Regulatory supervision at the crossroads

The separation of regulatory and representative functions was a key recommendation of the Clementi report on the legal services market in 2004, along with the setting up of a new supervisory regulator, the Legal Services Board (LSB).

The initial compromise saw regulatory authorities being established as arm’s-length bodies within the representative organisations under a set of internal governance rules (IRGs).

Since then, no government-backed review of the new framework has taken place despite regular calls to do so, most recently in 2016 by both the Competition and Markets Authority, which found the system was “not working well” for consumers or businesses, and by the Legal Services Board.

True, there are more pressing issues on the current government’s table right now, but it’s also true that the liberalisation of legal services is not a major vote winner, and it has been left to the LSB, within the remit of its jurisdiction, to press for greater autonomy for regulatory bodies mostly on its own, making the best of the tools available.

Available levers

“We published our vision document in 2016 but then it became obvious that there was no appetite in government for any fundamental reform, so the answer was to make the best of the currently available levers”, says LSB chair Dr Helen Phillips.

“One of these is the internal governance rules.” Exploiting the IGRs’ potential, the LSB is set on pursuing its drive to ensure “effectiveness and appropriate independence”, “if not full, then at least appropriate separation”, Phillips says. New rules are expected to come into effect in the spring following a consultation, which closed on 21 January.

According to Phillips, the responses available at the time of writing reveal widespread support for change, with the only significant resistance coming from the Bar Council, which is taking “a more conservative view”. One possible explanation for the Council’s reluctance, she suggests, is that they have not undertaken their own reflection about what the profession stands for.

“It’s not for [the LSB] to be working out what the residual function of the representative body is, but we would be foolish not to have an interest in making sure that there is a strong vibrant profession.”

The new rules will mostly continue with the principles-based approach “giving the regulatory bodies the opportunity to think about how they would comply with the outcomes we were trying to achieve in their own way” but the LSB is also being more prescriptive in some areas, such as the requirement for regulatory bodies to have an independent chair and the ability to make their own appointments to their boards.

“You wouldn’t think this would be hugely contentious, but it can be”, Phillips remarks. “You don’t want not to be sensitive to what the profession thinks is important, but you wouldn’t want undue influence by the profession over that appointment.”

Redefining functions

Much of the initial criticism of the post-Clementi order was that it reduced legal services to commerce, ignoring the nature of the issues lawyers deal with, and introducing competition for the sake of it without taking account of the legal profession’s own concerns and with little consideration for public protection.

Phillips acknowledges there may have been a disconnect and that as long as frontline regulators such as the Law Society are responsible for discharging the duties of their arm’s-length regulatory body, they will still feel a degree of ownership and oversight of them.

“We can’t mandate or require legal separation and there’s something about having that sense of ownership and oversight”, Phillips says, “but that must be appropriate and it mustn’t be a duplicate”. So how would the power dynamics change between Chancery Lane and the Solicitors Regulation Authority?

One proposal is to change the rules allowing the representative body to mandate the regulatory body to take their services, such as payroll or buildings, from the representative body.

“It should be in the gift of the regulatory body to decide where they would be accessing those services from”, she says, “so they have more autonomy about setting up and using their budget, and the representative body will have less potential to inappropriately curtail that budget-setting process”.

Some fear that this could hold the representative function to ransom, which Phillips agrees is a risk. “We’re not preventing [those involved] from having a constructive relationship or finding good ways of working together, but yes, we are deliberately changing the dynamic”, she says.

And to those concerned that this could create confusion and lead to a rise in the practising certificate fee, Phillips suggests that the fee shouldn’t in any event be used to forever fund representative functions via the permitted purposes provisions.

Instead of holding on to the fact that regulation used to be part of its remit, she says, representative bodies should be asking themselves what their constituents want to pay for.

“There could be something really quite exciting there”, she points out with determined conviction. Regulator shopping Whether the representative bodies will follow her lead with the same enthusiasm is not altogether certain.

There are, however, serious concerns in relation to the regulatory playing field, especially for solicitors, for whom the regulation burden is particularly onerous compared with other parts of the market.

Phillips is of the view that shopping around, including for a regulator, is “a good thing, because it creates a market” but she says there has been very little regulator swapping.

Nevertheless, it seems the LSB has acknowledged the potential problem – to an extent at least – and it is rolling out a new performance assessment framework for all regulatory bodies.

“We were taking too much of an interventionist approach in how the regulators were carrying out their functions”, Phillips comments.

Instead, the new approach will focus on testing the competence and capacity within a frontline regulator to deliver its regulatory function, looking at its governance and at how well led it is. “If that is in good order, we can rely to a greater degree on those assurances”, she says.

In practice, this means looking at how appointments are made, whether board members are competent, whether they are fit and proper, whether the regulator’s approach to setting standards and to enforcement are appropriate, whether its approach to risk assessment is sound, and at the quality and integrity of the data feeding into the performance assessments.

“The regulatory performance assessment is all about whether those minimum standards are met so there would be an appropriate degree of consistency across all regulators with regards to those standards”, Phillips says. The LSB is also hoping that its drive to instil a sense of “continuous improvement” across the regulatory spectrum would help with raising standards. 

This encourages regulators to learn from each other and share good practice. It is also inviting regulators to look at those in other sectors are doing – an approach it is keen to develop in relation to professional competence (see New Directions section). It’s not clear whether this new approach will genuinely even out regulatory competition.

It’s a move in the right direction for solicitors worried they could be losing out to other regulated providers, including accountants, but it may not be enough overall to protect the solicitor brand.

Future of regulation

In the background is the question of unregulated providers, which the lack of government interest in reviewing the Clementi legacy and the LSB’s legislative constraints still leave out- side the reach of regulation.

Much as the LSB is in favour of regulating providers such as will writers, the issue, according to Phillips, is fundamentally tied up with the future of regulation. At the moment, she points out, legal professionals are regulated on the basis of whether they’re carrying out a reserved activity but regulated practitioners may then decide not to operate in these areas.

“The real issue is regulation by title”, she says. “The vast majority of advice being provided by solicitors has nothing to do with reserved activities, especially in the big firms.” The answer to this conundrum could be revealed in the review led by Professor Stephen Mayson for the Centre for Ethics and Law at University College London.

An update to its three working papers is expected next month (February 2019), with a final report due to be submitted to the Ministry of Justice in early 2020.

New directions