Posts Tagged ‘legal services board’
Legal services regulation: the Mayson report
This is an important report on the need to rethink the approach to the regulation of legal services and those who provide them. The author Stephen Mayson has summarised his report on his blog. I reproduce what he wrote here, with his permission.
After two years, my final report of the Independent Review of Legal Services Regulation haas been published. It is available for download from this site and from UCL.
In 2016, the Competition & Markets Authority completed its market study and concluded that the legal services sector is not working well for individual consumers and small businesses, and that the current regulatory framework under the Legal Services Act 2007 is not sustainable in the long run. One of its recommendations was that the government should undertake a review of the current regulatory framework.
In light of Brexit, the Ministry understandably did not feel able at the time to commit to a formal review. In July 2018, I therefore volunteered to undertake the Independent Review on a pro bono basis under the auspices of the Centre for Ethics & Law, in the Faculty of Laws at University College London.
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Innovation and the use of technology in the provision of legal services
The Legal Services Board has just (November 2018) published its latest detailed picture of levels of innovation and use of technology in legal services in England and Wales.
This report looks at the attitudes of legal services providers, sets out the benefits from innovation and considers the perceptions of the main enablers, including the impact of regulation. The headline findings are:
- the legal sector makes use of a variety of technologies but the use of services such as Blockchain or predictive analytics are, as yet, rare
- overall levels of service innovation are unchanged since the first wave of the research three years ago
- ABS, newer providers and larger providers have higher levels of service innovation.
Although putting a positive spin on the outcomes of the survey, I cannot help thinking that the LSB may actually be rather disappointed at the outcomes of the survey – given all the talk that there has been about the importance of innovation and new technologies.
My impression is that change is happening, but that it will much longer for the full benefits claimed for the use of new technologies to be realised in practice.
You can read the full report at https://www.legalservicesboard.org.uk/news_publications/LSB_News/PDF/2018/20181128_Innovation_Driven_By_Competition_And_Less_Hindered_By_Regulation.html
Research into Alternative Business Structures: the Legal Services Board
Since licensing began in 2011 there have been 950 ABS licences issued. As of March 2017 there were 892 active licences. In April 2017, the Legal Services Board published a significant report into ABS. It sought to address 4 questions, which I have adapted from the report and which I try to summarise here:
1.What kind of investment activity has there been in ABS?
These businesses are predominantly existing legal service businesses converting to ABS status, with one in five respondents to our survey being new firms. Three fifths of ABS have less than 50% non-lawyer ownership. Just under one in five ABS are wholly owned by non-lawyers, with a similar proportion being fully owned by lawyers but having some proportion of non-lawyer managers….
The research shows that the majority of ABS firms (66%) either have already invested or are planning to do so, since they gained their ABS licence. These investments have mainly been made to hire more staff, increase marketing activity or to purchase IT. The LSB sees this as evidence of the increased scale that allowing non-lawyer ownership was designed to enable.
2.Is the market attractive to all sources of finance?
The survey shows ABS firms accessing a wide range of sources of finance, and only a small proportion of ABS indicating difficulties in accessing finance. The most frequent source of funding for investments was business profits or cash reserves which were used by 49% of those who had invested in their business. Just over a quarter of investments were solely funded us ing a loan from a bank, and a quarter were solely funded using the business’ overdraft facility.
External sources of equity finance accounted for only a minority of investment funding sources either as the sole or joint source of investment funds, and only 12% of ABS had used any form of external finance. Partnerships are more likely to use debt funding for finance, with 55% using loans or overdrafts, but none had used external investment. Companies limited by guarantee had the highest proportionate use of any form of external funding, with 24% issuing shares, investment from private equity, or becoming a subsidiary of another company.
3. What do investors think of the legal services market?
According to the investors interviewed, the legal sector is seen as a ‘sleepy’ market with opportunities for investors to grow their investment capital by improving efficiency within the business itself. They appear to have concerns about the ability to exit the legal sector once their investment has matured, although there are some examples of private equity investors having sold on their investment and exited the sector.
Except perhaps in the personal injury sector, it would appear that bank lending is a substitute for external capital. For the firm this means they do not have to cede ownership control of part of their business. In addition, there is a view that many firms do not present financial information in the ways investors expect and/or have a weak grasp of the value of their businesses.
This might explain the investor’s perspective of the legal sector as being reluctant to seek investment from private equity firms, and reports of investors struggling to find appropriate firms in which to invest. While the overall size of the market and the scale of businesses operating may limit opportunities for some investors, the LSB thinks that cultural norms, governance, and non-commercial financial management practices in some businesses are likely to be more important factors.
4. Are there any regulatory barriers to investment?
Only 6% of ABS identified some aspect of legal services regulation that prevented them accessing finance. Nor does the cost of legal services regulation appear to be a barrier… However there is anecdotal evidence of some areas of regulation causing concern to investors. These includes restrictions on ownership and picking up liabilities for historic complaints and insurance claims.
