Report of the Review of the Regulatory Framework for Legal Services in England and Wales

Foreword

To the Secretary of State for Constitutional Affairs

1. I have pleasure in submitting my Review of the Regulatory Framework for Legal Services in England and Wales.

2. I was appointed on 24th July 2003 and the Terms of Reference for the Review are:-

3. This Review follows closely the order of the issues raised in the Consultation Paper that I published in March 2004 [Endnote 1]. That paper raised a number of questions, and behind it lay three particular concerns:-

1. a concern about the current regulatory framework In its report published in July 2003 entitled 'Competition and regulation in the legal services market' the Department for Constitutional Affairs concluded that the current regulatory framework was "outdated, inflexible, over-complex and insufficiently accountable or transparent". Nothing that I learnt during the 18 month period of my Review has caused me to doubt the broad validity of the Government's conclusion. The current system is flawed. In part the failings arise because the governance structures of the main front-line professional bodies are inappropriate for the regulatory tasks they face. A further cause is the over-complex and inconsistent system of oversight regulatory arrangements for existing front-line regulatory bodies: the Law Society is overseen in many of its functions by the Master of the Rolls; much of the Bar Council's work and that of the Council for Licensed Conveyancers and the Institute of Legal Executives by the Department for Constitutional Affairs; the Office of the Immigration Services Commissioner by the Home Office; the Chartered Institute of Patent Agents by the Department of Trade and Industry; and the Faculty Office [Endnote 2] by the Archbishop of Canterbury. There are no clear objectives and principles which underlie this regulatory system; and the system has insufficient regard to the interests of consumers. Reforms have been piecemeal, often adding to the list of inconsistencies. The complexity and lack of consistency has caused some to refer to the current system as a maze [Endnote 3].
2. a concern about current complaints systems There is considerable concern about how consumer complaints are dealt with. The concern arises at a number of levels: at an operating level, there is an issue about the efficiency with which the systems are run; at an oversight level, there is a concern about the overlapping powers of the oversight bodies; and at a level of principle, there is an issue about whether systems for complaints against lawyers, run by lawyers themselves, can achieve consumer confidence. A large number of the responses to the Consultation Paper expressed dissatisfaction with the current arrangements.
3. a concern about the restrictive nature of current business structures The business structures through which legal services are delivered to the public have changed little over a considerable period. The most easily recognisable structure is the high street solicitor, practising either on his own or in partnership with other solicitors. But business practices have changed. In particular the skills necessary to run a modern legal practice have developed; but whilst those with finance or IT skills may sit on the management committee of a legal firm, they are not permitted to be principals in the business. There is concern also about whether the restrictive practices of the main legal professional bodies can still be justified, in particular those which prevent different types of lawyers working together on an equal footing. There is pressure for change from those who represent consumer interests, but also from many in the legal profession, particularly the Law Society who have made a strong case for liberalisation of law practices.

4. There is a relationship between the concerns set out above. For example, one of the difficulties which stands in the way of new business structures is that the current framework does not easily allow regulation of such structures. In the past, the Government has declared itself in favour of new business structures; and, as noted, one of the aims of this Review has been to propose an appropriate regulatory framework.

5. The Terms of Reference include the word 'independent' twice. I infer that the first reference calls for independence of the legal profession from outside influences, particularly from Government; and that the second reference calls for a regulatory framework which is independent in representing the public and consumer interest of those being regulated. Replies to the Consultation Paper from representatives of the legal profession have drawn my attention most often to the first reference. I judge that both are important.

6. In line with the Terms of Reference the Review seeks a regulatory approach to encourage competition. The grain of Government legislation over the years has been in the direction of encouraging greater competition between different types of lawyer. The Administration of Justice Act 1985 permitted licensed conveyancers to compete with solicitors in the conveyancing market. The Courts and Legal Services Act 1990 enabled solicitors to acquire rights of audience in higher courts, previously the preserve of members of the Bar; and since then two other professional bodies have been allowed to grant limited rights of audience to their members. Today there are around 2000 solicitors with higher court rights; and a significant amount of advocacy, primarily in the lower courts but increasingly in the higher courts, is done by solicitors. At the same time there are a large number of barristers, such as those who advise on tax or conveyancing issues, whose job is similar to many solicitors. The cultures of the Bar Council and Law Society are markedly different; but whilst they may remain separate professional bodies they cannot be regarded as separate professions.

