Proposed rules under section 30 of the Legal Services Act (Part 1), Legal Services Board consultation
Published on 01 June 2009
Chairman – Legal Services Board
1 June 2009
On behalf of our board, I enclose the SRA's initial response to the LSB's consultation on proposed rules to be made under section 30 of the Legal Services Act 2007. We will shortly be responding in relation to proposed rules to be made under section 51. The consultation process as set out in the introduction to your consultation document includes further meetings, and we may wish to make a further response before the consultation period ends on 26 June in order to take account of points raised.
The SRA welcomes the proposals set out in your consultation document. In the Board's view, based upon its experience of regulating since 2006, rules of the kind you propose are essential to maintain public confidence in the legal sector, and to ensure that the regulatory organisations can discharge their duties in the public interest. Key to the realisation of these objectives are clear governance arrangements, an independent appointments process for regulatory boards, and the ability of the regulatory organisation to control its resources.
Since its establishment almost four years ago, the SRA Board has been working within governance and management structures intended to separate our regulatory function from the representative role of the Law Society. We have also been operating under arrangements for the sharing of key services—Finance, Human Resources and Information Technology—with the Law Society. We have given examples in the response of aspects of those structures and arrangements where we consider that significant shortcomings are apparent. Our purpose in doing so is to provide evidence of direct relevance to the formulation of internal governance rules and guidelines.
The Law Society took the initiative in beginning the separation of its regulatory from its representative functions even before the publication of the Clementi Report, and the SRA Board was already well-established before the Legal Services Act became law. The Society's foresight deserves recognition, and it was probably inevitable that some aspects of untested arrangements would work better than others.
However, in the Board's view the time when inadequate arrangements might be tolerated is now past. Independent regulation must be firmly entrenched within the Law Society Group and across all the other legal regulators if public confidence is to be maintained and the public policy objectives behind the Legal Services Act are to be achieved. The rules which will be made following this consultation will play a fundamental part in ensuring that that happens.
Peter J Williamson
Chair of the SRA Board
1. In the section on "Securing independent regulation" in its recently-published Business Plan for 2009/10, the Legal Services Board says:
"Independent and transparent regulation is an essential hallmark of a publicly credible regulatory system. It was one of the foundations upon which the Legal Services Act was built, and for good reason: consumer confidence in a regime that was perceived to be 'run by lawyers, for lawyers' could not be sustained. The Act therefore requires us to make rules that can give effect to the reality and—importantly—also to the perception of regulatory independence."
2. We agree with the LSB's formulation of the position. The consumer interest is—and always has been—at the heart of the reform process which began with the Office of Fair Trading's 2001 report Competition in the Professions. The objective of securing consumer confidence in the regulatory framework governing the provision of legal services was central to the recommendations of the report of Sir David Clementi's review published in 2004, and is firmly embedded in the provisions of the Legal Services Act 2007.
3. It is also the case that both the review and Parliament recognised the importance of safeguarding the independence from government of the legal profession, and the advantages of building the new regulatory framework on the foundation of the existing bodies rather than by creating a centralised Legal Services Authority. That was not, of course, an invitation to those bodies to introduce only limited change to their existing structures, because limited change could never deliver consumer confidence in regulation. It is inconceivable that parliamentarians could have intended approved regulator status under the Act to be deployed by lawyer-controlled bodies to produce arrangements which entrenched the position of the legal profession and its elected representatives, making or appearing to make regulation—or any aspect of its delivery—subordinate to representative interests.
4. In our view, internal governance rules must achieve three things:
- first, that the board or equivalent body which is responsible for the regulatory arm of an approved regulator is appointed through a public, transparent process, under the control of the regulatory arm itself, and that the board's membership is constituted so that it cannot be dominated by the regulated profession;
- second, that the regulatory arm is able to secure the resources which it needs to carry out its work in accordance with its own objectives, and that it has control of its staff, finances and other resources (including any resources delivered by services shared between it and the representative function);
- third, that the regulatory arm is neither subordinate in fact nor perceived by consumers to be subordinate to the representative function. Representative influences on the regulatory arm must be transparent, exercised within clear parameters, open to external scrutiny, and clearly separated from the "approved regulator" role.
