As Sir David Clementi delivers his verdict on reform of legal services regulation, Neil Rose outlines the crux of his recommendations

If and when the Clementi review of the regulatory framework of legal services in England and Wales is implemented, lawyers will have to come to terms with a host of new acronyms. Principal among them will be the LSB (legal services board), OLC (office of legal complaints) and LDPs (legal disciplinary practices). MDPs (multi-disciplinary practices) may have to wait, however.


These first three concepts - the key recommendations of Sir David’s 18-month review - address what he identified as the main concerns with the current system: the regulatory framework, complaints systems and business structures.


When the review was set up, the government made much of the ‘regulatory maze’, identifying 22 regulators of legal services, and then added to it by creating the Legal Services Complaints Commissioner.


There are: primary regulators, such as the Law Society and Bar Council; ten ‘super-regulators’ which oversee the system, including the Lord Chancellor and Master of the Rolls; service regulators (for example, the Council for Licensed Conveyancers); and some purchasers of legal services, including the Legal Services Commission, which are not technically regulators but do tell lawyers how to operate to varying degrees.


He starts his report by defining what the objectives of the regulatory regime should be. ‘These would be the objectives against which the regulator must determine appropriate regulatory action, and against which it would be held accountable,’ it says.


The six are: maintaining the rule of law; access to justice; protection and promotion of consumer interests; promotion of competition; encouragement of a confident, strong and effective legal profession; and promoting public understanding of the citizen’s legal rights.


In promoting the LSB to achieve these objectives, Sir David is bringing all the powers of the super-regulators together, in a body independent of government and accountable to Parliament. It would then devolve regulatory functions to the ‘front-line bodies’, such as the Law Society and Bar Council, subject to their competence and governance arrangements.


Integral to all this is a change in emphasis in regulation. He says it should promote the consumer and public interest, rather than concentrate on the ‘standing of providers’ as at present, and the report says there will also be a shift ‘towards regulation of the economic unit and away from regulation of individual lawyers’.


The proposal is essentially model B+ as described in his consultation paper. Some participants and commentators, such as the Legal Services Ombudsman and Consumers Association, called for model A, a completely new legal services authority taking on all regulation.


The report says: ‘In judging the strength of the arguments between different models, it is clear that a B+ model would build on the current system to a greater extent than model A. It is true that, if one started from scratch, with no history of professional bodies with strong roots, one might conclude that model A should be preferred for its clarity and flexibility. But even those who are critical of what they see as the self-serving nature of the current professionally based arrangements would recognise strengths. The current system has produced a strong and independently minded profession, operating in most cases to high standards, able to compete successfully internationally. These strengths would suggest that the failings of the system... should be tackled by reform starting from where we are, rather than from scratch.’


He recommends that the LSB should have 12 to 16 members with a lay majority. It would be led by a part-time chairman and full-time chief executive, both non-lawyers and appointed by the Secretary of State for Constitutional Affairs in consultation with the Master of the Rolls. The regulator would be under a duty to consult, while there would need to be a proper process of appeal from its decisions.


Following work Sir David commissioned from accountants Ernst & Young, he predicted that the cost of regulation would be broadly similar to that currently estimated at around £80 million. The LSB’s costs would run to around £4.5 million, shared between lawyers and government in proportions to be decided. Sir David says: ‘The recognised bodies would, as at present, cover their own costs through a levy upon their members.’ They could also levy fees upon LDPs.


The professional bodies also face reform. ‘It should be a statutory requirement for a front-line regulatory body to separate out its regulatory and representative functions, but that in regard to detailed governance arrangements, the body would need to satisfy criteria laid down by the LSB.’


Sir David says the combination of functions does not result ‘in the public interest being consistency placed first’.


He makes it clear that neither the Law Society nor Bar Council have acceptable governance arrangements but notes that the Law Society is moving towards a split in functions. If the LSB is still not satisfied with a body’s separation, ‘it should be empowered to call for further measures, including the right finally to insist upon institutional separation’.


The Institute of Legal Executives, Chartered Institute of Patent Agents and Institute of Trade Mark Attorneys (not currently a recognised professional body but likely to become one soon) would also have to ensure separation. The Council for Licensed Conveyancers and the Faculty Office (for notaries) are both purely regulators.


While he recognises that recommending institutional separation now would have made this split transparent, Sir David concludes that it would add to the number of bodies which form part of the legal system and probably increase costs.


However, one aspect of regulation that the professional bodies will lose if the recommendations are adopted is complaints handling. It has arguably been coming for some time, and Sir David says: ‘I do not believe that the current system delivers sufficient independence from the legal practitioner, nor that it provides appropriate levels of consistency and clarity. The current system is not well suited to offer flexibility, either to accommodate new legal providers being brought within the net or to permit alternative business structures where lawyers from different backgrounds may work together. The present oversight arrangements are confused.’


Thus he proposes the OLC, under the general supervision of the LSB, again with a lay chairman and overall lay majority. It would do away with both the Legal Services Ombudsman and Legal Services Complaints Commissioner. Sir David says: ‘The arguments for a single independent complaints system... go well beyond the failures of the Law Society.’


As well as dealing with individual complaints - including those that involve negligence up to a certain financial limit - the OLC would have a more strategic role, such as setting targets for lawyers handling complaints in-house (which they would have to do as a first step) and overseeing indemnity insurance and compensation fund schemes.


Sir David says the OLC should first try and mediate a dispute. If this fails, it would then investigate and decide, with power to require the practitioner to provide information. He calls for any system of appeals against OLC decisions not to frustrate the overall aim of providing quick and appropriate redress.


He says conduct issues should be referred to the relevant professional body, describing the current arrangements as satisfactory.


