The regulatory maze: can the regulators work it out?

In the note that follows, I summarise the recent paper on Legislative Options Beyond The Legal Services Act 2007 emerging from discussion between the LSB, and front line regulators, chaired by Stephen Mayson.  It’s a long summary, only for those interested in the detail. So I provide a very quick overview of some key points in the next few paragraphs. In the broadest terms it does not resolve, but rather restates or clarifies, the key problems with the Legal Services Act as seen by the regulators (although the paper is way of saying that there is in fact agreement that these are the key issues as seen by all the regulators).

I would say the key points are:

• This is an attempt to get the Government to take reform of some of the central concepts behind the Legal Services Act more seriously and not to be persuaded into rethinking the shift away from self-regulation put in place by the Legal Services Act (as the professions’ representative bodies would like). In particular:

• the concept of reserved legal services needs revisiting, with the potential for regulation of high risk legal services and low risk legal services differing significantly – in broad terms the tenor is that legal services regulation should be wider – to encompass more easily the unregulated sector) but more targeted and proportionate;

• implementation of independence between representative and regulatory arms needs completion; and,

• the realities of the new legal services market needs acknowledging. On the latter, of particular note, is that the paper comes interestingly close (reading between the lines a bit) to saying a single regulator is likely to be the way forward.  The pragmatic argument will be – if we have mixed different types of legal service and lawyers together in ABSs we need a regulator that can get to grips with all of them.

A restatement of activity-based versus provider-based regulation comes no closer to resolving this issue (and I would add is not greatly informed by evidence or research into effectiveness in regulation. This is not the fault of the authors of the paper but it is the fault of the regulators – research on legal services has tended to focus on what services are risky and merit regulation or on dealing with issues around access to justice and innovation rather than on the effectiveness of regulation).

….

The paper, “explores options for reform of the Legal Services Act 2007 (LSA). [being]…the product of LSB-facilitated cross-regulator discussions [1] chaired by Professor Stephen Mayson.  It is not apparently a consensus document, articulating “the choices ahead and the regulatory tools that are available” rather than agreed positions or decisions.  It is clear that there was not always unanimity within the group, although it is not clear what this unanimity was lacking on: it might be expected that unanimity was not present for solutions to all the problems, but it is also likely – I surmise – that the regulators did not all agree on what the key questions they faced and what the options were for resolution.

The paper founds itself on the now familiar idea that regulatory reform has the potential to contribute to access to justice, even though:

Regulatory reform following the LSA has been wide ranging: collectively the regulators have simplified processes and removed barriers to market entry, enabling innovation among new and existing providers, improving consumer choice and competition. The structure of the market has already changed as a consequence of liberalisation, allowing a wider range of business models.

…While many factors beyond regulation affect access to justice, an efficient and effective regulatory framework – one which eases market entry, sets only proportionate constraints on commercial operations, and which seeks to minimise burdens on practitioners – can make a positive contribution.

The contribution of regulation to access to justice is important, but it is also a slightly strange place to focus.  Indeed, the rest of the paper, although it is not set out initially, is more concerned with how best to protect key consumer interests and public interest element associated with legal services.  In reality, to my mind, the access to justice emphasis is a palatable way of making the (perfectly plausible) case for greater de-regulation where possible.

The paper sees the chief problems of the current regulatory settlement as being:

• Its foundation in a fixed list of six, somewhat arbitrary reserved activities, which may be misleadingly narrow from the perspective of consumers.
• An inconsistent approach to non-reserved activities:

• for some authorised providers provision of unreserved services are automatically regulated; and,
• non-reserved legal services by non-authorised providers, “cannot be brought within the scope of legal services regulation regardless of the risks posed by the activities undertaken.”

• Insufficient independence between some lawyers and their regulators, “because of the historic link between the professional bodies and regulators being largely preserved under the LSA.” This holds back the pace of reform, “undermines public confidence in the independence of regulation,” and requires practitioners, “to fund representative activities regardless of their wishes”.

It then focuses on a key set of questions:

• What should be the number, nature and presentation of any regulatory objectives?
• What should fall within the scope of regulation? Essentially, should all, some or no legal services fall within scope?
• Should regulation be focused on activities or the providers who carry them out?
• How can the independence of legal services regulation from both government and representative bodies best be assured?
• Does the regulatory framework need to give consumers a [stronger] voice?
• How should the legal services regulator(s) be structured?

