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Legislative Council - Fifty-First Parliament, Second Session (51-2)
2008-02-13 Daily Xml
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LEGAL PROFESSION BILL

Second Reading

Adjourned debate on second reading.

(Continued from 17 October 2007. Page 1002.)

The Hon. R.D. LAWSON (20:12): I rise to indicate that Liberal members support the second reading of this bill and its ultimate passage, subject to a number of significant amendments, to which I will refer later in this contribution.

The regulation of the legal profession in South Australia has a longstanding history. In fact, in Act No. 6 of 1845 there was an ordinance to regulate the profession of the law in this state, and ever since that time—and subject to many amendments over the years—the legal profession has been regulated by legislation. Under legislation the Law Society was established and will continue to exist under the new legislation, and it plays a central role in the regulation and affairs of the legal profession here.

I mention that, in the historical context, in 1859 the Public Notaries Act enabled notaries to be appointed. That legislation provided that every person who was desirous of being appointed as a notary should apply to the court. This was followed by another significant amendment in 1911, the Female Law Practitioners Act, which enabled women to be admitted to the bar in this state.

One of the highlights of South Australian jurisprudence occurred in 1920, when the first female practitioner, Mary Kitson, having been admitted to practise as a lawyer, applied to be a notary public. I mentioned a moment ago that the Public Notaries Act provided that every person desirous of obtaining appointment as a notary should apply to the court. The Full Court of South Australia held that the word 'person' could hardly include women; therefore, Mary Kitson was not entitled to be appointed as a notary public. It required subsequent amendment to overcome that absurd conclusion.

This current version of the Legal Practitioners Act is the first occasion on which there has been an attempt to unify the laws relating to legal practice across the whole of the country. The current process began in 2001, with a resolution of the Standing Committee of Attorneys-General. Since that time, a great deal of work has been done to provide, in effect, for the establishment of an Australian legal profession in which persons admitted to practise anywhere in Australia are, subject to conditions, entitled to practise anywhere in the country.

This has led to legislation which is, I have to say, somewhat complex and prolix. We are here replacing the current Legal Practitioners Act, which comprises some 50 pages and 100 or so sections, with the bill before us, which comprises 153 pages and 500 clauses. It is a very significant enlargement. I will give the chamber accurate figures: we are replacing an act of 84 pages and 255 sections with one which will have 153 pages and some 500 sections. So, in the age of deregulation, we are certainly verbose in our regulatory scheme.

More importantly, there are a number of entirely new provisions, which deal not only with the question of the rights of Australian legal practitioners to practise throughout the country but also with foreign lawyers and which allow, for the first time, foreign lawyers to practise foreign law in Australia, that being the sort of provision which the larger Australian firms insisted upon to enable them, hopefully, to practise Australian law in other foreign jurisdictions.

The bill introduces and allows multidisciplinary partnerships, whereas previously lawyers could be in partnership only with other legal practitioners. There is now an opportunity for partnerships to be formed between lawyers and other professions. The rules relating to incorporated legal practices have changed. Generally speaking, the previous regime was that an incorporated legal practice could be established, but all its owners had to be legal practitioners or persons related to legal practitioners. This requirement disappears, and it will be possible for legal practices to be owned by persons who are not qualified.

It will be possible for major corporations to establish legal practices. It will be possible for legal practices to be owned by public companies, and already, pursuant to provisions introduced elsewhere, there are publicly listed legal firms whose shares are quoted on the Australian Stock Exchange and whose shareholders are purely investors.

In another place, the shadow attorney-general (Isobel Redmond), herself a former sole practitioner, has lamented the fact that this new organisation of the legal profession is, in her view, leading to the loss of many of the important characteristics of the former profession. She sees legislation of this kind as the end of sole practices, and it is certainly true that for the sole practitioner or a small firm the arrangements relating to the conduct of legal practice are being complicated.

One of the difficulties about regulating the legal profession is that it is a widely divergent profession; there are many different modes of practice within it. There are on the one hand very large commercial firms, especially on the eastern seaboard, comprising large staff and operations that extend beyond states and internationally—some of these firms have offices in London, Hong Kong and Singapore—but at the other end of the scale there are very many sole practitioners or small firms, many practising in suburban areas and in small towns, handling a wide range of family legal problems, whether it be family law, small criminal matters, small business issues, wills, estates and the like.

There are at one end of the scale legal aid lawyers employed by community legal centres, in the Aboriginal Legal Rights Movement and the like, being paid a salary. There are lawyers in large corporations and specialist boutique firms, some of which are highly remunerative. Much legal practice, especially sole practitioners and small firms, struggle to make financial ends meet. They provide a good service to their clients, but the manner of practice and challenges they face are far different from those in the big commercial firms where lawyers are highly remunerated.

There are barristers, some of whom are highly skilled and act in major commercial and constitutional matters; they are being paid significant fees. There are other barristers at the other end of the scale undertaking legal aid and pro bono work and whose remuneration is not at all significant, given their qualifications. Yet this legislation seeks to cover, in an overall way, the whole of legal practice. The widespread public perception that all lawyers are well remunerated is certainly a misconception.