5.A further point needs to be made at the outset: the development and implementation of effective internal governance rules needs to be seen by both representative-controlled approved regulators and by their regulatory arms, as an opportunity. If properly formulated and used, the rules will enable the representative and regulatory functions to resolve outstanding constitutional matters constructively, without constant recourse to the LSB. It is in the interests of everyone, including consumers and the legal profession, that boundaries are clearly marked and differing responsibilities clearly understood. Robust rules will facilitate that outcome, and will ensure that the focus turns to regulatory issues of substance.
How might an independent regulatory arm best be "ring-fenced" from a representative-controlled approved regulator in the way we describe (i.e. requiring a delegation of the power to regulate processes and procedures; and the power to determine strategic direction)?
6. We agree that the regulatory arm should have powers, free from veto, to determine its own processes, procedures and strategic direction. The SRA published its own strategy in 2007, and also has a rolling strategic plan, annual business plans and an equality and diversity strategy. The Council of the Society can comment on, but not require the SRA to change its business plan. The SRA has delegated powers to deal with regulatory matters, develops policy (on which it consults the Society and other stakeholders), sets its own procedures and makes decisions on individual cases. In 2008, the Society delegated rule-making powers to the SRA.
7. We consider that this level of devolution is absolutely necessary for credible, independent, public interest regulation. It is not, however, sufficient in itself. As we make clear in our answers to questions below, even a regulatory arm which has had delegated to it strategic and operational responsibility for the whole range of regulatory activity can still be subject to representative pressures and influences working outside formal, transparent consultation processes.
8. For example, if a representative-controlled approved regulator defines and manages the appointments process for regulatory board members, there is a risk that it will be able subtly to influence the outcome. If it controls the management of resources and shared services, it may be able to pursue its priorities, financial or otherwise, at the expense of the regulatory board's. Even if it actually does none of these things, the fact that it has the ability to do so may act as a subtle restraining influence on a regulatory board, and may risk creating the impression that the board is subsidiary to the representative arm.
9. In our view, therefore, independent regulation is about much more than delegating the power to make decisions in individual cases, and about much more than delegating formal responsibility for regulatory strategy, policy, procedures and rules. It is about delegating the means to carry out that responsibility effectively, in the interests of the public and all consumers of legal services, demonstrably free from improper restraints and influences. It is also about providing real clarity to consumers and the profession about the separation of regulatory from representative functions—a particular challenge where those activities have previously been carried out by an undivided professional body. These are essential components of ring-fenced regulatory arrangements.
10. Getting the governance structure right is critical to the achievement of that aim, which is why the internal governance rules made under section 30 of the Legal Services Act which will be the ultimate product of this consultation are so important. If those rules prove to be inadequate or deficient at the outset, that has the potential to undermine confidence in the robustness of the new framework for the regulation of legal services in the public interest.
11. It is worth adding that, whilst the risk of representative interests inhibiting or subverting independent regulation is an obvious concern, there is another risk: that the representative arm will be so closely enmeshed in the discharge of the approved regulator role that it will not develop a vigorous and effective representative role on behalf of its members.
12. For both reasons, the internal governance rules must guard against the mischief that a representative-controlled body interprets its status as approved regulator to justify the assumption of a quasi-regulatory role. We do not believe that the Act supports such an interpretation, and it would clearly be contrary to the public policy intention behind the Act. Those drafting the Act had no option but to refer to the existing regulatory bodies, but did not intend that this should be used to give the representative elements of the organisation a controlling voice. We think it is clear that it was intended to give the LSB the flexibility to deliver the public policy intention through detailed rules which could more easily take into account factors relating to the very different sizes and structures of the different approved regulators.
13. Whilst we favour the flexibility of an approach which leaves some material to guidance rather than incorporating it in the formal rules, so that the latter can be kept relatively succinct, there are risks if the balance is not right. We think that the current draft rules are probably a little too unspecific, and comment on this in more detail below.
14. We do, however, favour the general approach adopted in draft Rule 3. Our understanding is that this provides approved regulators with two options for achieving ring-fenced governance arrangements.
15. If an independent regulatory authority (i.e. regulatory board or equivalent) is directly accountable to a representative oversight body (such as the Council of the Law Society), then that oversight body's power to intervene in the regulatory functions of a regulatory authority is subject to the express approval of the LSB, which it is only likely to agree in limited circumstances.
