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Report of the Review of the Regulatory Framework for Legal Services in England and WalesChapter BRegulatory ModelsIntroduction 1. This Chapter looks at the strengths and weaknesses of different models for the regulation of legal services. It also looks at what powers should rest with each party in the regulatory structure. 2. The regulatory system was described in the Scoping Study annexed to the Government’s report published in July 2003 entitled ‘Competition and regulation in the legal services market’. Some of the bodies described in the Scoping Study are front-line regulators, some are oversight or superregulators. 3. Among the front-line practitioner bodies, five combine regulatory and representative functions: the Law Society, the Bar Council, the Institute of Legal Executives, the Chartered Institute of Patent Agents and the Institute of Trade Mark Attorneys. 4. Among the oversight regulators, the Secretary of State has significant powers over many areas of practice and rules. In particular, under the Courts and Legal Services Act 1990 as amended, he has the right to approve (following proper consultation with the judiciary, the competition authorities and an advisory panel) applications from professional bodies seeking to become authorised to grant rights of audience or rights to conduct litigation to their members. Currently four professional bodies are authorised to grant general or limited rights to their members:-
The Secretary of State has the power to ‘call-in’ rules relating to the grant or exercise of rights to conduct litigation and rights of audience if he considers that they are unduly restrictive. He also has powers (under the Administration of Justice Act 1985 as amended) concerning the rules made by the Council for Licensed Conveyancers. The Master of the Rolls has broad regulatory oversight powers over the Law Society, including the right of admission to the Roll. 5. The Consultation Paper set out two main regulatory models. The first, referred to as Model A, involves stripping out all regulatory functions from the front-line practitioner bodies. All these functions would be vested in, and carried out by, a Legal Services Authority (LSA), which would interface directly with the providers of legal services. Model B gives responsibility for the regulatory functions to front-line practitioner bodies, but creates a Legal Services Board (LSB), which provides consistent oversight in respect of all the bodies. 6. The Consultation Paper made clear that these two Models are polarised constructs and on either model there could be a number of variants. The variants arise because it is possible to take a different view about each of the regulatory functions; it is not necessary that all should be given to the new regulator, under Model A, or all given to front-line practitioner bodies, subject to oversight, as envisaged under Model B. One important variant, labelled as B+, would be to require each of the front-line bodies to separate their regulatory functions from their representative functions. 7. The Paper identified five core functions of regulation:-
As in the Consultation Paper, this Chapter deals with the first three functions. Chapter C deals with complaints and discipline. 8. The key functions of a body with representative powers would include representation in areas such as rates of pay for legal work, practising rights internationally, policy issues for government and other interested parties, information services for members and information for prospective members and clients. 9. Against this background the Chapter takes the issues in the following order:-
Regulatory and representative functions 10. As noted above five of the legal professional bodies (the Law Society, the Bar Council, the Institute of Legal Executives, the Chartered Institute of Patent Agents and the Institute of Trade Mark Attorneys) combine both regulatory and representative functions. The Consultation Paper made clear that one of the central issues of this Review is to explore whether this hybridity meets the Terms of Reference. 11. The distinction between regulatory and representative functions of a professional body is not a theoretical concept incapable of being applied in practice. Under the Access to Justice Act 1999 professional bodies are required to distinguish between the two functions and to break them out separately in the annual practising certificate fee, and they have done so. 12. In determining whether regulatory and representative functions need to be separated, I judge that four aspects of the Terms of Reference have particular relevance:-
Each of these is dealt with in turn. 13. The first consideration relates to the public and consumer interest. The majority of respondents to the Consultation Paper argued that on these grounds the regulatory and representative roles of professional bodies should be split. For example the Council for Licensed Conveyancers stated in their response to the Consultation Paper: “It is difficult to understand how one body can effectively both regulate a profession and also represent and lobby for its interests without prejudice to either its regulatory or representative functions.” There is a conflict of interest between the two roles which should be tackled. In a regulatory body the public interest should have primacy. Issues such as changes in practice rules should be examined, not against the wishes of the membership, but against the test of the public interest. In a representative body the interests of the membership should have primacy. It is hard to conclude that the decision by the leadership of the Law Society in the mid 1990s to restrict funds to its complaints handling operation was anything other than a body placing its representative interests ahead of its regulatory responsibilities, to the detriment of the public and consumer interest. 