The Costs of Regulation
The Law Society of Ontario bencher election finished at the end of April. The cost of regulation and the finances of the Law Society were the focus of some of the campaigns by bencher candidates. Perhaps not surprisingly in a campaign context, some of the comments were hyperbolic and some were rather imprecise.
This column seeks to address what lawyers in Ontario are required to pay in order to be able to practice law. The point of this review is to help better understand where the money goes to better inform discussions. I will look at this issue from the perspective of a full time lawyer in private practice[1].
Errors, Omissions and Dishonesty
In Canada, lawyers in private practice are required to have insurance for errors and omissions (“E&O”). In Ontario, the mandatory insurer is the Lawyers Professional Indemnity Corporation or LawPro. LawPro was established by the Law Society in the 1990s as a subsidiary with a separate board of directors and management. Lawyers are required to have coverage of $1,000,000 per incident and $2,000,000 in the aggregate.
Making E&O insurance mandatory is a policy choice. The Law Society could choose not to require E&O insurance, as is the case in most of the United States[2]. As in Canada, lawyers in England are required to have E&O insurance.
The principal public policy rationale for mandatory E&O insurance is client protection. Clients who suffer damages from negligence are able to obtain recovery irrespective of the lawyer’s ability to pay. A further public policy advantage is that LawPro engages in risk management activities. For LawPro, this both reduces the cost of claims and results in better service to clients. LawPro is well known and respected for its practice management assistance. And looked at from the lawyer’s perspective, insurance protection against client claims is important.
The current LawPro base premium is $2,950 per annum.
Clients are also protected from dishonesty[3]. The Law Society maintains two Compensation Funds, one for lawyer and the other for paralegal dishonesty. Claimants can apply for a discretionary grant from the Compensation Fund to a maximum of $500,000 per claim. There is a separate annual levy for the Compensation Fund.
Compensation Fund levies are determined based on actuarial assessments of the required fund balance to meet future claims based on Law Society policy. The current target balance of the lawyer Compensation Fund is $20.4 million. Due to unusually high claims experience in the last few years[4], higher levies have been required to replenish the fund over several years. The improved claims experience in 2018 allowed a reduction in the levy from 2018 to 2019.
Obviously, the dishonest lawyers and paralegals are not protected by the Compensation Funds. The point of the Compensation Funds is public protection and reflects an obligation on the part of legal profession as a whole Stoward those who suffer from the dishonest acts of the few.
In 2018, the Lawyer levy for the Compensation Fund was $301.
Putting the LawPro base premium together with the Compensation Fund levy for 2018, the amount required per lawyer in private practice was $3,251 for protection in respect of lawyer negligence and dishonesty.
Professional Regulation and Professional Competence
In addition to levies for the E&O Fund and the Compensation Fund, there are levies for the General Funds, the Capital Fund and the County Libraries Fund[5]. The County Libraries Fund is discussed below.
In 2018, the revenues of the Lawyer General Fund totaled $92,508,000 of which $65,252,000 came from annual fees ($1,584/FFE lawyer[6]). These revenues also included $18,942,00 from licensing and CPD fees. Excluding the amount of these licensing and CPD revenues from the expenses of the Professional Development and Competence, the expenditures of the Lawyer General Fund in 2018 were as follows:
The amount for Corporate Services is somewhat misleading because Corporate Services provides services for other areas of the Law Society (e.g. HR and Training, IT, Facilities, Catering), operates the Osgoode Hall Restaurant and operates the Client Service Centre, the Call Centre, the Law Society Referral Service, Membership Services, Complaints and Competence and By-Law Administration Services.
Professional Regulation Division (PRD) and Tribunal
A principal responsibility of the Law Society is to receive complaints, to undertake investigations and to take action where appropriate including formal disciplinary proceedings before the Tribunal. The Law Society ensures compliance with Tribunal orders. The Law Society also steps in as trustee and takes over legal practices and records whether because practices are abandoned or otherwise.
The direct costs associated with the work of the PRD and the Tribunal were $624/FFE lawyer as set out above. However, these costs do not include the portion of Corporate Services costs that is in respect of the receipt and preliminary assessment of complaints nor an allocation of overhead from Corporate Services.
Professional Development and Competence (PD&C)
The work of the PRD and the Tribunal is largely reactive and punitive. The focus of the attention of the PRD and the Tribunal is past professional conduct. The regulatory responses are intended to be rehabilitative and/or punitive as may be appropriate, intended to affect future conduct of the specific lawyer and the conduct of lawyers generally.
The work of PD&C is also focused on professional conduct but the principal goal is to better ensure proper conduct going forward rather than addressing past conduct. The work of PD&C may be described as being proactive in nature rather than being reactive.
This proactive work includes the Practice Management Helpline, the Coach and Advisor Network, free and reduced cost CPD, the Great Library, Spot Audits and Practice Reviews,
PD&C is also responsible for new lawyer licensing which is self-financing other than a $1,000,00 contribution from lawyer fees. PD&C provides and accredits CPD and receives revenue from CPD.
The net cost[7] of the work of PD&C in 2018 after revenue from licensing and CPD was roughly $250 per FFE lawyer.
The cost of reactive and proactive regulation
Together and taking into account relevant costs from Corporate Services, the regulatory work of PRD and PD&C is the substantial part of the costs funded from the lawyer General Fund.
Services for lawyers, paralegals and the public
The Law Society directly and indirectly provides services to members and to the public. These are mostly paid from the General Funds. There is also a specific fund, described in financial statement as the County Libraries fund, which funds county and district libraries through LiberaryCo.
