360 Business Law: Deregulation in the Legal Industry: Unlocking a closed market while maintaining quality of service for consumers and businesses
How did it start? Why is there deregulation in the law sector? Would I receive the same level of service and assurances from a deregulated law practice over a regulated one? Why is it so much cheaper to use a deregulated practice? Does cheap mean low quality?
These are some of the questions being asked by consumers and businesses alike since the CMA (Competition and Markets Authority) published their final report in December 2016.
In this report, they concluded that ‘competition in legal services for individual consumers and small businesses is not working well. There is not enough information available on price, quality and service to help those who need legal support choose the best option. People need better information about legal services to help them shop around more effectively.’ https://www.gov.uk/government/news/cma-demands-greater-transparency-from-legal-service-providers
This report stirred uncertainty and discomfort within the legal sector. There haven’t been any fundamental changes to the law profession for the last few hundred years. It’s a profession that’s proud of its traditions and it has a reluctance to move with the times.
Regulatory reform was needed to open the market, provide cost-effective solutions for the public and drive economic growth through a wider and more diverse industry. Since then, steps have been taken to deregulate the market and as a result, the legal industry is slowly but surely evolving.
Nevertheless, the subject of deregulation is still one that unsettles solicitors and confounds the public. By relaxing regulations and removing restrictions, the concern is that consumers will be completely vulnerable to “rogue” lawyers and have nowhere to turn if they receive a substandard service.
So, how does deregulation affect the legal industry and what will be the long-term outcome of regulatory reform?
The current legal landscape – some background information….
The last decade has seen the start of reform in the legal profession, with regulators simplifying their processes and removing barriers to market entry to make way for fresh players in the industry. The Legal Services Act 2007 saw the introduction of alternative business structures (ABS). Where previously, only qualified lawyers could run law firms, this new business model allows non-lawyers in professional management roles to offer legal services to the public.
Now, law firms can become part of multinational companies and similarly, multinationals can form and run their own law firm. Since 2012, The Solicitors Regulation Authority has approved 435 Alternative Business Structures license applications.
To name but a few, BT, The AA and The Co-operative Group all feature on the list of businesses who have branched out into law through an approved ABS license. Regulatory reform has also encouraged law firms to harness legal technology to increase efficiencies and drive down costs.
However, there are many law firms that are still reluctant to change their processes and costly infrastructures and view the CMA report as an enforced mandate to compel them into expensive change.
What does regulated or unregulated mean? Which one to choose?
When seeking legal advice, the consumer now has two options:
- a regulated practice or:
- an unregulated practice.
A regulated practice means:
This means a firm that is licensed by the Solicitors Regulation Authority (“SRA”) to undertake any reserved or non-reserved legal activity – see below for a list of reserved matters. A regulated practice must abide by a set of extensive SRA Rules that can be burdensome to a firm and are costly to implement and comply with.
Additionally, the law firm must hold professional indemnity insurance at a minimum of three million pounds. Professional indemnity insurance cover is extremely expensive, even though claims are rare.
The cost of compliance with the SRA Rules forces a law firm to impose high hourly rates on its clients to cover this overhead cost.
An unregulated practice means:
An unregulated practice, which in effect was introduced by Parliament, does not require lawyers to register under SRA Rules or, in the case of Barristers, comply with the codes of conduct set out by the General Counsel of the Bar of England and Wales; nor to hold professional indemnity insurance. Such practices regulate their own activities under contracts with their clients, as happens with most other professions and businesses.
The downside, from a consumer or business point of view in dealing with an unregulated practice is that, other that suing a firm under contract or in tort for negligence, which is the remedy in most commercial contract situations, there is little recourse to the lawyers governing bodies, and complaints to the legal ombudsman are also restricted.
Consumers also need to check and make sure that the business they are dealing with use qualified lawyers with more than 5 years PQE, as there is no requirement for this in an unregulated practice.
However, once the client has vetted the business, the major upside to an unregulated practice is that they will be dealing with qualified barristers and solicitors at a considerably reduced hourly rate. This is because the high overhead costs associated with SRA registration do not apply so cost savings are dramatic.
Why choose are regulated Practice?
Which type of practice to choose should ultimately depend on the area of law the consumer or business requires advice for, as there are certain issues requiring specialist attention from a qualified expert.
These are known as ‘reserved matters’, and currently, there are only six areas of legal activity that Parliament has determined must be reserved. These are:
- the exercise of rights of audience (i.e. appearing as an advocate before a court);
- the conduct of litigation (i.e. managing a case through its court processes);
- reserved instrument activities (i.e. dealing with the transfer of land or property under specific legal provisions);
- probate activities (i.e. handling probate matters for clients);
- notarial activities (i.e. work governed by the Public Notaries Act 1801); and
- the administration of oaths (i.e. taking oaths, swearing affidavits etc.).
These areas require a practicing certificate and therefore, SRA or General Counsel of the Bar registration, and with good reason. These are matters that demand specific and intensive legal training. When seeking advice on a niche subject or particularly complicated circumstances, it makes perfect sense to instruct a regulated lawyer.
Why choose an unregulated Practice?
If the consumer is seeking advice on an unreserved matter, i.e. - none of the above, there is an option to consider instructing an unregulated lawyer to reduce the cost. After all, soaring prices can, in some part, be attributed to the fees a regulated law firm must pay for high overheads and insurances. If it’s an issue that does not require specialist attention, this can be a cost-effective solution.
According to a report from the Legal Services Board, unregulated providers of legal services are often cheaper, more innovative and more transparent with their prices than their regulated competitors.
However, while the report claimed that unregulated providers offer a wide variety of benefits, it also noted that there was a lack of awareness among legal consumers about the regulatory status of providers and the differences in the levels of consumer protection.
How will deregulation affect the legal consumer?
There is an undeniable change sweeping the legal market, and according to Law Society president Robert Bourns, it could have a detrimental effect on the consumer:
"If solicitors were to offer legal services from unregulated companies, as suggested by the CMA, then their clients would no longer enjoy a raft of protections - from confidentiality to compensation - offered by every solicitor in a solicitor firm. These deregulatory changes would undermine consumer protections and erode trust in the legal system.” https://www.theguardian.com/law/2016/dec/15/report-uk-law-firms-display-prices-competition-and-markets-authority
But what if there was a way of unlocking the legal market without opening Pandora’s box?
The sad truth is, there will always be those people who like to take advantage of the consumer by offering a poor service for an affordable price. They exist in every industry: just consider rogue traders.
However, spotting a cowboy law practitioner isn’t as easy.
If the legal industry is to continue to expand through deregulation, lawyers have a duty to educate the public on the key indicators of quality, such as gaining testimonials and references on the quality of the service and work that the business offers and checking the qualifications of the consultants and lawyers. Similarly, the industry needs to highlight the businesses that operate in a negative manner in the profession.
Regulated or Unregulated? The choice is yours.
While the considerable cost benefits of an unregulated practice are undeniable, it’s of paramount importance that consumers and businesses receive protection from poor-quality advice and disreputable firms. To achieve this, it will take both the legal professionals and consumers/businesses to adapt to the changing face of the market.
It’s up to innovators of the profession to inform the market and pioneer new, cost-effective solutions that meet the standards of those most crucial to the industry: the consumers and businesses.