Sir David’s consultation paper earlier this year was criticised by some for failing to get to grips properly with regulatory gaps, a problem highlighted vividly in recent years by the growth of unregulated claims farmers. Those same criticisms may be voiced again now his final report has been published, although on the specific issue of claims farmers, the government last month threatened action.


It appears he found this subject tricky. He points out that the regulatory net for legal services is defined by the provider and/or by the service. There is also what he calls ‘asymmetry’ in regulation - solicitors who have to be regulated for certain reserved activities also provide other services that unregulated individuals can supply, meaning differences in the regulation of those providing the same service.


One solution would be to increase the number of reserved activities, but this could be ‘unjustified and anti-competitive’. Sir David concludes that such a decision would need to be subject to a detailed cost/benefit analysis and that, ultimately, this is a matter of public policy for the government.


The proposal for LDPs and external ownership - the fabled ‘Tesco Law’ - has been well flagged up. The bar’s effort to stop non-lawyer ownership will now have to move to the corridors of the Department for Constitutional Affairs.


LDPs would be legal practices, and to ensure that lawyers with different professional qualifications maintain equal standards, he recommends there should be a code of professional practice for LDPs, as agreed by their regulator, to which all lawyers would have to adhere.


While non-lawyer managers - such as the head of finance - could become partners, it must be on the basis that their role is to enhance the provision of legal services rather than to provide other services to the public. Lawyers would have to be a majority by number of the partners.


There would have to be a lawyer, called the head of legal practice, who is nominated to the LSB as responsible for service standards, and a nominated manager responsible for finance and administration.


Sir David says there would be considerable benefit in permitting outside owners. ‘In general economic terms, new capital from outside the industry would be permitted which should increase capacity and exert a downward pressure on prices. In a business sense, new investors might bring not just new investment but also fresh ideas about how legal services might be provided in consumer-friendly ways.’


However, he recognises there are concerns about how it would operate and puts forward a series of safeguards: there would be a ‘fit to own’ test for prospective outside owners to pass, while the suggested structure of LDPs would also provide protection from inappropriate influence. If an external owner wanted to change the nominated head of legal practice, it would have to explain its reasons to the LSB.


In addition, the outside owner ‘could have no adverse interest in the legal outcome of individual client matters dealt with by the firm, and would have no right to interfere in any client case, or have access to client files or information’.


Sir David says: ‘In order to ensure these safeguards are followed and clearly visible, it would be appropriate, as suggested by the Law Society to require that the LDP, registered with the LDP regulator, be a ring-fenced legal entity. It is also proposed that all owners should covenant with the regulator to indemnify any loss of client monies incurred by clients of the practice.’


He takes on those who fear that practices owned by non-lawyers will cherry-pick the best work to the detriment of high street solicitors and possibly access to justice. ‘The argument ignores the fact that it is the right of existing legal practices to determine which areas of the law they wish to practise in; and many have become specialist. It should be recognised, also, that "cherries" generally grow where there are restrictions to free trade, either in terms of who may do a certain type of business or ease of access of capital.’


He also maintains that external capital is separate from the question of the future of rural legal practices. He says a small law firm with a good reputation and loyal following need not necessarily fear losing clients to new entrants if the service they offer is superior.


Sir David proposes that all the professional bodies should be able to apply to the LSB to regulate LDPs within their area of competence. If approved, they would state in the licenses what kind of work the LDP could do.


He keeps open the possibility that the Council for Licensed Conveyancers, for example, could regulate an LDP that offers more than conveyancing services, but the council would have to convince the LSB that it was capable of doing so.


This is one area where the shift to mainly regulating the entity rather than the individual lawyer becomes clear, and Sir David even raises the possibility that if the regulation of LDPs works, it could be extended to existing structures.


He says: ‘A number of solicitor-advocates, operating as sole practitioners, have indicated that they might wish to have as their lead regulator the Bar Council. Adopting the same principle, it is possible that a set of chambers, wishing to operate outside the practice restrictions imposed by the Bar Council, for example in the matter of direct access, might wish to choose a different regulator competent in advocacy. There should be no objection in principle to these arrangements.’


Like the Lord Chancellor, Lord Falconer, Sir David sees merit in MDPs, but he is cautious, especially in relation to regulation. Who would regulate such a body needs careful consideration, especially if there were several professions represented in an MDP with no overall majority. Legal professional privilege is ‘a related inhibitor’, he adds.


He sees LDPs as walking and MDPs as running, and recommends that the first step ‘must be to find a way in which lawyers from different front-line bodies can work together in one consistent regulatory framework’.


The proposals for LDPs and their regulation - which could lead to professional bodies competing with each other - could begin to bring down the barriers between the different types of lawyers. The greatest barrier - that between the bar and everyone else - is likely to be most affected and the hoariest of all hoary chestnuts, fusion, is bound to be on the agenda again.


Sir David does not go that far, but noting how the bar has approved greater direct access and the growing number of solicitor-advocates, he does address the possibility of the Law Society and Bar Council merging. ‘There would be advantage in such a move in areas such as education, and it would ease some of the existing regulatory and competition issues.


‘But I do not make such a recommendation in this review, because I regard issues of mergers between overlapping professional bodies, or for that matter de-mergers within existing professional bodies, as ones for the bodies themselves and their members. The regulatory framework needs to be able to accommodate either merger or de-merger.


‘It needs to recognise too that, whilst the Bar Council and Law Society account for a significant part of the legal services industry, there are other bodies that the system needs to accommodate.’


As such, he says the possibility of the Chartered Institute of Patent Agents and Institute of Trade Mark Attorneys merging ‘cannot be ruled out’.

As we face up to the post-Clementi world, could it be the first of many? If so, unlike many of the other reviews of the legal profession in years gone by, Clementi’s legacy will go down in legal history.