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

Chapter E

Regulatory Gaps

Introduction

1. Chapter E of the Consultation Paper raised issues of gaps and anomalies in regulated legal services. Currently, part of the existing definition of legal services for regulatory purposes is set by reference to the type of service itself, and part by reference to the type of provider. The Consultation Paper raised questions about the mechanism and criteria for broadening or narrowing this definition. It asked whether the determination of legal services for the purposes of regulation should rest with Government (as it does within the financial services industry). It then looked at how the need for a flexible framework fitted with the different proposed models.

2. The Scoping Study [Endnote 31] carried out for the Department for Constitutional Affairs described the landscape of regulation for legal services and drew attention to a number of gaps and overlaps. For example, some service providers are doubly regulated (such as solicitors providing non-incidental financial advice, regulated both by the Law Society and the Financial Services Authority). There is a mix of provider and service based regulation: everything done by a solicitor is regulated by virtue of his professional status, whereas service regulation has developed in areas such as immigration. Some services, such as general legal advice, are regulated if provided by, for example, a solicitor or barrister, but are otherwise unregulated. There are only six areas which are regulated by virtue of their being reserved to those who are appropriately qualified. There are a number of services which most people would regard as legal services which are not reserved and can be provided by anyone who cares to do so. The consumer may, therefore, buy such services from providers who are regulated by virtue of their professional status, or from unregulated providers. The following table sets this out:-

3. The Consultation Paper did not set out to look at each service individually to determine whether or not it should be regulated; but it took as its starting point where the regulatory net currently falls. It took the view that it is for Government to decide which types of legal services should be regulated, as these are public policy decisions. The task set out in the Terms of Reference is to find the most suitable framework.

4. The Consultation Paper pointed to the inflexibility of the current framework, which does not allow services to move easily into or out of regulation. Currently, where it becomes apparent that a legal service needs to be regulated, primary legislation has to be introduced in order to cover the whole service area, since the service providers, who are not members of the designated or authorised professional bodies, have to be brought into the net. The Consultation Paper indicated that a future framework would have to be sufficiently flexible to be able both to bring in new services and to deregulate where necessary, with as little disruption as possible. It said that there was a need for a framework that could encompass new areas with a degree of consistency.

5. This Chapter takes the issues in the following order:-

• paragraphs 6 to 13 set out a definition of legal services (the 'outer circle');
• paragraphs 14 to 16 set out a definition of reserved legal services (the 'inner circle');
• paragraphs 17 and 18 refer to the not-for-profit sector;
• paragraphs 19 to 26 discuss the asymmetry of regulation and regulatory gaps;
• paragraphs 27 to 33 set out how changes to the inner circle might be determined;
• paragraphs 34 to 37 deal with the role of the Regulator; and
• paragraph 38 sets out conclusions.

Definition of legal services (the 'outer circle')

6. As the Consultation Paper made clear, it is difficult to prescribe the boundaries of any industry and, consequently, questions will always arise at the margins, particularly as new activities develop. However, in the context of this Review, a definition of legal services is desirable for two reasons. First, it will be important to the successful working of any new regulatory framework that the range of services for which the Regulator is statutorily responsible should be as clear as is possible - the Regulator should not be permitted to extend its powers beyond this, nor should Government require it to take responsibility for services outside the defined range. Secondly, the concept of the Legal Disciplinary Practice, discussed in Chapter F, would benefit from as clear a definition as is possible of what constitutes a legal service.

7. There have been many attempted definitions of legal services. Reporting in 1979, the Royal Commission on Legal Services chaired by Sir Henry Benson stated that:-

"A legal service may be described as any service which a lawyer performs for his client and for which professional responsibility rests on him...Services which are "legal", in the sense that a lawyer would perform them in the ordinary course of practice, may also be performed by nonlawyers." [Endnote 32]

8. Crucially, however, this leaves open the interpretation of the "ordinary course of practice" which, for the purposes of enforcing the Solicitors' Practice Rules, the Law Society determines on a case-by-case basis. It does not appear that there has ever been a comprehensive statement of what can be done properly within a solicitor's practice, and the list of prohibited activities no longer appears in the Guide to Professional Conduct, in recognition of the fact that matters that may be considered unacceptable have changed over time.

