The unregulated legal market is likely to grow as fast or even faster than the regulated sector over the next three years, the oversight regulator has predicted.

The Legal Services Board said new entrants are likely to be attracted by fewer barriers to entry and a lower regulatory cost base.

The LSB will now begin work, in partnership with the legal ombudsman if necessary, to ‘explore the scope for expansion of redress’ to cover the unregulated services market.

At present consumers of unregulated services have no recourse to the ombudsman, and many areas of legal work are not reserved legal activities under the Legal Services Act.

In its draft strategic plan for 2015-18 published for consultation yesterday, the LSB said it will seek to understand how regulated providers can compete ‘on a level playing field’ in the next three years.

Sir Michael Pitt, chair of the LSB board, said the development of the unregulated market cannot have escaped anyone’s notice in recent years.

‘I believe that the LSB must take a keen interest in unregulated services,’ he said. ‘We can’t achieve our regulatory objectives – or even work meaningfully towards them – if we don’t look at the legal sector as a whole.’

The LSB also predicts more unbundling of services, as consumers and legal services providers combine their efforts to deal with different parts of the same case.

There will also be more legal and non-legal services provided under one roof.

While the unregulated market will grow, the oversight regulator also foresees growth among traditional firms and alternative business structures.

New entrants will be drawn to the legal market by the growing economy boosting demand, the ongoing unmet need for legal services and greater confidence among financers.

Existing firms can thrive, the plan notes, if they can adapt to increasing cost effectiveness and investment in technology.

But the marketplace is set for more turbulence than ever, with more providers exiting the sector than in the past, outdated business models failing and a declining flow of legal aid work affecting incomes.

The LSB says its two key themes are to break down regulatory barriers to competition, growth and innovation, and to enable the need for legal services to be met more effectively.

It will encourage a greater range of business models in the sector with increasingly diverse service provision, while trying to create a smaller number of regulatory arrangements.

The oversight regulator wants to find ways in which all regulators replicate their work and possibly encourage them to jointly commission ‘back office’ functions – especially in investigation and enforcement. Within the next year it plans to look at the variation in regulators’ approach to firms in financial difficulty with this aim in mind.

In particular, the LSB will examine the Solicitors Regulation Authority’s focus on financial stability and whether the use of intervention powers is a ‘proportionate’ response to a failing firm.