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Law Society kicks Hunt's restructure proposals into long grass

12 November 2009

The Law Society has rejected recommendations in the Hunt report to amend its own structure, choosing instead to highlight the suggestion that would “help the SRA to focus on what actually needs to be done in order to build and effective regulatory regime which serves the public interest and encourages fair competition”.

Lord Hunt, whose review was launched with much publicity a year ago, published his findings on 5 October, but it has taken the society, which commissioned the review, over a month to comment on the findings.

In his report, Lord Hunt recommended a new self-governance approach for law firms called ‘authorised internal regulation’, or AIR, and principle-based regulation.

He also said the Law Society should set up a new corporate board that would have “oversight of the efficient running of each constituent part of the Law Society”.

The board would be made up of representatives of the legal profession, of the SRA and of “suitably experienced and knowledgeable independent” lay members, “all appointed by means of a suitably transparent, independent and rigorous appointments process”.

But, while the society has endorsed the main thrust of the recommendations on regulation, it has ignored those that would see the creation of a new corporate board.

Solicitors Journal understands that the decision not to act on the recommendations to change the structure of the Law Society was justified by a need for a period of stability following the recent change of structure at the society and the LSB’s changes to the regulatory structure of the profession announced in September.

The society is also said to consider that delaying any action on these recommendations will give the SRA the chance to focus more effectively on supervision and regulation.

There are no firm plans yet as to how the society will take forward the recommendations it has endorsed.

According to the society’s legal policy director, Mark Stobbs, Chancery Lane will establish specialist working groups to look into priorities such as authorised internal regulation (AIR) and principle-based regulation, with a view to coming to a final position early in the new year.

The Law Society has otherwise welcomed the other main proposals in the Hunt report.

In particular, the society supports the idea of principle-based regulation and of authorised internal regulation (AIR).

According to Marks Stobbs the AIR approach would reflect the fact that some firms, such as large commercial firms, are low risk because they tend to be heavily audited. Firms with the Lexcel accreditation are also less risky.

However, Stobbs said the society would like to see AIR applied to firms other than large ones. “There is understandable concern about AIR – as expressed in an earlier report by Nick Smedley – that it would be very corporate-firm focused and would not be within reach of private client firms”.

The Hunt report assuages some of those concerns, according to Stobbs, when it advocates that AIR should apply to smaller firms too. “But there are a few problems –reporting arrangements, for instance. What level of breach does it have to report: should there be a threshold?”, he says.

A proper pilot across a representative range of firms – not just large firms – should identify and help provide solutions to some of these issues.

Another issue is the extent to which the risk-based approach currently taken by the SRA needs to change to embrace more principle-based regulation.

And of course there is the arrival of alternative business structures. “A lot more work is needed because there has to be a change of culture,” says Stobbs.

“With principle-based regulation, you need to give firms a margin of appreciation,” he continues. “The regulator must look at the spirit of the rules and give firms flexibility. Firms must be confident that if disclosures are made in good faith, they will not be unduly sanctioned later”.

According to Stobbs, the main question there is access to justice and ABSs should be subject to same duties and obligations.

Similarly, will-writers and other currently unregulated organisations such as employment consultants, who provide quasi-legal advice, should fall within the LSB’s remit. “It’s important that they should be regulated on same basis as regulated professions”, says Stobbs. “It’s one thing to buy a £5 will from the post office but it’s something else to buy will advice from someone who has no qualification, is unlikely to have insurance, and could be charging for other services that are not needed.”

He also suggested that it would be illogical for the Law Society not to remain the regulator for a firm listed on the stock exchange.

Stobbs said reference groups will be set up to consider AIR and principle-based regulation with a view to making more detailed recommendations early next year. After that the lobbying work will start.

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