14. Even where a body does place the public interest ahead of that of its members, there remains an issue of perception. For example, it may be that each of the restrictive practices to be found in the practice rules within the Law Society or at the Bar has operated in the public interest. But, perhaps because many senior lawyers have been conditioned by the system that they grew up with, there is a perception that the issues have not historically been addressed with the vigour and independence to be expected of a regulatory body. 15. Just as there can be criticism that professional bodies give insufficient weight to the public interest, so there can be criticism from members of professional bodies that their respective bodies give insufficient attention to representative needs. For example, many high street solicitors have argued in the past that the Law Society has not represented their interests sufficiently in areas of the law which have been opened up to competition. 16. There has also historically been criticism from employed barristers and non-practising barristers that the Bar Council has not given sufficient weight to regulatory issues which affect them. Professional bodies carrying out regulatory functions in the public interest should deal with their members in an even-handed way. But on the basis of the evidence collected in this Review, I formed the view that the Bar Council places the interests of the employed Bar second. Indeed this position was in part acknowledged by the then Chairman of the Bar who wrote in the Bar Council’s Annual Report published in April 2003 that “it is no longer acceptable, in the twenty-first century, for the employed Bar to be treated as second-class citizens”. 17. In terms of the public interest, the potential conflict between regulatory and representative issues is most clear in those issues which deal with the negotiation of fees for lawyers. Both the Law Society and the Bar Council have fought hard in recent years on behalf of their members in connection with rates for legal aid work. It is reasonable that a representative body should use its influence in the interests of its members to raise remuneration levels funded by the State; but the function of representing members in such matters sits uneasily with the regulatory responsibility to act in the public interest. 18. The Terms of Reference require that the regulatory framework should promote competition. It is, however, particularly difficult for professional bodies who combine both regulatory and representative roles to deal with competition issues. Regulatory bodies should be expected to encourage open competition, subject to maintaining quality standards; representative bodies have a legitimate right to fight their corner, warning that the public may suffer if the market is opened too widely. This is a difficult set of conflicting issues for one body to balance. The dual role caused difficulty for the Law Society in its consideration of the extension of conveyancing rights beyond its own monopoly in this area. It also caused difficulty for the Bar Council which fought hard to protect the monopoly rights of its members in higher courts, and to prevent their extension to solicitors, under the Courts and Legal Services Act 1990. 19. In addition to competition, the Terms of Reference refer to the regulatory system encouraging innovation. The Law Society has sought to carry through reforms to its practice rules. But it has been clear that, in some cases where change has been proposed by the leadership, it has been held back by the difficulty of getting it through its large representative Council. The Bar Council has argued that it regularly reviews its own practices and makes changes where it considers it appropriate. But there is little evidence that the Bar has been a force for innovation in customs and practice. It fought hard against the extension of higher court rights to solicitors, referred to above. It did introduce changes to the rules on direct access under the ‘Bar Direct’ proposals; but the more recent proposed change to direct access, set out in the Kentridge Report [Endnote 10], was not a proactive step by the Bar, but a reactive response to the Office of Fair Trading’s challenge in its report ‘Competition in professions’. [Endnote 11] 20. There is a further complication, and one which touches upon transparency, in connection with the Bar. It is that the Bar Council shares regulatory responsibility in respect of some functions with the Inns of Court. These shared regulatory functions include education, entry standards and disciplinary issues. The four Inns (Middle, Inner, Gray’s, Lincoln’s) have responsibilities for training students, for the granting of scholarships and for admission (individuals must be called to the Bar by one of the four Inns) and they also have an important role in the disciplinary process. 21. The Inns are run by benchers, new benchers being elected by existing ones from among the distinguished members of their respective Inn. Under an Agreement reached in 1987, updated in August 2001 [Endnote 12], the Inns agreed “to accept and to implement the general policies laid down from time to time by the Bar Council” subject to certain conditions. The document states that the Agreement has no force in law and that any Inn may cancel the understanding with 12 months notice. The Agreement followed the report written by Lord Rawlinson dealing with uncertainties in the relationship between the Bar Council and the Inns. 22. The Agreement, including the right of cancellation, has allowed some to argue that the Inns have real power, underlined by the fact that at the head of each Inn is often a senior judge (this year there are three Court of Appeal judges and one retired Law Lord) with