UK: The Draft Legal Services Bill

The proposed reform of legal services has already had a long history, culminating in the recent publication of the draft Legal Services Bill. In this article we give a brief overview of the Bill and assess the early reaction to it.

Following publication of Sir David Clementi’s Report in December 2004 and the government White Paper in October 2005, the draft Legal Services Bill was published on 24 May 2006. For the first time, the draft Bill provides the detail of how the reforms set out in the White Paper will be implemented.

The draft Bill establishes a new framework for the regulation of legal services in England and Wales which seeks to address the three main areas in which Sir David recommended reform: the regulatory framework; the complaints system; and the restrictive nature of current business structures. To quote Lord Falconer, the reforms represent "a real watershed".

The current regulatory maze will be brought to an end by the creation of the Legal Services Board ("the Board") which will oversee regulation of the whole legal services market.

The Board will have a duty to promote seven regulatory objectives, one of which is the protection and promotion of consumer interests. This reflects the Government’s agenda to be seen to be putting consumers first and will be achieved by the establishment of a Consumer Panel whose representations the Board must consider. Perhaps in response to concerns expressed by the City of London Law Society ("the CLLS") that the White Paper focused too much on the needs of individual consumers and did not adequately address the position of City firms and their sophisticated business clients, membership of the Consumer Panel must fairly reflect those using legal services in a business and nonbusiness manner. Further, the definition of "consumer" in the draft Bill is wide enough to include sophisticated business clients.

In its oversight role, the Board will authorise approved regulators (including the Law Society and Bar Council) to carry out day to day regulation, but will retain power to take steps to remedy any failings which are identified. These will include issuing performance targets, specific directions, public censure, financial penalties and, only if these fail, an intervention direction under which the Board will exercise one or more of the approved regulator’s regulatory functions. Ultimately, the regulator’s approval may be cancelled.

The draft Bill removes the ability of approved regulators to provide redress to complainants and grants this to the Office of Legal Complaints (the "OLC"), creating a single independent complaints handling service designed to foster greater consumer confidence and provide quick and fair redress when things go wrong.

Accountable to the Board, the OLC will have clearly-defined powers to deal with all consumer complaints about those who carry out legal activities, provided the complainant has followed the firm’s in-house complaints procedure. Complaints will be investigated by caseworkers who, if attempts at conciliation fail, will prepare a report explaining how they consider the case should be resolved.

If one party is unhappy with the report, the complaint will be referred to a new ombudsman scheme headed by the Chief Ombudsman, a lay person appointed by the OLC. The Ombudsman will have powers to determine the complaint according to what is fair and reasonable in all the circumstances of the case. This may include requiring an apology or ordering a payment for loss, inconvenience or distress.

The new complaints procedure removes the need to differentiate between complaints of inadequate professional service, professional misconduct and negligence, which have traditionally been dealt with through different processes by each professional body. However, the White Paper acknowledged the need to strike a balance between the consumer who is rarely concerned by such a distinction and the practitioner’s rights under the Human Rights legislation. If the OLC could make an award of an unlimited or very high monetary sum, it could have implications for indemnity insurance and lead to increased costs for the consumer. Therefore, in line with the figure proposed in the White Paper, the draft Bill limits the total value of any directions given by the OLC to £20,000. This limit (which may be altered by the Secretary of State after consultation) includes not only any award of compensation, but also the cost of taking any steps required and the return of any fees.

Perhaps controversially, there will be no external appeal process. If the Ombudsman’s determination is accepted by the complainant, it is binding on both parties (whether or not the professional agrees) and no further legal proceedings can be pursued relating to the subject matter of the dispute. The Government believes that provided the OLC’s procedures are structured properly and fairly, an external appeal process will not add sufficient value to the consumer to justify risking the objective of quick and fair redress. However, this ignores the fate of the professional potentially facing an award of up to £20,000 and a damaged reputation, whose only recourse will be judicial review. Equally, it does not prevent a professional who has been cleared by the ombudsman from facing a further challenge by way of legal proceedings by a dissatisfied, and possibly unreasonable, complainant.

