Caught in the Act

The starting gun in the race to reform legal services regulation has been fired. Neil Rose assesses the big issues worrying lawyers ahead of the White Paper later this year

There appear to be two ways of looking at the forthcoming reform of legal services regulation, confirmed in last month’s Queen’s Speech.


The optimist has it that while the regulatory structure may be different, little in practice will be noticed on the ground – in fact, if the Lord Chancellor, Lord Falconer, is true to his word, the promised ‘light-touch’ regulation may make life easier for many law firm managers.


The pessimist sees the first stage to a bossy body in the image of the Financial Services Authority (FSA) that will interfere dangerously in the affairs of an independent profession.


If you want to add a touch of conspiracy theory, there is even the suggestion that the current proposals are a Trojan Horse, quietly laying the foundations for a legal services authority without provoking a war with the profession.


A White Paper is due out in the next few months, kicking off the argument about the detail of the proposals. There is now broad consensus among the profession’s leaders backing the changes – they could be worse, after all – although the Bar Council continues to oppose external ownership of legal practices. It is not alone, as plenty of lawyers fear the consequences of this too.


The main elements of the reform will introduce three key acronyms: the LSB (legal services board), which will take on regulatory oversight of the legal profession; the OLC (office for legal complaints), an independent body to handle all inadequate service complaints against lawyers, although conduct cases would be referred back to the professional bodies; and LDPs (legal disciplinary practices), introduced to allow all the various types of lawyer to join in partnership, senior non-legal support staff to become partners, and non-lawyers to invest in or even own law firms.


The LSB should not be a new tier of bureaucracy; it will bring together oversight functions now spread across a variety of bodies. Where the set-up differs is that the board will have all the regulatory functions vested in it – the Law Society and Bar Council failed to lobby successfully to retain their powers, with the LSB just having firm oversight.


It will delegate them to the front-line professional bodies, provided their governance arrangements are deemed acceptable. This in particular means that regulation and representation must be separated, and both the Law Society and Bar Council are in the process of achieving this. But in practice firms may not notice much difference.


How the brave new world turns out depends to a large extent on what kind of body the LSB is. In his report, Sir David said that although the LSB – which should have a non-lawyer majority – should retain the right to carry out regulatory functions direct in the absence of a recognised front-line organisation, ‘it is intended that as far as possible the LSB should be a small oversight body’.


Speaking at the St Paul Travelers annual On Risk conference in London earlier this month, Lord Falconer said the professional bodies will have to meet the standards set by the LSB. If they do not, it will have a range of sanctions, from having the power to direct a professional body through to the ‘ultimate sanction’ of de-recognising it.


‘People must be confident that the board can act – and will act – if self-regulation fails,’ he insisted.


Lord Falconer said the LSB will apply its regulatory powers using a ‘risk-based approach. Our energies must be focused: targeted where regulatory attention can do good, and where it can improve outcomes for the consumer. In many cases, I would hope this would mean less red tape. Good regulation does not equate to more regulation. By changing the system, we do not want to increase the burden.


‘So, under the LSB structure, regulation and controls will be focused where they need to be – applied heavily if there are problems, and lightly if there are not. We must have the powers to deal with extreme cases. But this does not mean all should receive the same level of attention.’


Law Society President Edward Nally has previously raised the prospect of different levels of regulation – the big banking client of a top City firm, for example, does not necessarily need a rule 15 letter in the same way that a high street practice’s private client does.


Peter Martyr, chief executive of top-ten City firm Norton Rose, told St Paul delegates that he found the concept of variable regulation ‘astonishing and difficult’ – however, earlier in the day, David Gold, the senior partner of Herbert Smith, had attacked the Law Society for not doing this and seeking to regulate big and small practices in the same way.


The broader fear is that the LSB could become much bigger and controlling than envisaged – as Bar Council chairman Guy Mansfield QC said at the conference, the staff recruited to the LSB are going to look for something to do.


City of London Law Society chairman David McIntosh told delegates that he had found Lord Falconer’s words ‘soothing’, yet ‘unconvincing and worrying’. The reforms would give the government – and/or civil servants – the tools to control the profession if it wanted to, he said.


The powers of the LSB meant that lawyers would have ‘supervised self-regulation’ at best. With a heavy hand on the rudder, it could soon turn into an FSA-type body, he cautioned.


For Mr Nally, if Sir David’s recommendations are implemented, a light touch should emerge; the problems would start if the LSB becomes a ‘burgeoning bureaucracy’.


The debate raises the nature of self-regulation. The reforms are described as ‘co-regulation’, but equally it is true to say that no legal profession anywhere enjoys complete self-regulation without the involvement of government or some other authorised body.


Addressing a forum on the global consequences of Clementi at the International Bar Association’s mid-year meeting in Lisbon last month, top German lawyer Hans-Jürgen Hellwig acknowledged this, but said: ‘What Clementi proposes is that the bars have the regulatory powers removed from them and given to a body in which lawyers will play only a minority role, and will have the powers given back only if, when and for so long as certain conditions are fulfilled for which the judges will be, in the main, non-lawyers.


‘Thus the bars under Clementi will, at best, at some point in time be given self-regulatory powers “on probation”.’


Mr Hellwig was president of the Council of Bars and Law Societies of Europe (CCBE) last year when it made its submission to Sir David. ‘The CCBE argued that the independence of the individual lawyer and the independence of the bar are two sides of the same coin,’ he said. ‘The collective independence of the bar is a front-line defence for the individual independence of a lawyer in his day-to-day work.


‘In a country with a long democratic tradition such as the UK, it is unlikely that the powers of the LSB will be abused. However, in other countries, such a system could be likely to have its risk.’


