With the publication of a draft Legal Services Bill expected in the next couple of months, Neil Rose looks at the key issues practitioners want the government to address
The draft Legal Services Bill is expected some time after May’s local elections for a period of pre-legislative scrutiny. This means the Department for Constitutional Affairs will have had a good five months to consider some hefty responses to its White Paper The future of legal services: putting consumers first.
Observers will hope it was enough time to have thought long and hard about issues that go to the heart of the legal profession, and not just in England and Wales. The department may consider this legislation a purely domestic matter, but such is the profession’s global standing that there are law societies, regulators and governments watching on across the world with more than a passing interest in what lessons they can learn.
The other international angle, put forcibly by the City of London Law Society, is the impact if independence of the profession is impaired – or at least looks as though it may be. ‘In the international sphere, lawyers’ involvement in their own regulation and independence from government are regarded as key defining features of a strong profession,’ it says in its response.
With City firms operating in more than 30 other jurisdictions, it is ‘essential that the new framework does not adversely affect the international recognition of the legal profession in England and Wales and the hard-won reciprocal [practice] rights in many countries’.
The society felt bound to point this out because it, along with others, laid serious charges against the White Paper. The proposals ‘do not allow for sufficient independence from government’, in its view; ‘risk impairing the independence of the legal profession’, according to the national Law Society; and even breach the UN Basic Principles of the Role of Lawyers by allowing government interference in the profession, says the Legal Aid Practitioners Group (LAPG).
These criticisms focus on the role and powers of the legal services board (LSB), the body that will take on oversight of all the front-line regulators (FLRs), such as the Law Society and Bar Council. One radical shift brought about by the new arrangements will be to transfer to the LSB all regulatory powers currently vested in the FLRs. The LSB will delegate many of them back down once it is satisfied with each FLR’s fitness for the task.
The LSB is meant to be a ‘light-touch’ regulator, and would largely be a welcome development if it proves to be so, to judge by the responses. But the LSB, according to the White Paper, is to have ‘effective control over FLRs’ and the extensive powers it will have give it the potential to be much more (see box on page 21). The Law Society describes them as ‘disproportionate and inconsistent with the concept of an oversight regulator’.
The Bar Council response says the LSB must not turn into an all-powerful Financial Services Authority-style body by stealth: ‘There is always a danger that such bodies will wish to take an ambitious and extensive view of their powers… We are concerned that the proposals in the White Paper do not provide sufficient checks against the LSB developing into a costly mechanism for second-guessing FLRs.’
The Law Society puts it more bluntly: ‘The powers and role of the LSB appear to be based on an assumption that the FLRs cannot be trusted. We do not think such an assumption is justified – particularly in the light of the separation of regulatory from representative roles.’ It thinks regulatory powers should remain with the FLRs, and that the LSB should only be able to remove them via primary legislation.
The Institute of Legal Executives (ILEX) agrees, saying ‘the focus should be on FLRs having regulatory powers, and the LSB ensuring that those powers are being appropriately used to achieve the statutory objectives. The principle of subsidiarity should be paramount’.
For the LAPG, the suggestion in the White Paper that the LSB – a board appointed by the government and containing a majority of non-lawyers – should ‘exercise control over professional codes and standards’ and approve an FLR’s governance arrangements before authorisation is clear external interference as prohibited by the UN principles.
‘It is proposed that changes to the objectives and principles [of legal services regulation] could be made by secondary legislation,’ the LAPG continues. ‘By definition, these are the fundamentals of the legal profession, which should not be changeable at the will of a politician by statutory instrument.’
ILEX sees several flaws in the set-up if the LSB is truly to have a light touch. It should not be able to tell FLRs what is required in terms of indemnity insurance and compensation funds, nor should it be setting regulatory targets for them unless there are clear grounds to believe an FLR is failing. It should not be able to amend rules or ‘insist upon its own pro-active proposals’.
Similarly, says the Council for Licensed Conveyancers, the LSB should only have limited grounds on which to refuse to approve rules proposed by FLRs.
But most of all, ILEX continues, the LSB should not have the power to remove a FLR’s authorisation. ‘The public interest is properly covered by having a regulatory/ representative split,’ it argues. ‘We have noted that the Healthcare Professionals Council does not have a backstop power to deregulate any particular individual regulator.’
A common theme among the responses is opposition to the power given to the Lord Chancellor to appoint the chairman of the LSB and, in consultation with that person, the rest of the members. There is a strong plea for an independent and more transparent appointment process, such as a selection board putting forward candidates for approval by the Lord Chancellor and Lord Chief Justice. Concerns over the Lord Chancellor’s role do not end there. The Law Society and City of London Law Society call for parliamentary oversight of the LSB through the constitutional affairs select committee, rather than making it accountable through the Lord Chancellor.
But when it comes to the other aspects of the reforms, and particularly alternative business structures (ABSs) and the office for legal complaints, the concerns in many of the responses are more at the level of detail, not least because the White Paper is short on it in many areas. How, for example, will the ‘fitness to own’ test for non-lawyer investors in ABS firms – seen as critical to the new regime – actually work? The White Paper also says it will be for the LSB to put in place clear rules to avoid conflicts of interest caused by non-lawyer owners. Beyond floating the possibility of setting a maximum percentage level of ownership, it does not suggest what these rules might be. Consumer group Which? wants to know exactly how the regulation of non-lawyers in ABS firms will work.
