John Gould - senior partner of Russell-Cooke LLP & author of The Law of Legal Services – on the news the government is considering more reforms to the legal services sector
With reports out that the government is contemplating reform of the legal services market once again, now appears to be a good time to stop and take stock of the arrangements that have already been made to accommodate alternative business structures & ask whether they have been worth the effort?
Although the Legal Services Act 2007 has arguably led to far-ranging consequential changes in the way lawyers are regulated, the basic changes were significant but few – the most significant being that non-lawyers were allowed to own and manage law firms. Non-lawyers, of course, provided unregulated legal services long before the Act. Most legal services are not “reserved” to lawyers and never have been. But even in non-reserved activity non-lawyers have been unable to sell their services under the protected professional titles such as “solicitor” or “barrister”. So the objective was to find a way in which non-lawyers could provide services such as conveyancing and litigation on the same basis as existing law firms. It was thought that this would unleash competition, innovation and the application of commercial investment and nous for the benefit of consumers. Questions may be asked, with the benefit of hindsight, as to the strength of any economic analysis and evidence supporting this belief; but there it is.
The direct provisions to allow alternative business structures (called licensed bodies) to operate are necessarily complicated. It is understandable that the licensing of a new type of law firm and the approval of individual non-lawyer owners and managers would be approached with at least some degree of care. The concept seems to have had little precedent either historically or globally. There have been complaints that applications have been processed slowly, but so far less than five hundred have been authorised and their market impact has been small.
Licensed bodies required different regulatory treatment from conventional law firms. The emphasis needed to be on the corporate body or entity rather than an individually accountable lawyer. Entity regulation raised the question of individual responsibility for compliance and so the Act introduced compliance officers. The regulators were given powers to punish the new bodies without reference to the traditional tribunal based approach. Codes of conduct needed to be expressed in a way which allowed the new bodies to operate differently from existing firms but yet maintain standards. This meant moving away from rules requiring specified conduct to “outcomes”.
It would have been very difficult to accommodate this change without adjusting the regulation of the existing 150,000 or so lawyers and around 12,000 law firms. It is these adjustments which have had the greatest impact so far - greatly exceeding the impact of any change in the way that legal services are provided by licensed bodies.
The regulatory emphasis on the supervision of all lawyers is now on entities rather than individual lawyers. Compliance officers are now mandatory for all law firms and ubiquitous. The resources devoted to managing compliance risks in many firms may now be beyond those required by the actual risks because the system has introduced someone whose job is to be cautious. Since it seems likely that the change has increased the total cost of compliance, the question is whether a proportionate benefit for consumers has been achieved.
At the same time as the compliance responsibilities of firms have been formalised and focused, the emphasis of the regulators has moved to supervision. This moves the approach towards that of financial services regulation, which is perfectly logical where services are provided by similar corporate players. The trend of regulators having stronger powers to fine entities directly rather than refer to independent tribunals has been established.
It may have been that some of the changes would have happened anyway. It could be that the evidence will show eventually that even the changes which were simply the consequences of the Act have produced real benefits to both consumers and the professions. It is possible, however, that a price has been paid in some otherwise unnecessary consequential changes for a concept which is failing.
A longer version of this article was first published on Solicitors Journal.