16. Alternatively, the regulatory authority may instead be accountable to an independent oversight body established by the approved regulator, which would be a body with no representative functions and a majority of non-legally qualified members. We assume that this body could include members (whether or not legally qualified) appointed from the regulatory authority and a minority of members appointed from amongst the elected representatives of the profession. We also assume that, where established, the body could in addition be the "independent and objective forum" for shared services and monitoring mentioned in paragraphs 3.22 and 3.37. In our view, such a body would need an independent non-legally qualified chair. (The recently established Law Society Shared Services Resolution Board is a step towards arrangements of this nature, though would need further development to ensure a suitably balanced membership and sufficiently wide terms of reference.)
17. Taken together with the other draft rules, this appears to provide a fairly robust and workable method of ring-fencing, subject to what we say in answer to Question 5. However, we would prefer to see draft Rule 3 expanded to encompass the appointment and tenure of members of the independent oversight body, so that it is clear that the body must be genuinely separate from the representative function.
18. We are pleased to note and strongly support draft Rule 3(5): Its contents need to be discussed in the accompanying guidance. The Law Society Council recently amended its own regulations, against the express wishes of the SRA Board, to allow the representative Law Society to take over from the SRA responsibility for certain professional accreditation schemes, which the SRA considered to be part of the regulatory function, in a way which left the SRA with residual and effectively inoperable responsibilities. Dealing with regulatory functions in this way will confuse both consumers and the profession, is unlikely to secure consumer confidence, and should not be permitted by internal governance rules.
What do you think of our proposals relating to regulatory board appointees, set out under paragraph 3.15?
19. We agree that all appointments to regulatory boards should be made on the basis of merit, in accordance with equal opportunities principles and in accordance with best practice for public appointments.
20. All members of regulatory boards should be appointed explicitly on the basis that it is their duty to act in accordance with what they consider to be best in the public interest and the furtherance of the regulatory objectives. It follows that they cannot be appointed to represent any particular group or sectional interest. It would therefore constitute a conflict of interest for any person elected or appointed to membership of the representative body of the approved regulator to sit also on the regulatory board.
21. Representation of group interests must of course be contrasted with the need to ensure that a regulatory board is properly representative of the community as a whole. It is essential that all proper steps are taken to ensure that every regulatory board contains a diverse membership. This is important for securing public confidence and an effective mix of experience and talent. In our view, this should be reflected in guidance.
22. We can see no reason for any provision that the chair of a regulatory board must be a lawyer. We would not support a provision that a regulatory board must have a built-in lawyer majority (as is the case under the current arrangements which the Law Society has provided for the SRA). Arrangements of this kind will always carry a risk that the regulatory board is open to allegations (which may be quite unfair) of regulatory capture. They are unnecessary either for ensuring that professional expertise is available from within the board—which simply requires a sufficient number of lawyer members, not a majority—or that the board takes proper account of the views of the profession—which is a function of the flow of information and comment between the representative and regulatory organisations.
23. It is, however, important that a regulatory board should contain both lawyers and non-lawyers. The SRA's experience is that having a mixture of lawyers and non-lawyers is vital for ensuring that a full range of perspectives and expertise can be applied to the work of the board (and indeed to that of committees established by the board, which may deal with issues which are both technical in nature and of high importance for consumers). We have previously suggested that it might be appropriate to provide that the SRA board should have a minimum number of lay members and the same minimum number of solicitor members.
24. We have not argued strongly in the past for an in-built lay majority on the SRA Board, partly because, although our board has a solicitor majority, in practice it does not divide on lay/solicitor lines, and partly because we considered that the Law Society was unlikely to agree. Nevertheless, we can see the weight of the argument that providing for a built-in majority of non-lawyers may be important in securing consumer confidence in the independence of regulation from the regulated profession.
25. We agree that it is vital that arrangements for the appointment of the chair and members of regulatory boards must be demonstrably independent of the representative arm of an approved regulator. The risk that individuals (whether or not existing board members) may be or be thought to be subject to more influence by the representative body than is healthy must be taken seriously. Robust measures are essential to safeguard the integrity of the appointments process from the perception—even if unjustified—of improper representative influence.