The Liberal Party has taken the position that this legislation, developed as it has been nationally and more or less uniform (although there are significant state differences), is to be supported. In so far as it helps break down barriers between states, we certainly support it. It is important to remember that this legislation deals with the regulation of the legal profession—and the Attorney-General described that profession in his second reading speech in rather glowing, flattering terms—as constituting the bulwark of the independence of the courts and essential for a fair and effective legal system. He also described the profession as 'not simply another economic activity' and stated:

Some of its activities have a profound impact on the self image of society, on its standards of justice and civilisation and on its commitment to the rule of law and the defence of rights. The abiding challenge facing the legal profession as it enters a new millennium is one of preserving the idealism and professionalism of a potentially noble calling dedicated to the attainment of justice, while paying more attention to the realities of delivering that same justice to ordinary people.

These are high sounding ideals, but in many ways the legal profession is the provider of services to the community, and one of the most important aspects of any bill of this kind is the protection it offers to consumers. The notion that the legal profession is solely a noble profession is regrettably being overtaken by the notions of market economics where the legal profession is a supplier of services and a business like any other business.

I am a legal practitioner and have been for a number of years. I am, and am proud to be, a member of the Law Society, but we have to face the fact that the constraints of ordinary trading businesses apply to the profession and that service to the consumer, protection for the consumer, is an important and paramount element in legislation of this kind. We do not regulate the legal profession merely for the purpose of regulation. We regulate the people who are actually allowed to practise law and the privileges they have in being able to practise law, in the interests of their clients, to ensure that the clients have persons of competence and integrity handling their legal affairs and also to ensure that the courts have appearing before them barristers and solicitors committed to high standards of integrity and professional conduct.

It is unnecessary to outline in any detail the provisions of the bill: in another place the shadow attorney-general did that at great length. There is, however, one aspect of this legislation that ought be changed and addressed. Since 2001, when the process of developing this legislation began, there has occurred in South Australia certain circumstances that have exposed the weakness of some of the provisions of the legislation—and I here speak of the Legal Practitioners' Guarantee Fund, which I will describe in some detail in a moment.

However, as a result of the collapse of an old established legal firm, many clients in South Australia have suffered considerable inconvenience, loss and delays and their plight, which is continuing, has exposed the need for a better system. The enactment of this legislation provides the parliament with a timely and appropriate opportunity to ensure not only that the suffering of those persons cease but also that, if similar circumstances occur in the future, clients will not have to suffer the loss, delay, inconvenience and trauma that they are currently suffering.

The new bill's funding arrangements were described in the following terms by the Attorney-General in his second reading explanation:

Funding arrangements will continue as at present. The combined trust account and the statutory interest account will operate as they do now, as will the Litigation Assistance Fund, the Professional Indemnity Insurance Scheme and the Legal Practitioners' Guarantee Fund. These funding arrangements and the general arrangements will continue as at present.

In other words, the government and the proponents of this legislation have not looked at a new model: they simply propose that what occurs now will continue in this regard. That in itself shows a level of complacency, and I think the attitude of the Law Society, regrettably, and of the government, to the plight of the Magarey Farlam claimants, indicates also that complacency.

When the bill was introduced in September last year, the Attorney-General was well aware of the Magarey Farlam issue. Indeed, he referred to it in the following terms:

I am seeking advice on what, if any, changes may be required in the wake of the recent collapse of an established South Australian practice, Magarey Farlam. However, as this matter remains the subject of action and given the fact that the profession is eagerly anticipating the bill, the government did not want to delay its introduction pending finalisation of possible amendments.

Although the government has tabled certain amendments here in relation to this bill to be moved in this council, and further amendments were tabled this day by the Minister for Police and have not yet been studied, the fact is that the Magarey Farlam issue has not been addressed in the bill. It suited the Law Society not to have it addressed because, as one might imagine, it is keen to have the legislation enacted so that it can join the national profession, and anything that might lead to any delay in that is something that it is keen to avoid. Unfortunately, we take a different view—a view that is justified, I think, to a great extent, by the course of the Magarey Farlam matter.

It was in July of 2005 that a serious irregularity was identified in relation to the trust accounts at Magarey Farlam. It appeared that a longstanding employee of that firm, who was not a lawyer, was involved in dealings with a trust account and that there was a significant shortfall in the trust accounts of the firm at the time the irregularities were discovered. On 1 August 2005, the Council of the Law Society appointed a supervisor of the trust accounts. That supervisor was, indeed, a member of the staff of the Law Society, and it was her task to ascertain and verify entitlements to the trust accounts.

Her role proved to be complex and difficult. Accountants were engaged. The Law Society subsequently appointed, in addition to the supervisor, a manager of the practice, who was a partner in a leading Adelaide law firm. A number of lawyers and accountants were engaged to assist in ascertaining the loss, which was fairly quickly identified at $4.5 million, and thereafter investigations occurred. There has been an application by the supervisor for directions to the Supreme Court. Extensive expenses were incurred and paid out of the guarantee fund—over $1 million was paid up to 30 June 2006—and the applications to the Supreme Court in relation to that matter are ongoing.