9. Many have noted the difficulties in attempting to frame a precise definition of 'legal services'. In 1988, the Marre Committee said:-

"'Legal services' is not a phrase which is susceptible of a precise definition. Following the broad approach of the Benson Commission, (paragraph 2.2) we have taken it to include any service which might be available to help people to deal with legal problems regardless of whether payment is to be made from public or private funds. The phrase includes both criminal and civil legal services and also includes legal advice, legal assistance (for example in conveyancing and in the making of wills) and legal representation." [Endnote 33]

10. The Lord Chancellor's Department agreed in its 1989 Green Paper:-

"A comprehensive definition of what is meant by legal services is very difficult to frame, but, broadly speaking, legal services are concerned with the advice, assistance and representation required by a person in connection with his rights, duties and liabilities." [Endnote 34]

11. It is right to acknowledge that a precise definition is not possible; it needs some flexibility, given the need to accommodate the inevitable change which occurs over time in the boundaries of what is considered to be 'legal'. For example, methods of alternative dispute resolution continue to grow in popularity and new areas of law develop through statute and case law. The LCD Green Paper recognised that legal services "may of course change over the years with the prevailing values of society, the legislative will of Parliament and the decisions of the courts".

12. Internationally, the World Trade Organisation and the United Nations advocate a broad definition of legal services which includes advisory and representation services as well as all the activities relating to the administration of justice. 13. One definition that commends itself to me and which captures a broad definition of legal services is:-

1. Advice and assistance in relation to the operation or exercise of legal rights and the performance of legal obligations; and
2. Advice and assistance in relation to all forms of resolution of legal disputes.'

This would include services funded publicly as well as privately, civil and criminal, contentious and non-contentious matters. This type of broad definition may be said to create an outer circle of legal services.

Definition of reserved legal services (the 'inner circle') and of regulated legal services

14. The definition of reserved legal services is relatively straightforward since those areas are contained in statute. The areas currently reserved to those who are appropriately qualified are set out in paragraph 2 above. These areas could be termed the inner circle of legal services. In order to provide such services, a practitioner must be certified by a regulatory body which has itself been authorised so to do. A 'lawyer' could therefore be defined as any duly certified member of such a body. [Endnote 35]

15. The definition of regulated services is more complex. It includes all inner circle services, plus those in the wider, outer circle which a lawyer is allowed to undertake in a professional capacity.

16. There are also other services, such as financial, which a lawyer may be able to provide in the course of his business, either through direct regulation by another regulator, for example the FSA, or through an exemption regime.

The not-for-profit sector

17. In considering where the regulatory net should fall, there is a question of whether the legal services provided by the 'not-for-profit' sector would be included.

18. My intention is that those who are employed for the purposes of operating in this area should be liable to come within the regulatory net. Those who provide advice and assistance on a voluntary basis should either be brought within the net by dint of their pre-existing status as legal professionals; under supervision arrangements whereby a qualified person takes responsibility for the quality of the work done; or by dint of the regulation that surrounds the operational unit in which they work, for example through the Citizens Advice Bureaux network. Some have expressed concern about the burden of regulation in this sector - the Advice Services Alliance refer to "the growing, and sometimes disproportionate, burden of regulation on small voluntary sector agencies." They point out that they are often highly regulated in other ways, for example by the Legal Services Commission and/or Charity Commission. Whilst it is to be hoped that the consistency that the new Regulator will seek to achieve may assist in the rationalisation of these disparate arrangements, and that the regulatory touch will be light, to suggest that the not-for-profit area should not be covered by regulation would leave vulnerable those most likely to be disadvantaged by lack of knowledge of the law and legal services.

Asymmetry of regulation and regulatory gaps

19. There are two main strands of asymmetry of regulation. The first is that a provider, such as a solicitor, who is authorised to provide one or more of the reserved, or inner circle, services will also be regulated in the provision of the unreserved or outer circle services. However, these services can also be provided by an unauthorised individual, and in this case would not be subject to regulation at all. There can, therefore, be an asymmetry in the regulatory reach as regards individuals providing the same legal service.

20. The second asymmetry is that the rules set by front-line regulatory bodies may be different, even for the same reserved service, e.g. the rules pertaining to conveyancing are different as between Law Society members and members of the Council for Licensed Conveyancers.

21. These arrangements may create significant anomalies between lawyers regulated by different front-line bodies, and between lawyers and nonlawyers, in terms of both consumer protection and the regulatory burden. There have been calls for such discrepancies to be removed.

