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Legal Services Bill: Licensing Authority


15th October 2007

Jonathan Djanogly calls for the Government to address outstanding issues relating to the licensing of so called Alternative Business Structures (ABS) which will enable lawyers and non lawyers to work together to deliver legal services.

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Mr. Djanogly: In moving new clause 6, I initially note that there is no doubt that the alternative business structure regime will provide a huge set of possibilities for the future provision of legal services and those that provide them. However, in Committee concerns were raised that we were not quite there yet. On the one hand, lawyers will be able to work together almost immediately, and yet the full ABS provisions were unlikely to come into place before 2011. There was a need for a halfway house, so I fully support Government amendments that will enable early consumer benefits by providing new powers and related provisions for the Law Society to regulate bodies with low levels of non-lawyer management during a transitional period before part 5 comes into force. For instance, in-house accountants and managers could now become partners of the law firm. I am glad that the Minister took note of the views of the several bodies whose opinions I highlighted in Committee, and has understood the consumer benefits of not delaying the possibility of practices with limited non-lawyer managers being regulated until the full implementation of part 5.

The Law Society has expressed its views as follows:

"in one important respect, the Bill will be an improvement on the version which left the House of Lords. In the House of Lords, Ministers resisted the amendments which"

Lord Kingsland

"and Lord Hunt tabled which would have enabled the Law Society to regulate LDPs under our existing regulatory regime, rather than having to wait until about 2011 when the Legal Service Board will be in place. However, Ministers have now accepted that it is anomalous for the Council of Licensed Conveyancers (for example) to be able to regulate such firms, whilst the Law Society cannot, and so they have made appropriate amendments to Schedule 16 to cover the point. We think that will enable real benefits for both the public and the profession to be achieved earlier than would have otherwise been the case. It also has the practical effect of ensuring that the incremental approach to the introduction of ABSs-which both Sir David Clementi and the Joint Committee chaired by Lord Hunt favoured-will be followed."

My party colleagues and I are extremely pleased that the Government came round on this issue, and that the hard work of many in addressing this issue has led to such a satisfactory result. I would like to express my appreciation to the Minister for conceding on this point, as I believe that this is the type of change that will help ensure that Britain maintains its position as the foremost provider of legal services in the world.

I also thank the Minister for listening to the views of the Opposition in Committee and for tabling amendment No. 85, which will take us back to the position under amendments made to the then clause 83 in the other place by my noble Friends, the Liberal Democrats and Cross-Bench peers to ensure that licensing rules contain provisions requiring the consideration of the impact on access to justice.

The arguments set out in the other place and by my hon. Friends and myself in Committee have obviously proved compelling. I do not propose to repeat them at length, but I would just like to highlight the importance of this Government concession as it will deal with the particular risk to access to justice posed by alternative business structures. We have maintained that whilst the timetable for low risk alternative business structures should be brought forward, access to justice should not be reduced as a consequence.

Lord Woolf expressed his concern when, in a report of earlier this year, he stated:

"There is no doubt that large businesses could provide legal services in a novel and interesting way. But that could-unintentionally, perhaps-have a devastating effect on those who have traditionally provided services in rural areas in particular. Great care has to be exercised to see that damage does not occur".

The Law Society was worried that despite the fact that, as they put it:

"New entrants into the market may bring about some benefits...there is a risk that there may be long-term structural effects that destroy service provision and the fabric of small communities. Put bluntly, new entrants might cherry pick more profitable and less complex areas of work, driving down the profitability of established local firms who offer a full range of services at the heart of their communities. If that happened, where would consumers go for advice on complex matters?"

Mr. Mark Field (Cities of London and Westminster) (Con): Does my hon. Friend recognise that the Law Society was making the same arguments some 20 or so years ago over the ending of the conveyancing monopoly? What has happened, however? Some of the more innovative firms with flair have been able to thrive in all parts of the country. I do not suggest that there are not issues to do with legal aid-which do not affect this discussion-but does my hon. Friend not recognise that some Law Society fears have been proved wrong in the past?

Mr. Djanogly: My hon. Friend makes a good point, but the Law Society welcomes the changes. However, when they are brought in, there ought also to be a concern for access to justice. A balance must be struck.

Mr. Alan Beith (Berwick-upon-Tweed) (LD): Before the hon. Gentleman is too persuaded by the argument of his colleague, the hon. Member for Cities of London and Westminster (Mr. Field), I hope that he will continue to recognise that not only the conveyancing issue but a range of other matters-the centralisation of police court work means that duty solicitors are sought only from the main court centres, for example-are all working against small firms in rural communities who provide a range of legal services for constituents such as mine. We must make sure that it is still viable to run a solicitor's practice in a small town.

Mr. Djanogly: The right hon. Gentleman makes an important point that has been supported by both his party and mine throughout the passage of the Bill.

The Law Society concludes:

"The Law Society's conclusion is that whilst the regulatory issues concerning new service providers can be dealt with...there are very serious risks to access to justice from the uncontrolled admission of new entrants. Existing practitioners report that in many areas, a number of existing firms serving small localities would be in jeopardy if large institutions entered the market for legal services".

The Joint Committee on the draft Legal Services Bill under the chairmanship of Lord Hunt also highlighted the issue, stating that it was,

"persuaded by some of the evidence suggesting that some of the reforms may reduce geographical availability. We consider that ABSs may reduce the number of access points for legal services and we see this as a potential problem. There is clearly an issue here and the only conclusion we are able to draw is that we cannot be sure how it will work out. We recognise that there may be a trade-off between the quality and accessibility of advice-for example, a small, high street solicitor in a rural area may not be able to provide the specialist advice a client requires. We recommend that the Government amends the draft Bill to ensure that the impact of ABSs on access to justice, particularly in rural areas, informs the decision-making process for licensing an ABS firm".

