The changing regulatory landscape
3.42 This Review is taking place in the wake of major regulatory reforms in the legal services market. The LSA 2007 itself provides a key context for the Review. The Act created the new regulatory regime, and sought to marry modern market liberalism to the core social values of professionalism. These are recognised in the LSA 2007 regulatory objectives, the statement of professional principles contained in the Act itself, and in the ethical principles of the individual professions. They have also been mentioned often in the stakeholder contributions to the research team and in qualitative material. For example:
But then for barristers whose overriding and first duty is to the court and to the administration of justice and then to their lay client: actually, society itself is very much the consumer. … If barristers screw up or misbehave then fundamentally the justice system is undermined. That is not in our interests or anybody else’s. So those regulatory objectives around access to justice and rule of law, I mean at one level, they are clearly important for all lawyers, but they are especially important for barristers because so much of what they do is in terms of the interaction of the court. So that’s actually very important.
3.43 In exploring the regulatory context, this section focuses on three aspects:
- outcomes-focused regulation;
- title-based, activity and entity regulation;
- regulatory reach.
Each of these is outlined here and will be considered further in subsequent chapters.
The move to principles-based regulation and OFR
3.44 Legal services regulation is moving towards risk-based regulation. This appears to be a consequence of both regulatory steering by the LSB, and a growing professionalisation of legal services regulation itself, a process which sees the sector drawing its influences at least as much from commercial and financial services regulation as from the regulation of professions.
3.45 Outcomes-focused regulation (OFR) is an important element of risk-based regulation. Risk-based approaches to regulation tend to be aligned to a strong consumer/service provider orientation. Rather than focusing on rules, the regulator identifies the risks that need to be managed in respect of certain activities, and designates the outcomes that must be achieved in order to manage or vitiate those risks. These outcomes are then constructed as ‘targets’ for the regulated community. OFR is a move away from traditional, more directive, conduct standards. It has also received ‘in principle’ support from respondents as a less bureaucratic and more enabling framework.
3.46 The outcomes-focused approach has important implications for education and training. The Smedley Report, which contributed to the body of evidence suggesting that regulatory change was required prior to the LSA 2007, emphasised the importance of culture change, requiring an adjustment from ‘investigation, scrutiny and punishment’ to ‘education, information, training, expert advice and promotion of standards’ (2009:22). Boon has argued that OFR introduces ‘situational ethics’ which will require different education and training to a ‘rules-based’ system (Boon, 2010:223). The move to OFR may also necessitate some development of particular management skills and processes in organisations and entities in order to cope with risk based regulation.
The emphasis on title-based, activity and entity regulation
3.47 Prior to the LSA 2007, individual professional lawyers were regulated by their professional bodies and regulations allowed certain activities (the ‘reserved activities’) to be carried out by certain of the professions. Conveyancing for example could only be carried out by licensed conveyancers, notaries and solicitors, whereas advocacy in the higher courts could only be carried out by barristers and solicitor-advocates and, in specialist proceedings, costs lawyers and IP attorneys. Qualification as a barrister, notary or solicitor brought entitlement to undertake other reserved activities. Each professional body regulated the individual professional practitioners who were its members.
3.48 The LSA 2007 has created a complex regulatory framework in which activities may be regulated rather than the professionals who are licensed to carry out such activities. It has also warranted moves to regulate entities (law firms, limited partnerships or ABSs) who supervise professionals and activities rather than the individual professionals themselves.
3.49 Reserved legal activities are an important though problematic part of the Act, for a number of reasons, because:
- They lack coherent justification. Mayson suggests in his work for the LSB (Legal Services Institute, 2010), that the reserved activities are largely the product of historical accident and political settlement, lacking a clear public interest rationale.
- The LSA 2007 has not broken the link between titles and reserved activities. All activities undertaken under a title are in practice regulated, whether reserved or not. Consequently transactional lawyers and law firms that do little or no reserved activity are, as Mayson (2010:6) observes, ‘at risk of competition from people who do things totally differently and not in a regulated way’, and must still bear the full costs of regulation (albeit in exchange for the benefits of a protected title).
- The LSA 2007 has also retained overlapping regulatory jurisdictions over the reserved activities while at the same time extending jurisdiction over reserved activities to previously excluded occupations. This is not necessarily problematic in itself, but it does raise questions about comparability of regulatory requirements across an activity.
