Re-thinking legal services regulation

My interim report for the Independent Review of Legal Services Regulation in England & Wales is published today (available here).  This post is extracted from it.

While the reforms of the Legal Services Act 2007 have been mainly beneficial overall, that legislation might best be characterised as an incomplete step towards restructuring legal services regulation.

For reasons that are understandable, it did not fully follow through on some key elements of the regulatory structure.  These include: review and reform of the reserved legal activities (those few activities that must be provided by lawyers); the known regulatory gap (as a consequence of which the non-reserved activities of lawyers are regulated, but those of non-lawyers can legally be provided but cannot be regulated – to the potential detriment of consumers); and the separation of regulation from professional representative interests.

This lack of follow-through has led to increasing challenges to the integrity of the regulatory framework as the legal sector has evolved and developed since 2007.

The shortcomings and challenges

What the findings of this interim report confirm is the nature and range of issues that will need to be addressed in any future reform of the legal services regulatory framework.  They point to some significant shortcomings and challenges arising from the present structure for the regulation of legal services and those who provide them.

In summary, they are:

  • inflexibility arising from too much statutory prescription;
  • competing and possibly inappropriate regulatory objectives;
  • a pivotal set of reserved legal activities that are anachronistic and do not necessarily include all activities that ought to be regulated;
  • title-based authorisation that leads to additional burden and cost in relation to some activities being regulated that do not need to be (resulting in higher prices to consumers);
  • the unsatisfactory nature of the separation of regulation and representation;
  • the existence of unregulated providers who cannot be brought within the current regulatory framework (with an expectation that their numbers will increase);
  • the prospect of LawTech that will be capable of offering legal advice and services independently of any human or legally qualified interface or interaction, beyond the reach of the current framework;
  • a regulatory gap that exposes consumers to potential harm when some activities are not regulated when they ought to be, and puts qualified practitioners at a competitive disadvantage;
  • seemingly ever-increasing prices of private practice lawyers, reducing further the availability and affordability of legal services for many; this encourages either greater self-lawyering and litigants-in-person, or nudges increasing numbers of citizens into the world of unregulated providers and LawTech;
  • consumer confusion, caused by the existence of both regulated and unregulated providers for the same legal services, and a profusion of differently regulated professional titles;
  • inadequate or incomplete consumer protection, that is not consistent with a widespread consumer expectation that all legal services and those who provide them are subject to some form of regulation and protection; and
  • as a result of all of these issues, the risk of low public confidence in legal services and their regulation.

From narrow to broad

The current regulatory structure presents a narrow ‘entry gate’ to regulation, in the sense that a combination of a reserved legal activity, combined with an authorisation to carry on such an activity (usually arising from a professional title), is required.  However, once through that gate, the whole array of regulatory tools is engaged, resulting in everything that the holder of a legal professional title does being subject to legal services regulation.

On the other hand, an individual or business wishing to offer only non-reserved activities, and not otherwise subject to legal services regulation, cannot gain admission to legal sector regulation.

However much they might otherwise wish to subject themselves to regulatory obligations or offer the benefit of regulatory protection to their consumers, they cannot because they do not hold a professional title or a licence for an alternative business structure (ABS).  They lie outside regulatory reach, legally able to carry on non-reserved legal activities, but not able to enter (or to be brought within it) – that is, they are both unregulated and unregulatable.

In sum, the current regulatory structure provides an incomplete and limited framework for legal services regulation that will struggle in the near-term and beyond to meet the demands and expectations placed on it.

However, this does not lead me to the conclusion that, in some way, the next step should be to ‘finish the job’ of the Clementi Review and whatever the 2007 Act might have left incomplete or problematic.  Instead, I envisage an opportunity to revisit and reform rather than to ‘make good’.

An alternative approach?

The hypothesis of the alternative approach to regulation explored in the interim report is that, in the future, authorisation to practise and the application of regulatory requirements would not be imposed only on those who hold one or other of the existing professional titles.

Instead, all providers of legal services should be capable of entering the regulated domain for at least after-the-event regulation.  Beyond this entry level, a risk-based approach could determine whether additional during- and before-the-event requirements should be applied.

