(Reprinted from HKCER Letters, Vol. 43, March, 1997)
the Legal "Contrivance to Raise Prices"
"People of the same trade seldom meet together . . . but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible to prevent such meetings by any law consistent with liberty and justice. But [the law] ought to do nothing to facilitate such meetings; much less render them necessary."
Adam Smith, An Inquiry into the Nature and Causes of The Wealth of Nations, 1776.
Existing law in Hong Kong requires solicitors and officials to meet and set the fees solicitors charge for the conveyancing of property. Under the Legal Practitioners Ordinance, Solicitor's (General) Cost Rules (Cap 159, section 74), a "Costs Committee," comprised of officials and solicitors and approved by the Chief Justice, meets and sets "scale fees" for the conveyancing of property. Solicitors who provide conveyancing services at fees below the stipulated scale fees are subject to disciplinary action by the Law Society.
The Hong Kong government has proposed a change in legislation under the Legal Services (Miscellaneous Amendments) Bill, 1996. This bill would render unnecessary the way solicitors in Hong Kong now necessarily meet in what Adam Smith described as seldom anything but a "contrivance to raise prices." Under the government's proposal, solicitors would not be required to charge the current or any other "scale fees." The Law Society has objected strenuously to the proposal. In this paper, I discuss the society's objections and argue that the government proposal is consistent with the interests of the Hong Kong public. I do not address the general question of whether a set of scale fees can make economic sense. My focus is on the objections raised by the Law Society.
The Law Society's Response
The Law Society has considered the Hong Kong government's proposal. In its response to the proposal, the society starts by stating that, "the cardinal principle for either proponents or opponents of scale fees must be to protect the interests of the public" (Annex to Law Society Response to the Green Paper, 34). At the end of its response, the society first rejects the government's proposal and then rejects its own "cardinal principle." It argues that consumers of solicitors' services do not know enough to distinguish good from bad service: "letting loose market forces of competition among solicitors would result in "irreparable damage . . . upon both the public and the [solicitors' profession" (Annex to Law Society Response, 34). The society states that "the Costs Committee . . . should act as the arbitrator in balancing the interests of the public and the profession." The cardinal principle has thus been altered from "protecting the interests of the public" to "balancing the interests of the public and the profession."
The Law Society's Arguments
The Law Society's arguments follow a common theme: in a world in which consumers of conveyancing services have less information than do solicitors, consumers may be subject to various sorts of predation, ranging from simple high-cost/low-quality service, to serious negligence, to outright fraud. (In the particular case of the government's proposal to eliminate the regulation provided by the Costs Committee, and as part of the Law Society's uninformed consumer argument, the Society states that there may be additional undesirable outcomes that include a reduction in respect for the rule of law, inconvenience for the local universities, and reduced incomes for solicitors and university lecturers. I leave a discussion of these additional undesirable outcomes for later.)
In situations in which consumers are disadvantaged by having less information than providers do, it is possible that they would be served better in the presence of some "countervailing power." Such countervailing power could come in the form of some restriction to reduce solicitors' ability to prey on consumers, or it could come in the form of some mechanism to reduce or render less harmful consumers' ignorance. Legally enforced information dissemination might achieve these ends. Elimination of the rules that currently prevent advertising by solicitors might achieve them, too.
This argument is well known, and the Law Society uses a variant of it to make the point that the current mechanism of fixed fees set by the Costs Committee is the preferred countervailing power against solicitors' ability to prey on consumers. The society's variant of the argument is based on stark alternatives: either we can inhabit a world of anarchy in which unscrupulous solicitors prey on their clients, or we can inhabit a world in which scrupulous solicitors, and other members approved by the Chief Justice, set fair and reasonable prices. These are not the only alternatives. We have experienced some others.
One alternative is deregulation of the sort proposed by the government and which has been used in the market for conveyancing services in other jurisdictions. We also have some experience with deregulation in other markets. A notable example of such a market is the airline market, which was also thought to be susceptible to negligence. It was widely alleged that negligence in the airline industry would increase unchecked because of differential information.
Deregulation of Conveyancing Services in the Market
The following comments rely on the Law Society Response to the Green Paper, and the figures contained therein. Scale fees were abolished in England in the early 1970s. The Law Society seeks to support its argument against abolishing these fees in Hong Kong today by claiming that "The housing market in the U.K. collapsed in 1988 and . . . as a result, the Solicitors Indemnity Fund has been paying out . . . £50 million" per year in claims linked to residential conveyancing (Law Society Response to The Green Paper, 4).
