Westminster Legal Policy Forum Keynote Seminar: The future of legal services regulation

Location: The Caledonian Club

This seminar brought together key stakeholders with policymakers to discuss the future of legal services regulation. SRA Chief Executive Paul Philip contributed to a panel session entitled "Re-organising the regulatory landscape—competition, standards, accountability and consumer protection."

The future of legal services regulation - Philip, P


Good morning ladies and gentlemen. It's a pleasure to be here this morning and, with an accent like mine, particularly so, at the Caledonian Club!

I'm the Chief Executive of the Solicitors Regulation Authority. I have been the Chief Executive of the SRA for all of seven months now. Not very long, I know, but it's amazing how much can happen in such a short period.

I joined the SRA from the General Medical Council where I spent most of the last decade regulating doctors. Of course, I knew there would be similarities and differences between the two sectors. The differences are fairly obvious: the profit motive, the business environment and the subject matter. But the similarities are striking:

  • Two of the oldest professions in the land, struggling with their place in the world.
  • A number of conflicting policy agendas. In health, the issues are public or patient protection/resources/prioritisation/and debates about models of delivery. In the middle of this is the regulation debate. The General Medical Council (and eight other professional regulators), an overarching health professions regulator in the shape of the Professional Standards Authority, others bodies include the Care Quality Commission, the Human Fertilisation and Embryology Authority, The Medical Devices Agency....the list goes on. Should there be a single medical regulator? Certainly the question has been asked. So far however, the answer has been a categorical no.
  • In law the policy issues and the landscape are similar. Here the issues are similarly public or consumer protection, resources and prioritisation issues. The legal aid debate certainly brings the latter to the fore. And again, in the middle of this, there is the regulation discussion. The SRA (and ten more professional regulators ) and an overarching regulator in the form of LSB. Should there be a single legal regulator. Well, no doubt, we will come to that today.
  • Other similarities include individuals in both professions being unsure of what it means to be a doctor; or a solicitor in the twenty first century? Entrants to both professions have very different attitudes and values to those entering as generation ago.
  • Issues such as what is the scope and role of their baliwick and who else has rights in this regard are present in both sectors. In health, the issues are about the role of doctors vis-a-vis nurses, pharmacists, dentists etc. For instance, who can, and should, prescribe drugs? Traditionally the role only of doctors - but now many, many more health professionals do this on a daily basis. In law it is the somewhat antiquated continuation of the concept of reserved activities and the notion of who can own and control legal businesses with the introduction of alternative business structures.

But the most striking similarity between doctors and solicitors (and I strongly suspect lawyers of all types) is a commitment to core principles. Principles such as integrity, honesty, independence, confidentiality, competence and putting the patient, or the client first. It's no surprise that the Legal Services Act contains many of these principles. Solicitors, of course, have their added obligations to the Court and to the Rule of Law but then, one might argue so do doctors, at least where their professional life brings them into a situation where they are giving evidence to a court or tribunal.

So different, but not that different.... And this is where my personal journey in legal regulation began, earlier this year.

Where to begin then... turning firstly at some of the problems in the sector. These, of course, have been identified for some time. Certainly, before I was on the scene. Many are set out in the SRA's response to the MOJ's call for evidence last year.

The regulatory settlement provided by the Legal Service Act remains imperfect. The system may function better than it did pre-2007, however, it has significant flaws. These include:

  • Too much detail in primary legislation hampering regulators' ability to meet regulatory objectives;
  • the shear complexity of the primary legislative backcloth with the Legal Services Act just layered on top of a multitude of other legislation controlling the regulation of solicitors that stretches back some 40 years;
  • the wholly outdated idea of regulating on the basis of six reserved activities which have accumulated in a piecemeal fashion and which have never been subject to an objective, evidence based review.

And, of course, the multiplicity of regulators, largely based around the regulation of titles, some of which have statutory protection and some that do not.

Regulatory reform

So those are some of the problems, but the government's message to regulators in its response to the call for evidence was pretty clear - Although there is to be no constitutional change, at least for now, regulators should cut red tape, cut costs to those they regulate and cut unnecessary barriers to entry so as to free up business to grow the legal market - and help more consumers benefit from legal services at a lower cost.

In the meantime and independently of this, we published our plans to dramatically reform the way we regulate.

In April this year the SRA Board took some timeout. Timeout to consider where it has been, where is it is going, what challenges lie ahead and what its priorities should be. There were a number of conclusions arising from that discussion and we published a policy statement that is on our website. I very much encourage you to read it.

In a nutshell, the Board committed to a programme of operational and strategic reform.

Operational reform; specifically:

  • better husbandry of our cost base,
  • much greater focus on driving and evidencing value for money;
  • increased operational efficiency;
  • speeding things up and improving customer care for everyone who uses our services.

The journey will take some time, but we will get there.

In 2015 the SRA's operating budget will be £47.7m, down from £52.8m, a reduction of £5.1m, or 10%. Practising fees for individuals and entities will reduce this year, for the former by 17% on average by around 13% for the latter. We have also been able to reduce contributions to the compensation fund by £5m, or 37%.

These are the "green shoots" of change, at the SRA. And that is our operational agenda in the months and years ahead.

The Board's strategic reform package includes a number of fundamentally important workstreams. It includes:

  • an increased focus on the regulatory principles I mentioned earlier
  • a continuing commitment to cut bureaucracy, red tape and unnecessary regulatory activity that adds cost and burden. Some examples would include the abolition of student enrolment, the abolition of the annual keeping of the roll exercise and our recent consultation on residual client balances.

Another important component of the reform package is pressing hard on the development of a regulatory model that is truly proportionate. One that provides appropriate consumer protection whilst, at the same time, does not introduce, or include, components that are unnecessary, costly or unduly burdensome for legal businesses; or indeed, a regulatory model that includes inappropriate barriers to entry to the marketplace.

