The Regulation of Legal Services: What Is the Case for Reservation?

THE REGULATION OF LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION?

STRATEGIC DISCUSSION PAPER

July 2011

THE REGULATION OF LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION?

July 2011

Introduction and summary This is the second of two papers. In the first1, we traced the origins of the six reserved legal activities found in section 12(1) of the Legal Services Act 2007. We sought to understand the history and the reasons behind the selection of each of various legal activities for reservation. We concluded that the history of the currently reserved activities would not provide a sound basis for identifying suitable criteria for the addition or removal of reserved activities in the future. In this second paper, therefore, we explore the broader basis for the regulation of legal services and in particular a contemporary approach to reservation in the light of the Legal Services Board’s powers under the Act to recommend the addition or removal of legal services as reserved activities. A description of the Board’s powers and the process involved will be found in Appendix 1. The Act provides for the extension or removal of reserved activities by order of the Lord Chancellor (rather than by primary legislation, and only on the recommendation of the LSB). However, it seems to us that, for the Board to make any recommendation to add a reserved legal activity to the list, it must be clear in articulating the policy reasons and criteria for doing so. Only in this way will it be possible to test the recommendation, not just in relation to the recommended activity itself but also in relation to other legal activities that appear to satisfy the same policy reasons and criteria. Further, to the extent that one (or more) of the currently reserved activities does not appear to meet those same policy reasons and criteria, it should follow that the Board ought to recommend that it (or they) should be the subject of a recommendation for removal. The creation of reserved legal activities (as a form of exclusivity granted by the State to those deemed to be appropriately qualified) is only one approach to regulation. Parliamentary intervention has also led to some services that would fall within the definition of ‘legal activity’ in section 12(3)(b) of the Legal Services Act 2007 being regulated by statute, but not as reserved legal

1 LSI (2010a) Reserved Legal Activities: History and Rationale, available at http://www.stephenmayson.com

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION? activities. Examples include immigration advice, claims management services, and insolvency work. This adds a degree of complexity to the regulatory terrain. In a final twist, some legal activities are neither reserved under the Legal Services Act 2007 nor regulated by any other statute. However, where the person carrying them out is qualified and regulated (such as a barrister, solicitor and licensed conveyancer), the activities they undertake can become regulated as a consequence of the person being regulated. The outcome is that non- reserved legal activities carried out by unregulated persons can be undertaken without any regulatory oversight. This leads to a ‘regulatory gap’, where clients who procure activities which are not reserved or regulated, from providers who are not regulated as qualified or licensed practitioners, are left without any protection. Activities that currently fall into this gap include some that could potentially seriously affect the lives of the people involved and of others around them (such as the preparation of wills, or advice about mental health). As things currently stand, therefore, the regulation of legal activities is somewhat confusing (and surprising) for consumers. It would seem illogical to consider the creation or removal of reserved activities merely in the context of the powers to reserve or liberate without reviewing the broader approach to the regulation of activities, individuals and entities. As a result of our first paper, we are not convinced that there is yet a coherent public interest argument that applies to the current reservations, or even a cogent set of arguments that forms a reasoned basis for their continuation. At the end of our first paper, we posed three questions: 1. On what public interest basis should any legal activity be regulated? 2. If there is a case for regulation, should it be one for reservation or some other form of regulation (and what should be the difference in effect between regulated and reserved activities)? 3. If there is a case for regulation, should it be of the activity, of the individual who provides the service, or of the entity within which an individual is engaged? This paper seeks to address those questions, and in doing so explores the potential public interest rationale for the regulation of title and person, and reservation of legal activities, in order to suggest a contemporary approach to reservation. It is, accordingly, fundamentally a paper about the reservation of legal activities rather than a broader attempt to revisit the totality of regulation relating to legal services. There is, nevertheless, a necessary observation: the essence of the current regulatory approach to legal services derives from an era when there was much less general consumer protection – either in legislation or in commercial ethos. It must therefore be right to question whether all aspects of that traditional regulatory approach continue to be justified in a different time and circumstance. We take as a given the fundamental framework of the Legal Services Act 2007, namely the regulatory objectives, reserved legal activities and authorised persons. However, if the reserved legal activities are anachronistic or presently lacking an articulated public interest justification (which we believe they are), there is a significant risk that the Legal Services Act will have promoted (and the LSB will be overseeing) an increasingly irrelevant regulatory infrastructure. We do not believe that this failure of legislature intention would be in the public interest. The regulatory gap that we refer to above could result in a considerable proportion of non-reserved activities being carried out by providers other than authorised persons. There is some risk that consumers might not be adequately – or even competently – advised or represented on issues that are fundamental to their physical, mental, personal, social, and economic well-being2. We do not regard this as being in the public interest either. Our rather ambitious objective in this paper is to draw conclusions and suggest proposals for the future regulation of legal services on issues that Sir David Clementi and the introduction of the Legal

2 To be clear, we are not suggesting that this risk is either inevitable or, in itself, sufficient justification for regulation.