The global influence of the English and Welsh legal profession means that lawyers in other countries are nervous about Clementi affecting them too, despite Sir David’s warning not to export his recommendations. Among European bar leaders in particular, there is what – from the point of view of a commercial transactional lawyer – might be seen as an old-fashioned view of the lawyer’s role as officer of the court and guardian of access to justice. Thus, any perceived attack on a basic tenet of the profession, such as independence, strikes a chord.


This has also led to warnings from the likes of former CCBE president Heinz Weil that City firms operating abroad could fall foul of foreign regulators if the reforms – and he had non-lawyer ownership particularly in mind – go too far in compromising the integrity of the profession. Mr Martyr said he was ‘troubled by how little consideration has been given to the international impact’.


When it comes to the OLC, the Law Society has come to the view that whatever the reality of its complaints-handling, it is impossible to get over the public perception problem of lawyers sitting in judgement on their peers.


The Bar Council, however, is less enthralled by the idea, seeing it as thrust upon barristers as a result of the Law Society’s problems. Mr Mansfield even sought to defend Chancery Lane’s record at the St Paul conference, saying that improvements in complaints-handling have taken time to work through the system because of the difficulties of catching up with earlier under-investment.


The Bar Council envisages that given the current, relatively low, level of complaints against barristers, the new system will cost them more. Of course, it is in the nature of a referral bar that it receives fewer complaints than solicitors on the front line, and as a result of LDPs, that might change.


In any case, there seems little prospect of the bar winning this argument. As simplifying the system is a key aim of the reforms, it would make no sense to allow some bodies to opt out of the OLC.


LDPs would make possible the oft talked-about prospect of supermarkets, banks, insurance companies, motoring organisations and the rest moving into legal services by setting up – or more likely buying – branded law firms.


Whoever owns it, the LDP will be a ring-fenced legal practice. There will be a raft of safeguards put in place to ensure that independence is maintained, conflicts of interest avoided and that only ‘fit and proper’ people can invest.


They also raise the intriguing prospect of professional bodies competing to be the lead regulator of an LDP made up of more than one ‘type’ of lawyer.


The consensus at the St Paul conference – which was mainly attended by representatives of large commercial practices – and of a recent survey by Wheeler Associates of managing partners at 51 of the top 100 firms in England and Wales, was that LDPs will have more impact on the high street.


Large firms may well take the opportunity to bring senior non-legal staff into the partnership – such as the heads of finance, HR and marketing – but interest in external capital, and even more ambitious models such as stock market listings, appears low at the moment, especially given the potential international impact. Such practices do not have great problems in accessing the capital they need anyway.


The debate about the high street continues to rage. Part of the problem for solicitors is the insistence by consumer groups – which have a lot of influence in this process – that they are poor at client care; allowing in consumer-focused organisations such as supermarkets could only help, the argument goes.


A key question surrounds the potential cherry-picking of the most profitable work and what impact that will have on the high street network, especially in rural areas. Many firms can only afford to offer legal aid and other low-margin but socially important work by cross-subsidising it from privately paying clients. But if this more lucrative work is hived off to Tesco or whomever, the small firm might collapse. And would Tesco, for example, want to handle divorce work? It seems unlikely, as the disgruntled ex-spouse on the other side may decide never to use any Tesco-branded service as a result.


‘Whilst services such as legal aid are important, their costs should be transparent,’ said Sir David. ‘There is no clear reason why they should be subsidised by the users of other services.’ It would be a rich irony indeed if the government’s enthusiasm for LDPs ended cross-subsidies and exposed the true cost of legal aid, forcing it to raise rates.


If the future of high street firms is uncertain, so is one thing affecting every solicitor, from the senior partner of Clifford Chance to the sole practitioner in Aberystwyth: the cost of these reforms and who should pay for them.


Lord Falconer estimates the set-up cost of the LSB and OLC at £13 million, and expects the profession to cough up. The professional bodies maintain that the government should pay for its reforms, but it is hard to envisage them winning such an argument.


Sir David, with help from consultants Ernst & Young, estimated the cost of regulation in 2003/4 at £81 million: £46 million spent on entry standards and training, rule making, and monitoring and enforcement; and £35 million on complaints and discipline.


The broad cost of the model he put forward was just under £80 million. While the first three functions would cost more – £50.5 million – mainly as a result of the LSB, savings from a unified OLC meant complaints and discipline came in at £29 million. The fear is that, to ensure the reforms work, the government will gold-plate them, especially the OLC, and expect the profession to pay for it.


Law Society chief executive Janet Paraskeva says: ‘Solicitors will continue to pay for the Law Society’s regulatory work, which benefits the reputation of the profession as a whole and helps maintain consumers’ confidence. We will be asking the government to give the OLC the power to levy costs primarily on those lawyers who are the cause of complaints, rather than spreading the costs on the legal profession as a whole.


‘However, the government currently pays for the supervisory functions carried out by the Lord Chancellor and Master of the Rolls, and there is no reason why that should change when the LSB is established.’


There has been no word yet on whether the government will contribute financially; but it is significant that both Lord Falconer and Sir David have referred to the estimated £18 billion annual turnover of the profession – making the cost of regulation, even if paid for entirely by lawyers, well below 1% of their collective income.

Ahead of the White Paper, there is furious activity behind the scenes and this will only intensify once it is actually published. Whether it be that senior partner of Clifford Chance, who might be concerned about the impact on his many overseas offices, or that Aberystwyth sole practitioner fearing for the future of his entire practice, one thing, at least, is clear: legal services reform is here, and nobody can afford to ignore it.