Indeed, the applications came before Justice Debelle. One of the principal issues was whether a freeze that was placed on the trust account of the firm should apply to the whole of the trust account and, secondly, whether those clients whose balances had not been interfered with at all should be forced to have their claims pooled with others who had identifiable losses and whose assets within the trust accounts had been dissipated or were missing. These claimants were identified as the pooling claimants and the tracing claimants. That led to an application to the court, and the court made a decision after hearing many lawyers representing many parties.

Subsequently, there was an issue about whether or not the claimants should be allowed their costs out of the Legal Practitioners Guarantee Fund, and the judge ruled that they were entitled to recover their costs. The Attorney-General appealed against that order, because he considered that the Legal Practitioners Guarantee Fund should not be used to pay legal costs of that kind. There was an appeal by the Attorney-General against that decision, and the Attorney-General's appeal itself was dismissed by the Full Court of the Supreme Court in August 2007. It is interesting to note that, after the court had ruled against the Attorney-General, the Attorney-General introduced an amendment to this bill to overcome the effect of the judgment of Justice Debelle—in effect, to reverse Justice Debelle's decision—and to say that contrary to the Full Court's decision those persons who had lost money were not entitled to have their legal costs paid out of the fund.

The difficulty with the current system is that there are caps on the amount of money that goes into the guarantee fund. For the record I should explain briefly the way in which the practitioners guarantee fund operates. A number of years ago interest on solicitors' trust accounts was not paid by the banks. There was a feeling within the profession—not universally—that banks should not have the benefit of the interest on solicitors' trust accounts; that a better scheme would be to require the banks to pay interest on those funds and that the interest would be applied in a certain way for the benefit of clients and the profession. The argument was a reasonable one. Why should banks enjoy the use of the money of the clients of lawyers? It was the clients' money: it should be applied to the benefit of the clients.

A scheme was established whereby that interest was paid into certain funds; first, a statutory interest account and, secondly, the Legal Practitioners Guarantee Fund. From the guarantee fund as established—and I will come to the limits on that fund shortly—there was to be paid money to reimburse clients who had suffered a pecuniary loss as a result of the default of a solicitor. It was an extremely good scheme, because it enabled lawyers to advertise to their clients that, if there was a defalcation and the lawyer was unable to meet the defalcation, the client would have a call upon a guarantee fund. So, if a client went to a lawyer, he had the benefit of that guarantee fund. If he went to an accountant or land broker, or some other form of professional for advice, he would not have the benefit of that fund.

However, not all the interest derived from this account was to be applied to the guarantee fund; some of it was to be applied for other purposes. It is perhaps best to describe this by reference to the current act. Before so doing, I mention that there was a great deal of debate at the time of the introduction of this scheme. Whilst most members of the legal profession considered that the banks should not enjoy the benefit of clients' money, many considered it was inappropriate to use interest earned on clients' money for purposes other than giving it to the clients themselves.

However, the scheme eventually agreed upon was one which allowed the benefit to pass through the Legal Practitioners Guarantee Fund to the general body of clients of lawyers, rather than to those particular clients whose money was invested in trust accounts.

Section 53 of the current act establishes a combined trust account, and legal practitioners are required to pay an amount of their trust account to the combined trust account. That has operated, I think, since 1981 at least. The Law Society was required to establish and maintain a statutory interest account into which all interest earned from the combined trust account was to be paid. The balance of the statutory interest account, after paying accounts, etc., was to go five-eighths to the Legal Services Commission and the remaining three-eighths to the Legal Practitioners Guarantee Fund.

The Legal Practitioners Guarantee Fund was to be established up to a limit, and that limit was an amount calculated by multiplying $7,500 by the number of legal practitioners in the state. The current balance of that account is something over $20 million. When the Law Society reported in December 2006, the total assets of that fund were $21 million. I think it is now $22 million calculated in accordance with that formula. The excess over that $21 million is to be paid and applied by the Law Society to the Legal Services Commission and for certain other purposes approved by the Attorney-General and the Law Society.

The Legal Practitioners Guarantee Fund comprises the money paid into it from the statutory interest account and a certain proportion of money from the fees that are paid by lawyers for their annual practising certificates. The purposes for which money in the guarantee fund may be applied are fairly extensive. They include matters such as investigation of complaints against legal practitioners and legal disciplinary proceedings against legal practitioners; costs of the fees paid to members of the board and the Legal Practitioners Disciplinary Tribunal; and educational publishing programs conducted for the benefit of legal practitioners. It is important to note that no payment may be made from the guarantee fund except with the authorisation of the Attorney-General.

As to other interest accruing on legal practitioners' accounts—that is, the accounts that remain in their trust accounts—50 per cent of that money is to be paid to one or more of the Legal Services Commission or the community legal centres in such shares and subject to such conditions as the Attorney-General directs; 40 per cent of the money must be paid to the guarantee fund; and 10 per cent must be paid to a person nominated by the Attorney-General, subject to such conditions as the Attorney-General directs. So, significant funds are generated.

