Legal scales
18 May 2021

Legal Regulatory Sandboxes – An Experiment that Might Reinvent the Legal Ecosystem?

Published on 18 May 2021

The change agenda is well underway in the legal ecosystem. It hasn’t been transformative - well mostly not – it’s been more about using tech tools to improve efficiency rather than radical change. This post is not about arguing the case for change, that ship has sailed. It’s about reclaiming a spot for lawyers, so they are part of the solution and not the problem. It’s about finding a way to make the law accessible and affordable. It’s about understanding that different clients have different needs and expectations from the legal ecosystem – not just from law firms and lawyers. It’s about creating a different workplace. It’s about doing legal practice differently. And, it’s about whether regulatory sandboxes will become the legal experiment that not only achieves all this but becomes an industry wide model for the way we can investigate the new, the different and…change!

What are Regulatory Sandboxes?

Regulatory sandboxes are a safe place for legal businesses to offer services/products differently. That’s a loaded sentence so let’s unpack it with a little retrospection:

  1. From the moment Richard Susskind wrote and spoke of the disaggregation of legal services in the 2000s, we were prompted to not only think about legal matters as a sum of their parts but also about who (or more recently what) could deliver on them faster, cheaper and without compromising quality.
  2. The focus shifted from lawyers providing all parts, to allied professionals providing some of those parts. That meant a reskilling for some roles and a consolidation and/or credentialing of other long-standing roles like those for paralegals or para-professionals. It also meant experiments in creating new support roles like the US Limited Licence Legal Technician – some of those roles flourished, others did not. What we learned from this was undeniable - lawyers did not need to provide all the parts and it was too expensive for consumers if they did.
  3. This plethora of new or different roles happened as a consequence of or at least in parallel with the global financial crisis. The focus was on efficiencies and providing more for less. At the same time, technology and the application of data analytics to decision making was on the rise and gave a name to a new profession – legal operations. It was also a perfect storm for the creation of new businesses - not just law firms – to evolve and combine digital with human resources. These so called Alternative Legal Service Providers today make up a near US$14 billion industry, one which Law Societies and Bar Associations around the world can no longer ignore – they are critical stakeholders in the legal ecosystem.
  4. Then came a global pandemic. It created a global proof of concept that the legal ecosystem can change, and that tech and data are critical parts of every legal business. It also brought into sharp focus again, the access to justice gap AND, that this is too big and the demand too high for the legal industry to find the solution exclusively within the existing pro bono and community legal sectors.
  5. During all of these changes, legal regulators have not been idle but have struggled with defining their role. Should it focus on outputs i.e., legal advice or certain types of activities (to be provided just by lawyers) versus legal information (to be provided by anyone (or anything in the case of tech applications)? Is it about what is provided or who provides it? With advances in tech and AI, does this sort of division make sense? Is regulation and licencing only relevant to lawyers? Should allied professionals be regulated and licenced too? Where does the balance lie between access to justice and public protection? Who or what can best supervise and enforce all of this?

Here enters the legal regulatory sandbox…

What do they do?

The regulatory sandbox concept first appeared in the financial sector back in 2015. In the legal ecosystem it is, in essence, an experiment run by legal regulators. These regulators may be collected together as a new branch of a Bar Association, Law Society or Court (depending on the jurisdiction in which the sandbox operates) so mostly, these are the same bodies that regulate the legal profession (lawyers) but not necessarily comprised exclusively of lawyers – that’s important. While core staff in these regulatory sandboxes are essential to their operation, so too are the interdisciplinary advisory committees/councils to adjudicate applications to them. If the sandboxes seek to encourage interdisciplinary legal providers, it is likewise critical that their services/products are assessed by people with comparable capabilities.

The sandbox itself is a platform or safe place to explore innovative ways to provide legal advice and services/products through different business models. It is intended the providers step outside the bounds of the current regulatory regime.

Involvement in the sandbox is by application. Everyone - lawyers and allied professionals, law firms and alternative legal service providers, and other professionals outside the legal industry - working in collaboration or not, can apply. These applications require details that include:

  • Information and background on the provider;
  • The services/products to be provided;
  • How the services/products will be provided e.g., technology to be used, what it does and how it will be used;
  • A profile of prospective clients;
  • How the services/products will enhance access to justice;
  • Whether the provider has insurance;
  • What rules or regulations might need to be waived for the provider to operate;
  • Procedures and protocols for data collection and governance;
  • An assessment of any risks to the public;
  • The ability to address complaints from the public and/or changes required by the regulator; and
  • An exit strategy if the provider cannot continue operating.

If the application is successful, then the legal business will be subject to strict supervision, monitoring, analysis, and reporting by the provider to the regulator as well as auditing by the regulator of the provider – something akin to agile evaluation. The regulator puts in place a mechanism to notify the provider if something needs to be changed and guidance on how it must be addressed. A consumer complaints mechanism is also an important part of this process. However, non-compliance with regulations will not lead to prosecution, to the contrary, regulatory roadblocks may be waived and could, at the end of these sandbox periods, be permanently changed (re-regulation). The regulatory oversight here is focussed predominantly on the ethical, effective, and efficient delivery of quality legal advice, services/products that best serve the B2B or B2C or C2C or maybe even P2P markets.