The amount spent in 2018 from the lawyer General Fund for services to members and the public together with the County Libraries levy was $353/FFE lawyer[8]. This amount does not include an allocation of relevant overhead from Corporate Services.
Examples of services provided include the Members Assistance Program, the Referral Service, funding for CanLII and funding for the County and District Libraries. Services to members are useful to lawyers and paralegals themselves but also assist the public by better ensuring quality services for clients.
Convocation, Policy and Outreach
The Law Society Act provides that “[T]he benchers shall govern the affairs of the Society” and that “[t]he Chief Executive Officer shall, under the direction of Convocation, manage the affairs and functions of the Society”.
The benchers act through Convocation in which 40 elected lawyers, 5 elected paralegals and 8 public appointees vote. Former Treasurers may speak at Convocation but do not vote. Benchers are members of policy committees which provide policy advice to Convocation. Benchers also sit on the Tribunal as adjudicators and on other types of committees such as the Proceedings Authorization Committee and the Compensation Fund Committee.
The costs included under Convocation, Policy and Outreach reflect that benchers are assisted in their policy work by the Policy department and by outreach to stakeholders and others. These costs include the contribution of the Law Society to the Federation of Law Societies of Canada which amounts to approximately $25/FFE lawyer.
While correct in an accounting sense, the reality is that Convocation could not do its job properly without the expertise of the Law Society’s management which supports the development of and manages the implementation of Convocation’s decisions. Like all organizations, the board and management must work in partnership to be effective.
The rough estimate of the cost of Convocation, Policy and Outreach in 2018 is nearly $300/lawyer.
Summary and History
We can say with precision what is spent by the various Law Society departments but assigning those costs to the regulatory functions of the Law Society is not straightforward based on the financial statements. It would be useful to be able to better understand the cost of regulation in terms of the different aspects of regulation that are undertaken.
On the other hand, we can say with precision what is required to be paid by lawyers in total which was $5,135 per FFE lawyer in 2018 as set out in the following chart:
Of the $5,135 paid, $3,251 provided public protection for professional negligence and dishonesty leaving $1,883 per FFE lawyer. The majority of this balance is in respect of reactive and proactive conduct regulation with the balance being comprised of services to the members and to the public, Convocation, Policy and Outreach and other expenses.
History of fees and levies
Looking back to 2010 and adjusting for inflation, the annual fees and levies per FFE lawyer have been as follows:
[Click on the image above to view the larger graphic.]
There has been some suggestion that the Law Society has engaged in deficit financing. This may arise from a misunderstanding. The General Funds are, by Convocation’s policy, to be maintained in the range of two to three months of anticipated expenses from that fund. In order to keep the General Funds within the range contemplated by policy, the budget[9] may contemplate a reduction of the General Fund (in accounting terms, an operating deficit). However and as can be seen below, the Law Society has not engaged in deficit financing:
[Click on the image above to view the larger graphic.]
Since 2000, the cost of fees and levies that lawyers must pay in Ontario has declined. The reason is the decline in the cost of errors and omissions insurance. The remaining costs have essentially stayed the same in real terms.
The largest part of the costs paid by lawyers in private practice is in respect of E&O insurance and funding compensation for dishonest lawyers. This amounts to nearly two-thirds of these costs[11].
The largest part of the balance is in respect of addressing possible and alleged professional misconduct and ensuring/encouraging proper professional conduct. What is left is mostly the cost of providing services to members and to the public and the costs of governance.
None of this is intended to suggest that everything is as it should be. There is no doubt room for improvement including greater efficiencies.
But for those who suggest that there should be radical reduction in the costs borne by lawyers, the key question is what, if anything, should no longer be done. This is always a legitimate question but one which requires focus on what is actually being done, looking both at purpose and efficacy of the work.
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[1] The costs for lawyers in in-house and government practice are lower as are the costs for paralegals.
[2] There are only several states where E&O insurance is mandatory. It has been estimated that some 40% of lawyers in the U.S. are uninsured.
[3] Naturally, lawyers are not insured for claims made in respect of their own dishonesty or fraud.
[4] Particularly from defalcation of condominium purchaser deposits.
[5] As a non-share capital corporation, the Law Society maintains a number of separate funds. Some are restricted funds meaning that there are limited purposes for which the funds may be used. There is an unrestricted lawyer General Fund and an unrestricted paralegal General Fund.
[6] FFE is short for Full Fee Equivalent. Not all lawyers pay full fees. Some pay reduced fees for various reasons. Expressing expenses per FFE lawyer rather than per capita allows a better understanding of costs per lawyer.
[7] Net of revenues from licensing and CPD
[8] $158/FFE from the General Fund and $195/FFE from the County Library fund
[9] Law Society budgets are conservative in nature in that budgeted spending includes spending yet to be finally authorized and spending that may extend beyond the period of the budget. Given this approach, the annual budget can include a call on the General Funds that may well not be necessary.
[10] In 2013, funds were transferred to the general funds from a Working Capital Reserve. In this context, the May 2013 policy described above was established which sets the target range for the general funds balances.
2017 provides an example of the variability of claims for compensation for dishonesty. There were significant claims that material reduced the fund balance in 2017 which resulted in the requirement for increased comp fund levies in 2018 and 2019.
[11] 63.3% of $5,135
Thank-you, Malcolm. Good article.
Thanks for this article Malcolm.