I have mentioned one limitation on the guarantee fund, and that is the one derived by the formula mentioned. That is described as a cap. Another cap is that any claim against the guarantee fund is limited to 5 per cent of that fund. That means, in a case like the Magarey Farlam case, where a number of clients have suffered loss as a result of a particular series of incidents, the total amount available to all of them will be 5 per cent of the fund—something like $1 million. That 5 per cent can be changed by regulation. However, the issue highlighted in the Magarey Farlam matter is the fact that there are $4.5 million worth of losses, there are millions of dollars of costs, yet section 64 of the current act, which is replicated in the new legislation, provides that the amount that can be applied towards the satisfaction of all claims in that matter is limited to 5 per cent.

That has led to injustice. The amendments proposed by us, foreshadowed in another place but not accepted by the government in another place, was that those caps be lifted and that the impediments which are presently placed in the way of satisfying the Magarey Farlam claims be removed.

The course of the proceedings in the Magarey Farlam matter have been tortuous, and they have been criticised by Justice Debelle in colourful and trenchant language. In the course of delivering one of the judgments in this case, the judge said:

The more I have to do with this matter, and the more I am concerned as to how people who innocently suffer loss are put to extraordinary cost, the more it seems to me that, when this is all over and done with, I will be writing to the Attorney-General, I have to say, to see if some better system cannot be put into place. I mean, I can recall way back some 12 months ago almost, I think, saying, 'There's got to be a better way than this,' and 'Is there not some means whereby the insurers can sort out the position in consultation with the Attorney-General?' That's obviously not transpired and the deplorable state of affairs that costs are continually being incurred to a point where, rather like Bleak House, by the time the costs are paid what is going to be left for those people who innocently suffer from the fall of another. There must be a better system.

Indeed, there is a better system, and the amendments I will be moving provide a way forward.

On 23 November last year, the respected legal commentator Chris Merritt wrote in The Australian:

The failure of law firm Magarey Farlam is one of those catastrophes with ever more repercussions. It's bad enough that South Australia's flawed regulatory structure prevents the Law Society from compensating those who lost money in this firm. But now it looks like the inability of the government to solve this problem has delayed the passing of the state's new Legal Profession Bill.

Attorney-General Michael Atkinson has given up trying to get the bill through parliament this year. But he had the courtesy to tell the Law Society. Until that bill makes it through the parliament, South Australia's lawyers will be left out of the uniform regulatory system in other jurisdictions...Atkinson's problem is that the opposition, and some of the minor parties in the upper house—

The PRESIDENT: Order! It is either 'the honourable minister' or 'the Hon. Michael Atkinson'.

The Hon. R.D. LAWSON: Yes. Well, Mr Merritt describes the Attorney-General simply as 'Atkinson'. I certainly mean no discourtesy to the Attorney: I am quoting from Mr Merritt's remarks. Mr Merritt goes on to say:

...[the] problem is that the opposition, and some of the minor parties—

I think that is another mistake. They are not minor parties: they are significant representatives in this place—

want to amend the Legal Profession Bill to permit a quick compensation deal for Magarey Farlam victims...Laid on these different approaches is the fact that any long-term change to ensure there is no repeat of the outrageous treatment of the Magarey Farlam victims will have one big loser: the state government. The logical solution is for the government to permit legislative change that will make it possible for future victims of failed law firms to be immediately compensated from the solicitors' guarantee fund. But that would require the government to sacrifice budgetary interests to ensure the financial welfare of consumers of legal services.

Mr Merritt continues:

South Australia is not the only state that bludges on consumers of legal services in this way. But is definitely the worst.

In New South Wales, Victoria and Queensland, consumers of legal services who lost money in a failed law firm would never be subjected to the mindless shenanigans that passes for consumer protection in South Australia. The Law Society has enough money in the solicitors' guarantee fund to pay out all Magarey Farlam victims tomorrow. The only thing stopping it is state law. And until the law changes, it is a permanent reminder that the South Australian government cares more about itself than the financial welfare of consumers of legal services.

There is a good deal of truth in those sentiments. We believe the opportunity to correct the wrongs of the present, and also to ensure that they are not repeated in the future, is presented to the Legislative Council through the amendments I will be moving in the committee stage of this bill. But, as I say, whilst we support the regulatory provisions, the consumer protection provisions and the other important reforms, we do believe that it is just as important that this measure, which is ultimately a consumer protection measure, is amended in the manner foreshadowed.

The Hon. D.G.E. HOOD (20:58): Family First sees many good aspects to this bill; we have a number of concerns as well. The bill contains provisions which are keenly sought by lawyers and legal organisations and which are part of national model legislation. Members would be aware of a number of opposition amendments, to which Family First is favourably disposed at this point. However, we are principally concerned that the victims of a current case (that is, the case the Hon. Mr Lawson mentioned a number of times in his contribution, namely, the $4.5 million Magarey Farlam lawyers fraud) be paid compensation for all stolen money and costs. That is Family First's primary objective in dealing with this bill.

South Australians should be deeply disturbed by the handling of this case, because the tens of thousands of people who use our legal system, from children to retirees, are at risk, and will continue to be at risk, under this system. Unfortunately, this bill in its original form will do little to help them. In fact, this legislation, some might argue, should never have come before this parliament in its current form.