7. Against this background, a number of observers have wondered whether I might recommend that there should be fusion between the Bar Council and the Law Society. 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, in particular the Institute of Legal Executives, the Office of the Immigration Services Commissioner, the Council for Licensed Conveyancers, the Chartered Institute of Patent Agents, the Institute of Trade Mark Attorneys and the Faculty Office. I note that the Chartered Institute of Patent Agents and the Institute of Trade Mark Attorneys co-operate on a variety of issues; they submitted a joint response to the Consultation Paper and it cannot be ruled out that at some point they might choose to merge their organisations.

8. If this Review favours greater competition between lawyers, it also seeks to permit competition between different types of economic units: for example, between sole practitioners, lawyers working in chambers, unlimited partnerships, limited liability partnerships and companies. There are advantages and disadvantages in each type of economic unit. I do not believe that the public and consumer interest are always better served by one type of economic unit as against another. The Review favours a regulatory framework which permits a high degree of choice: choice both for the consumer in where he goes for legal services, and for the lawyer in the type of economic unit he works for.

9. In this debate it is important to distinguish between facilitative and mandatory proposals. The key recommendations in this Review in the area of business structures are intended to be facilitative. Whilst I accept that sole practitioner status, when combined with the chambers system, has merit as a way to provide advocacy services, and I accept also that the partnership model adopted by many solicitors has significant strengths, I do not accept that other structures for the provision of legal services should not be permitted.

10. Whilst it is plain that there is competition between lawyers within the current system, and the proposals in this Review are intended to increase this, I have learnt that certain lawyers dislike being described as part of an industry. They see a conflict between lawyers as professionals and lawyers as business people. The idea that there is a major conflict is in my view misplaced. Access to justice requires not only that the legal advice given is sound, but also the presence of the business skills necessary to provide a cost-effective service in a consumer-friendly way. In the Consumers' Association's summary [Endnote 4] of a survey of those dissatisfied with legal services it comments: "The biggest cause of dissatisfaction was delay. According to one respondent 'it would have been quicker to do a course in conveyancing'. Cost also ranked highly: 'We feel that we were misled as to costs from the very start.' " Research shows that complaints arise as much from poor business service as from poor legal advice. If certain lawyers continue to reject the notion that they are in business, such complaints will continue until they are indeed out of business.

11. The issue of costs is an important one: high quality legal services are important to society, but of limited value if available only to the very rich or those paid for by the State. In developing business systems to minimise costs whilst maintaining high standards, there is no reason why lawyers should not work alongside those with other skills, for example in finance or IT; and the Review makes recommendations designed to facilitate this. In proposing reforms designed to encourage cost-effective practices, there is no suggestion of diminution in standards, either in the quality of legal advice provided or in the ethical standards of practitioners.

12. The current regulatory regime incorporates some strands of regulation which are based around professional bodies, and some which are based around particular services. Whilst it would be intellectually tidy to move` strongly towards either a professionally based regulatory system, or one which is service based, it would come at a price and some degree of hybridity is likely to remain. The change in regulatory emphasis which is proposed in this Review is a shift in emphasis towards regulation of the economic unit and away from regulation of individual lawyers. This is particularly relevant for the regulation of new business practices which bring together lawyers from different backgrounds; but it also has relevance for some existing legal practices, where regulatory emphasis needs to be on practice management and systems as much as on individuals.

13. In the Department for Constitutional Affairs' statement dated 26th May 2004 [Endnote 5] on the issue of QCs, the Government proposed an interim arrangement for the appointment of QCs. It also proposed a long-term market study to assess how "to help consumers choose the best legal services for themselves". The Government's statement went on to say: "The interim scheme will then be reviewed to see if it is consistent with the Clementi recommendations and any results of the market study." This Review has not inquired into the QC system; but it does propose a regulatory framework in which the Regulator is likely to take an interest in how the system operates. Given the objectives of the Regulator discussed in Chapter A, the Regulator is likely to want to understand what the 'kitemark' is awarded for; the fairness of the system, recently amended, under which candidates are selected; why, in a profession which stresses the importance of independence, the kitemark is finally bestowed by the State rather than the profession itself; and whether the system as a whole operates in the public interest.

14. The issues which this Review has inquired into are raised using the same chapter headings from A to F as in the Consultation Paper.

15. Chapter A proposes that the first step in defining the regulatory regime should be to make clear what the objectives of the regime are. The Chapter proposes six primary objectives for the regime. These would be the objectives against which the Regulator must determine the appropriate regulatory action; and against which it would be held accountable. The Chapter also looks at legal precepts or principles, such as a lawyer's duty to the client, which should be incorporated within the regulatory arrangements.

