services at low incomes• Legal principles (attorney-client privilege)

The scope of regulatory restrictions

• Qualitative entry • Quantitative entry• Fees• Advertising• Partnerships, ownership,

management• Legal aid

Many are enforced through self-regulation (i.e. bar associations)

RECENT DISRUPTIVE INNOVATIONS IN LEGAL

SERVICES

No shortage of dramatic predictions…

What is underlying these bold predictions?

Communication technology

A few broad trends (not all of them new)…

Accessibility of knowledge regarding legal needs and services

Fee and affordability pressure

These trends have given rise to:

Online service delivery

Professional quality data via rankings and reviews

Automation of tasks or

entire services

Service unbundling/ end of the

“black box”

IMPLICATIONS OF DISRUPTIVE INNOVATION

FOR LEGAL SERVICES REGULATIONS

Does the rationale still apply?

Information asymmetries

• Inability to assess quality (credence/experience good)

• Use of alternative indicators of quality• Moral hazard

Externalities

• Imposition of additional costs due to poor quality

• Positive externalities from good quality

Other policy objectives

• Regional fairness• Accessibility of services at low incomes• Legal principles (attorney-client privilege)

New relationship due to online research, reviews, new competition,

commoditisation

Still an open question – will reputation and consumer awareness mitigate these

risks? Will new problems arise?

Innovation could be addressing some of these concerns

Changes to the market may mean fewer, or different, market failures

Implications

The current regulatory framework rests on several foundations which may be under stress

ExclusivityQuantitativ

e entry restrictions

Qualitative entry

restrictionsSelf-

regulation

Consumer protection and other

regulationsIs it

necessary, desirable or enforceable in current

forms?

Are they still relevant?

Should they be adapted to fit online

service delivery models?

Are conflicts of interest emerging?

Have any new

consumer protection

issues arisen?

What is its precise scope?

Are they limiting

innovation?

Can para-professional

s play an expanded

role?

Is there a need for further

oversight?

Can other policy

objectives be achieved without the status quo?