22. The first asymmetry, relating to regulatory reach, could be reduced by broadening the scope of the inner circle to bring a wider group of services within it, i.e. to widen the perimeter of the inner circle to bring it closer, if not aligned, to that of the outer circle. It may be considered that increasing the number of reserved services may be unjustified and anti-competitive, making the delivery of such services too burdensome for the practitioner and, therefore, restricting their availability to the consumer. As is mentioned at paragraph 30 the inclusion of any further services within the reserved inner circle would require a detailed cost/benefit analysis.

23. A further way to limit the asymmetry of regulatory reach would be to limit the ambit of regulation purely to the reserved services. On this basis a solicitor would only be under a regulatory obligation when providing, for example, litigation services and not in providing will writing or general legal advice which are unreserved. But this would be to undermine one of the main principles on which the leading professional bodies operate - that all services provided by their members are done to the same high standard of care and concern for the client. In short, it would be a dilution of professionalism and of the brand, and would be likely to add to confusion for consumers.

24. The second type of asymmetry, that regulatory rules do not fall evenly on all lawyers, was referred to in Chapter B; and one possible solution requires the setting of a minimum consistent standard across the service type. However front-line regulatory bodies would be free to impose additional standards if they wished. This would permit competition between front-line regulatory bodies, whilst preventing erosion of important consumer protections.

25. Increased consumer education, leading to a heightened awareness from the consumers' perspective when using legal services, is a further way of reducing the effect of these asymmetries. Subject to the public interest consideration of securing probity in the legal system, where customers are well informed the availability of providers regulated in different ways expands consumer choice: buyers can choose a more expensive service with regulatory protection or a cheaper service with limited protection.

26. As regards the deregulation of services which were previously reserved, in the main there has only been the opening up of a reserved service to competition through the potential for delivery by other authorised providers; and this may continue to be the pattern in the future. However, one consequence of such liberalisation could be to create uncertainty about regulatory reach. The initial proposals for the liberalisation of the delivery of certain probate services did create uncertainty. Issues raised included the regulatory responsibility for new providers and the jurisdiction of the complaints bodies. Such issues in themselves should not act as an inhibitor to change, but the Regulator will need to ensure that the regulatory framework provides the appropriate levels of consumer protection and avoids uncertainty of regulation.

Determining changes to the 'inner circle' of legal services

27. Some had hoped that the Review would look in detail at currently unreserved services. To look in the necessary detail at each area would not be possible within the time frame of this Review, nor would it be a complete solution, since new 'gaps' will emerge over time.

28. The Consultation Paper proposed that it is for Government to decide which types of legal services should be regulated. Almost all respondents agreed. Of those respondents who did not agree, some suggested that the power should lie with Parliament and some suggested that it should lie with he Regulator. In my view, it would be for Parliament to enact the primary legislation, setting out the broad framework, and for Government to propose the precise areas of reserved services through secondary legislation. To be too prescriptive about the areas of reserved services in primary legislation would reduce the flexibility of the model. These are public policy decisions for Government, albeit it must be expected that the Regulator would have a need and a right to make its views known. Government would have to assess the impact of any proposal, as it does today, and undertake a detailed analysis of costs and benefits in order to determine where the public interest lay. The risk to the individual consumer would need to be weighed against such wider public interest concerns as proportionate access to justice.

29. This type of analysis may involve considerable work, as it did for the Blackwell Committee. [Endnote 36] This committee, commissioned by the Department for Constitutional Affairs and chaired by Brian Blackwell CBE, looked at some length in 1999/2000 at the activities of non-legally qualified claims assessors and employment advisers.

30. It is envisaged that, whenever Government identifies a new field in the legal services market that might be regulated or de-regulated, a process of consultation with stakeholders and the public would take place. A cost/benefit analysis is a way of ascertaining whether the risk is such that a change to the regulation of the legal service or provider is required. This approach has been endorsed by the Better Regulation Task Force which advocates a flexible, risk-based approach to regulation. It states:-

"The level of risk involved in any activity should determine the level of protection necessary." [Endnote 37]

"Trade-offs between the costs and benefits of regulation need to be assessed, and citizens allowed, within reason, to make their own judgements about the risks in question." [Endnote 38]

31. The Consultation Paper set out some of the points to be considered in weighing the advantages and disadvantages of whether a service should be reserved or unreserved:-

• provision of information: reserved services may help bridge the asymmetry of information in cases where there is an informed provider and uninformed consumer;
• improved quality: the service may be of poor quality if not regulated;
• a level playing field: its absence may drive people out of business because of the burden of regulatory cost and distortions in competition. A level playing field would require that the regulatory burden falls evenly on persons who provide the services, whether they are qualified or not;
• cost: in principle, regulation provides some protection for the consumer against failure - but regulation has a cost. That cost is likely to be passed on to the end consumer of the service provided;
• choice: the difficulty for the consumer lies in making an informed choice, knowing what level of service, in terms of value and quality, he might obtain and whether or not he is protected in any way against a failure in that service. Regulated services should offer greater protection to the consumer, for which they may choose to pay;
• access: consumer friendly services, run as commercial concerns, may provide easier and cheaper access to justice to some consumers than might the conventional high street solicitor's firm; and
• a competitive market: regulation may be seen as an unnecessary restriction in the provision of services in the market place.