precedence over the barristers who run the Bar Council; and that this position of strength is further underlined by the fact that, through their property interests, the Inns have wealth and contribute significantly to the Bar Council’s finances. By contrast others argue that, whatever may be said in the Agreement and whatever may be the financial arrangements, regulatory power has now irreversibly transferred to the Bar Council. The truth probably rests somewhere in between. The Agreement contains a complex formula for dealing with deadlock between the parties. This has never been used and in practice it appears that matters of particular concern to the Inns, for example the issue of deferral of call, proceed in a consensual manner, often at the speed of the slowest. A key body, and at the centre of determining the consensus between the Bar Council and the four Inns, appears to be the Council of the Inns of Court. A number of people at the Bar, and almost everybody outside the Bar, seem to be unaware of the existence of this important body. 23. In my discussions with the Bar Council and with the Inns there was a recognition from some that the Agreement should be revisited. As things stand, it would be hard for any Reviewer to conclude that it is clear where regulatory authority, and hence responsibility, lies as between the Bar Council and the Inns. 24. As noted, my Terms of Reference include a requirement to propose a framework that promotes the public and consumer interest, promotes competition, promotes innovation and is transparent. The framework needs to meet these criteria, and be seen clearly to do so. For the reasons set out 32 above, I do not believe that the current combination of regulatory and representative powers, in particular within the Law Society and the Bar Council, permit a framework that gets close to meeting this requirement. I do not believe that the combination of functions results in the public interest being consistently placed first. I do not believe that the combination provides the right incentives to encourage competition. I do not believe that it provides a framework for promoting innovation. Finally, I do not believe that at the Bar the arrangements between the Bar Council and the Inns are satisfactory, and they are plainly not transparent. 25. A key recommendation of this Review is that the regulatory and representative functions of front-line regulatory bodies should be clearly split. The relative advantages of Model A and Model B+ 26. The Consultation Paper argued that a split between regulatory and representative functions could be achieved in a number of different ways. Model A provides the clearest split since all regulatory functions are removed to the Legal Services Authority. Model B+ leaves the front-line regulatory functions at practitioner body level, subject to consistent oversight by the Legal Services Board, but requires the bodies to split their regulatory arm from their representative arm, with separate governance arrangements. 27. The broad arguments for Model A are that:- (a) the principle that the regulatory framework should be independent of those being regulated is better achieved by Model A since it removes one of the self-regulatory elements within the framework; (b) the creation of a single regulator simplifies the system, involving far fewer regulatory bodies. In turn this is likely to lead to clearer lines of responsibility and greater accountability for the objectives of the regulatory system set out in Chapter A; (c) a single regulator provides a clear forum for dealing with any conflicts in objectives within the regulatory regime. It is better that resolution of such conflicts rests within one accountable body, rather than in separate bodies where deadlock may arise; (d) a single regulator is likely to give rise to greater consistency, providing a single coherent system of authorisation, supervision and investigation. This arises in part because Model A takes a more service driven approach to regulation. It would be possible to divide the rule-making body so that it was able to make rules for different services such as, for example, advocacy, conveyancing and immigration; and this might lead to a more even ‘playing field’ and in turn to increased competition. Such a shift to service driven regulation, away from professionally driven regulation, might be accompanied by a more consumer driven approach, one that emphasised the need to satisfy the consumer rather than sustain the standing of the professional provider; (e) a single regulator should permit significant flexibility in the system. New services to regulate would not require new bodies to deal with them, as the decision in 1999 to regulate immigration services led to the creation of the Office of the Immigration Services Commissioner. Similarly it would make it easier to regulate Legal Disciplinary Practices which bring together lawyers from different professional backgrounds; and (f) a single regulator should facilitate more consistency in training and entry standards, permitting common training between different legal service providers and making it easier to transfer between them. 28. Many of the strengths of Model A can be preserved within Model B+. Model B+ rationalises the oversight function that is currently disparately held by, among others, the Secretary of State for Constitutional Affairs and the Master of the Rolls into one regulatory Board. That Board will have clear objectives against which it will be held accountable; and the front-line regulators to whom regulatory functions may be delegated will act in support, being part of one regulatory system. 