It is in this area where the White Paper, and now the draft Bill, is most radical. It paves the way for alternative business structures ("ABS"), allowing lawyers and non-lawyers to work together in providing legal services and non-lawyers to inject capital into legal services firms in ways in which, in the highly politicised language of the White Paper "suit consumers not providers".

The use by household names of the ability to set up legal services providers became known as "Tesco law". In fact, it is the Co-op which has most recently stated its intention to launch a legal services business that will be available to members initially, but offered to the public as a whole as soon as the reforms are implemented.

The Bar Council dubbed the proposal to allow external investment as "Maxwell law" suggesting that the relaxation of the rules would allow ownership of law firms to fall into less desirable hands. However, the draft Bill seeks to guard against this by imposing a licensing system under which prospective ABS firms will have to apply to become "licensed bodies". A range of safeguards aimed at protecting consumers and demanding high standards will be put in place. These include a "fitness to own" test and the appointment of a Head of Legal Practice, to ensure compliance with regulation, and a Head of Finance and Administration with responsibility for maintaining appropriate accounts and administrative systems.

It is early days, but already the draft Bill has provoked some strong reactions from interested bodies, especially on the subject of regulation. The Law Society has warned that legislation intended to create a flexible, modern and consumer-focused framework must not be undermined by unnecessary regulatory burdens on firms. It calls for the legislation to make clear that primary responsibility for regulation should rest with the independent professional bodies, with the government’s appointed Board acting only as a supervisory guardian. This is echoed by the Bar Council which has stressed that the Board must act as a lighttouch oversight regulator which should not be able to "second-guess" the legitimate decisions of approved regulators.

The CLLS has repeated its call for a lighttouch regulatory regime for City firms and their sophisticated clients, allowing firms to retain their independence, flexibility, competitiveness and international standing. The group are also concerned, as are the Law Society, that members of the Board will be appointed by the Secretary of State rather than an independent selection panel. In fact, the group feels so strongly that it has reportedly engaged a professional lobbyist to assist in putting together a hard-hitting response to the draft Bill.

The draft Bill is now subject to pre-legislative scrutiny by a Joint Committee headed by Lord Hunt of Wirral (formerly senior partner at Beachcrofts) who will report with recommendations in July. If initial reaction is anything to go by, certain aspects of the draft Bill face some strong opposition and it will be interesting to see how the concerns already expressed will be reflected in the Joint Committee’s Report.

Despite the concerns, most welcome the idea of reform and a better (but not necessarily more) regulated profession. This should have a positive impact on the professional performance of the legal profession as a whole thereby reducing the number of negligence claims. However, much will depend upon the manner and degree of regulation on the ground. Notwithstanding the detail of the draft Bill, we are still some way from being able to assess that.

The better handling of complaints by an independent body which can provide real redress to consumers may also help to reduce the number of negligence claims being pursued through the courts. However, this will not impact on claims worth more than £20,000 and there is a danger that we might see a rise in the numbers of claims worth less than £20,000 with the prospect of pursuing free redress through the ombudsman scheme.

Finally, it remains to be seen what the profession will make of the new opportunities posed by the prospect of ABS firms. Whilst the Government is keen to allow the possibility of outside investment, it is interesting that the CLLS, in its response to the White Paper, considered that there was little enthusiasm in the City for alternative business structures, save for the prospect of forming partnerships with barristers and promoting limited numbers of non-lawyer managers to partnership. Incidentally, the CLLS urged that such matters alone should not transform the firm into an ABS practice attracting greater regulation.

Undoubtedly, the reforms will bring new challenges for the profession and insurers alike, but it is hoped that they will have a positive impact upon the profession, improving standards, claims records and hopefully therefore reducing professional liability insurance premiums. Whatever view one may take of the Government’s proposals, few practitioners are likely to argue with that!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.