Professional regulation of lawyers and law firms in Germany: Comprehensive reform comes into force

Almost two years after the publication of the draft legislation, the reform of the professional regulation of lawyers and law firms in Germany comes into force today. The reform brings significant changes regarding greater freedom of organisation under company law for law firms and regarding the regulation of law firms.

Foreign law firms also benefit from the reform of the Federal Lawyers’ Act, as it expands their freedom to act within the scope of their activities in Germany, subject to compliance with certain requirements. However, the increased requirements for admission in Germany and compliance with professional duties must be considered.

Increased organisational freedom and legal neutrality

Lawyers are allowed to form professional service firms which may have one or more partners. As a result of the reform, such a professional service firm can take on any legal form provided for by German law. In addition, it may take the form of any European legal entity, or any legal entity that is permitted under the law of a member state of the European Union or a contracting state of the Agreement on the European Economic Area. The new ability for professional service firms to adopt this wider range of legal forms means that they have a much broader freedom of organisation under company law. This provision will also mean increased legal neutrality for both German and foreign law firms, as the same regulatory regime will apply regardless of the legal form chosen.

Foreign law firms

Foreign law firms that have their registered office in the UK, the USA or any other member state of the World Trade Organization may also provide legal services in Germany under certain conditions (Section 207a Federal Lawyers’ Act).

For this, the respective law firm must:

• be constituted in such a way that its object is to provide advice and representation in legal matters,
• be authorised to provide legal services under the law of the state in which it has its registered office,
• have partners who are lawyers or members of one of the professions referred to in Section 59c para 1 Federal Lawyers' Act,
• have its own management of the German branch office which can represent the firm and has sufficient powers to ensure that professional law is observed in relation to the German branch office and
• be admitted by the local Bar Association at the place of their German branch office.

Section 207a para 6 Federal Lawyers’ Act shall also apply to law firms from other states, provided that reciprocity is guaranteed.

Admission of domestic and foreign law firms

In principle, all professional service firms require admission by the relevant local Bar Association. The only exceptions are professional service firms in which the individual partners/members have unlimited liability and in which the management and supervisory boards are made up only of lawyers or members of the professions mentioned in Section 59c para 1 sentence 1 no.1 Federal Lawyer’s Act.

Every application for admission to the Bar must contain the following information pursuant to Section 59g Federal Lawyer’s Act:

• the chosen legal form as well as the name, registered office, and object of the professional service firm,
• the business address of the branches of the professional service firm,
• name and occupation of the members, the members of the management and supervisory boards, as well as of any persons “indirectly involved” (as defined) with the firm.

In the case of foreign law firms under Section 207a Federal Lawyer’s Act, the law firm must apply for admission to the Bar at the location of its branch office. If it has several locations in Germany, one of these locations must be designated as the branch office. The application for admission must then be submitted at the location of that branch. The other locations may continue to exist as administratively subordinate branches. For existing foreign law firms, there is a transitional period and applications for authorisation must be made by 1 November 2022.

The Bar Associations have already published forms for the admission of professional service firms pursuant to Section 59g Federal Lawyer’s Act. The forms for authorisation pursuant to Section 207a of the Federal Lawyer's Act are not yet available from most Bar Associations. In this respect, there are still some uncertainties for foreign law firms regarding the documents and information to be provided in the context of an application.

Shareholder and capital structure of professional service firms

The reform of the Federal Lawyers' Act also introduces some innovations in the structure of professional service firms. For example, professional service firms as legal entities can now themselves be partners in other professional service firms, provided that both entities meet the requirements of professional law. The previous requirement that a majority of the partners should be lawyers is now dropped due to the other guarantee of compliance with professional duties, in particular through Section 59d Federal Lawyer’s Act. However, the reform still does not permit a pure capital participation in a professional service firm. In this respect, it remains to be seen whether the legislator will act again in the current legislative period and relax the prohibition on third-party ownership that has continued to apply up to now.

Professional Duties and Compliance Requirements

Whereas current professional law and regulation solely apply to individual professionals, the Federal Lawyer’s Act now introduces a dualistic approach which is more in line with practice outside of Germany: in the future, the entity through which the individual professionals exercise their profession will also be subject to regulatory requirements and have professional duties of its own. In addition, law firms will be capable of performing legally effective actions in their own name before German courts and may also use a mailbox in the firm name for electronic filings with the Courts and for correspondence.

The other side of the coin is that, under the Act, a law firm will be obliged to ensure the adherence of its professionals to their individual professional duties. Law firms will have to ensure through their management boards and, where appropriate, through their supervisory boards that violations of professional obligations are detected at an early stage. The firm must provide appropriate mechanisms for this purpose.

In cases of violations of the law firm's regulatory obligations, particularly its culpable omission to put in place appropriate organisational, personnel and technical measures, the law firm itself can be sanctioned (Section 113 Federal Lawyers' Act). According to Section 114 para 2 Federal Lawyers' Act, sanctions can range from warnings to fines of up to EUR 500,000 or in a worst-case scenario to disqualifying the law firm from providing legal services.

Facing such consequences, law firms will be well-advised to double-check their current compliance measures. Although law firms will not be required to nominate an official compliance officer, it seems inevitable that increased time and money will be spent on training courses, ombudspersons and (facultative) compliance officers.

New regulation of the conflict of interest

One of the core pieces of the reform is the new regulation of the provisions on lawyers' conflicts of interest. Conflict of interest provisions prohibit giving legal advice to or representing more than one client in the same legal matter where they have conflicting interests. However, this is strictly limited to activities within the scope of a legal mandate. This does not include, for example, initial negotiations for a possible assumption of a mandate in the course of which one comes into contact with confidential information. What remains unchanged is that the scope of application extends to all lawyers and legal staff of the entire law firm. The prohibition on the entire law firm acting can now be lifted, but the individual lawyer cannot be exempted from it. Where it is lifted (such that another lawyer from the same firm can act), the new provisions stipulate the appropriate precautions which must be taken to maintain confidentiality.

The regulation also newly extends to the activities of legal trainees. Thus, trainee lawyers may not take up any activities for clients after their admission to the Bar if this is in conflict with an activity from their traineeship. However, this is limited to cases in which the trainee lawyer has worked directly on the mandate rather than, for example, dealt only with abstract legal questions. By contrast, the regulation was not extended to the activities of research assistants.

Compulsory insurance of the professional service firm

Whereas under the old provisions professional liability insurance was only obligatory for certain types of companies, the insurance obligation now extends to all professional service firms. This also ties in with the intended legal neutrality, according to which all forms of companies are to be treated equally. The content and scope of the insurance to be taken out does not change, with the exception of the minimum level of professional liability cover.

Limited liability companies must have a minimum cover of EUR 2.5 million (unless they have fewer than ten professionals, in which case it is only EUR 1 million). The minimum cover for companies without limited liability is EUR 500,000.

The minimum cover for individual lawyers is EUR 250,000, irrespective of any limitation of liability.

Outlook

The reform of the Federal Lawyers’ Act modernises the regulation of professionals and adapts it to the changed conditions of the legal market in Germany. In recent years, the importance of professional service firms has continued to increase. In addition, the internationalisation of the legal market for business clients continues to progress. However, the reform of professional regulation does not resolve all the tensions that exist between a traditional understanding of the lawyer’s profession and the challenges of the future for the legal market. Not only is there ongoing competitive pressure between law firms, but new legal service providers are also offering their services to clients. It remains to be seen whether further issues will be taken up by legislators in the short term that will further change the legal market in Germany.