29. The specific arguments for Model B+ are that:- (a) leaving day-to-day regulatory rule-making and oversight as far as possible at the practitioner level is more likely to increase the commitment of practitioners to high standards; such commitment is important, particularly in the area of professional conduct rules, where rules of behaviour and ethical standards should be seen as an aid to raise standards, not as a constraint to be circumvented; (b) whilst the principle that the legal profession should be independent of Government can be met under Model A, it is more clearly demonstrated in Model B+, where front-line regulatory powers can be exercised at practitioner level. It is a point stressed in most submissions from lawyers, but by others as well; (c) the consistency promoted by Model A can also be achieved in Model B+, with the LSB setting minimum standards to which front-line regulators would need to adhere in order to be recognised to carry out regulatory functions. Contrary to the argument in paragraph 27(d) above, precise uniformity in standards that a single regulator might lead to may not always be in the public interest or lead to greater competition. Some degree of choice in the type of provider, and the regulatory rules under which they operate, is to be welcomed, subject to a minimum standard being met. It is a point that is made in the submission of the Council for Licensed Conveyancers who argue that not all providers of this reserved service need follow the same rules. The Bar Council makes a similar point in its submission: that the need for consistency in the regulatory regime should not be equated with uniformity, the requirement that an identical set of rules should apply to all lawyers. The Office of Fair Trading also draws attention to the possibility of regulatory choice and competition which Model B+ allows for, putting the LSB “in a position to both encourage such competition, but also to step in if it appeared that such competition was weakening regulation to the point where this was endangering consumer protection”; (d) whilst, as noted in paragraph 27(e), Model A provides significant flexibility in respect of new services, Model B+ does provide a degree of flexibility for an oversight regulator. The LSB could be empowered in respect of such new services: (i) to authorise new bodies to regulate their members offering these services; and (ii) to allow existing bodies to take on regulation of these services. As noted in paragraph 54 below, the LSB would have power to regulate direct, although the intention is that it should be an oversight regulator; and (e) putting all regulatory functions into one body guarantees that it would become a large organisation; it runs the risk that it might become a large and unwieldy organisation. Model B+, which leaves much of the work with front-line bodies, is less vulnerable to this. 30. A further argument in favour of Model B+ is that the practical transitional arrangements would be much easier to organise than for Model A. Only a small number of jobs involved in oversight functions would need to move to the new oversight regulator; the great majority of positions would remain as they are, in the front-line regulatory bodies. The risk of losing regulatory expertise during any transitional period would be much reduced. 31. It could be argued that the B+ proposal is reminiscent of the financial services industry before the Financial Services and Markets Act 2000 (FSMA), with a large number of front-line regulatory organisations (some under the oversight regime of the Securities and Investments Board) overlapping in their responsibilities; and that this is a discredited model. It should be recognised, however, that the backgrounds of the financial services industry and of the legal services industry are quite different. In the financial services industry the big players had no real history of self-regulation: prior to the FSMA the banks were regulated by the Bank of England and the insurance companies by the Department of Trade and Industry (and for a few years by HM Treasury). For these large players the issue of regulatory independence did not arise. It should be recognised also that wider issues about systemic stability, which can be addressed more easily in a Model A framework with a single regulator, do not arise to anything like the same degree in the legal services as in the financial services industry. 32. In judging the strength of the arguments between different models, it is clear that a B+ model would build on the current system to a greater extent than Model A. It is true that, if one started from scratch, with no history of professional bodies with strong roots, one might conclude that Model A should be preferred for its clarity and flexibility. But even those who are critical of what they see as the self-serving nature of the current professionally based arrangements would recognise strengths. The current system has produced a strong and independently minded profession, operating in most cases to high standards, able to compete successfully internationally. These strengths would suggest that the failings of the system, identified in the Scoping Study and covered in this Review, should be tackled by reform starting from where we are, rather than from scratch. Governance issues for front-line regulatory bodies 33. If regulatory functions, subject to oversight, were to be given to front-line bodies along the lines of Model B+, there would remain the issue of how the split between regulatory and representative functions should be achieved and appropriate governance arrangements. Currently both the Law Society and the Bar Council fall well short of good governance practice for a regulatory body. Regulatory bodies should have lay involvement in their decision making functions. The Law Society has some lay involvement in certain sub-committees; and its main Council of 105 includes 5 lay members. The Bar Council again has some lay involvement in sub-committees, but the Council itself, with