32. Further considerations have been suggested, including:-

• proportionality: the ease of extending regulation and the avoidance of regulatory duplication;
• the maintenance of trust and confidence: an appropriate level of consumer protection (including appropriate redress mechanisms) and certainty of outcome;
• the cost and ability to apply appropriate standards of education, training and conduct.

33. Bodies outside of the regulatory net may perceive benefits of being able to say that they and their practitioner members are regulated, seeking to attract to themselves the status attached to a 'professional' body and the ability to provide clients with added levels of assurance about the quality of service. It might be argued that providers of such legal services should not be refused entry to the regulatory net, if they meet the minimum standards and pay the relevant costs. However, it is important to recognise that regulation does not constitute a guarantee: it should be acknowledged that no framework can regulate against all risks. Equally, it should be recognised that the cost of regulation ultimately falls to the consumer and would divert regulatory resources. Regulation should be in place primarily to protect consumers of legal services, not to enhance the standing of providers. So a desire to be regulated on the part of practitioners should be met by the same careful cost/benefit analysis.

The Regulator's role

34. The Regulator will have a place in determining what services should be within or without the regulatory net. The Regulator should be enabled to advise the Government of areas where problems surface: for example, where complaints come to the Board about unreserved services or providers. The Regulator may come into contact with activities conducted on the fringes of regulation, with intermediaries who act as channels, and with 'rogue' operators. The Regulator's experience and expertise will be of value to the Government in reaching policy decisions about such activities.

35. For those who are deemed to be within the regulatory net, the Regulator would retain the right to carry out regulatory functions direct if necessary, although, as Chapter B makes clear, it is intended where possible that these functions should be delegated to a front-line body recognised for these purposes.

36. I see the Regulator as also having a role in looking beyond the regulated area to the boundaries of the legal services industry, viewing the extent of activity within the whole field to assess how it is working. It would be able to observe legal service activities in the field and detect problem points. In addition there are organisations which are not legal service providers but which do crucially impact on whether, when and how legal services are provided. Legal expense insurers are an obvious example. The Regulator's knowledge of the field would support any advice given to the Government when it was considering regulating a new service type. The Regulator could be available for consultation by those in legal services areas who were unregulated but who might move towards regulated status. Further, it would have an educational role, for example in encouraging information supply to the consumer.

37. As well as supervisory powers over those regulated, the extent to which the Regulator should have powers, enabling it to pursue those who operate in regulated areas without the necessary licence, is for further discussion.

Conclusion

38. I conclude that, within the appropriate legislative framework, it is for Government to decide which legal services should be reserved, after appropriate consultation, in particular with the Regulator. Whereas there should not be a gap in regulation once it is determined that something is within the regulatory net, there are asymmetries in the regulatory system of which the Regulator should take note. Any changes to the regulatory net to deal with such matters should be subject to careful cost/benefit analysis. The Regulator's role will be to oversee those who are within the regulatory net, but it should also have a wider public interest role to look beyond the regulated area to the boundaries of the legal services industry and those non-legal bodies which interact with it.

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Endnotes

31. op. cit.
32. The Royal Commission on Legal Services (the Benson Report) (Cmnd 7648), 1979
33. A Time for Change Report of the Committee on the Future of the Legal Profession (The Marre Committee), 1988
34. The Work and Organisation of the Legal Profession, LCD Cm 570, 1989
35. This definition is wider than the definition of 'lawyer' in various EU Directives, e.g. the Mutual Recognition and Establishment Directive (98/5/EC) and Services Directive (77/249/EEC).
36. The Report of the Lord Chancellor's Committee to Investigate the Activities of Non-Legally Qualified Claims Assessors and Employment Advisers, February 2000
37. Alternatives to State Regulation, Better Regulation Task Force, July 2000
38. Principles of Good Regulation, Better Regulation Task Force, October 2004

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