That said, the LAPG for one still doubts the whole concept. While seeing potential benefits in multi-disciplinary partnerships, it says the White Paper goes ‘way beyond… and opens up a virtual free for all of outside ownership of and investment in law firms. The government has not engaged with the concerns expressed across the [post-Enron] world as to the damage such liberalisation would do to the interests of clients and of society as a whole’.
The City of London Law Society says there is no ‘clearly voiced aspiration’ among its members to become ABSs, and cautions against the regulatory problems they throw up overshadowing other aspects of the new regime. While there is interest in bringing barristers and senior non-legal managers into partnership, the society says this should not trigger ABS status.
The Legal Action Group notes that while the White Paper cites a whole range of potential benefits for the consumer from ABSs, on the whole little evidence is given to support the claims. The response continues: ‘It may well be that increased choice and reduced prices will result in certain areas of legal practice, but we find it hard to envisage that similar benefits will accrue in the field of social welfare law. In fact, we are very concerned that the impact of these changes will have the opposite effect.’
This could come from high street firms losing profitable privately paying work to commercial providers and being unable to subsidise legal aid work. Sir David Clementi said in his report – on which the White Paper is based – that he did not understand why legal aid should be subsidised in this way, and while the Legal Action Group agrees, it notes that ‘in practice this is often seen as necessary’.
The regulatory impact assessment accompanying the White Paper envisaged that ‘inefficient’ high street practices may close as a result of these reforms, to be replaced by new providers. The group says: ‘It seems unlikely that these new providers will be in the areas of legal aid or social welfare law. In any event... it is difficult to imagine that commercial provides will be willing or able to deal with clients with more complex legal problems and client groups with multiple needs.’
The responses suggest the government may also be wrong in proposing not to extend legal professional privilege to communications between clients and non-lawyer members of an ABS, leaving it once more to the LSB to ensure that FLRs and firms have ‘appropriate arrangements in place’ to safeguard consumers.
While the City of London Law Society supports this position, many others are critical. The national Law Society says simply that privilege within ABS firms should work in exactly the same way as it does now in law firms. The Bar Council and the joint response from Institute of Trade Mark Attorneys and Chartered Institute of Patent Agents question how it could work otherwise. The bar considers the White Paper to be ‘unrealistic’, insisting it will be difficult to design safeguards that ensure privileged information is not disclosed – either by the lawyers in the practice or by clients themselves – to those whose advice is not covered.
As the joint response puts it: ‘The average consumer cannot be expected to make informed decisions about so complex an area, particularly in an ABS where different personnel are involved – he or she will just want to know that their dealings with their legal advisers are confidential.’
The main dissenters over the planned regime for consumer complaints are the Bar Council and Council for Licensed Conveyancers, which want the office for legal complaints (OLC) to have the power to delegate service complaints to FLRs. In reality, this means they want to continue handling complaints against their members, as each argues that they have a good record on this front.
The government will take some convincing to make a move that would arguably undermine the whole point of the OLC. The Law Society says it accepts, ‘in the interest of clarity for consumers and public confidence’, that the OLC should not be able to delegate in this way. The consumer publication, Which?, agrees, describing it as ‘vital if consumers are to retain confidence in the system’.
Unity, perhaps unsurprisingly, breaks out again over the government’s proposal that the profession pick up the whole tab for the new regulatory regime. Sir David, with help from consultants Ernst & Young, estimated the running costs of the present system of regulation in 2003/04 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 (£4.5 million), savings from running a unified OLC meant complaints and discipline came in at £29 million.
Lawyers are not convinced by these figures for several reasons, especially if the LSB fails to be that light-touch regulator, and both it and the OLC end up duplicating the work of the FLRs through a lack of clarity as to their roles.
While practitioners largely accept that the OLC will be funded through a mixture of a general levy and ‘polluter pays’, there is outrage that they will be forced to stump up for the transitional costs and the LSB more generally, with no government contribution.
‘In our view the start-up costs of the LSB and the majority of its continuing costs should be borne by government,’ says the Law Society, summing up the general mood. ‘The government makes a substantial contribution to the cost of the supervising regulator in the accounting field (the Financial Reporting Council) and meets the full cost of the supervisory regulator in the health field (the Council for Healthcare Regulatory Excellence).
‘At present, the government bears the costs of the great majority of the current supervisory costs, whether exercised by the Lord Chancellor, the Master of the Rolls, or elsewhere in the legal field. There is no justification for loading all these costs onto the legal profession and, ultimately, its clients.’
The powers of the legal services board
According to the White Paper, the LSB should seek ‘stop now’ powers under the Enterprise Act, allowing it to obtain a court order to require practices or individuals immediately to cease carrying out a specified activity.
Legislation will provide for the powers of the LSB to be amended by secondary legislation, subject to the approval of Parliament.
In carrying out regulation, the LSB will be able to:
In most cases, the LSB will want to work alongside the FLR in areas of weakness to improve them. However, where an FLR continues to fail, the LSB will be able to remove part of the authorisation of the FLR and either identify an alternative FLR or carry out the regulatory functions itself.
Ultimately, the LSB would be able to recommend secondary legislation fully to remove the authorisation of an FLR entirely.
After consideration of any wider public interest issues, the secretary of state would be expected to carry through the LSB’s recommendation in such a case.
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