16. Chapter B addresses the key architectural issues around the design of a regulatory system which meets the Terms of Reference; and it looks at the arguments around the different models set out in the Consultation Paper. It also looks at the costs of different models. The Chapter concludes that regulatory functions are best dealt with by a model based on what the Consultation Paper referred to as Model B+. This model provides for the setting up of an oversight regulator, the Legal Services Board (LSB), vested with regulatory powers which it would delegate to recognised front-line bodies, where it was satisfied as to their competence and that appropriate arrangements, in connection with governance issues and the split between regulatory and representative functions, had been made. The Chapter discusses the current governance arrangements of the Law Society and the Bar Council and concludes that they are inappropriate for the regulatory tasks they face.

17. Chapter C concentrates on complaints mechanisms. It examines the problems which exist with the current system and possible solutions. The Chapter concludes that for reasons of independence, simplicity, consistency and flexibility a single independent complaints body for all consumer complaints should be adopted. The Office for Legal Complaints (OLC) would be independent in dealing with individual complaints but would need to work closely with the LSB to ensure that regulatory oversight served to minimise complaints at source. The OLC would be part of a single regulatory framework, with the LSB at its head.

18. Issues about professional conduct, including disciplinary action, would be handed down to the front-line bodies. The Chapter's overall conclusion is that the disciplinary systems of the front-line regulators work reasonably well and could be left, subject to a small number of changes, broadly as they are.

19. Chapter D focuses on the governance and accountability issues around the LSB. It proposes a Board of between 12 and 16 members with both Chairman and Chief Executive being non-lawyers. It makes proposals for how such appointments should be made. It sets out arrangements for consultation with relevant parties and explains how the LSB might be accountable to Parliament, to Ministers, to the public and to practitioners. It comments on the process for appeal from decisions of the Regulator; and it looks at how the regulatory system might be funded.

20. Chapter E raises issues of definition and regulatory gaps. The Chapter includes a broad definition of the 'outer circle' of legal services; and then sets out a definition of the 'inner circle' of reserved legal services which may be carried out only by those authorised to do so. It discusses the asymmetry which arises in respect of outer circle services, which come within the regulated net if provided by practitioners such as solicitors, but are unregulated if provided by practitioners outside a front-line body. It proposes that the determination of how widely the regulatory net should be cast should rest with Government, and suggests criteria which would be employed in the relevant cost/benefit analysis accompanying any change.

21. Chapter F looks at issues around the permission of alternative business practices. Legal Disciplinary Practices (LDPs) are law practices which bring together lawyers from different bodies to provide legal services to third parties. The Chapter proposes that non-lawyers should be permitted to become principals or 'Managers' of such practices, subject to the principle that lawyers should be in a majority by number in the management group. It also proposes that outside ownership should be permitted, subject to a 'fit to own' test and also to a number of safeguards built around the identity of those who manage the practice and the management systems they employ. Within England and Wales outside ownership is already permitted in respect of legal practices which provide licensed conveyancing services; it is proposed that it should, subject to safeguards, now be permitted in other areas of the legal services market.

22. In the regulation of LDPs, Chapter F proposes that the focus of the regulatory system should be upon the economic unit, rather than the individual lawyer. Recognised front-line regulatory bodies would apply to the LSB for authorisation to regulate designated types of LDPs; and the LSB would determine each application against the recognised body's competence in particular legal service areas and the governance and administrative arrangements that the recognised body had in place.

23. Chapter F also looks at Multi-Disciplinary Practices (MDPs). These are practices which bring together lawyers and other professionals to provide legal and other services to third parties. There are considerable issues in connection with such practices, in particular that of regulatory reach since the LSB would have no jurisdiction beyond the legal sector. The setting up of a regulatory system for LDPs would represent a major step towards MDPs, if at some subsequent moment it were determined that there were appropriate safeguards to permit such practices.

24. Taken together the proposals set out in Chapters A to F form my recommendations for a new framework. I believe this framework would represent a considerable advance on the "outdated, inflexible, over-complex and insufficiently accountable or transparent" regime which currently exists. The establishment of the LSB as a single oversight regulatory body, separate from Government Departments where many of the oversight functions currently sit, and the split in front-line bodies between their regulatory and representative functions, should provide a framework independent of Government in which to promote competition and innovation, including in the area of alternative business structures. By giving the LSB clear regulatory objectives, by requiring it to consult in respect of any major decision and by insisting that it reports to, among others, Parliament, it should be a transparent and accountable Regulator. By giving the LSB powers over all existing front-line bodies and powers to recognise new bodies, the system should be able to be consistent, comprehensive and flexible. In a number of ways, in particular through the LSB as a regulator which counts consumer protection among its statutory objectives and through the OLC as a single complaints body independent of the existing professional bodies, the new system should better serve both the public and the consumer interest. The analysis of costs suggests that the OLC, as a single complaints body, might yield some savings compared with the current system with its many complaints handling and oversight bodies. Taken together the LSB and OLC should not impose on the system any materially greater burden of cost than the current arrangements.

