Report of the Review of the Regulatory Framework for Legal Services in England and Wales

Chapter D

Governance, Accountability and Related Issues

Introduction

1. This Chapter turns to detailed issues about the regulatory framework; and in particular deals with issues of governance and accountability of the Regulator.

2. The issues dealt with are those raised in the Consultation Paper:-

• Paragraphs 3 to 5 deal with whether the Regulator should be a board or an individual;
• Paragraphs 6 to 9 deal with board structure and composition of the Regulator;
• Paragraphs 10 to 17 deal with the appointment process;
• Paragraphs 18 to 20 raise issues about the independence and qualification of the Regulator;
• Paragraphs 21 to 25 examine the manner in which the Regulator should be held accountable;
• Paragraphs 26 to 30 deal with the Regulator's duty to consult;
• Paragraphs 31 to 33 comment on the process for appeal from decisions of the Regulator;
• Paragraphs 34 to 37 discuss funding issues;
• Paragraphs 38 to 41 examine the relationship between the Law Officers and the regulatory system; and
• Paragraph 42 sets out the broad conclusions.

The Regulator: board or individual

3. The Consultation Paper acknowledged that a regulator may be either an individual or a board. When the utility regulators were first set up in the 1980s, single regulators were common, but the trend now is towards a board.

4. There are good reasons for believing it would be better to vest the powers of the Regulator in a board, rather than in one individual. A board provides a source of expertise and opinion. It provides an opportunity to bring together individuals from different backgrounds, including both those who are suppliers and consumers of legal services. Importantly, it reduces the personalisation of issues, which could be a distraction.

5. The vast majority of respondents supported the idea that the regulator of legal services should be a board. The balance of this Chapter assumes that the regulator will be a board, the Legal Services Board, with the broad objectives and powers described in Chapters A and B.

Board structure and composition

6. The LSB will be an important policy making body and needs to be small enough to be effective. It might number between 12 and 16 members.

7. The Consultation Paper commented that the Board might be "headed by a Chairman and, if thought appropriate, a Chief Executive...". The Chairman's role, likely to be part-time, would be to run the Board, responsible for policy decisions; the Chief Executive's role, almost certainly full-time, would be to run the operations of the Regulator and to implement policy. It would be possible to combine the two roles in one individual, but in general best practice would be for the two roles to be kept separate, and I would favour this.

8. The Chief Executive should be on the Board; and the Board might include a small number of other senior employees of the Regulator. But the majority of the Board should be non-executive. The non-executives should be drawn from a variety of backgrounds, including practitioners. To meet the Terms of Reference that the Regulator should have independence from those being regulated, it is proposed that the majority of the Board should be non-lawyers.

9. All non-executives should be appointed on merit, on the Board to assist the LSB to meet its objectives, not to represent any particular interest. To include representatives would cut across the principle, set out in Chapter B, of separation of regulatory from representative functions. Nevertheless, within the practitioner element of the Board, care should be taken to ensure that the mix of skills and expertise appointed reflected the diversity of activities carried out within the legal services sector.

Appointment process and tenure

10. The Consultation Paper made clear that there are a variety of different precedents for the appointment of directors to regulatory boards. This variety was reflected in the responses.

11. As regards the appointment of the Chairman and the Chief Executive, I judge the main choice to lie between appointment by the Secretary of State for Constitutional Affairs and appointment by the judiciary. There are conflicting pressures. On the one hand, the LSB will need to demonstrate that in the performance of its duties under statute the Board has been free from political influence; and this might suggest appointment other than by the Secretary of State. On the other hand, the Secretary of State will remain the Minister responsible to Parliament for the conduct of the legal services sector and will have a significant interest in the performance of the Regulator; so it is not obvious that he should be excluded from the process.

12. Given the need for independence, and the objective of the rule of law, it seems right that the judiciary should be involved in the appointment; but that it should be solely their appointment would imply that they had primary responsibility for the regulatory system and its performance.

13. The proposal of this Review is that the appointment of the Chairman and Chief Executive should be made by the Secretary of State in consultation with a senior member of the judiciary. Given his historic involvement in regulatory matters within the legal sector I would propose the Master of the Rolls. The appointments would be made in accordance with 'Nolan' [Endnote 30] principles and it would be expected that the Master of the Rolls himself, or a senior judge appointed by him, would sit on the selection panel.

14. All other appointments to the Board should be made by a Nominations Committee of the Board chaired by the Chairman, operating in accordance with 'Nolan' principles. If a Senior Independent Director is to be appointed, the appointment should be by the Board itself from among its lay members.

15. With regard to tenure, there is a balance to be struck between having directors in post long enough to understand the issues and make a full contribution, and not so long as to become a fixed part of the framework and to lose independence. The proposal is that non-executives should have a fixed appointment period, with the possibility of one renewal. The same principle should apply to the Chairman and Chief Executive. The precise period of tenure will be for the legislators to determine.