26. It is quite legitimate for representatives of the regulated profession to have a defined role in the appointments process, but never a dominant voice. We think that your proposals are appropriate for securing that aim, but they should be fully reflected in the rules.
27. We agree that board members should be subject to an objective appraisal process, in accordance with best practice in the public sector. We also agree that there should be clear arrangements for eligibility for reappointment. These points together should help to facilitate an appropriate degree of continuity of membership—it is not usual practice in the public sector, unless a board has wholly failed or its functions are changing, to replace its entire membership at the end of a term. We have been critical of the Law Society's failure to give sufficient weight to the issue of continuity during the current SRA Board appointments process (the Board's four-year term ends on 31 December 2009).
28. That process is inconsistent in a number of ways with your proposals, although the Society was well aware of those proposals and we had invited it to reconsider its arrangements before it advertised for a chair and members to sit on the SRA Board next year. The inconsistencies are as follows:
- The SRA Board will have a built-in solicitor majority.
- Only solicitors have been able to apply to be chair.
- The preparation of the appointments panel and the surrounding process has been led by the Society, not by the SRA.
- The current chair is not on the appointments panel for members.
Although the Society has subsequently made some adjustment to the composition of appointments panels to reduce solicitor influence, it is possible that the SRA Board which begins its term in January 2010 will not be compliant, and will not have been appointed through a process which is compliant, with rules coming into force at the same time.
29. It is important that the LSB should be able to deal with the situation whereby the composition or appointment of an existing regulatory board is inconsistent with internal governance rules or guidance. Clearly, this must be done in a proportionate way which causes no detriment to the continuing work of the regulatory arm but ensures that consumer confidence is secured. Solutions might include (according to the individual circumstances), bringing forward the end of the term of the board or of some of its members, or of its chair, so that a new appointments process can take place; or undertaking recruitment of additional members to bring about an appropriate balance of membership (e.g. a non-lawyer majority). Provision should be made either within the rules themselves or in guidance enforceable through a direction by the LSB. In determining what action is appropriate in any particular case, the LSB will have to assess the level of risk posed to consumer confidence by the non-compliance. This may well be greater in the case of a large regulator than in the case of a small one.
Is it necessary to go further than our proposals under paragraph 3.15, for example by making it an explicit requirement for the chairs of independent regulatory boards/equivalents to be non-lawyers?
30. We have not advocated this, and on balance our view is that the position of chair should be open to both lawyers and non-lawyers. The case for an explicit requirement for a non-lawyer chair may be weaker if there is to be provision for an in-built non-lawyer majority on the board.
Do you agree with our proposals in respect of the management of resources, including those covering "shared services" models that approved regulators might adopt? What issues might stand outside such arrangements as suggested in paragraph 3.22?
31. We have previously said that a regulatory board must
- be responsible for determining its own business needs;
- have the resources which it reasonably requires, with the right to inform the LSB if it considers it has not been provided with those resources;
- have full control of its resources (capital, current expenditure, and human resources) within its agreed budget;
- be responsible for appointing and managing its own staff.
32. This represents the minimum standard which is required to ensure that a regulatory board is able to develop, resource and implement its own regulatory strategy. We agree that a budget setting process structured so that the needs of the regulatory function cannot be subordinated to those of the representative function is a critical part of this.
33. As you say in paragraphs 3.20 and 3.21, there are advantages in shared services, and the SRA is in principle in favour of such arrangements. That said, our own experience of them in practice has not always been positive.
34. One important reason for this is that responsibility for the services which the SRA shares with the Law Society is vested under regulations passed by the Society's elected Council in the Society's Management Board, a representative body, and in the executive management responsible to it. This has led to a number of difficulties for the SRA. For example:
- In 2008, the Society was able, against the SRA's wishes, to reverse an earlier agreed arrangement that Human Resources and Finance staff should be embedded in the SRA;
- Later in the same year, the Law Society Group as a whole worked on the introduction of an element of performance-related pay as part of improvements to the management of performance. Whilst there was no disagreement of principle between the SRA and the Law Society, we wished to implement PRP for our own staff in a way which reflected the SRA's own priorities. Although the difference was one of detail, the Society's Management Board wanted a common approach for the representative Society and the SRA, and the SRA's proposals were overruled by the Council.