around 120 members, has no lay content. The size and make up of both the Law Society Council and the Bar Council are representative in nature. They are inappropriate for a decision making regulatory body. 34. There is a further governance difficulty that both bodies face in their regulatory role and it is the requirement that their Chairman should change on an annual basis, in office long enough for the incumbent to want to ensure that no damage is sustained ‘during his watch’ but not long enough to see through difficult change. Such a short term of office might be appropriate for a representative role, but not for a senior regulatory position. Nobody could seriously suggest that the Chairman of the FSA, or the President of the General Medical Council, should change annually. It may be that it would be more difficult to find suitable candidates, but this is an issue that the professional bodies must face if they wish to retain serious involvement in regulatory matters. 35. A key question, asked in the Consultation Paper, is how a separation under Model B+ might be achieved. There are two broad options. One possibility would be institutional separation to create separate bodies for regulation and representation, similar to the split within the medical profession between the General Medical Council and the British Medical Association. The other option would be to ring-fence the regulatory function from the representative function within a single body. 36. The argument in favour of separate institutions is that it makes the split transparent. Against this it would add to the number of bodies which form part of the legal system and is likely to increase costs. Whilst it would be expected that ring-fencing, within a single institution, of regulatory functions away from representative functions would require separate executive and policy teams, it would be possible for a number of common services to be provided under a single senior administrative officer. 37. The Bar Council’s response to this specific issue, and to the broader issue of its governance arrangements, is that there is scope for reform. In a letter to me of 21st September 2004 the Chairman of the Bar Council states:-
38. The Law Society’s response has gone beyond recognition of the scope for reform to consideration of some of the detail. It argues in its response to the Consultation Paper that:-
Last year the Law Society set up a Governance Review Group chaired by Baroness Prashar, First Civil Service Commissioner. Key points of the interim report [Endnote 13] included the proposals that:-
39. The Law Society has considered these interim proposals and in principle accepted the case for ring-fencing its regulatory from its representative functions; but it has not agreed on the details of how it might be implemented. The recommendation of this Review is that it should be a statutory requirement for a front-line regulatory body to separate out its regulatory and representative functions, but that in regard to detailed governance arrangements the body would need to satisfy criteria laid down by the LSB. There needs to be consistency of criteria, which would not necessarily require uniformity of structure. The recommendations of the interim report by the Governance Review Group represent a good check-list of criteria which the LSB might take into account. In addition to requiring a body to take steps to ensure that the regulatory functions are kept separate from, and not subject to, the representative body, the report calls, as noted above:-
Where the LSB was not satisfied that the governance arrangements for a front-line regulator were sufficient, it should be empowered to call for further measures, including the right finally to insist upon institutional separation. If the LSB is to remain an oversight regulator, and have only a small staff itself, it needs to have confidence that the underlying regulatory boards are satisfactorily constituted. The powers of the LSB are discussed further in paragraphs 53 to 60. 40. The B+ Model described above relates to the regulation of members that each front-line body admits to membership. It cannot automatically extend to regulation of others. The question of who should regulate Legal Disciplinary Practices, which are legal practices that bring together lawyers admitted by different bodies, as well as permitting as principals others who are not lawyers at all, is discussed in Chapter F. Other front-line regulatory bodies 41. The arguments above relate primarily to the position of the Law Society and the Bar Council. The regulatory model chosen needs also to accommodate other bodies with front-line regulatory responsibilities. 42. The Institute of Legal Executives (ILEX) carries out both regulatory and representative functions. However, most of its members work for solicitors’ firms and are, in practice, regulated by the Law Society. The LSB would need to be satisfied that the representative functions of ILEX did not influence the regulatory side. 43. The Chartered Institute of Patent Agents (CIPA) carries out both regulatory and representative functions and would need to take the necessary steps to satisfy the LSB that a proper separation had been made. The broad activity of patent work is an unreserved activity [Endnote 14] and is not the preserve of members of the Institute. However, CIPA is a recognised body under the Courts and Legal Services Act 1990 and is able to grant to its members rights of audience in court and rights to litigate. It is this part of Institute members’ work which brings it within the regulatory net (see Chapter E). 