16. All respondents who touched on the issue commented on the importance of the directors being free of the fear of removal without cause. Nevertheless there will be exceptional circumstances in which, to maintain public confidence, a director should lose office. This power should be vested in the Board, not the Secretary of State. This power should be carefully circumscribed, but might include cases where the Board was satisfied that the director was incapable of performing his duties by reason of physical or mental health.

17. The circumstances in which a director should automatically lose office could include conviction of a serious criminal offence, bankruptcy or disqualification as a company director or as a charity trustee.

Independence and qualification of the Chairman and Chief Executive

18. The Chairman and Chief Executive must have the skills, qualities and experience that such senior public appointments require. The difficult issue revolves around whether such appointments should be made solely from among those with direct experience of the legal profession, for example a judge, or whether such appointments should come from outside the profession.

19. There are coherent arguments in each direction. Some argue that knowledge of how the industry actually works requires that the Chairman and Chief Executive should come from within the profession. Others argue that the over-riding need to demonstrate independence requires that the candidates should come from without.

20. There are a number of lawyers with a high degree of objectivity about the strengths and weaknesses of the current system for providing legal services. There is, therefore, an argument that statute should not preclude these candidates. Such a degree of objectivity is not, however, a universal characteristic of lawyers. On balance I conclude that the arguments about independence require that the Chairman and Chief Executive should be nonlawyers. It is of note that the Bar Council also conclude that these posts should be filled by non-lawyers:-

"...we favour a requirement that a majority of the members of the Regulatory Board, including both the key positions of Chairman and the Chief Executive, must be non-lawyers."

Accountability mechanisms

21. Under any transparent regulatory system Parliament, Ministers, public interest groups and the industry itself have the right to know how the LSB is discharging its functions, and be in a position to judge its performance.

22. Through the legislative process it will be for Parliament to determine finally the duties and objectives of the LSB; and the LSB would be accountable to Parliament. The appropriate Select Committee (currently the Constitutional Affairs Committee) could scrutinise the LSB's work and call upon members of the Board to be available for questioning and to account for its performance. It is clear that the LSB will need to publish an Annual Report; this might be laid in Parliament and publicly available.

23. The LSB should consult regularly with Ministers, but would need to retain its independence. The Secretary of State will share with the LSB the latter's concern for access to justice and proper rule of law. But there will be a number of issues on which there may not be an identity of interest; in particular the Government is a major purchaser of legal services and there may be occasions when resource considerations conflict with the requirements for regulatory decision making in the public interest.

24. The LSB should consider ways in which communication with consumers, and groups who represent them, may be increased. Plainly consultation (dealt with in the next section) on important policy matters will be important. As noted, the LSB will need to publish an Annual Report. It should consider, as other regulators have, an Annual Meeting open to the public and possibly a series of meetings around the country. As proposed in Chapter A, the LSB will have a duty in the area of 'promoting public understanding of the citizen's legal rights' and will need, therefore, to consider carefully how it communicates with its wider audience in this area. It would in any event make sense for the LSB to have a Consumer Panel, broadly similar to that which the Financial Services Authority (FSA) has.

25. The LSB will also need to maintain its relationships with those being regulated. As already noted, the Board is likely to contain a number of members drawn from the legal services sector, but their purpose on the Board is to contribute to all the activities of the Board, not to serve as a conduit for discussion with front-line bodies. As with other regulators (for example the FSA and its Practitioner Panel) the LSB will want to consider arrangements under which it maintains constant dialogue with those who represent the legal services sector.

The Regulator's duty to consult

26. Good practice indicates that a regulator should carry out appropriate consultation before exercising some or all of its powers. Under the current system there is a widespread duty to consult, and on occasions to obtain the concurrence of designated parties.

27. In exercising his powers under the Courts and Legal Services Act 1990 to grant or revoke authorisation of a body, or approve rule changes in respect of rights of audience and rights to conduct litigation, the Secretary of State must consult the designated judges (namely the Lord Chief Justice, Master of the Rolls, President of the Family Division and Vice-Chancellor). There is also a requirement to consult the OFT and the Legal Services Consultative Panel in certain cases. Under section 28 of the Solicitors Act 1974 as amended the Master of the Rolls may make regulations concerning matters such as admission and practising certificates with the concurrence of the Secretary of State and the Lord Chief Justice. Under section 31 the Council of the Law Society may make rules in relation to professional practice, conduct and discipline of solicitors with the concurrence of the Master of the Rolls.

28. The duty on any regulator to publish proposals and consult during a minimum consultation period is, as noted, good practice, but it is recommended that for the Legal Services Board this requirement should be set out in statute.

29. Consultation with the senior judiciary would be important and the judges will want to consider how best they might deal with such matters efficiently.