Accordingly, the working assumption of the interim report is that all legal services (to be re-defined) would be regarded as low risk unless they are separately defined and identified as either ‘intermediate risk’ or ‘high risk’ services requiring more targeted regulation.

As a consequence, entry into regulation would be set with broader scope.  In relation to low-risk legal services, after-the-event redress would become available (principally through a reformed Legal Ombudsman).  This level would set the minimum conditions of regulatory intervention to which all regulated providers of legal services would be subject.

There would then be additional powers to determine that certain legal activities carried higher risk (to the public good or to consumers).  These activities would be subject to practice conditions (usually applied on a during-the-event basis), as well as the lower-risk entry-level requirements.

Practice conditions might include: accreditation requirements to assure competence; continuing professional development (CPD) obligations and re-accreditation to assure continuing competence; obligations relating to the handling of clients’ money; contributions to a compensation fund; undertakings; and appropriate management systems.

There could also be further additional powers to determine that certain legal activities carried a high innate degree of risk (again to the public good or to consumers).  These highest-risk activities could then be subject to before-the-event regulation, as well as to during- and after-the-event requirements.

Before-the-event conditions would ensure that providers have prior authorisation to carry on the highest-risk activities before they were allowed to offer their services to clients.  This would probably be in much the same way as is presently required for the reserved activities – although the report also proposes that these activities should be reviewed, and that the notion of ‘reservation’ would not be necessary in the future.

This approach could be supported by a public register of those individuals and entities who are subject to regulation.  Consumers would then be able to consult the register as they contemplate using any particular source of advice and representation to help with their problem.

The register would establish for them whether or not their prospective provider is regulated, and for what.  If the prospective provider is registered, there will be specific regulatory protection; if not, the consumer is on notice that protection and redress will not be available.

This alternative approach would not assume the disappearance of professional titles or of any need to regulate them, but would instead offer an additional route into regulation.  In principle, the same requirements should be applied to those who hold a professional title as to those who do not.  To do otherwise would be to create an unlevel regulatory playing field.

The report accepts that there might once have been (and in many cases continues to be) a compelling need for lawyer advice and its regulation, justifying the traditional reservation of certain activities to those who are legally qualified.  However, it also allows an alternative in relation to those activities or situations where such a monopoly has become inappropriate in the twenty-first century.

Such an alternative approach need not be seen necessarily only in terms of an increase in the scope of sector regulation.  The position now is that in fact all legal services are within the scope of regulation if they are provided by someone who is already legally qualified and authorised to practise.

Unfortunately, the current structure will not admit those who are not legally qualified.  This is now an unnecessary restriction that inhibits further access to legal advice and representation as well as to regulated innovation, competition and technological substitution.

The case for change

The potential benefits of the alternative approach explored in this interim report are:

  • It would be easier for consumers to check whether their provider or prospective provider is registered or not (including for higher-risk activities that attract additional regulatory requirements and protection).  This is a simpler starting point for consumers than the current complex mix of factors.
  • A differentiated, or layered, approach to regulation would allow before-, during-, and after-the-event interventions to be applied to providers based on the risks of the services that they actually offer.
  • Adopting such a risk-based approach would mean that more of the cost and burden of regulation could be self-selected and cumulative, depending on the commercial or operational choices that providers elect to make.  As such, it would offer a more targeted and proportionate response to the public and consumer risks within the legal sector.
  • This approach would enable those who are currently unable to enter the regulatory structure to choose to do so, for the benefit of their consumers.  This should lead to an increase in regulated access, competition and innovation in legal services.
  • This approach could also apply to those providers who are moved (or move themselves) outside the current regulatory framework, for instance by having been struck off, disbarred, or even simply retired.  It would constrain their current option to set themselves up as an unregulated paid adviser in respect of non-reserved activities.
  • A framework that is constructed around ‘providers’ of ‘legal services’ could apply to the providers of LawTech that substitutes for lawyers in ways that the current framework cannot.

An important question for this interim stage of the Review is whether such a longer-term alternative approach would sufficiently address the identified shortcomings of the current framework, and whether these projected benefits would be worthwhile.

The report therefore poses some consultation questions, and the consultation period closes on 29 November.  Please read the full report and send in your responses!

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