44. A degree of oversight of CIPA’s work is provided by the Patent Office, which is an agency under the Department of Trade and Industry. In particular the Patent Office has oversight of qualifying examinations. It is proposed that oversight powers should move to the LSB, removing the Patent Office from a regulatory role, although it would be expected that the LSB and CIPA would wish to consult with the Patent Office in respect of relevant changes to regulatory arrangements. 45. The position of the Institute of Trade Mark Attorneys (ITMA) is broadly similar to CIPA, except that it is not at present a recognised body under the Courts and Legal Services Act 1990. However it has applied for such recognised body status. In principle Ministers have approved the application and it remains subject to an Order in Council to be laid and debated in Parliament over the next few weeks. If Parliamentary approval is obtained, this would place ITMA on the same footing as CIPA. 46. The Council for Licensed Conveyancers is solely a regulatory body, and there should be no difficulty in it fitting into a Model B+ framework. In its response, as already noted, the Council argues strongly that there needs to be clear separation between regulatory and representative functions; and it argues also for improved oversight arrangements. 47. The Notarial Profession also already distinguishes between regulatory and representative functions. It is distinctive amongst legal providers in England and Wales because the profession is primarily concerned with documents which are to take effect abroad and not in this country. Front-line regulatory powers are exercised by the Master of the Faculties through the Faculty Office. Under ecclesiastical law [Endnote 15], the Master of the Faculties is also Dean of the Arches and Auditor [Endnote 16], and this joint role must be held by one person, who must be a senior lawyer and a member of the Church of England. Under the Ecclesiastical Licences Act 1533 the Archbishop of Canterbury is effectively the oversight regulator. The Faculty Office’s response to the Consultation Paper noted that I had found the system “somewhat anachronistic”. [Endnote 17] 48. The majority of notaries are also solicitors and it would be better in my view if the oversight function of this secular legal activity moved from the Archbishop to the LSB. In its response to the Consultation Paper, the Faculty Office argues that this might be difficult since the international recognition of notaries in England and Wales rests in part on the independence of the Archbishop. But the LSB will also need to be able to demonstrate independence from Government (as discussed in Chapter D). It should be emphasised that the proposed changes relate solely to the secular legal activities of concern to the Master of the Faculties. 49. The position of the Immigration Services Commissioner (ISC) is complicated by two issues. The first is that the ISC is both a front-line regulator and an oversight regulator. The ISC has told me that approximately 80% of his resources are spent on direct regulatory functions and 20% on oversight functions. The second issue is that his jurisdiction covers not only England and Wales but also Scotland and Northern Ireland. 50. The ISC directly regulates those immigration advisers and immigration service providers who are not members of designated professional bodies (DPBs) and decides if they are ‘fit and competent’. The ISC has oversight powers in respect of DPBs (where members provide similar services). The professional bodies designated by the Immigration and Asylum Act 1999 are: the Law Societies of England and Wales, of Scotland, and of Northern Ireland; the Bars of England and Wales, and of Northern Ireland; the Faculty of Advocates in Scotland; and ILEX. The ISC reports annually to the Secretary of State at the Home Office. He keeps under review the list of DPBs and must notify the Secretary of State at the Home Office if he considers that a body is failing to provide effective regulation in this field. 51. So far as England and Wales are concerned, it is proposed that the dual role of the ISC should cease, and the oversight function in respect of the designated bodies within England and Wales (the Law Society, the Bar Council and ILEX) moved to the LSB. This would leave the ISC as a frontline regulatory body, in turn answering to the LSB. In respect of England and Wales he would no longer report directly to the Secretary of State at the Home Office, although the ISC and the LSB would want to consult carefully with the Home Office in respect of any proposed changes in rules or standards. 52. In respect of Northern Ireland and Scotland, in the absence of any further change, the ISC would remain as he is, retaining his dual role. I would regard this as an unsatisfactory position but issues in respect of these jurisdictions are outside my remit. Powers of the Legal Services Board and the application of international law to the regulation of the legal profession 53. Under the Courts and Legal Services Act 1990, the Secretary of State has powers to authorise bodies who wish to grant rights of audience or rights to conduct litigation, or to revoke such designation. He also has power over the rule-making process in relation to those two areas; authorised front-line bodies have to submit such rules or changes thereto to him for approval, and he can also ‘call-in’ any such rules that he believes to be unduly restrictive. 54. The recommendation in this Review is that these oversight powers of recognition and ‘call-in’, presently held by Government, should be vested in the Legal Services Board. In addition, and to provide the LSB with the maximum regulatory flexibility, I consider that these powers, which currently include only certain practice rules, should be extended to include all rules of those bodies regulated by the LSB. Indeed, as far as is practicable, I recommend that all regulatory powers be vested in the LSB, with the LSB required to delegate day-to-day regulatory operations (subject to its oversight) to recognised front-line bodies, where such bodies satisfy the LSB that they are competent to handle regulatory functions and have set appropriate governance arrangements to deal with such functions without conflict. The LSB would retain the right to carry out regulatory functions direct, in the absence of a recognised front-line body. But it is intended that as far as possible the LSB should be a small oversight body, so delegation should be expected, subject to the LSB’s satisfaction about competence and governance arrangements as set out above. 