Law: Exploding the myth of the fat-cat lawyers

Our Learned Friend

WHAT IS the truth about "fat cat lawyers"? This month has seen the publication in the United Kingdom of the country's two leading legal directories, Chambers & Partners and the Legal 500, complete with league tables of law firm performance, and the wider speculation about the earnings of partners. And that is quite apart from the headlines on the lawyers acting for the Royal Family. There are enough statistics - real or imaginary - circulating in the marketplace to allow the publication of many headline- winning articles.

But while pounds 900,000-a-year profit shares undoubtedly make good copy, the truth is that the vast majority of the 71,000 solicitors practising in England and Wales (and indeed barristers) earn nothing like the figures awarded to a handful of the profession's star players. While it is naive to attempt to garner sympathy for lawyers, in the interests of accuracy the following points should be made.

n Law firm partners earning the gross sums touted in the media do not get paid each month anything like the rate of one-twelfth of the headline figure. Partners can pay themselves only what is in the bank, after covering the salaries and pension contributions of their staff, and subtracting sizeable sums to cover overheads and development. There is no minimum figure set by firms for distribution to partners, and if there is no profit, the equity partners draw no income.

n Partners have to invest money in their practice's working capital needs. In a large City firm, the individual investment of each partner will run to a six-figure sum.

n In addition, during partnership, lawyers may see a proportion of their income retained in the firm's account to increase working capital as the business grows. But each partner will continue to be taxed on the full sum of their income, at the top-bracket rate of 40 per cent. Compare a company where money retained for the benefit of the business is subject only to tax at 21 or 31 per cent.

n Unlike a company, a law firm will simply return to its retiring partners their initial investment, in devalued pounds. And it offers no shares for sale or reinvestment by retiring partners.

n The profit shares attributed to partners by legal journals and the media do not reflect the sums available to most members of the profession. Those sums can be secured by partners in only a handful of the largest City firms, while last year's Law Society Annual Statistical Report tells us that average earnings for partners in firms outside of London stand at around pounds 30,000 pa.

n For many law firms, particularly those in the regions, the reduction by the Government of a substantial proportion of the Legal Aid budget, the encouragement of no-win/no-fee arrangements, and the massive increase in indemnity insurance premiums, has placed additional pressure on turnover figures and cash flow.

Politicians jump on the populist bandwagon to castigate lawyers, but it is the MPs who promote and then vote for vast quantities of legislation, together with supporting regulations, and much of it is unconsidered. Parliamentary draftsmen are very capable people, and the Government officials who instruct them are not to be underestimated for their knowledge, but they are not at the sharp end of commercial deals, and can only act on the say of their political masters.

It is the lawyers who must wade through impenetrable text, and advise clients as to what it all means. This learning process takes considerable time, which could otherwise be spent in the pursuit of clients and the billable hour - so is it a surprise that when the advice may affect a major transaction, and the client would be well-justified in suing if the advice proved wrong, that that responsibility can be seen as justifying significant hourly rates of charge?

This is particularly arguable when advice has to be given under pressure from demanding clients. Stress is no respecter of status, so it is no surprise that partners in major City firms are earning at their maximum for no more than 10-15 years. To that extent, the shelf-life of a partner is not that much different from that of a top-class footballer - but not as well-paid.

Martyn Gowar is the senior partner at law firm Lawrence Graham