CILEX and regulatory delegation: outrage or arbitrage?

The recent announcement by the Chartered Institute of Legal Executives (CILEX), the governing body and ‘approved regulator’ for chartered legal executives, that it is contemplating moving its delegated regulatory authority from CILEX Regulation to the Solicitors Regulation Authority (SRA) has understandably caused a stir.  The response of CILEX Regulation (the current delegated regulatory body) that CILEX has no power to do this has resulted in the episode being described as a public spat.  But a spat is usually something that is brief and about an issue that is petty or not that important.  This quarrel is none of those things, and so it matters.

Background

CILEX’s case for change focuses attention yet again on the challenges created by the regulatory framework of the Legal Services Act 2007 and the structure of multiple front-line regulators organised by professional title.  It observes that this multiplicity makes it difficult for the smaller regulators to achieve economies of scale in regulation.  It further observes that the regulatory cost for individuals under CILEX Regulation is 20% higher than that for individuals regulated by the SRA.  So far, the Legal Services Board (LSB), as the overarching regulator, has issued only a somewhat anodyne statement focused mainly on the future process for approving any change in CILEX’s regulatory structure.

The very experienced and ever-perceptive Crispin Passmore has written persuasively about this tangled web. His thoughts address a wider range of issues than I intend to here.  He looks at the roles of CILEX, CILEX Regulation, SRA, LSB and Ministry of Justice and concludes, “a pox on all their houses”.  For the most part, I share his views.  But, in the context of the present quarrel I do not come to quite the same judgement – mainly because of the Byzantine structure within which these bodies are required to operate.

I do not wish to comment on the substance of the case for change, or whether regulation by the SRA would be ‘better’ (or even possible) for legal executives.  Instead, I wish to concentrate on the exercise by CILEX of its powers to delegate its regulatory responsibilities, and on the consequences of this quarrel now being played out in public.

The Legal Services Act 2007

I have probably written enough previously about the challenges and consequences caused by the 2007 Act through its unfortunate goal of securing the independence of regulation from representative interests rather than avoiding the real mischief of regulatory capture (see the Final Report of the independent review of legal services regulation, paragraph 3.7.2).  However, the Act requires, in section 30, that the LSB must make internal governance rules that include requirements to ensure that the exercise by an approved regulator of its regulatory functions is not prejudiced by its representative (membership) functions.  Those rules must also ensure therefore that decisions relating to regulatory functions are – so far as reasonably practicable – taken independently from decisions relating to the exercise of representative functions.

In this case, CILEX is the ‘approved regulator‘ under the Act (Schedule 4, paragraph 1), not CILEX Regulation.  The LSB’s internal governance rules require (in rule 2(1)) that CILEX should then delegate the discharge of its regulatory functions to a separate ‘regulatory body’ (an expression that is not defined or used in this context in the Act, but is currently CILEX Regulation).  Incidentally, I do not read the Act as requiring the delegation of regulatory functions: its objective of separation and independence could just as well be achieved by an approved regulator retaining the regulatory functions and delegating its representative functions.

Under section 27(1) of the Act, ‘regulatory functions‘ refer to functions under or in relation to regulatory arrangements or in connection with the making or alteration of those arrangements.  Those ‘regulatory arrangements‘ are defined in section 21(1) as the arrangements for authorisation, discipline, qualification, indemnification, compensation and ABS licensing, as well as practice and conduct rules.

It seems to me that the effect of this confusing combination of ‘regulatory functions’ and ‘regulatory arrangements’ is that the Act requires the approved regulator (CILEX) not to prejudice the discharge by the regulatory body (CILEX Regulation) of its responsibilities under those arrangements.  This does not extend to the initial act of delegation to the regulatory body, or to any subsequent process to review that delegation.  It would seem very odd indeed if the Act required an initial act of delegation, but prohibited any later review of that decision.

In any event, as I said earlier, the Act does not require delegation, but rather that the exercise of regulatory functions should not be prejudiced by the exercise of representative functions.  This could be achieved in a number of ways.  It is the LSB’s internal governance rules that require delegation – and perhaps tendentiously only of regulatory functions.

It seems to me that CILEX Regulation in its response to CILEX is correct to claim that it is “our role as regulatory body to decide independently of CILEX whether changes to the existing regulatory arrangements are needed”.  But it is wrong to elide “regulatory arrangements”, which are specifically defined as above, with all decisions relating to regulation, including the approved regulator’s decision to delegate in accordance with the internal governance rules.  Further, in those rules, the expression ‘regulatory functions’ is defined expressly to exclude “functions relating to arrangements for delegation of regulatory functions to a regulatory body”.

