The Legal Services Act 2007 introduced sweeping changes to the regulation of the legal services market. The principal objectives of the Act were stated to be the liberalisation and better regulation of the legal services market, the encouragement of greater competition, and the provision of a new process for handling consumer complaints... | LBLBulletin

Reforms to the Legal Services Market

The Legal Services Act 2007 introduced sweeping changes to the regulation of the legal services market. The principal objectives of the Act were stated to be the liberalisation and better regulation of the legal services market, the encouragement of greater competition, and the provision of a new process for handling consumer complaints. The Legal Services Board was established to promote the regulatory objectives of the Act, which has meant in practice the oversight of the nine legal services regulators approved by the Act including the SRA amongst others. In addition, a Legal Ombudsman service was set up to provide an alternative process for the handling of consumer complaints. Most radically of all the Act provided for Alternative Business Structures (ABSs), which allowed non-lawyers to own and run law firms and provide legal services.

In many ways, the legal profession is still coming to terms with those changes. Law firm “plc’s” have arrived and private equity firms have taken ownership stakes in some law firms. What has been less immediately newsworthy, but perhaps more important, has been the regulatory changes brought in by the advent of the SRA. The Clementi Review had recommended that the Law Society be stripped of its regulatory functions in accordance with principles of independent regulation. After all, there is a clear conflict of interest between acting as a membership body representing the interests of solicitors on the one hand, yet regulating their activities and punishing their misdemeanours on the other. One cannot be gamekeeper and poacher at the same time. Consequently, the SRA was constituted as the approved regulator for solicitors.

Nevertheless, and in accordance with the principles of the classic British compromise it was not thought appropriate to displace the Law Society entirely from all regulatory matters. Consequently, the Law Society is responsible for the oversight (including budgetary oversight) of the SRA’s activities. This is not an entirely satisfactory arrangement. Regulators are by their nature fiercely independent, yet in the case of the SRA it is subject to oversight by the body which represents the profession they are regulating. It is not difficult to imagine that what the Law Society considers to be the exercise of proper and proportionate governance over the SRA, the SRA considers to be unnecessary and unjustified inter-meddling. This has led to understandable tensions in the relations between the Law Society and the SRA.

The Ministry of Justice does not see this as a long-term arrangement and is already on record as saying that legal regulators should be independent of their representative bodies. The current position is therefore a transitional arrangement and at some point the SRA will become fully independent. When this happens, it will have manifold ramifications for both the Law Society and for the legal profession.

For the Law Society, this will be a seismic change, because it would then be a fully independent membership organisation and almost certainly entirely reliant for its funding on its commercial activities and membership subscriptions. The funding issue would be challenging because the Law Society would lose its “section 51” income, which is derived from practising fees. In 2015/2016, the profession was obliged to pay £105m for practising certificates of which circa £35m was assigned to the Law Society. This amount formed the majority of the Law Society’s annual revenues of circa £50m. On this basis, it has been suggested by commentators that the Law Society’s practising fee income amounts to about £250 per solicitor per year. The disappearance of circa 70% of its annual income would be a serious challenge to any organisation and that would certainly be the case for the Law Society. The huge shortfall of what was previously paid compulsorily would have to be met by payments from the profession which could not be compelled.

As a membership organisation, the Law Society’s continued existence in its current form would therefore stand or fall on whether solicitors would be willing to pay voluntarily for it to represent and promote the interests of the legal profession nationally and indeed internationally. Although many solicitors are oblivious to the Law Society’s work on their behalf, there is a real and growing need for representation of the profession at a national (and international) level, not least because of the SRA’s plans to increase competition. That need will become even greater and more pressing as and when the SRA becomes fully independent. Without strong representation in any consultation over legislative and regulatory changes, the profession could find itself in a seriously disadvantaged position. 

The SRA’s agenda as a regulator is not to support solicitors; its raison d’être is to champion the rights of the consumer. In that regard, the SRA is understandably and rightly concerned about “unmet legal need”. With the wholesale withdrawal or reduction in public funding, many consumers simply cannot afford a solicitor. How can this gap be bridged? 

The SRA addressed this challenge in its June 2017 paper “Improving Access – Tackling Unmet Legal Needs”.  Some of the market research on which the paper was based indicated that legal services were too expensive and there was a lack of pricing transparency. The SRA’s principal answer to these challenges was to reform the legal services market in order to “support a healthier and more competitive legal market”, which was “more open”. The most obvious method to make a market more open and competitive is to allow more competitors into that market. 

Greater competition should always be welcomed and may assist in meeting the unmet legal need. But in the case of legal services, more competition may also lead to a dilution in service standards. This may not be in the consumers’ best interests. Unless the professional standards required of new entrants are maintained, price competition may be increased at the expense of quality and service. It remains to be seen whether the SRA will approach the maintenance of professional standards as zealously as they approach liberalising legal services and increasing competition, but the indications are that price competition may take primacy and there will be a consequent dumbing down of standards.

If providers of legal services are not competing on a level playing field, those operating to higher standards may be put at a competitive disadvantage. Although the effect of increased competition will be felt first by High Street firms, this should be a cause for concern for all solicitors. Very few firms would be immune from planned regulatory changes. Given the ever-increasing cost of providing legal services, pressure on prices may have serious consequences for a significant number of firms.

The profession will shortly face greater challenges than ever before and it is abundantly clear that it needs a national body to represent it. When the SRA becomes fully independent and the Law Society loses its share of the practising income, the question of whether law firms will be willing to pay substantial sums for representation by the Law Society will be brought into even sharper focus. 

Michael Frape

Law Society Council Member for Bedfordshire & Cambridgeshire