Burdensome regulation on law firms can deter innovation, says LSB

Restricting legal services providers from being connected with other businesses can stifle innovation, the Legal Services Board (LSB) has found.

In its report on the regulatory restrictions on business ownership in the legal services industry published this week, the LSB found that the SRA imposes the most restrictive rules on businesses connected to law firms.

The report also found that the number of waivers to the rules restricting business ownership granted to ABS firms by the SRA may be placing existing law firms at a competitive disadvantage.

LSB chief executive Chris Kenny commented: "This report is a timely contribution to the ongoing debate on over burdensome regulation in the legal sector. It is clear that there are some regulations in place that are not needed and should not be there. Saying that, we strongly support the work that the SRA is doing to review the separate business rule and hope that this thematic review assists with this exercise."

The LSB carried out a thematic review examining what business ownership restrictions are in place at each of its approved regulators; the statutory basis for having these restrictions in place; and whether these restrictions are compatible with the eight regulatory objectives set out in the Legal Services Act, the government's Better Regulation Principles, as well as best regulatory practice.

One of the key reforms of the Legal Services Act 2007 was to allow non-lawyers to invest in, own and manage alternative business structures (ABS). Despite these freedoms, regulatory arrangements of some approved regulators continue to place ownership restrictions on lawyers and legal businesses by preventing them from being connected with, investing in and owning a range of businesses.

The SRA's separate business rule puts ownership restrictions in place to protect consumers, however, research into the proportionality of regulation carried out by the LSB in 2013 suggests that this rule does not secure the protection that it has been put in place to provide.

The report also drew attention to the fact that there is nothing currently in statute that requires a regulator to restrict legal services providers' ability to be connected with, invest in or own any other business.

While consumers remain confused about the scope of legal regulation and mistakenly assume that all legal services are regulated, it may be legitimate to impose additional regulatory requirements on lawyers with connected businesses.

The LSB suggested that new regulations might include imposing additional disclosure requirements. The super-regulator has, however, concluded that blanket bans are likely to be disproportionate, would deter innovation and could cause more harm than good.

While the SRA imposes specific restrictions to prevent legal services providers from being connected with, investing in or owning other businesses, the Costs Lawyers Standards Board (CLSB), the Institute of Accountants in England and Wales (ICAEW) and ILEX Professional Standards (IPS) do not impose any restrictions.

Meanwhile, the Bar Standards Board (BSB), the Council for Licensed Conveyancers (CLC) and the Intellectual Property Regulation Board (IPReg) operate, or intend to operate, a notification process. Once a notification has been issued to a legal services provider, these regulators may, depending on the risks posed to consumers, impose conditions, grant certain permissions or supervise the regulated entity differently.

Chris Kenny added: "We also support the exploration of collaborative work between regulators to consider the issue of consumer confusion about what is and what isn't subject to legal service regulation, the effectiveness of disclosure and whether more consistent approaches can be developed."