- The Act also potentially creates a division between the protected title (barrister, solicitor, etc) and authorisation to practise a reserved activity. In the context of the LETR, this has generated debate about the scope or need to move away from regulation by title and towards regulation by activity, an idea that has raised concerns among a number of professional stakeholders, but received strong support from the LSCP and some others (see, eg, Legal Services Institute, 2012).
3.50 Entity regulation, as introduced by the LSA 2007, encourages competition and innovation by allowing the development of business structures with multi-disciplinary and external ownership in contrast to the traditional law firm partnership model. Such alternative business structures (ABSs) are licensed only in respect of specified reserved activities. They cannot undertake reserved work beyond those limits, but this does not preclude them from also providing general (ie, unreserved) legal advice – thus, for example, an ABS with probate and reserved instrument licences, could potentially offer an entire property and estate management service, including providing (currently unregulated) will-writing services, conveyancing, probate, tax and estate administration.
3.51 At present both the SRA and the CLC are licensed as entity regulators and IPReg permits registered bodies to be entered into the registers (IPReg, n.d.). The BSB is also proposing to develop its role in respect of barrister entities providing advocacy and litigation services. The Institute of Chartered Accountants (ICAEW) is also seeking authorisation as a regulator of reserved probate activities, including licensing ABSs. The licensing regime permits the SRA to license all of the reserved activities to an ABS, except notarial activities which are expressly reserved to qualified notaries. The CLC can only license reserved instrument activities (essentially conveyancing), probate and the administration of oaths, but has explored extending its reserved activities to include the conduct of litigation and the exercise of a limited right of audience as well.
3.52 A number of the frontline regulators are developing entity regulation more generally as a regulatory tool. This is most apparent in the SRA’s activities: the designation of senior compliance roles has been extended to all regulated practices, and a significantly more rigorous authorisation process for ‘traditional’ law firm start-ups has also been introduced in the wake of the ABS application process. The publication in 2012 of Equality and Diversity Rules that imposes obligations on chambers is a first step for the BSB, (BSB, 2012), and it is now consulting on the mechanics of entity authorisation. IPS is seeking authorisation for legal executive entities, which would be fundamental to redefining Chartered Legal Executives as independent legal practitioners.
3.53 Entity regulation is thus an area of considerable regulatory activity, and the LETR research reveals it to be of some concern to stakeholders who worry that standards of professionalism are being compromised by these developments – this point is illustrated further later in the chapter.
Regulatory reach and supervision
3.54 The extent of regulation or ‘regulatory reach’ is an important issue for the review, not least because decisions to regulate or increase regulation carry costs and therefore have market effects for both regulators and the regulated. The scope, burden and proportionality of regulation are all of significance.
3.55 A number of responses to the LETR research focused on the perceived risks posed by those outside existing regulation, working in completely unregulated entities (discussed below). A greater proportion, however, focused on risks from unregulated groups working within or alongside regulated entities. A significant concern for the LETR is the impact of these developments on the competence and quality of the workforce. Views have been particularly expressed about the negative impact of before the event (BTE) insurers and claims management companies (CMCs) on professionalism and quality of service in personal injury work, particularly as the level of referral fees has been pushed up, and margins on that work have narrowed for law firms:
The lawyer should be a trusted advisor and the person of affairs to whom the ordinary client can turn, with complete trust in their competence, skills and ethics. By climbing into the sewer with the claims management companies the part of our profession with which most of the public has some form of involvement spreads their ordure onto ourselves. Conveyancers who buy work from estate agents are in exactly the same sewer.
Solicitor (online survey)
3.56 Alongside the interest in professionalism and conflicts of interest, supervision of paralegals within regulated entities was frequently raised as a further issue. The scale of paralegal use at the high volume end of the market was said to be ‘staggering’ by some, with respondents querying ratios of qualified staff to paralegals, and the quality and efficacy of supervision under these conditions, with suggestions about the need to regulate supervision.
[S]ome firms are running a very clear pyramid structure with only a few qualified people allegedly supervising this bottom rump of the pyramid who are paralegals, [who] may not even have any legal qualification at all and they do the case really at a low unit cost and therefore they make a profit on these high volume cases.
There’s supposed to be about eight paralegals per solicitor in terms of monitoring but that’s always honoured in the breach … to our mind it makes a bit of a mockery about the whole talk about standards and quality of service to the client when potentially half of your fee earners – they’ve got no training at all and no-one seems to care.
