LegalTech providers promise consumers simple and inexpensive access to the law. Debt collection service providers in particular are appearing under this term and are increasingly providing their services according to standardized processes. They are thus also driving a change in the industry, which is evolving from a market for individual legal advice determined by lawyers to a more broadly based legal services market.
The legitimacy of the business models of LegalTech service providers has often been called into question in recent years. Criticism has focused primarily on the financing of the consulting services. This is because legalTech providers enjoy freedom in pricing that lawyers have not had up to now - especially when it comes to contingency fees and procedural costs.
A new law is now intended to create more legal certainty. Above all, however, it is intended to strengthen the protection of consumers who commission a LegalTech company to enforce claims. The German parliament has passed the Act to Promote Consumer-Friendly Offers, which will come into force on October 1, 2021. It aims to increase the transparency and comprehensibility of LegalTech business models.
More transparency for collection services
There will be a number of new transparency requirements for debt collection companies in the future. For one thing, debt collection service providers must already present their intended activities in the registration process so that any disagreements about the permissibility of the business model can be clarified, if possible, before they start operating.
In addition, they must make transparent which financing options they offer as well as under which conditions and with which costs a settlement is to be possible. When agreeing on a contingency fee, they are obliged to disclose their expenses.
Advice and representation in court remain the preserve of lawyers, but debt collection companies are allowed to initiate these steps. Overall, it is unlikely that the two sides will come into conflict. LegalTech providers will focus primarily on easily standardizable mass cases, if only because of the scalability of their business models. The law does not guarantee a high quality of advice from debt collection service providers. Section 12 of the RDG requires them to have only very rudimentary legal knowledge. In practice, it is apparent that many LegalTech providers take the enforcement of the law seriously and also take cases with low amounts in dispute all the way to the highest instances.
Financing - more freedom for lawyers
There is now movement on funding: contingency fees and lawyer litigation funding. The law is driven by the idea that consumers' rights can only be enforced if they can pass on the financial risks. Where legal expenses insurers and external litigation financiers fail to provide coverage, the legal service providers themselves must assume the risk.
Lawyers are now to share in the freedom enjoyed by collection service providers. The law allows them to agree on contingency fees to a greater extent and to assume litigation costs. In particular, they will be placed on an equal footing with collection service providers when it comes to collecting out-of-court receivables. In future, lawyers will be able to agree a contingency fee for the enforcement of attachable monetary claims up to a maximum of EUR 2,000 without further justification. Above this threshold, the law frees up contingency fees and attorney litigation funding in all other areas in which debt collection service providers can operate. Agency commissions, however, remain prohibited for attorneys.
The bottom line is that the new law helps clarify the scope of services provided by legal tech service providers. While they do not receive any new privileges, the consumer debt collection model is now regulated by law. For the clarification of the term LegalTech and the standardization of legal services, the law provides a good framework. It also makes clear what LegalTech cannot provide: namely, individual legal advice on more complex issues. Here, we lawyers remain the relevant point of contact with our in-depth legal knowledge, professional specializations, networks and experience.