The regulator requirements for ownership and structure of these legal businesses may be more or less prescriptive depending on the jurisdiction in which they operate. The entity may be an individual, partnership, or a limited liability company. Ownership may involve a lawyer or it may not. Income may be shared between lawyers with those who are not. In British Columbia, the emphasis on a “bottom up versus top down” approach, where providers propose the ownership and structure rather than regulators mandate it, was seen as critical. And being less prescriptive from the get-go likely supports greater innovation too. Interestingly, regardless of lawyer involvement, the entity through which the services/products are delivered may still be referred to as a law firm - no doubt that will soon give way to something more accurate like legal provider.

The core objective of these sandboxes is to make legal services/products more affordable and accessible. The services/products are designed with the user in mind. Technology and data analysis feature significantly. It’s about new legal business models, new owners, new providers, and new opportunities for regulators to understand and get in on the ground floor of regulating for public protection not obstruction, in a transforming legal marketplace.

The one downside is that the operation of these businesses is potentially limited to the duration of the sandbox, although there seems to be a growing consensus that continuity of these businesses should be allowed (otherwise this will constrain participation) after the sandbox ends. The common starting period for sandboxes has been 2 or 5 years. Those that started at 2 are already reconsidering e.g., Utah has recently extended from 2 to 7 years. These time extensions were inevitable particularly for the start-up businesses in the sandboxes. It’s hard to get a new business off the ground in 2 years. Launching the sandboxes for a shorter period, checking on progress, and then deciding to extend, has, however, been a prudent and cautious approach given the “newness” of the concept and the conservatism of the legal profession.

The UK has been leading in this space. With the in-depth review of the legal industry, the subsequent implementation of the Legal Services Act 2007 and the most recent Reforming Legal Services: Regulation Beyond the Echo Chambers report (2020), the UK legal sector has entrenched its role in leading legal industry transformation well beyond the regulatory sandbox space! However and often with reference to the changes in the UK, we’re now seeing a number of States in the US jumping in like Utah, Arizona, California (details still being worked out) and their near neighbour, Canada (British Columbia and Ontario) too.

Beyond regulation there is….?

Some may dismiss regulatory sandboxes as an apparition. The more sceptical as a way to appease the growing demand for change within and outside the legal profession. Some may even label them unnecessary and point to the fact that parts of the legal profession are doing really well right now with many firms enjoying a bumper year. But that’s not the whole picture, is it?

In addition to the access to justice issues mentioned earlier, the legal profession continues to be significantly and adversely impacted by mental health, stress, harassment, substance abuse, burn out and bullying issues. So, it would seem the current law firm business model might work well for some but definitely not all – clients and legal business employers/employees need alternatives!

So, while regulatory sandboxes may have intended to focus mostly on deploying new tech/AI in new and different ways to provide legal services/products for consumers, they may also be providing a platform to create better workplaces. By their nature, the sorts of legal businesses the sandboxes will attract or spawn will require interdisciplinary collaboration, foster and provide new ways to communicate within and outside the business, entrench flexible and remote working, reimagine user experience, demonstrate the augmentation of human and digital resources, enhance personal and organisational agility, focus on continuous improvement and, get us back to our humanity – or, putting it another way, here lies the opportunity to stop talking and start acting!

Could legal regulatory sandboxes be the industry or even ecosystem wide innovation incubators we’ve been looking for?

Where to from here?

In Australia, we’ve long been familiar with the important role of allied professionals; in some states, we’ve permitted interdisciplinary ownership of law firms for a while now; and we even floated the first law firm on a stock exchange in 2007. But, despite these early inroads, most in our legal industry still falls into the category of doing the same things slightly differently rather than doing different things differently – it’s not quite been a defence of the status quo, but it’s been pretty close!

At a time when much has changed in the legal market, and where every legal service/product provider has been impacted by it, is it time for us to harness the power of now and the opportunity for real innovation that regulatory sandboxes can offer? Are we ready for it? Do we want to be? I hope so, but I’ll leave the last words on this to Jordan Furlong who in his recent post The legal sandbox tipping point said:

The tipping point of regulatory reform in the law is drawing near. The legal profession should be throwing its considerable weight behind reaching this point sooner, in order to truly and fully advance the public interest — and thereby prove itself worthy to continue governing not only the legal market, but also its own affairs.

P.S. If you would like to watch the CLI video with an amazing international panel discussing The New Legal Industry Regulatory Regime – Who’s regulating whom, how and why? you’ll find it here or you can listen to the podcast here. We chat about what was happening in this space in December 2020 in the US in Arizona, California, Utah and new initiatives in Victoria (Australia) too. Thanks so much again John Lund, Lynda Shely, Jason Solomon and Jennie Pakula.

About the Author

Terri Mottershead is the Executive Director of the Centre for Legal Innovation (Australia, New Zealand and Asia-Pacific) (CLI) at The College of Law. Terri works internationally with leaders of legal businesses supporting them in identifying trends, developing strategies, and transforming their capabilities and practices to deliver legal services/products in the new legal ecosystem. She is the “developer and designer in chief” of CLI’s global initiatives, networks and programs including the Legalpreneurs Lab, the Innovation Incubator Program, the Chief Innovation Officers Forum and its podcast series, The Legalpreneurs Sandbox. Prior to joining CLI, Terri was a practising lawyer, founded start-ups on three different continents, and established or led the in-house talent management departments for global firms and associations in Asia and the US including Lex Mundi, the Inter-Pacific Bar Association (IPBA) and DLA Piper LLP (US).