But for a pressing need, according to the Law Society of South Australia, to implement the bill by 1 July, as well as a desire to assist Magarey Farlam victims as quickly as possible, Family First may very well have opposed this bill until comprehensive changes to the trust account and guarantee funds provisions had been made. The rights of victims should always be paramount, and that is certainly true in this case as well. For that reason, we are inclined to support the bill, with consideration of the amendments the opposition will put forward in due course. They are largely designed to help the Magarey Farlam victims. We also give notice that we are considering the introduction of a private member's bill that will put to rest those unjust aspects of the current system.

A damning indictment of the current system was made by Justice Debelle (also referred to by the Hon. Mr Lawson) during a Supreme Court directions hearing into the Magarey Farlam matter, when he said on 28 November 2006:

...the more I have to do with this matter, and the more I am concerned as to how people who innocently suffer loss are put to extraordinary cost, the more it seems to me that when this is all over and done with, I will be writing to the Attorney-General, I have to say, to see if some better system cannot be put in place.

He goes on:

I mean, I can recall way back, some 12 months ago almost, I think, saying, 'There's got to be a better way than this' and 'is there not some means whereby the insurers can sort out the position in consultation with the Attorney-General?' That's obviously not transpired and one has the deplorable state of affairs that costs are continually being incurred to a point where, rather like Bleak House, by the time costs are paid, what is going to be left for these people who innocently suffer from the fall of another? There must be a better system.

For a Supreme Court judge to make such a damning statement about a law mid-way through a case is extraordinary indeed, and it should have been enough for the government and the Law Society to take immediate and decisive action to resolve the matter, recognising that victims were being put through protracted litigation with heavy legal costs as well as other costs and losses (as usual, the lawyers are the winners and everyone else are the losers). Yet they rebuffed all attempts to reach an out of court settlement, with the government opposing and, with the society's support (to its shame), appealing, unsuccessfully, against the victims' application to the court for their costs of proceedings to be paid directly from the guarantee fund—a fund that victims can claim is now nothing more than a Law Society slush fund and of little, if any, use at all to victims.

I intend to concentrate on the major steps in this matter, emphasising the unjust impact on victims, and then cover the systemic problems highlighting why sweeping changes are needed—and needed urgently. The Magarey Farlam matter—again, as highlighted by the Hon.  Mr Lawson—began with the discovery in July 2005 of the first of a series of thefts during a 15-year period of some $4.5 million from 42 of the 250 trust accounts managed by the Adelaide-based firm of Magarey Farlam lawyers. The actions of the Law Society and the government subsequently resulted in a number of things:

a court intervention by the society without providing victims with a chance to sort out the matter with the Magarey Farlam partners;

a 21-month Law Society freeze of the remaining assets of all 250 victims, not just those beneficiaries of the 42 defrauded trust accounts. How can that be justified?;

the refusal of the Law Society to discuss an out of court settlement with the victims, and the failure of the government to convene promised mediation;

an absolutely needless three-day case with about a dozen direction hearings into how the remaining moneys were to be distributed, the society splitting victims into two groups—essentially, those stolen from and those not stolen from—and then initiating Supreme Court action which forced the two groups to fight against each other. However, the groups were never defined properly, causing difficulty for some clients in determining to which group they belonged;

a one day hearing of an application by all victims for their costs of proceedings to be paid directly from the guarantee fund;

a one-day full bench appeal against that decision;

about 25 different solicitors and five barristers acting for clients, with a supervisor retaining a solicitor and a barrister;

the Solicitor-General appearing in the appeal for the Attorney-General;

the failure of the government, the Law Society and the lawyers involved in the case to heed the call of the Supreme Court's Justice Debelle for a conference aimed at settlement to heed Justice Debelle's 'Bleak House' statement;

more than $2 million spent by the Law Society (mainly on legal fees), all of which came from the guarantee fund—which, as I will cover later, is financed largely by money from the clients of law firms. The expenditure, which all has to be authorised by the Attorney-General, may be close to $3 million if reports are correct that the Law Society's financial statements do not make clear all the expenditure;

an estimated further $1 million spent on legal fees by victims, the amount being subject to adjudication and Supreme Court proceedings.

Again, I ask: how does this advantage anyone but the lawyers themselves? All that was achieved was a decision about how the remaining assets were to be distributed. Those victims whose assets were plundered are still trying to recover their losses, with some only recently having started legal action to do that. The lawyers win again. By the time the action ends, the total legal fees will almost certainly exceed the amount stolen of approximately $4.5 million. Let me say that again: by the time all of this legal action ends, the total legal fees will almost certainly exceed the amount initially stolen from the Magarey Farlam clients of some $4.5 million. The lawyers win yet again.

It is a disgraceful situation, particularly as it was initiated by the peak organisation of lawyers in this state. If the Law Society had opted not to intervene in the matter, or had immediately acted to compensate the defrauded victims for their $4.5 million, this huge expenditure and clogging of the courts would probably never have occurred at all. In addition, the beneficiaries of all the 250 trust accounts administered by Magarey Farlam will have suffered losses and costs because of the society-initiated 21-month freeze, including interest on trust account moneys that were held by the society in trust for 21 months instead of the few days it is usually held, costs associated with recovering assets (mainly dividend payments) found to be missing when the society-appointed manager of Magarey Farlam lawyers returned the assets; and yet to be assessed losses and costs caused by the freeze. These include:

income associated with the frozen assets;

costs associated with restructuring finances;

losses connected with inability to develop and maintain businesses;

costs of relocation to take up essential employment;

forced sale of property and equities to meet living costs and legal fees;

lost equity trading opportunities;

court attendances, travel, accommodation, etc.; and finally

mental and physical hardship.