The Government's welcome concession here, via amendment No. 85, will ensure that the licensing authorities consider the possible effect on access to justice and give the issue full weight when determining applications for an ABS licence. This will go some way to allaying the concerns that I set out. I wholeheartedly commend the amendment to the House, and I will not seek to move amendment No. 53, which I feel is no longer necessary in light of the Government's change of heart.

Amendment No. 156, which is a probing amendment following representations made to me on behalf of the United Kingdom notarial forum and the Law Society of Scotland, forms an alternative to our amendment No 65. The original desire of the UK notarial forum, which amendment No. 65 would put into effect, was to exclude notarial activities from the provisions of part 5 altogether. The Minister expressed her views on this issue in a letter to the director of law reform at the Law Society of Scotland. She said that

"the potential development of Alternative Business Structure (ABS) firms should not present a challenge to professional independence, in relation to notarial services or any other legal services".

I certainly understand the Minister's position, and I have no doubt that the Bill's intention is to ensure that independence is considered when dealing with ABS licences under part 5. However, the question is whether the legislation makes this sufficiently clear. The issue for the Law Society of Scotland is

"whether ‘regulatory arrangements' as envisaged under clause 176 are the same as the regulatory objectives or the professional principles referred to in clause 1."

Its concern is that there is no specific link between clauses 1, 90 and 176.

I hope that the Minister can see the possible gap here. Regulatory arrangements are not the same as regulatory objectives. The requirement for a licensing authority to prepare a policy statement on how it will comply with the duty to promote regulatory objectives is not the same as having a rule in place stating that it must comply with the regulatory objectives. Following the Minister's rebuttal of the Law Society of Scotland's argument regarding excluding notarial activities from part 5, is she prepared to compromise along the lines of amendment No. 156, which specifically states that licensing rules must provide

"appropriate provisions reinforcing the independence and integrity of the legal professionals concerned"?

Such an amendment would go a long way towards allaying the concerns of the United Kingdom notarial forum, and promoting the independence and integrity of the legal system. I would be interested to hear the Minister's views on that.

Finally, amendments Nos. 148 to 151 were suggested to us by the Institute of Chartered Accountants in England and Wales on a probing basis. The intention is to ensure that the provisions applying to low-risk bodies under clause 108 are consistent with the Government's welcome developments in the form of amendments made to schedule 16. Those amendments, which have our support, will allow for bodies with up to 25 per cent. non-lawyer ownership and management to be regulated by the Solicitors Regulation Authority during a transitional period before part 5 comes into force. As a result of those amendments, we will have bodies with up to 25 per cent. non-lawyer ownership that can be in operation before the full implementation of the full ABS regime.

However, as the Bill now stands, when the full ABS regime is finally implemented, such bodies would not fall within the definition of a low-risk body under clause 108, unless non-lawyer ownership and management were below 10 per cent. The amendments suggest that the opportunity should be taken to align the definition of a low-risk body with the new provisions of schedule 16. If that is not done, we risk an almost absurd situation. For example, the law currently considers bodies with up to 25 per cent. non-lawyer ownership and management suitably low risk to see them permitted very quickly following enactment. However, a few years down the line, when they are tried, tested and well-established, they will suddenly be regarded as outside the low-risk regime and subject to full licensing rules.

To illustrate how bizarrely that could play out, I shall give an example. At the earliest opportunity post-enactment, a firm comprising three solicitors decides to promote its non-client-facing finance director to partnership, not to widen the services on offer but to retain his talent, which enhances the performance of the firm. On part 5 coming into force, such a firm would be subject to the full licensing regime. The firm will not fall within the low-risk category because it will be 25 per cent. owned and managed by a non-lawyer. There is no basis for suggesting that such a firm has suddenly become more risky. The only option for that firm would be to admit a further six solicitors as partners to water down their non-lawyer holding, to demote the financial director from partnership, or to subject themselves to the full licensing regime. Surely we need to develop a system in which such tried and tested bodies, with up to 25 per cent. non-lawyer managers and owners, are considered low-risk bodies for the purposes of part 5.

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Amendments such as those that we have tabled would ensure that the low-risk definition is in line with Government developments in respect of schedule 16. They would help to ensure that firms are not discouraged from coming together to share overheads and offer combined services that will benefit the consumer, because of the regulatory hoops that they will need to jump through once part 5 comes into force. It would be of great concern if the effect was to hinder small and rural practices, depriving them of the benefits of being low risk, while assisting retail giants. I will be interested to hear the Minister's reaction to these points, as this is an outstanding issue that needs to be looked at.

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Mr. Djanogly: A lot of important points have been made in the debate, and I wish that we had more time to discuss them, but there are still groups to discuss, so I want briefly to address the key issue on clause 108. The Minister thought that 25 per cent. bodies should not be automatically considered as low risk. I totally agree with that, but such 25 per cent. limited disciplinary partnerships would be much more likely to be low risk and a known entity by the time that the full ABS licensing provision comes into effect. Although I hope that the regulators and the LSB will consider the issue carefully and in good time, so that no upset is caused as a result, I take the Minister's point that the Lord Chancellor can recognise the need for flexibility based on the board assessment, so I beg to ask leave to withdraw the motion.



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