The regulatory infrastructure that underpins the legal profession is undergoing unprecedented change and the idea that the profession is capable of regulating itself has been irretrievably abandoned.  Now that the new, wholly independent, governing bodies are in place, attention is focused on the way in which the new order will go about its day-to-day business. 

Whilst the proposed changes are undoubtedly a step in the right direction, questions are starting to be asked about who will pay the significant costs involved, both in creating the new regime and in running it. In this article we consider the implications of the changes, both for the legal profession and for the public at large.

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The legal landscape is shifting. The regulatory infrastructure that underpins the legal profession is undergoing unprecedented change; the idea that the profession is capable of regulating itself has been irretrievably abandoned. And, now that the new, wholly independent, governing bodies are in place, attention is focused on the way in which the new order will go about its day-to-day business.

Whilst the proposed changes are undoubtedly a step in the right direction, questions are starting to be asked about who will pay the significant costs involved, both in creating the new regime and in running it. And what other costs and liabilities are likely to come out of the changes, both for the legal profession and for the public at large?

Brave New World

The reforms enshrined in the Legal Services Act focus on the organisational change that is needed to move away from self-regulation towards a more independent structure. These are huge – and costly - reforms. The new and independent Legal Services Board has been created to be the 'oversight regulator' for the entire legal profession, with a mandate to raise public awareness of the professional standards against which practitioners are assessed (and the grievance procedures that are available if required). Expensive TV adverts and consumer campaigns will, very soon, begin to shout the message from the rooftops.

The SRA will continue to be the primary front-line regulator of solicitors' conduct, subject to the jurisdiction of the LSB. In preparation for the brave new world, it has undergone a sea-change in its outlook and focus, a discussion of which would go far beyond the scope of an article such as this. However, one need only mention phrases such as 'outcomes-focused regulation' to see that the days of tick-box rule compliance are now over; whilst the FSA may be going, the SRA seem to be keen to ensure that its underlying principles live on.

And, when the 'outcomes' upon which we will all be focusing do not match up with the client's expectations, complaints regarding service will now be passed to the newly-constituted Office for Legal Complaints (OLC). This body (which will replace the Legal Complaints Service) is likely to be the legal profession's equivalent of the Financial Ombudsman Service and, as such, will dovetail nicely with the new-look SRA in its consumer-focused approach.

Cost of Change

The operation of the LSB, OLC and 'new and improved' SRA will be funded in large part by the legal profession. The costs are and will continue to be considerable.

There has been much disquiet surrounding the recent increases in the practising certificate levy; however, when one looks at the indirect costs associated with the regulatory changes, increased levies may be the tip of an iceberg.

(1) Cost of compliance

Solicitors will undoubtedly have to work very hard to comply with the new regime. The bedrock of the new system is self-governance; firms (and individuals) will have to demonstrate not only that the services they provide are up to a certain standard but also that the way in which the firm manages itself is robust and watertight. This is a marked shift away from the previous system and firms will need to invest heavily in changing and moulding their procedures in order to satisfy the increasingly proactive regulator.

(2) Cost of complaints

Dealing with the anticipated deluge of complaints will also be very expensive for firms. The OLC is not bound to adhere to any legal principles when considering complaints, it will deal with most complaints on paper without any hearings and it can award up to £30,000 in compensation. As a pro-consumer organisation, it is intended to be an informal non-legalistic alternative to the Courts and, as such, it will not charge consumers to use it; to do so would fundamentally undermine the LSB's desire for it to be readily accessible.

The OLC's authority seems likely to increase to £100,000 in due course (a further nod in the direction of the Financial Ombudsman Service). When allied with the LSB's profile-raising campaign, such a move will result in a further (and probably even more dramatic) increase in the frequency and cost of complaints.

Improved visibility of - and accessibility to - the legal profession's disciplinary process appears to have been one of the major factors behind the decision by solicitors' PII insurers to withdraw cover for costs of disciplinary proceedings as of October this year; insurers are already making significant losses on solicitors' PII, so the prospect of seeing further costs and losses through the proposed regulatory changes (and uncertainties) must have been deeply unappealing.

This obviously means, however, that the profession will have to bear the brunt of these additional costs, either by self-funding or by paying for additional insurance cover to meet the exposure.

Impact on firms

Firms that invest now and prepare themselves for the inevitable onslaught – by tightening up their complaints procedures significantly - will undoubtedly reap the rewards when the new regime kicks into action; resolving complaints 'in-house' (and thereby preventing the OLC from becoming involved) must be the way forward.

However, many firms will doubtless go by the wayside as the costs of continuing to operate in this new environment simply become untenable.

Comment

Last year, Lord Hunt produced his report into how the new regime should run. At the end of his report, he suggests "...what ultimately matters is outcomes, not processes, but the latter in so many cases shape the former". Whilst this must be correct, those seeking to implement the current reforms must be careful to balance the need to protect consumers against the need to maintain an active and healthy market for legal services.

The costs of increased regulation – whether by virtue of practising certificate levies, PI premiums, uninsured costs of the disciplinary process or decreased competition in the marketplace - are ultimately passed on to clients in increased fees. As such, there must be doubts as to whether this costly regulatory regime and all of its likely implications can be said to be truly in the public interest.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 26/07/2010.