At present, there is no way of quantifying these costs and losses. There should probably be a mechanism for calculating and collecting these claims, but there is none at the moment. Some of the victims in court today never actually had money taken from their accounts, yet they have their assets frozen nonetheless; their accounts were never touched yet their assets have been frozen. Unless victims can recover those costs, they will have been put in the unjust situation of having suffered losses and costs to have returned to them their assets, which were never stolen in the first place. What a farcical situation! The lawyers win again.

To understand why innocent victims of crime should be put in this position, an understanding of the system forced upon them is needed. A chart of the system used to appropriate funds from lawyers' clients has been sent to some members. It is a 'spaghetti junction' and shows the complex funding and distribution system created by the act—a system that will be maintained under this bill.

In very simple terms, interest earned on clients' assets in lawyers' trust accounts is appropriated and managed by the Law Society—not their money. The majority of the interest earned goes directly to the Legal Services Commission for Legal Aid. A smaller amount is granted directly to community legal centres. However, like all taxpayers, clients already make contributions to Legal Aid and community legal centres through their taxes. Why should they give twice?

The state government is, therefore, double dipping into the funds of tens of thousands of its citizens, forcing them to make two contributions to two organisations that should clearly, as a matter of equity, be funded entirely by the commonwealth and state revenues that already exist. I can conceive of no logical reason to argue why, for example, a user of commercial legal services should necessarily be required to fund, via interest on their assets in lawyers' trust accounts, criminal defence work via the Legal Services Commission. Why should they fund this?

In any event, the system is structured so that clients' trust account interest actually ends in the pockets of lawyers via Legal Services Commission certificates and the community legal centre employment of lawyers. Again, the lawyers win. Incredibly, the system means that the Magarey Farlam victims are making a double contribution to the defence costs of the person who allegedly committed the fraud, as he is, I understand, also receiving Legal Aid. How ironic!

Another considerable proportion of the interest on those assets is deposited in what is known as the Legal Practitioners Guarantee Fund. The fund also receives a prescribed proportion of lawyers' practising certificate fees. It also receives funds from investments, costs recovered in disciplinary proceedings, fees paid to the conduct board, any money the society sees fit to provide, disposal of investments, and income from other investments.

Key figures taken from the society's 2006-07 annual report show that the guarantee fund's total income of $5.3 million included $2.4 million (or some 46 per cent of total income) from interest on clients' assets—not their money; $616,812 (or approximately 11.6 per cent of total income) from lawyers' practising certificate fees; and $1.6 million (or approximately 30.9 per cent of total income) from investment income.

Calculating the exact proportion of clients' contributions is difficult, because the amount of interest on clients' assets in the guarantee fund's investments is not known. One estimate that has been used is that it is approximately 75 per cent. It is a very cosy situation indeed. The fund provides direct grants, first, to the Legal Practitioners Conduct Board; secondly, to the Legal Practitioners Education and Admissions Council; and, thirdly, for a range of costs, including those consequent upon the appointment of a supervisor or manager, for example, handling cases of financial irregularities at law firms, such as in the Magarey Farlam case we have been discussing.

The second issue therefore follows. Lawyers' clients, because they are contributing the bulk of the guarantee fund's income (which, as I said, has been estimated as 75 per cent), may be said to be paying the bulk of contributions to the conduct board, which received $1.7 million from the guarantee fund in 2006-07. There seems to be no reason for that in connection with the conduct board, which handles complaints against lawyers. A fifty-fifty contribution by clients and lawyers would seem fairer, or a case could be argued for lawyers to be the sole funders.

The amount of the grant to the LPEAC, which oversees practitioners' education, training and admission to practise, is not clear from the society's financial statements. In any case, again there seems to be a compelling case for lawyers to pay their own costs for these activities and no reason whatsoever for their clients to support them. As I mentioned, as with funding to the Legal Services Commission, funding provided to the conduct board and to the LPEAC again ends directly in the pockets of lawyers, as they are briefed and retained for court matters or education purposes.

There is simply no justifiable reason for this. The major function of the fund should be to pay compensation to the victims of fraud. Again, under the current system, this is not the case. The lawyers win again. One reason is that the act provides for the balance of the fund to be manipulated and for a cap, based on the balance of the fund, to apply to compensation payments.

The manipulation of the balance can be effected in two ways: first, there is provision for the excess between the amount of the fund and the amount calculated by the number of practising certificate fees, multiplied by $7,500, to be diverted to the Legal Services Commission and (guess what?) therefore to lawyers themselves. Secondly, under the act, the society is able to invest money from the fund and to transfer money from the fund to what is known as the Statutory Interest Account, interest from which is granted to the Legal Services Commission.

In the first way, the balance of the fund can be maintained at about $20 million. This is a key factor, because the amount of compensation that can be paid is capped by a formula established by regulation. At present, it is 5 per cent of the fund's balance at the date of the last audit. This means that currently the cap is about $1 million, which is, as I said, about 5 per cent of the fund.