The paper argues that there is a need for the sector specific regulation of legal services (i.e. the normal laws of contract, tort, competition and consumer protection are insufficient):

…sector-specific regulation could even be argued to enable that market to exist, by:

1. giving consumers sufficient assurance in the justice system and in the regulation of legal advice and regulation that they have confidence to purchase services;

2. ensuring that rogue practitioners do not compromise the quality and credibility of legal services more generally; and

3. allowing practitioners to act ethically without putting their reputations or livelihoods at risk.

…it is unlikely that generic consumer protection regulation and enforcement could adequately address public interest issues such as risks to the rule of law or problems with legal services such as poor quality of service. These matters require a more focused, proportionate and tailored approach than is possible with cross-economy legislation and enforcement.

Nevertheless, any sector-specific regulation must be proportionate and, where appropriate, remove barriers to competition, support market entry and exit, and reduce regulatory burdens and costs wherever possible, consistent with the public and consumer interests it seeks to promote.

A key problem is, and will continue to be:

The sector itself also needs to be defined more fluidly to recognise the role that law plays in the fundamental operation of society. It permeates many spheres of service supply. Dentists, architects and accountants, for example, will interpret law as part of their service supply but would not necessarily be understood by the consumer nor indeed themselves to be supplying legal services. Regulation, if appropriate, needs to have boundaries that recognise the prime areas of expertise and the alternative protections available to the consumer.

In other words, the activities that a legal service regulator will regulate and the identities of those it regulates are not likely to be or remain clear any time soon.  In relation to the statutory objectives for legal services regulation, the paper says that regulator experiences are that they, “are not necessarily fully clear in their intent or meaning” but that having principles is useful (in practice) as it helps regulators analyse and manage the competing dimensions of decision-making.  Beyond that, the paper does not appear to favour any particular approach to objectives, although it does float building in a more deregulatory emphasis.

As it turns to what should be within the scope of sector-specific regulation there is something of a steer towards a, “spectrum of regulation” somewhere between a total absence of sector specific regulation and “full regulation” (akin to the US’s prohibition on the unauthorised practice of law –although even the US, this does not bring all legal services within scope).  Beyond rehearsing some options, the discussion immediately runs into the linkages between this issue, statutory objectives (if you define these then perhaps it is easier to see what range of legal services needs regulating is the gist of this argument I think) and whether to regulate activities or providers.

In deciding how any future regulatory settlement would be decided they propose

assessing the extent to which a particular legal activity or provider protected or promoted the delivery of public interest outcomes or, conversely, had the potential to put such outcomes at risk.

Implicitly, the paper suggests quite a narrow sense of what constitutes a public interest that contributes to what it calls, “public good outcomes” rather embedded in the (historical and arbitrary?) definition of reserved legal services, “certain kinds [intriguingly, which?] of advocacy, conducting litigation, notarising documents, or swearing oaths” and services/providers that, “present a particular risk to consumer protection outcomes.”  In terms of the public interest questions, it is interesting to reflect on the role of lawyers in corporate governance generally and specifically – for their clients – their engagement with regulators: are corporate and banking lawyers ever relevant to public good outcomes: evidence from Lehman brothers, Standard Chartered Bank, the News of the World all suggest they are or can be. Indeed, legal professional privilege, which applies generally to legal advice, not just advice on litigation sees a general public interest in permitting privilege.  Advice, and other lawyerly activity beyond litigation and advocacy, can and does have public interest dimensions.

There are what look like sensible, if debatable, attempts to outline how thresholds of harm might determine when consumer protection might be significant enough to justify sector specific regulation:

activities that result in irreversible harm (including, for example, advice or representation that might lead to loss of liberty, home, children, or citizenship, or arises from a threat to health, physical or mental well-being, or education), and those activities in the legal sector that involve forced participation in the justice system (such as advice or representation given to those on criminal charges or to some defendants in civil litigation).

The paper acknowledges that, “providers will be subject to different requirements in different situations” and activity based regulations seems (to me anyway) an idea very much aimed at how regulators see the world.  Let’s match an articulation of risk to an articulation of regulatory response and we will be proportionate and effective regulators.  Consumers who come face to face with an activity based regulator who tells them that problem a falls within the remit but problem b is outside of scope, is likely to be baffled and annoyed.   Complexity is the enemy of public confidence.  The paper recognises the problem:

[It] requires a balancing act between the attractions of simplicity derived from a largely common approach and retuning a finely calibrated model where various intervention tools are applied based on shifting patterns of risk.