Only 1.5% of ABS identified some aspect of wider regulation that prevented them accessing finance. The regulatory barriers to investment cited by the investor and investment consultant we spoke to relate mainly to wider regulatory and governmental activity, particularly in relation to personal injury reforms
Conclusion:
The potential link between investment and enabling better access to legal services is well–rehearsed elsewhere. However, investment remains an under-explored area of research and generally licensing authorities have not used their data to understand trends in investment and financing. [Overall it may be concluded that] levels of innovation are not increasing.
The dynamics of competition create incentives for suppliers to increase productivity through innovation, which lowers costs and hence prices through time. This is likely to involve taking a different approach to delivering a service, or developing new services completely. In the absence of strong competition, there is insufficient impetus for law firms to take the greater risks (and rewards) involved with using external capital.
Until these incentives change the LSB thinks there is unlikely to be significant growth in the use of external capital by ABS firms.
The report can bee seen at http://www.legalservicesboard.org.uk/news_publications/LSB_News/PDF/2017/20170613_LSB_publishes_investment_in_legal_services_research.html
Competition in Legal Services: new report
The Competition and Market Authority Final Report on legal services was published in December. Its interim report was noted in this blog in July 2016.
The CMA found that competition in legal services for individual and small business consumers is not working as well as it might. In particular, there was a lack of digital comparison tools to make comparisons easier for consumers. Lack of competition meant some providers can charge higher prices when substantially cheaper prices are available for comparable services.
In response to these findings, the CMA set out a package of measures which challenges providers and regulators to help customers better navigate the market and get value for money. These changes were drawn up after discussions with key stakeholders, including the 8 frontline legal regulators, and will be overseen by the Legal Services Board, which will report on progress.
They include:
A requirement on providers to display information on price, service, redress and regulatory status to help potential customers. This would include publishing pricing information for particular services online (only 17% of firms do so at present).
Revamping and promoting the existing Legal Choices website to be a starting point for customers needing help, information and guidance on how to navigate the market and purchase services.
Facilitating the development of comparison sites and other intermediaries to allow customers to compare providers in one place by making data already collected by regulators available. At present only 22% of people compare the services on offer before appointing a lawyer.
Encouraging legal service providers to engage with feedback and review platforms to ensure that customers can benefit from the experience of others before making their choice.
Recommending that the Ministry of Justice looks at whether to extend protection from existing redress schemes to customers using ‘unauthorised’ providers.
In addition, the CMA considered the impact of legal services regulation on competition. The CMA found that whilst the current system is not a major barrier, it may not be sustainable in the long term. In particular, the framework is not sufficiently flexible to apply proportionate risk-based regulation which reflects differences across legal services which could harm competition. The CMA therefore also recommends that the Ministry of Justice reviews the current framework to make it more flexible and targeted at protecting consumers in areas where it is most needed.
The Legal Services Board has welcomed the report and announced that it will publish its response in due course. The Ministry of Justice response is also awaited.
For more detail https://www.gov.uk/government/news/cma-demands-greater-transparency-from-legal-service-providers
Unregulated providers of legal services
Not all legal services are provided by lawyers or legal executives who are regulated by their professional bodies. There is a group of legal service providers who are not authorised and regulated under any legal sector specific legislation, but who are providing legal services for profit and as a significant focus of their work.
The Legal Services Board has recently (June 2016) published research on the work of this sector of the legal service market. The research looked in detail at will-writing, online divorce and intellectual property.
The Key Findings of the research were:
- For profit unregulated providers make up a small proportion of the legal services market. In the individual legal needs survey, they represented 4.5-5.5% of cases in which consumers paid for advice or representation.
- In contrast, not for profit providers, most of whom will be unregulated, accounted for approximately 37% of all legal problems where advice was sought.
- Benefits for consumers include lower prices and greater price transparency compared to regulated providers, innovation and service differentiation, and competitive impact on regulated providers.
- The main risks to consumers relate to consumers not making informed choices and misleading advertising claims. The research did not assess the technical quality of work.
- Consumer satisfaction with customer service is broadly comparable across regulated and unregulated providers – 84% versus 81% respectively.
- More than half of consumers who instruct for profit unregulated providers are aware of their regulatory status. Of those who don’t check, a significant proportion do not do so because they assume that they are regulated.
- There is a limited potential market for voluntary regulation beyond existing trade associations given the size of the market and low appetite for such initiatives among providers.
For the time being, at least, the policy conclusions for the Legal Services Board are that
- The for profit unregulated sector is smaller than expected, although in some segments these providers have gained a significant market share.
- Based on the evidence of benefits and risks to consumers and limited potential market for voluntary regulation beyond existing trade associations, the LSB will monitor developments but will not pursue a voluntary arrangement under the Legal Services Act.