30. In general the LSB will not be involved with matters of court practice and procedure, which are largely matters for the Rules Committee. But there will be certain issues which are directly related to the operation of the courts and which will be of special interest to the judiciary. In particular, as discussed in Chapter B, this would include the power to authorise bodies to grant rights of audience and rights to conduct litigation to their members. In such areas it would be difficult for changes to be made and to be effective unless they had the backing of the judiciary. It is for consideration, therefore, whether in those matters directly affecting the operation of the courts it would be right that the requirement on the LSB should move from consultation with the judiciary to concurrence.

Appeals process

31. The issue of appeals will need considerable attention once the broad outline of arrangements has been agreed. The precise nature of the appeal mechanism must depend upon the type of regulatory decision.

32. Where the decision by the LSB related to the exercise of its powers in regulatory areas such as practice rules then, in the ordinary way, such decisions would be subject to judicial review.

33. The regulatory model proposed involves the LSB in oversight functions of front-line recognised bodies, not the direct regulation of firms or individuals. To the extent that the LSB were to be involved in such matters, the overall procedure, including any appeal, would need to be ECHR compliant.

Funding issues

34. Chapter B set out an estimate of costs for the proposed regulatory system. The recognised bodies would, as at present, cover their own costs through a levy upon their members. They would also have the right to levy fees upon legal practices (such as are described in Chapter F) which come under their regulatory auspices.

35. The issue arises as to how the LSB should be paid for. At present a substantial part of the oversight function is paid for by the State: judicial oversight falls to the taxpayer, as does the cost of the oversight function carried out by Government departments. The arguments in favour of the Government contributing to the cost of oversight functions, beyond the fact that it does already, are:-

• that the LSB, in pursuit of its objectives set out in Chapter A such as 'access to justice', has a wider role in the public interest than the oversight of practitioners in the legal sector; and
• that an element of payment by other than the bodies being regulated confirms that the regulator is independent of the regulatee.

36. There is an interesting precedent in the proposed funding of the Financial Reporting Council. Its funding is to be split, two thirds falling to the private sector and one third to Government. How the split should be made between the private sector and Government for the LSB would need to be covered in statute and would, therefore, be the subject of Parliamentary scrutiny.

37. There remains the issue of how the proportion to be raised from the recognised bodies should be split among them. There are various ways in which the levy could be calculated, including by size of front-line body (having regard to either numbers of members or turnover), or by regulatory resources required (having regard to the risks to regulatory objectives). It should be expected that, like the FSA, the LSB would consult on how it intended to raise the levy and have the power to change it over time.

Law Officers and the regulatory regime

38. The Law Officers in England and Wales are the Attorney General and the Solicitor General. They are the chief legal advisers to the Government and in certain cases represent the Government in court. They also carry ministerial responsibility. The Attorney General, in his role as Government Minister, is responsible for the Treasury Solicitor's Department, HM Crown Prosecution Service Inspectorate, Customs and Excise Prosecutions Office and the Legal Secretariat to the Law Officers.

39. The Attorney General and the Solicitor General are ex officio members of the Bar Council. They attend meetings of the Bar Council and the Attorney General usually chairs the Annual General Meeting.

40. The Government's own Scoping Study, which preceded this Review, named the Law Officers as one of the regulatory authorities. In fact it is not evident that the Law Officers have either regulatory duties or representative interests in respect of any professional body. But the fact that they are members of one such body could cause confusion. Whilst the Law Officers plainly need to be practising lawyers and closely in touch with many parts of the profession, it would be better if they had no formal link to any body with regulatory functions.

41. The Bar Council reaches a broadly similar conclusion in its response:-

"In any new regulatory structure there will be no need, in our view, for any formal relationship between the Law Officers, the Regulator and professional bodies with advocacy rights. The perceived independence of the Regulator and the professional bodies concerned would be enhanced by the absence of such a relationship."

Conclusion

42. This Chapter has examined governance options which might be suitable for the LSB. I conclude that the most appropriate arrangements would be for the LSB to be governed by a Board, led by a part-time Chairman and a fulltime Chief Executive and consisting of between 12 and 16 members. For reasons of independence, I conclude that the Chairman and Chief Executive should be non-lawyers and that there should be a lay majority on the Board. The appointment of the Chairman and Chief Executive should be fixed term, on merit and made by the Secretary of State for Constitutional Affairs, in consultation with the judiciary, following a 'Nolan' type process. The LSB should be held accountable to Parliament and the public. It should consult widely before making major decisions; such decisions might be subject to appeal in defined circumstances. The LSB should be funded through a mix of Government and practitioner input. The Law Officers should not have a role in the regulatory framework.

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Endnotes

30. In the case of ministerial appointments, detailed guidance is given in the Commissioner for Public Appointments Code of Practice for Ministerial Appointments to Public Bodies, December 2003, the principles of which are derived from the Committee on Standards in Public Life (the Nolan Committee)

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