I therefore conclude that CILEX is not seeking to explore or exercise any powers that can fall within the definitions of ‘regulatory functions’ or ‘regulatory arrangements’.  Consequently, CILEX Regulation is in a difficult position in claiming that CILEX has no power to consider a change in delegation (it surely must have that power).  Equally, it is difficult to claim that, in doing so, CILEX is exercising its representative functions in a way that prejudices the exercise of the ‘regulatory functions’ or ‘regulatory arrangements’ (as defined).  Having delegated regulatory functions, CILEX is only left with decision-making in relation to representative functions and so it should not be surprising if those decisions are made “in connection with the representation, or promotion, of the interests of” its regulated members (section 27(2)).

I suppose it might be possible to dance on a pin-head and suggest that an approved regulator has a decision to make relating to delegation to a regulatory body that is neither a regulatory function (as defined) nor a representative function (as defined), and must therefore be made in some hermetically sealed decision-making process devoid of regulator and representative interests….

It would be surprising if the LSB did not have a view about the application of its own internal governance rules to the present circumstances.  If so, it would be helpful for them to share it publicly.

But, in short, I see no cause for outrage.

Regulatory arbitrage

If the 2007 Act and the internal governance rules allow delegation of functions, then clearly an approved regulator has a decision to make and is expected to make it.  As stated above, I would find it extraordinary that, having made a decision to delegate, an approved regulator was not allowed to revisit that decision.

There is no requirement in the Act or the internal governance rules that, in exercising the decision to delegate, an approved regulator can only choose in favour of its own ‘connected’ regulatory body.  Individual practitioners can, to some extent, engage in a form of regulatory arbitrage by making their own choice of regulator for the reserved activities for which they wish to be authorised.  There seems to be no reason in principle why approved regulators should not be allowed to engage in a similar process in exercising their powers of delegation if they feel that another regulatory body offers coverage, style and cost-efficiency that is sufficient to discharge what the approved regulator believes to be in line with the regulatory obligations under the Act.

As Crispin Passmore’s blog makes clear, it is by no means certain that the SRA – or any other current front-line regulator – would be able to take on the regulation of CILEX members and ABSs.  This might be because their constitutional arrangements make this impossible or too challenging, or because they lack sufficient technical competence or resource capability to do so.  No doubt the current review and talks with the SRA will look at these issues.

It therefore seems to me that CILEX is exploring the merits of an alternative approach to the delegation of its regulatory functions in line with the freedom that the 2007 Act gives it.  I make no comment here on whether such arbitrage should be allowed, or whether it offers meaningful and effective regulatory alternatives, or whether the outcome will be a good thing.  However, my views about the longer-term need for a single sector regulator for legal services probably offer a strong clue about the principle of regulatory arbitrage!

Putting out the fire

There is clearly some mutual discontent at the heart of the CILEX quarrel.  The reasons for that do not need to be aired; they need to be resolved.  If there is a loss of confidence, that needs to be explored rather more than the flames being fanned.  The Legal Services Board sits as the overarching regulator of regulators.  If there is a loss of confidence somewhere in the structure, it should be actively involved in seeking a resolution: after all, both the regulated practitioners (legal executives) and those for whose benefit they are regulated (clients, consumers and the public generally) deserve assurance and reassurance.  It is not clear whether the Board is seeking to do so privately in this instance rather than in public.  But lead it must, and preferably publicly.

Playing this out in the public domain is not conducive to an early, or possibly even satisfactory, resolution.  It might be that the interest of the public here is in practice limited to CILEX members and a handful of regulatory specialists and aficionados.  But it is still crucial to the public interest in regulation.  Above all else, this episode demonstrates only too painfully and strikingly what an uncertain, awkward, messy and confusing regulatory settlement the Legal Services Act 2007 has created.  In fact, it is anything but ‘settled’.

And so I repeat my call for the Ministry of Justice to recognise that the current framework is so seriously flawed that it cannot deliver the effective regulation of legal services that twenty-first century society, consumers and practitioners should be able to expect.  This quarrel provides further evidence of the flaws.  Now is the time to kick-start the process of reform towards a revised scope of regulation and a single regulator for it.

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