55. As noted, it is recommended that the LSB, consistent with the delegation of day-to-day regulatory matters to front-line recognised regulatory bodies, would have the power to approve rule changes by recognised front-line bodies, and the power of ‘call-in’ in respect of existing rules. It would exercise its powers against the stated objectives of the regulatory regime discussed in Chapter A. This would include a public interest test and a competition test. 56. It is for consideration whether, as suggested by the Office of Fair Trading in their response, the LSB should have an obligation to seek competition advice from the OFT when exercising its powers to approve professional rules or applications from professional bodies to be recognised “for the purposes of qualifying and supervising members to provide services”. I would favour such an obligation on the LSB; and it would mirror the current obligation within the Courts and Legal Services Act on the Secretary of State to consult when exercising his powers in this area. 57. I recommend against primary legislation vesting regulatory powers direct with front-line practitioner bodies. In the first place it could introduce significant inflexibility. The Law Society’s regulatory powers derive primarily from statute, and this has created problems, including the inability to introduce the liberalisation reforms within the ‘Legal Practice Plus’ proposals, because of the inflexibility of the statutory framework. It might also inhibit mergers and de-mergers of front-line bodies if they take their regulatory powers from statute. Further, vesting the regulatory powers in the LSB makes clear that the front-line bodies take their regulatory powers from the Board; and it reduces the prospect of regulatory deadlock. These arrangements would give the LSB significant powers as an oversight regulator; but its powers would be circumscribed by transparency and accountability arrangements to be expected of a regulator, as discussed in Chapter D; and there would remain the safety net of judicial review. 58. The arrangements set out in this Chapter would require primary legislation, not least because the current arrangements are in large part statutory and would have to be repealed. Any new arrangements would need to be consistent with European Community law. Additionally they ought to take into account what the United Nations has said about the role of lawyers; and also take into account standards and conventions in other international jurisdictions, particularly within the European Community. These issues are important, self-evidently because the proposed regulatory system would need to be consistent with any applicable international law, but also because any arrangements which ignored international standards and conventions might affect the ability of lawyers in England and Wales to continue to compete successfully overseas. The latter point is particularly stressed in the submission from the City of London Law Society. 59. European Community law does not mandate required structures for the regulation of lawyers. The Bar Council draws attention to a resolution of the European Parliament which supports self-regulation as having a necessary role to play in the regulation of the liberal professions. But recent case law of the European Court of Justice if anything confirms that Member States retain the power to regulate the legal profession to a very considerable degree, even down to setting fee rates. In Case C-35/99 Arduino, the Court confirmed that the Italian system for regulating the legal profession was not an agreement between undertakings - which would fall within Article 81 of the Treaty which prohibits agreements which appreciably restrict competition - but a state measure, given that the Government retained substantial decisionmaking power and controls. Although the Italian Government was bound under Article 3(1)(g) of the Treaty not to introduce measures which would unduly distort competition, it was entitled to take proportionate measures for regulating the profession in the public interest, including setting fee levels for the Italian Bar. There was no suggestion that Government intervention of this kind infringed Community principles. Commissioner Monti, commenting on that judgment in a speech to the Bundesanwaltskammer in March 2003, said:-
60. I have looked carefully at what the United Nations basic principles say about the role of lawyers. I have also looked at how the legal profession is organised in a number of different European states. The legal advice I have received on these and related issues is set out in Appendix 2. The conclusion I draw is that none of these considerations would prevent a Model B+ arrangement and practice of the type I propose, established under UK primary legislation. EU law recognises that law societies and bar associations may be subject to oversight. International bodies should welcome a model where the oversight function would come from an Independent Regulator with clear objectives, rather than as at present a model where much of the oversight rests with Government Departments. The analysis does not suggest that a Model A arrangement is precluded either. But the detailed governance arrangements for a Legal Services Authority, its relationship with the professions and its independence from Government, would require further consideration. Costs 61. The Consultation Paper commented that the issue of costs would be an important one to look at before reaching a conclusion on the preferred model for a regulatory framework. A number of respondents said that Model A would be more expensive. They provided no data to support this assertion. Ernst & Young were commissioned to report on the costs of the current system and on the possible costs of the changes discussed in this Review. Their Report is set out in Appendix 3. 