- Consumers should be encouraged to check whether or not providers are regulated.
In other words no active intervention for the moment.
Notwithstanding these broad conclusions, the research did look more closely at the work of for profit unregulated providers in three areas: will-writing; divorce; and intellectual property, where not insignificant amounts of legal services work was being undertaken by unregulated providers – around 10% of the work. The dominance in the area of divorce by 5 on-line companies offering very cheap services can be particularly noted.
My guess is that, so long as the unregulated sector provides cost-effective services, with which consumers are satisfied, the lack of regulation will continue. But if there is a highly publicised scandal, then the regulatory context will change.
For the research go to https://research.legalservicesboard.org.uk/wp-content/media/Economic-insight-in-depth-unregulated-research.pdf
Regulating Alternative Business Structures
One of the last Ministerial actions taken by Lord Faulks, before he decided to leave the Government, was to publish a very important consultation on how Alternative Business Structures (ABS) should be regulated.
On 30 November 2015, the Government published, ‘A Better Deal: boosting competition to bring down bills for families and firms’ which set out the Government’s approach to encouraging open and competitive markets, for the benefit of the UK economy and UK consumers. A key part of the Government’s approach is to ensure that the statutory frameworks underpinning regulatory regimes allow regulators to regulate in a way that is proportionate and promotes competition and innovation.
As the legal services market is not only an important contributor to the UK economy, but also to ensuring individuals’ and companies’ access to justice, the Government seeks to develop a strong, independent and competitive legal services market, which will promote consumer choice and quality services at lower prices, ensuring greater access to justice for all.
The Better Deal document included a pledge to consult on two particular matters:
- making changes to the regulatory framework for legal services to remove barriers to market entry, and regulatory burdens on, Alternative Business Structures in legal services, and
- making legal services regulators independent from professional representative bodies.
The second of these is delayed, pending the final report from the Competition and Markets Authority – about which I have written separately.
However on 7 July 2016, the Government published a Consultation Paper on what changes might be needed to the regulation of ABSs.
Background
Since 2010, when Alternative Business Structures were first licensed to provide legal services, over 600 ABS firms have entered the market. According to the Government:
The introduction of ABS businesses, particularly those that have access to external investment and business and commercial expertise, has benefited the market more widely. Recent research has indicated that ABS firms are more likely to be innovative than other regulated legal services firms. These new, innovative providers have increased competition in the market, which [the Government believes] encourages a wider variety of legal services in the market that are more accessible and affordable to consumers.
As a result of concerns raised at the time about the potential risks of new and unknown business models, the legislative framework for the regulation of ABS businesses, set out in the Legal Services Act 2007, is more onerous and prescriptive than that for traditional law firms.
Six years on, experience suggests that ABS businesses have not been shown to attract any greater regulatory risk than traditional law firms. In consequence, the Legal Services Board and front-line regulators suggest that the current statutory requirements act as a deterrent and an unnecessary barrier to firms wanting to change their current business model to a more innovative one, as well as to new businesses considering entering the market.
The proposals
The proposals set out in the consultation aim to enable legal services regulators to reduce regulatory burdens on ABS, while taking a more effective risk-based approach to regulation. The proposals are very technical in nature. The following summary is set out in Legal Futures.
- ABSs should not have to provide reserved legal activities from a practising address in England and Wales. The consultation said this restriction can prevent online businesses being licensed as ABSs, while traditional firms are not required to do reserved work.
- ABS licensing authorities should be able to make their own rules around ABS ownership, in line with guidance to be provided by the LSB. The consultation said the current “inflexible” rules on which non-lawyers need to be investigated before assuming ownership of an ABS leads to unnecessary checks on some people who have no real control or influence over an ABS, but others who should be checked fall outside the definitions set out in the Act.
- Abolishing the requirement to consider whether an ABS applicant explicitly meets the regulatory objective of improving access to justice. There is no equivalent on non-ABS firms or individuals, while all the regulators and licensing authorities are separately under an obligation to improve access to justice anyway. “We consider that this would save cost and time for applicants who wish to become an ABS as well as for regulators.”
- Amend the Act so that heads of legal practice and of finance and administration (COLPs and COFAs in traditional firms) only have to report ‘material’ failures to comply with licensing rules, rather than ‘all’ failures as now. This would bring ABSs into line with non-ABS firms.
The Consultation runs until 3 August 2016.
For Lord Faulks Ministerial statement, see https://www.gov.uk/government/speeches/legal-services-regulation.
For the Consultation paper, go to https://consult.justice.gov.uk/digital-communications/legal-services-removing-barriers-to-competition
For the summary in Legal Futures go to http://www.legalfutures.co.uk/latest-news/government-lays-plans-encourage-abss-enter-market#
Martin Partington: Introduction to the English Legal System 15th ed 2021
Oxford University Press Learning Link Resources
Martin Partington: Spotlight on the Justice System 