Unnecessary duplication of regulatory requirements is raising costs and forcing small firms to divert time from their key priorities, research for the Legal Services Board has found.
A report by the super-regulator into barriers for entry into the profession says regulators can do more to ease the burden on practices.
In particular, the report says the Solicitors Regulation Authority’s assessment of business and financial risks duplicates the activities of insurers and lenders. The oversight regulator says there is scope for simplification.
The present system leaves thousands of small businesses trying to work out how to comply with a ‘complex and not self-evidently coherent’ set of regulatory requirements, the report says.
‘It has the potential to divert non-trivial amounts of the key resources of small practices (the time, attention and cognitive effort of the proprietors or partners) from other matters, such as the practice of law and the training of the next generation of lawyers.’
The LSB says outcomes-focused regulation is not closely enough linked to the objectives of the Legal Services Act, either in protecting consumers and promoting competition.
Those most affected by the regulatory burden are those with the most innovative business strategies.
‘The extra costs caused include higher costs of entry and of business restructuring. One consequence is encouragement of firms to converge on the traditional ways of doing things, and to shy away from doing things differently,' it states. ‘We are therefore of the view that the approach serves to chill experimentation and innovation which, as we understand it, is not the kind of outcome that the LSA was seeking to achieve.’
An SRA spokesperson said: ‘The LSB research is, unfortunately, a missed opportunity as its value to this important debate is significantly lessened by some factual inaccuracies and omissions. These could have been avoided if the researchers had engaged properly with the SRA during their research.
‘For example, it confuses the statutory time limits for alternative business structure applications with the time actually taken by the SRA to authorise new solicitor bodies. It also omits any reference to the LSB's requirements on all approved regulators to adopt risk-based and outcomes-focused approaches to regulation. This is particularly surprising in a report which was commissioned by the LSB.
‘In fact, the decision by the SRA to introduce risk based outcomes focused regulation was consistent both with regulatory best practice and the LSB's requirements. Far more importantly it was in the interests of consumers and the diverse range of excellent firms operating in this market. A rules-based, one-size-fits-all approach, is not in the interests of firms or consumers and is simply unsustainable.
‘There is more for the SRA to do to unpick the highly prescriptive and costly rules-based systems it inherited from the Law Society; and the SRA will continue to complete that work. Unfortunately this research, is of limited value to that important work.'
The research, based on 34 interviews and 101 surveys of key industry figures, found the entry and exit rates over the past two or three years to be around 10%. That is to say, for every 10 existing practices, around one practice a year disappears and one appears. These are a little below average entry and exit rates across all UK businesses, but not sufficiently different as to suggest any major, underlying problems.
In terms of business structure, there has been a marked shift away from sole proprietorships and traditional partnerships towards limited company status and LLP status. The number of limited companies has grown very quickly.
The report is available here.