Our recent proposals on professional indemnity insurance are a clear example of this. They form part of a wider review of the minimum terms and conditions for professional indemnity insurance. A subject which we will be turning to later this year with as view to introducing more changes in 2015.

We are also pressing ahead with our reforms in education and training; the introduction of different pathways to the profession such as the apprenticeship model that is presently being piloted and our reforms of CPD. It was absurd that we demanded 16 hours of CPD that might be entirely made up of listening to me speak, developing speed reading skills. This is 'fig leaf' regulation - its an input measure and in no way assures the quality and competence of solicitors.

And lastly, but by no means least, the Board looked hard at whether the progress on opening up the market and introducing different forms of ownership for legal businesses could be speeded up. ABS's have been around now for a couple of years. We have licenced over 300 of them, but few are genuinely multi disciplinary in nature.

What we are seeing is that ABSs have achieved a significant share of the overall market in certain areas of legal work. For instance, they account for a third of all turnover in the PI market.

The most significant change that ABSs have made, as a result of their new business model, relates to how the business is financed and the attraction of new investment.

But certain businesses have been notable by their absence. It was expected that ABSs would enable Multi-Disciplinary Practices, combining legal services with other professional services.

It is exactly the type of business that the Act was expected to facilitate: a 'one-stop-shop' for consumers; opening up access to legal services, increasing competition in the market, driving down costs and improving value for money.

The benefits of such services were expected to be seen at all levels with small MDPs entering the market to provide improved services to small businesses and, at the other end of the market, major existing professional services firms providing increased competition in the UK and globally to the major international law firms.

However, such entrants have been few and far between and we've concluded that we need to do more to facilitate their entry.

The scope of our regulation and how it applies to MDPs is at the root of the problem. In particular, the extent that the activities of non-lawyers within MDPs need to be regulated by the SRA.

The effect of our rules is that any 'legal activity' even if it is not a reserved legal activity, has to be regulated by the SRA within an SRA regulated firm or a connected business.

The situation we are particularly concerned about is where an MDP will be providing some or all of its non-reserved legal services by non-lawyers that are already regulated by another regulator.

For example, an accountancy practice that wants to become an ABS. Such a firm is likely to already be providing some sort of legal services, such as tax advice.

Under our current rules, if the accountancy firm wishes to add reserved legal activities to the services and applies to become an ABS, then all of that firm's legal services, including the non-reserved activities carried out by accountants, will also fall under our regulation.

And if the firm wishes to separate its reserved legal activities out, this is likely to be prevented by our separate business rule.

As a result, firms that have applied have had to be granted complicated waivers and gone through complex engagement with us to achieve the sort of market entry that we sought to deliver in the first place.

This can be costly for those applying, it can delay applications and, creates unnecessary burdens on applicants.

In terms of consumers. At the moment they have to access their advice from different sources. They will get different advice letters, different advice and have different routes to complain. Any problem that occurs will lead to arguments between the consumer and three different businesses as to who is at fault. Surely what would be better is one business taking responsibility, one advice letter and one insurer if things go wrong.

We think that we can deliver that. We proposed radical changes to the rules governing the authorisation and supervision of ABSs and we recently closed a consultation on our plans. Where an ABS carries out non-reserved legal activities through non-legal professionals, we are considering how we could get to a position that the activities will not be SRA regulated subject to appropriate safeguards. The SRA Board will make a decision about this later this month.

This in turn, if agreed will inevitably lead to a review of the Separate Business Rule to ensure that traditional solicitors firms are not disadvantaged in the marketplace.

Together these proposals set out a fairly radical overhaul of the regulatory model for Solicitors. Others include a focus on small businesses, with a view to ensuring that the burden of regulation does not unduly fetter their ability to compete and thrive.

This will include a review of the COLP and COFA arrangements for this sector, looking at whether this framework is really required for such businesses, or whether it's overkill.

I was asked to comment on the creation of a single legal regulator. Well, this is probably not one for me to get into - but I will say this. Structural change in the sector may, or may not be, part of the solution - but it is most certainly not the complete solution. It is not a universal panacea and it will, undoubtedly, bring with it its own problems and its own unintended consequences.

In the meantime, I see a new dawn emerging in the relationship between TLS and the SRA. The dramatis personae have changed radically since last year. There is much more that can be achieved within the present framework and I am committed to this agenda. I am not going to let the odd difference of opinion get in the way of us working, either with the marketplace or the representative body.

Likewise, the legal regulatory sector as a whole could, I think, work better together, The LSB has been tasked with looking at what can be done to improve legal regulation with, or without, primary legislative reform following on from the Regulators Summit with the MoJ in the Summer. The LSB can take plenty of credit for driving much of the change that has happened; but so can we. And without doubt we have an important contribution to make and we are keen to participate and make our contribution to that important agenda.

So in conclusion, as far as the future of legal regulation is concerned, I don't think we should just be thinking about what this might look like in 5 or 10 years time. We should be looking at what we can do more immediately to support businesses and reduce costs.

I think it was Dr Seuss who said "sometimes the questions are complicated and the answers are simple" and the question about the future of regulation can get very complicated indeed.

In the short term we need to look at more simple solutions to some of the current issues, going back to basics to focus on what really matters - focusing on protecting consumers, promoting market liberalisation and making regulation more proportionate. And, if I may be so bold, focus on what I would call professional standards - honesty, integrity, confidentiality, independence, well, you know the list....

It isn't for us to dictate what the market should look like, but it is for us to maintain standards while changing the regulatory model to provide appropriate consumer protection and allowing businesses to flourish. I think our regulatory reform programme will go a long way to achieving this.

Thank you for listening.