Research and survey work

25. In reaching these views I have taken into account a significant amount of research and survey work which has been published about the operation of the legal services sector. I regard some of these as particularly relevant: for example, the research work set out in the Scoping Study [Endnote 6] which preceded this Review, published by the Department for Constitutional Affairs in July 2003, and the survey published in summary form [Endnote 7] by the Consumers' Association in July and in October 2004.

26. This Review has commissioned two pieces of research. The first, carried out by MORI, is being published [Endnote 8] concurrently with this Review. The second relates to the cost implications of the different regulatory models covered by this Review. In June 2004 I appointed Ernst & Young to carry out work in this area. Their Report is contained in Appendix 3.

Process

27. A word about the process I have followed in reaching my recommendations. As noted above, I was appointed on 24th July 2003. On 8th March 2004 I published the Consultation Paper and interested parties were asked to reply by 4th June. During the 12 week consultation period the Regulatory Review team held a number of meetings in England and Wales: in Bangor, Birmingham, Bristol, Cardiff, Exeter, Leeds, Lincoln, London, Manchester, Newcastle and Norwich. In addition we attended many meetings organised by other bodies, a number of them organised by the Law Society in regional centres and two helpfully arranged by the senior judiciary.

28. I have received 265 responses to the Consultation Paper. They have come from a variety of sources: existing bodies and individuals with regulatory functions; organisations who speak for the consumer; lawyers; academics; and members of the public. Collectively they have provided a significant amount of evidence that I have used in forming my recommendations. I would like to thank those who took the trouble to contribute to the debate, and particularly those who are not themselves in the legal services sector. A list of respondents is contained in Appendix 1.

29. I have used the period since 4th June to follow-up on a number of points with key interested parties. These have included the Law Society and the Bar Council and I should add that I have received courtesy and co-operation from both bodies.

30. I have also had the opportunity to discuss the issues at length with the Advisory Panel that I announced on 8th March 2004. The members of the Panel are: Stephen Locke, Baroness Neuberger DBE, Neil Rickman, Edward Walker-Arnott, Graham Ward CBE and Robert Webb QC. I would like to thank them for their considerable help over the last few months. As I indicated at the time of announcement, I remain solely responsible for the recommendations.

31. I am also very grateful to the team who worked with me on the Review, and particularly the Secretary, Sheila Spicer, who worked ceaselessly to ensure that the Report was delivered on time. No doubt some will argue that we have missed points; but I believe that, thanks to the efforts of the team, the key high level points on which Ministers will need to reach decisions have been thought through after proper consultation and with due care.

What happens next?

32. What happens next is a matter for Ministers. Whilst some lawyers will continue to argue that the current system 'ain't broke', I believe there is strong evidence of the need for major reform: (i) to the regulatory framework which, as described in the Government's own Scoping Study, is flawed; (ii) to the complaints system which needs change to benefit the consumer; and (iii) to the types of business structures permitted to provide legal services to the consumer, which have changed little over a significant period. It is for Ministers to determine whether they wish to press ahead with reform.

33. Reform will not be easy. Whilst there is pressure for change, from consumer groups and also from many lawyers, reform will be resisted by other lawyers who are comfortable with the system as it is. Lawyers who are opposed to the reforms in this Review will either argue that I am mistaken and have failed to understand the special characteristics that set the law apart, or call for further research and consultation, kicking reform into the long grass. Changes will require significant political commitment, partly to meet the expected criticism from some lawyers and partly because reform will need primary legislation, which requires scarce Parliamentary time.

34. I hope that Ministers, and subsequently Parliament, will conclude that reform is necessary. In my view it is long overdue.

Sir David Clementi
December 2004

Endnotes

1. Review of the Regulatory Framework for Legal Services in England and Wales, A Consultation Paper, 8th March 2004
2. The Faculty Office is the front-line Regulator for notaries.
3. Ann Abraham, in the Annual Report of the Legal Services Ombudsman 2001/02 entitled: The Regulatory Maze
4. Regulating Legal Services, Point of Law Campaign Briefing, Which? October 2004
5. DCA press release, 26th May 2004
6. Annex B to Competition and regulation in the legal services market CP(R2) 07/02 DCA, July 2003
7. op. cit. and Which? July 2004
8. On our website www.legal-services-review.org.uk

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