However, not everyone agrees with this claim. In December 1995, Mr. Paul Marsh, former chairman of the English Law Society's special working party on conveyancing, wrote:
Between 1987 and 1994 the profession conducted over 23 million conveyancing transactions [2.875 million per year], yet the Solicitors Indemnity Fund (SIF) had only 17,125 claims. In other words, seven claims for every 10,000 transactions. (£17.39 per transaction). Despite extensive research, no conclusive connection has been found between low cost conveyancing and negligence."
Suppose the Hong Kong Law Society is correct, (and Mr. Marsh is wrong) in stating that the removal of scale fees in England in the early 1970s resulted in the negligence that occurred after the 1993 collapse of the housing market. (Note that this means that in the absence of scale fee abolition, there would have been not less negligence, but absolutely no negligence.) Even that, in itself, is not a sufficient reason to prefer a return to scale fees. The Law Society asserts that negligence will follow and the costs of (additional) negligence would outweigh fee savings, but it does not dispute the claim that the abolition of scale fees would cause fees to fall. The real question, therefore, is: would costs resulting from increased negligence outweigh the savings resulting from lower fees, or would savings resulting from lower fees outweigh the costs resulting from increased negligence?
Assume that the average value of transactions in England between 1987 and 1994 was £50,000 ($640,000). The negligence costs cited by the Hong Kong Law Society would then amount to 3.5/100 of 1 percent of the value of the English transactions. (If the average English transaction value was higher than £50,000, the alleged negligence costs would of course fall as a percentage of the value.) Current Hong Kong buyer and seller scale legal fees for a $3 million piece of property (the lowest price transaction cited in the Legal Society's response) amount to $33,000, or 1.1 percent of the value of that transaction. Following the Law Society's arguments, we might assume that abolition of scale fees in Hong Kong will result in extra costs of negligence similar to the total English costs of negligence per dollar transaction. In that case, a reduction of buyer and seller legal costs (the occurrence of which the Law Society does not dispute) of any more than 3.16% to the current fees of $33,000 on a $3 million transaction ($1,043) would constitute a saving in legal fees plus negligence costs for the Hong Kong public.
Following the Hong Kong Law Society's cardinal principle of protecting the interests of the public, the proposal to abolish of scale fees cannot be dismissed on the basis of the English experience. There may be arguments against abolition of scale fees, but they have not been made in the Law Society Response to the Green Paper.
Deregulation of the Airline Market
The U.S. airline market was deregulated in important ways starting in 1978. Significant opposition to deregulation arose, much of it from the era's major airline service providers. The specter of negligence and falling safety standards was introduced in ways analogous to the Law Society's recent predictions of rampant negligence in the event of deregulation of the conveyancing business.
As data became available, safety records were more and more closely scrutinized in order to detect any change in safety standards that might be attributable to the deregulation of 1978. The consensus reached in the late 1980s is that the 1978 deregulation caused no deterioration of safety standards. Indeed, available evidence suggests that airline safety improved, while at the same time deregulation was accompanied by considerable savings on airfare for consumers. Steven Forman, in "An Application of Box-Jenkins ARIMA Techniques to Airline Safety Data" (Logistics and Transportation Review, 29 (3) September, 1993), states that: "Overall, air traffic was safer after deregulation than it would have been had the previous regulatory environment continued." (For similar findings see also Steven Morrison and Clifford Winston, The Evolution of the Airline Industry, Brookings Institution, 1995; Cinton Oster and John Strong, "The Worldwide Airline Safety Record," Logistics and Transportation Review, 28(l) 1992; Leon Moses and Ian Savage, "Airline Deregulation and Safety: Theory and Evidence," Logistics and Transportation Review, 24(2) 1990; Adib Anafani and Theodore Keefer, "Airline Safety and Deregulation: some Econometric Evidence," Logistics and Transportation Review, 26(3) 1990.)
Additional Undesirable Outcomes of Scale Fee Abolition
The Law Society warns that there may be outcomes of scale fee abolition that go beyond increased negligence of solicitors: reduced respect for the rule of law, inconvenience for the local universities, and reduced incomes for solicitors.
It cannot be assumed that these outcomes would in fact materialize. It seems unlikely that the rule of law would be under threat, and, even in those instances in which the Society's predictions may come true, the outcomes would be consistent with the Law Society's cardinal principle of protecting the interests of the public. The principle of protecting the interests of the public cannot require convenience for university administrators or protection of the incomes of solicitors.
The proposal to abolish scale fees for Hong Kong solicitors is a sensible one. It is consistent with the Law Society's stated cardinal principle of protecting the interests of the public. The public's conveyancing costs can be expected to fall, and respect for the rule of law will not be eliminated by abolition of competition-reducing scale fees. And, if the abolition of such fees results in the reduction of solicitors' incomes, what does that have to do with the principle of protecting the interests of the public?