The implications for LSET
3.57 The core functions of regulation of education and training survive the LSA 2007. A central purpose of any regulatory system for professions must be to maintain the competence of the workforce. Competence is both an end in itself and a means by which the regulators advance consumer and public interest objectives. The maintenance of competence may be supported by a range of regulatory activities – setting outcomes and standards, evaluating compliance, and enforcement. Outcomes are a critical first step. A focus on competence requires the regulators to identify the core competencies necessary to deliver an effective workforce, and to ensure that LSET systems, so far as practicable, achieve such competency standards in practice. This, arguably,places the achievement of learning outcomes at the centre of the regulatory function, as the UK Inter-Professional Group (2000:4) has noted:
The emphasis on competence ensures that a professional body looks upon education and training provision from a particular perspective. Whilst it is interested in seeing best educational practice, attractive learning environments, imaginative teaching, social inclusion etc, it is absolutely concerned with learning outcomes. Those outcomes are not just narrowly defined lists of current factual knowledge, although they embrace a thorough understanding of the ‘first principles’ that underpin the science as well as their applications, but include the personal and professional development necessary to inculcate high ethical standards and professional attitudes and values. (Emphasis in the original.)
3.58 The move to a system of OFR creates an obvious synergy with outcomes-led approaches to education and training.
3.59 In other respects the creation of this new regulatory complex has major implications for education and training:
- activity-based regulation opens up the scope for radical re-design of qualifications and pathways. This was highlighted, for example, in the 2009 Hunt Review of Regulation for the Law Society, which suggested that the award of the solicitor’s title could be separated from authorisation to undertake reserved activities, which could then be separately accredited;
- it raises questions as to the level at which competence is set. This may be complicated in a multi-regulator environment such as the legal services sector. Should it be open to each regulator to determine their own level(s), or should there be a common minimum standard across the board?
- the focus on activities, similarly, raises questions about the necessity and means of ensuring comparability of standards, and the risks and benefits of permitting competition around standards;
- outcomes-focused regulation will necessitate achievement of a proper balance between the regulatory requirements placed on entities and individuals, and raises questions as to whether greater responsibility for quality assurance should be given to those involved in training. Regulators will need to focus their attention on ensuring that necessary standards of competence are being achieved through LSET but in a manner that is proportionate to the risks.
 Risk-based regulation can be defined as the adoption of regulatory strategies that are based on ‘an evidence-based means of targeting the use of resources and of prioritizing attention to the highest risks in accordance with a transparent, systematic, and defensible framework.’ (Black and Baldwin, 2010:181)
 OFR Outcomes are also derived at the highest level from general principles of good regulation and the eight ‘regulatory objectives’, specified by s.1, LSA 2007 (discussed at some length in Chapter 2 of the Literature Review). These apply to all aspects of the regulatory work of the Legal Services Board and each of the frontline regulators. They are a significant innovation of the LSA 2007 and a key recommendation of the Clementi Review (2004).
 In a recent survey by the SRA (2013), two-thirds of the 1,000 firms surveyed said complying with outcomes-focused regulation was more time-consuming, although reasons given for this included one-off actions, such as time spent learning about the new system, and many felt compliance was also too expensive. However, half of the firms surveyed had a favourable attitude to OFR, compared to only 36% in favour before its introduction. See http://www.sra.org.uk/sra/how-we-work/reports.page. See also Law Society (2012a): http://www.lawsociety.org.uk/representation/research-trends/research-publications/regulatory-performance-survey-findings-2012/
 Particularly financial and risk management. It is notable that nearly 60% of firms surveyed by the SRA had made changes to their risk management as a result of using OFR, and a fifth were in the process of improving risk management at their firm, or had identified a need to improve (SRA, 2013).
 For costs lawyers, see Legal Services Consultative Panel (2004). The history of IP attorneys’ rights of audience is set out in IPReg (2011).
 See, eg, the LSCP’s Response to Discussion Paper 01/2012.
 The SRA has provided examples ‘such as a firm with more than 25 per cent non-lawyer managers, or a company taken over by a non-lawyer enterprise, or a company floated on the stock exchange, or a firm which provides both solicitor services and non-legal services’: http://www.sra.org.uk/sra/legal-services-act/lsa-glossary.page
 The compliance officer for legal practice (COLP) and compliance officer for finance and administration (COFA).
 The quantitative impact of the abolition of referral fees is uncertain. The Ministry of Justice is expecting there to be a large number of CMCs exiting the market, though there are also expectations that ABS structures will be used vertically to integrate claims handling with the legal function.
 See further Chapter 4.
 Though this should not be taken as an indication that the structure of regulation itself should necessarily dictate the form or nature of educational outcomes and standards.