At this stage, there is no agreement about whether the cap applies to an individual claim or to a case involving claims by more than one party. However, on 17 October last year, in the other place, the Attorney-General indicated that the latter applied. If this view is correct, the 42 trust accounts defrauded in the Magarey Farlam case would have an unsatisfactory $1 million to share between them, despite the fact that there is some $20 million in the fund and the fraud total is $4.5 million.

This interpretation results in a completely unfair outcome for victims again, many of whom are struggling retirees who are now put in a difficult financial position due to fraud. It is clearly a matter of justice that each and every victim should be able to claim the full extent of their losses. The money is there. Why should these people not have what is theirs? Otherwise, the guarantee fund guarantees nothing and should instead be called what it is: an investment and employment fund for lawyers. That is exactly what it is, and it is the only purpose it serves.

The opposition's amendments partly seek to provide some relief to the victims, and Family First views them favourably. In the second way of manipulating the fund's balance, the society has an opening, if it knows or suspects that large claims may be about to be lodged in a forthcoming financial year, to ensure that there is a minimal balance in the fund when it is audited. Further systemic problems affecting clients arise because, under the act, the society or the Attorney-General may, but is not required to, appoint inspectors, who are known in the bill as 'investigators'.

A Law Society handbook obtained in early 2006 says, in chapter 20, entitled 'When the inspector calls' that the inspector's roles are, first, to detect and prevent fraud; secondly, monitor and report on compliance with the legislation; and, finally, to improve the standard of trust accounting through a process of education and training. Despite this, the Law Society has claimed to the Magarey Farlam victims that the audits are 'system audits' and not financial audits at all—a claim contradicted by some lawyers who have been inspected themselves.

Then there is a provision in the act that when a law firm suffers financial irregularity, that is, fraud in many cases, the society 'may' appoint a supervisor of trust moneys and a manager of the firm. The supervisor's role is to ascertain and verify entitlements to trust money and to dispose of trust money. The problem is that the government and the society have a major conflict of interest. They appoint inspectors to audit law firms and almost certainly become vicariously liable if those inspectors fail to detect and prevent fraud. Then they have a role in dispersing remaining funds and in determining claims. The conflict is very obvious but not often highlighted.

I now comment on the systemic problems facing clients when they seek to make claims for losses. The fact that there is a guarantee fund—and one into which law firms' clients forcibly (not of their own decision) contribute substantial amounts of money—suggests that compensation is readily available to victims of fraud: indeed, that is what the fund is for. Unfortunately, this is not the case. If victims have assets stolen, the act requires them, before claiming compensation from the fund, to show that 'there is no reasonable prospect of recovering the full amount' of the losses from other sources.

Thus, the fund is known as a fund of last resort. Victims have to pursue all other potentially liable parties, probably the law firm, its auditors, banks and even the Law Society itself because of its auditing role before they can claim compensation from the guarantee fund. That inevitably involves various insurance companies, including the Law Society owned law claims, and it involves a vast amount of time, energy and money. Because of this, as I have been advised by the Law Society, successful claims are surprisingly very rare indeed. Even after a claim is made, the society has some restrictive options, including the cap mentioned earlier. The Attorney-General also has to authorise all payments from the fund. That means he can refuse to authorise payments, despite not having to approve them.

The last resort provisions of the act are not supported by Family First. The guarantee fund is, as explained, largely funded by clients of the law fund. The money is readily made available for legal aid, for community legal centres, the conduct board, and education and admissions: read 'for all the lawyers who want access to it'. However, when clients need it to recover what they have had stolen from them they are forced to take legal action and possibly battle with the society and possibly the government itself, yet the plain fact is that it is their money. What a disgraceful situation!

In the Magarey Farlam case, the matter has been made worse by the dithering and inability of the Law Society appointed supervisor to decide how the remaining moneys were to be distributed. It forced all clients through the two court cases to make an appeal before those who had been defrauded even started claiming their losses. That creates a double pay situation because the supervisor's costs, including their extensive legal fees, are taken from the guarantee fund. Remember, that is the clients' money in the first place.

The fund is largely financed by law firm clients who have to pay their own costs. If the costs are recovered, and the Supreme Court has awarded them to victims (although the government is currently attempting to limit them) then there is a double drain on the guarantee fund. Then we have the problem of the litigation and losses and costs suffered even by those victims who had nothing stolen from their trust accounts in the first place, and that arguably is a greater injustice than the thefts and litigious nightmare the victims who had their money stolen have to endure.

Victims in this category are faced with the further absurdity of trying to claim some of their legal costs from the guarantee fund, through a Supreme Court order for costs by Justice Debelle, by attempting to recover the balance of their costs from the same fund by applying directly to the Law Society. The second application has had to be made without any knowledge of the amount recoverable from the first. There is also no certainty that legal costs associated with the recovery of trust account balances that have not suffered fraud are recoverable from the fund under either the current act or the bill before us. These issues are currently before the Supreme Court.