62. The Ernst & Young Report indicates that the cost of the regulatory system for 2003/04 was of the order of £81 million (up from approximately £69 million in the previous year). The total revenue of the industry is estimated to be over £18 billion [Endnote 18] (the legal aid budget itself is £2.0 billion) and, based on this estimate, the rough cost of the regulatory system is well below 1%. It is recognised that this is the external cost, and that the full cost would need to include the internal costs which practitioners bear in areas such as compliance. 63. The total estimated system cost of around £81 million in 2003/04 may be broken down between, on the one hand, the regulatory costs of entry standards and training, rule making, and monitoring and enforcement, and on the other, the costs of complaints and discipline. Consistent with paragraph 7 this Chapter deals with the first three functions (in total £46 million); Chapter C deals with complaints and discipline (in total £35 million). 64. The cost attributable to the first three regulatory functions of £46 million is an estimate, and subject to a number of points. Of these, one of the most important is that members of professional bodies, in particular the Law Society and Bar Council, and their sub-committees, give much of their time free. This is not included in the above costs. A further complication arises from judging the time cost of oversight regulators such as the Master of the Rolls and Government Ministers. 65. Of the cost of the first three regulatory functions, the largest constituent part is unsurprisingly the Law Society. The Bar Council is the next largest element. In reaching a judgment about the optimal structure, however, it is the aggregate cost of the system that matters, rather than the cost of any individual part. The Bar Council in its submission refers to the costeffectiveness of their system. But, of course, they are regulating a branch of the legal profession which is primarily dealing with referred work. It is not the cost of their system which is critical to reaching conclusions, but the total cost of the regulatory framework. 66. The Ernst & Young Report attempts to judge how the costs might look if either Model A or Model B+ were adopted. The key assumptions on which the estimates have been based are set out in their Report and it should be recognised that there is a significant element of judgment in the analysis. In practice a good deal would depend upon how the regulatory body chose to interpret its role under either model. 67. The broad estimate of the costs of Model A is around £47 million, similar to the cost of the current system. In the case of Model A it has been assumed that costs would rise, if regulatory functions were moved to a single regulator, from less uncosted practitioner time. Against this, there would be certain economies through collapsing various front-line regulators into one body. 68. The broad estimate of the costs of Model B+ is around £50.5 million. The main additional cost is that of the new Legal Services Board, estimated at around £4.5 million. The Board needs to have the resources to deal with its oversight functions in an efficient manner. It is a point made by the Council for Licensed Conveyancers who write:-
Relative to the current system, some savings would arise under Model B+ from bringing existing oversight regulators together. The additional cost of Model B+ would be less if a higher cost were attributed in the costing of the current system to the time of Ministers and the Master of the Rolls. 69. On the assumptions set out in the Report, the costs of Model B+ would be more than those of Model A. But the transitional costs and risks of moving to Model A, referred to in paragraph 30 above, are likely to be greater. Overall I do not believe, notwithstanding the element of estimate this exercise has involved, that the issue of differential cost should be a key determining factor in the choice between Model A and Model B+. Conclusion 70. I conclude that regulatory functions (other than complaints and discipline which are the subject of Chapter C) are best dealt with by what the Consultation Paper referred to as Model B+. It provides for the setting up of an oversight regulator, the Legal Services Board, and separation of regulatory from representative functions within the front-line regulatory bodies. I believe that this builds on the existing system. There are good arguments for preferring this arrangement, and the discussion on international issues suggests nothing that is incompatible with international law and practice. I think that the issues around costs are not decisive in the choice of regulatory models. 71. I conclude that the way to give effect to the proposals is to vest regulatory powers with the Legal Services Board, with powers to delegate to front-line regulators where it is satisfied as to competence and satisfied also that appropriate arrangements, in connection with governance issues and the split between regulatory and representative functions, have been made. At present the governance arrangements made by the Law Society and the Bar Council (together with the Inns) are inap propriate for their regulatory functions. Endnotes
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