35. The fundamental problem with the current arrangements for the sharing of services between the Society and the SRA is that, in practice, the SRA shares the Society's services largely on the Society's terms. Inevitably, that means that the Society's priorities, which are representative in nature, always have the potential to dominate. This does not need to imply intent or lack of good faith—the mischief is a structural one. Regulation and representation have, properly and necessarily, different drivers and objectives. It is unrealistic to expect a representative Council and Management Board, or the executive management responsible to them, to be able to assume a regulatory perspective when considering service and resource issues affecting the SRA.
36. The SRA has long argued that what is required is the creation of a corporate element in the Law Society Group's governance arrangements, which is neither representative nor regulatory, to deal with shared services. Although the Society has now agreed to the establishment of a Shared Services Resolution Board (SSRB), with some independent members, in our view—although welcome—the SSRB is, as currently constituted, too limited a response, and only partly solves the problem set out in the preceding paragraph.
37. We agree with you that, where shared services models are adopted,
- demonstrably independent shared services management arrangements should be in place, involving representative, regulatory and independent people, with significant participation of regulatory board members and staff in their design and running;
- line management responsibility for roles under the direction of a regulatory board should be to the board's own senior officer;
- in exceptional cases where that is impossible, there should be robust arrangements to prevent conflicts of interest;
- line management for staff with shared services functions should make clear that the interests of the regulatory arm are not subordinate to those of the representative-led organisation;
- the regulatory arm should consult, and take due account of, the views of the approved regulator before implementing changes to common terms and conditions (the implication of this—with which we agree—is that the initiative must lie with the regulatory arm);
- there should be an independent and objective forum to resolve disputes over budgets and shared services.
38. We agree that matters relating to the longer-term financial viability of an approved regulator raise difficult issues. For example, in the case of the Law Society there are major financial issues relating to the pension scheme which mean that it would not be appropriate for the regulatory arm to have a completely free hand, since decisions could have long-lasting financial consequences for the group as a whole. Other matters relating to capital expenditure might raise similar concerns. Our view is that these issues need to be defined, and dealt with under the proposed corporate services arrangements, with both sides having the right of appeal to the LSB if agreement cannot be reached. We do not think that such arrangements should stand outside the other governance arrangements.
Is our proposed balance between formal rules and less formal (non-enforceable) guidance right? In what ways would further guidance be helpful?
39. In principle, we are in favour of keeping the formal rules as short as possible. Nevertheless, we do have some concern that the draft rules as they currently stand omit some key areas. Since those areas are critical to the secure ring-fencing of the regulatory function, we would have more confidence if they were covered by rules rather than by non-enforceable guidance.
40. We would prefer that draft Rule 3 be expanded to make clear that members of an independent regulatory authority must be appointed in accordance with the principles set out in paragraph 3.15. We would also like draft Rule 5 to be expanded to provide explicitly for the "independent and objective forum" for resolving shared services disputes referred to in paragraph 3.22 (though we recognise that this might not be appropriate for the smaller approved regulators, so some flexibility may be required).
What are your views on our suggested permitted oversight role for representative-controlled approved regulators over their regulatory arms? Are practical modifications required to make it work?
41. We agree that there are certain limited circumstances in which intervention into the affairs of the regulatory arm would be justifiable.
42. Occasional independent strategic reviews are to be welcomed as a positive and constructive part of the framework of regulation. However, it is critical that, as you propose, they should be undertaken in conjunction with the regulatory arm, rather than being imposed upon it. It is also essential that new constitutional or structural arrangements arising from such a review should require the approval of the LSB.
43. The Law Society's handling of the launch of the Hunt and Smedley Reviews provides an illustration of why this is important:
- The SRA was given minimal notice of the reviews before they were announced publicly. Whatever the intention, this ran the risk of suggesting to observers that the initiative on regulation lay primarily with the representative rather than the regulatory arm.
- The Society itself seemed unclear about the relationship of the reviews to each other—an impression since confirmed by the fact that, whilst the Report of the Smedley Review called for a response by the SRA to all its recommendations within two months, the Hunt Review's Interim Report suggested that the Smedley recommendations should not be acted upon pending publication of the final Hunt Report later in the year.