There was an issue yesterday morning, 12 February, but I have not yet heard the outcome. When the available financial data is analysed, the entire trauma for the innocent victims of crime, the clogging of the courts and the shovelling of millions of dollars in fees into the bank accounts of lawyers involves a fairly small amount of money in comparison with overall government revenues. Working from Law Society annual reports, it appears that about $6.4 million was taken in 2006-07 in interest on clients assets—again not the lawyers' money, but the lawyers received it in the end. The Legal Services Commission was granted about $3.5 million and community legal centres about $400,000—let us call that roughly $4 million in total, although analysis of previous years' data suggested a discrepancy between the society's and the commission's figure. The commission's grant therefore could be even higher.

If the government were to find about $5 million a year approximately and as a maximum from general revenue put it into legal aid and community aid, this nightmare of a system for victims of fraud at law firms could be put to an end once and for all. The Law Society could be allowed to continue with its auditing of lawyers, but the current conflict of interest could be eliminated by removing it from any part of the supervision and management of the trust accounts of law firms that encounter fiduciary irregularities and from handling compensation claims.

In place of the current compensation system there could be a far more just and streamlined system, perhaps an insurance-type scheme launched using clients' money currently in the guarantee fund and estimated to be about $16 million, less whatever the payments to Magarey Farlam victims might tally. It could operate as simply as the society being required to take insurance cover for the clients' assets for the time they are in the lawyers' trust accounts, and often this is just a few days or weeks at most. This should be done at lawyers' own cost, in the same way as does every other organisation when it insures its services against such misgivings.

We will be considering this for the foreshadowed private member's legislation I mentioned earlier. It would allow the large amount of interest currently usurped for legal aid and community legal centres, and the obvious double dipping, to be retained by the lawyers' clients and not the lawyers themselves.

Much of that interest comes from what is known as the Combined Trust Account, which is funded by biennial, formula-based amounts of capital from clients' funds in lawyers' trust accounts. The capital remains the clients' but the interest is split between the Legal Services Commission and the guarantee fund. At 30 June 2007, the combined trust account balance was $52.9 million and the guarantee fund balance was $22.8 million. This shoddy system has been operating, as I understand it, since at least 1981, so a rough estimate based on 1981 as the starting date is that potentially some $200 million has been stripped from clients' accounts and taken by the legal profession over that period. Many of their clients would no doubt like it back.

This money was taken from them legally, but the morality of it is questionable, to the extent that it could be termed 'legalised misappropriation'. The concern is that this system is being continued under this bill. I stand against the dubious practice that takes hard-earned money from clients and puts assets into the trust accounts of South Australian lawyers. It is not their money: it is the clients' money.

It is for all of the above reasons that Family First views favourably the opposition's amendments, so as at least to ensure that Magarey Farlam victims get paid their losses and their costs as quickly as possible. The Law Society has put to us that the major proposed amendments lifting the cap and making the payments to individual claimants will result in increasing claims and the guarantee fund being exhausted. Those views simply cannot be accepted.

The society is saying, in effect, that there are either many more claims for fraud than are reported or that a greatly increased cap will result in more fraud as law firm staff are stealing more than is currently known, in the knowledge that their victims will be compensated. What an absurd proposition! If these theories are good, then it is the Law Society's role to improve its regulatory efforts and then cover such practices. The penalties for the failure of self-regulation should fall on the regulated, not on the clients.

As far as exhausting the fund is concerned, all I can say is that the fund should exist to compensate victims and, if the fund is depleted (which, by the way, I consider extremely unlikely), then so be it. As in any insurance-like scheme, premiums will increase appropriately. It seems to work in every other sphere of insurance.

Let me conclude with the views of one of the victims of the Magarey Farlam case in this sorry tale, and I quote directly from him, as follows:

I've incurred a lot of fees mostly because of the time I've spent discussing the matter with my solicitors, mainly thrashing through the injustices and offering ways and means about overcoming them. While they've admitted that there needed to be a circuit breaker to resolve the matter, they've offered and done nothing. They've just talked—and the meter was ticking all the time [of course]. When I made what I thought were positive ideas for getting resolution, they retreated behind the 'it's the system' argument. One suggestion was simply trying to get all victims' solicitors and victims together to forge a joint appeal to the Attorney-General and society to end the affair. Another was to ask the court to declare that a 'last resort' situation existed, providing grounds for compensation to be paid...But nothing was accepted or done. I now know that all my efforts have been really a prolonged scream for professional help—and it has never been provided. I know other victims who hold a similar view. One of the prime criterion for an occupation to qualify as a profession is that its practitioners act in the best interest of their clients. That has, in my strong belief, not happened in the Magarey Farlam case. I think that professionalism among the lawyers involved lay dormant because they were too scared of the society and more concerned about protecting themselves than helping their clients. I now call it the legal occupation and not the legal profession.

Other than that, 2½ years of my life has already been disrupted by the way this matter has been handled by the Law Society and lawyers.

Family First will carefully consider the further debate on this bill. As I initially stated, we support the introduction of a national framework, but I point out again that we will be most interested in a debate on how to ensure that the families affected by the Magarey Farlam matter will be compensated quickly and fairly. Again, the primary concern is that of the victims of this sorry affair, not the welfare of the lawyers involved.

Debate adjourned on motion of Hon. I.K. Hunter.

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