The result may be to increase the pressure to move away from sector-specific regulation in law (we’re starting to see something like this in the relaxation of the separate business rule).

The alternative is the (more traditional) regulation by provider.  The paper lists a number of challenges to regulation by provider:

• it helps render routes to qualification more inflexible;
• it may not guarantee competence (as provider qualifications are typically taken once at the start of one’s career);
• it tends to increase regulatory reach into areas that do not need it (because all work done by Lawyer X may be regulated if regulation is truly provider based);
• it is becoming increasingly difficult in the light of, “innovative business and operational combinations” which bring together and blur the divisions between different types of practitioner.

They suggest that these problems should be borne in mind when considering whether to regulate individuals, titles or organisations.  It may well be the case that at least some of these also create problems within activity based regulation.

Issues relating to regulatory independence are said to have, “manifested in various ways”:

• resistance by professional bodies to some reforms which would appear to benefit competition and consumers;

• complex governance arrangements …to manage relationships between the representative and regulatory functions, which do not achieve full independence of the regulator and distract senior management attention from regulatory matters; and

• lack of transparency of the cost of regulation… as well as some costs that should be collected from providers as optional professional membership being imposed as a compulsory regulatory levy.

“[E]xpert knowledge, constructive criticism and a practitioner’s perspective on the market and regulation” can be gained other than through links with the representative bodies and, it is claimed that:

the current structure risks undermining the credibility of regulation in the public perception in that some professions are still seen by consumers to be policing themselves (and therefore inferentially to be ‘protecting their own’). To ensure public confidence in regulation, it needs to be independent and be perceived to be independent. The experience of the legal regulators is that the public continue to question the fairness and independence of regulatory decisions despite the changes introduced by the 2007 reforms.

Perhaps more importantly in the long run, as a predictor of regulatory change, “the advent of legal disciplinary practices (combinations of lawyers) and multi-disciplinary partnerships (combinations of lawyers and non-lawyers) in the market is breaking down barriers between professional groups and thereby undermining regulation structured primarily by reference to those groups.”  Whilst the paper rehearses the benefits of regulatory arrangements more like the current or old ones, it clearly favours formal, clear statutory independence.

The consideration of consumer representation is strange and seems to respond to agendas not made clear in the paper itself.  The paper states the benefits of the current Legal Services Consumer Panel and floats only one alternative, “a remit for Citizens Advice”:

Citizens Advice could be given a remit to work on legal services regulation issues, funded through practising certificate fee contributions (as the LSCP is now). The energy and postal services work of Citizens Advice, for example, is funded on a similar basis.

What is not acknowledged here is that Citizens Advice is also a legal services provider.

The paper is also concerned with the vexed question of whether to reorganise the regulatory bodies.  Should there be a similar number of regulatory bodies? Should there be an oversight regulator?  Etc.  The steer seems to be towards single regulator (perhaps with, “specialist sub-units or divisions (focused on professional groupings or activities, or possibly a flexible combination of both)”:

an approach …close to the current settlement …brings the potential for specialist expertise by type of practitioner. But it also runs the risk of lack of independence, of perceptions of conflict and regulatory capture, lack of consistency in the regulation of the same legal activities carried out by members of different professional groups and, for that reason, of regulatory arbitrage.

Further, in the new landscape of organisations carrying out multidisciplinary legal and other activities within the same business, the multiple regulation of practitioners and employees from different professional groups presents potential complexity, burden and cost, and exacerbates the risks of inconsistency in regulatory standards.

Similar problems would apply, it is said, to purely activity based regulators.  Interestingly, as I read it, even with a single regulator, the report does not contemplate the abolition of an oversight regulator such as the LSB.  Full, real independence of regulatory and representative functions might enable more “relaxed” oversight.

[1] Bar Standards Board, CILEx Regulation, the Costs Lawyer Standards Board, the Council for Licensed Conveyancers, the Institute for Chartered Accountants in England and Wales, the Intellectual Property Regulation Board, the Legal Services Board, the Master of the Faculties, and the Solicitors Regulation Authority