- The Society put out confusing public messages about the status of the reviews. At different times, the Society suggested that the Hunt Review had been commissioned by the Society in its representative capacity; was being undertaken by the Society, rather than by the SRA, because the latter was not a legal entity and the former was responsible for its oversight; or was being undertaken by the Society because it was the approved regulator.
44. This is significant, because it undermines the credibility of the SRA as a genuinely independent public interest regulator, through the message it gives to consumers that the influence of representative interests over regulation remains dominant. Since the whole post-Clementi settlement, with the Legal Services Act at its centre, is predicated on the notion that it is possible to have credible public interest regulation, transparently independent of representation, without the need to establish a centralised statutory front line regulator, that is a serious matter.
45. We agree that there must be in extremis provision for the removal of one or all members of a regulatory board in the most serious circumstances. The need for dismissal would arise from the fact that the acts or omissions of the member or members undermine public confidence in regulation. That, of course, is a public interest issue, and it is right therefore that such a step should only be undertaken with the concurrence of the LSB.
46. We believe that it is essential that regulatory boards are properly accountable for their regulatory work and for their use of resources. We are also committed to the development of a constructive relationship between the SRA and the Law Society in its role as primary consultee on behalf of the profession.
47. The difficulty which the SRA has at present is not that it does not wish to be subject to oversight. The problem is that it is expected to be directly accountable to a wholly representative body—exactly the same representative body which it also deals with as primary consultee on behalf of solicitors, and which is responsible for the provision and management of shared services. In every capacity, the SRA is dealing with the same Law Society Council, Management Board and executive management.
48. A degree of oversight monitoring is acceptable, so long as it is proportionate, of demonstrable utility and does not compromise regulatory independence. However, we think that that is a different matter from the development of a vigorous relationship between those whose role it is to promote the interests of the profession and those responsible for regulating it in the public interest. We do not, therefore, agree entirely with what you say in paragraph 3.34, since it appears to compound the two.
49. It is part of the legitimate function of the representative arm to provide a rigorous critique on behalf of its members of how the regulatory arm carries out its regulatory responsibilities. If the regulatory arm is unable clearly to distinguish that proper representative role from the role of organisational oversight, it may be driven into defensive behaviour, interpreting every suggestion, reservation, or criticism made on behalf of the profession as a threat to its freedom of operation. That is not a desirable outcome.
50. An independent and (if necessary) vocal legal profession is an essential component of a free society. We are happy—and, indeed, keen—to engage directly with the Law Society in its representative role, as it seeks to advance the interests of the profession, and provides its members' insights, perspectives and concerns on regulatory issues. Much of the work of representative bodies such as the Law Society supports the public interest, and is greatly to be welcomed. We wish to engage with the Law Society through formal and informal consultation and the voluntary exchange of information. We also frequently draw on expertise from the profession in relation to the technical work of the SRA?s committees and working groups.
51. In our view, the quite distinct function of proportionate oversight should be undertaken through a mechanism like the one you propose in paragraph 3.37. The advantage of such a mechanism is that it removes direct accountability of regulation to representation, whilst at the same time providing confidence in relation to the regulatory arm's performance.
52. We advocate the establishment within the Law Society Group of a corporate board, with equal numbers of representative and regulatory members, together with independent members, to undertake that function, and to be responsible for shared resources and services. This appears to have points in common with your proposal for "an independent and objective forum" (paragraph 3.22) to resolve disputes over budgets and shared services, which could also be charged with undertaking routine and agreed monitoring activities (paragraph 3.37). The recently-established Shared Services Resolution Board is capable of development into a corporate board if changes are made to its constitution.
In principle, what do you think of the concept of dual self-certification?
53. In principle, we consider that this is a robust, fair, and proportionate method of identifying issues of possible non-compliance with the rules.
If a dual self-certification model were adopted, how should it work in practice? Or would alternative arrangements be more appropriate, either in the short or long term?
54. We agree that dual self-certification should be seen as part of wider arrangements for developing excellence in legal services regulation, rather than as a stand-alone process. We also believe that it should be set in the context of a programme of meetings between the LSB and the different Law Society organisations. If that programme works effectively, then dual self-certification should not produce any surprises, but would enable issues that remained unresolved to be formally recorded.
55. The certificates should be published, and the LSB should also publish its proposed steps to deal with any issues identified.