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION?

Services Act sidestepped. The focus of this paper, like the first, remains the reserved legal activities; but this time the emphasis is not on what they are and how they came to be reserved, but rather on what they should be (and why) and how reservation sits alongside other approaches to regulation. We are aware that the LSB commissioned the Regulatory Policy Institute to prepare a paper outlining the economic rationale for regulation in the legal services market3. We do not seek to replicate that work, although there is some inevitable overlap. Our own review of the underlying theory is in Appendix 2, to which we shall refer as appropriate. We strongly support the principle of risk-based and evidence-based regulation. We also agree that risk will often be demonstrated by evidence. It is therefore difficult to disagree with the objective of evidence-based policy. To express a somewhat cynical view, however, we think there is also a recent trend in many areas of public debate (within and beyond the world of legal services) of policy- based evidence – that is, the selective seeking or use of available evidence or commissioned research to provide empirical support for a desired policy outcome. There are obvious dangers and shortcomings in such an approach. Further, we think that it is legitimate to anticipate risk (that is, to foresee circumstances where risk might arise in the future) in the absence of any current evidence that such a risk has yet materialised. Indeed, we think that this is one of the major responsibilities of policy-makers and regulators. This will require policy-based regulation. Our preference, therefore, is to seek policy and regulation founded on sound principles, supported where possible by available evidence but not reticent about drawing conclusions in the absence of evidence where public policy or the public interest suggests that regulation would avoid or reduce a significant degree of risk. This paper will first consider how reservation might contribute to achieving each of the regulatory objectives in the Legal Services Act. It will then address regulation by title, person and activity, and suggest generic public interest justifications for reservation (the public good, and consumer protection). Finally, it will apply these public interest justifications to the currently reserved legal activities – to assess whether, and to what extent, the existing reservations can still be supported – as well as exploring the circumstances in which a case could be made to consider other legal activities for reservation. In summary: (1) we offer a definition of ‘the public interest’; (2) we believe that, in meeting the regulatory objectives in the Legal Services Act, those objectives could be divided into primary and subordinate objectives, where the primary objectives directly support the public interest and in any conflict among the objectives the primary objectives would prevail over the subordinate; (3) reservation can be justified on the basis of the public interest in securing public good (as a matter of principle and without further evidence) and consumer protection (where sufficient evidence exists to support it); (4) the current reservations for rights of audience, the conduct of litigation, court- related reserved instrument activities, the administration of oaths, and notarial activities can be justified in the public interest; (5) a strong public good case could be made for the current property-related reserved instrument reservation to be broadened to include all conveyancing services; (6) a strong public good case could be made for immigration advice and services to become reserved legal activities;

3 See Regulatory Policy Institute (2010) Understanding the economic rationale for legal services regulation: available at http://www.legalservicesboard.org.uk/news_publications/latest_news/pdf/economic_rationale_for_Legal_Services_R egulation_Final.pdf.

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION?

(7) a strong consumer protection case could be made for the preparation of wills and powers of attorney to become reserved legal activities; (8) the current probate activities reservation is too narrow; a strong consumer protection case can be made to replace it with a broader reservation applying to the administration of estates; (9) there is no or insufficient justification for adding either insolvency practice or claims management services to the list of reserved legal activities; (10) where reservation is justified, authority to practise a reserved legal activity should not be confined to those who hold a professional title and, for those who do, should be conferred separately by way of accreditation or endorsement to a practising certificate; and (11) if the work for any client involves a reserved activity, the provider should be obliged to inform the client that this is the case and name the authorised person(s) who will be responsible to the client for that work.

We are grateful for the many responses, and expressions of agreement and support, that we received as a result of our earlier interim paper. We particularly welcomed the helpful responses of The Law Society4 and the Institute of Chartered Accountants in England & Wales. We have also drawn on the discussion and comments made at a seminar jointly hosted by the Institute and the Legal Services Board. Finally, we welcome the LSB’s consideration of its approach to the scope of regulation, and hope that this paper will inform the Board’s thinking and approach on this important issue.

4 See http://www.lawsociety.org.uk/influencinglaw/policyinresponse/view=article.law?DOCUMENTID=439138.

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION?

1. Reservation and the regulatory objectives 1.1 Introduction Although often characterised as an Act promoting deregulation, we begin by observing that the Legal Services Act 2007 in fact introduces a framework for bringing into the regulatory net some bodies and activities that are currently not within it such as new approved regulators, new reserved legal activities, and new licensed bodies. It does not principally seek to remove from regulation bodies or activities that are currently regulated (although the power to do so does exist). It is therefore wrong in our view to regard the reforms as deregulation. The question in this paper relates to the issue of which legal activities should be regulated, and specifically by way of reservation to authorised persons. We begin by looking at the overarching objectives in the Act. Section 1 of the Act sets out eight regulatory objectives. The LSB is under a statutory duty to promote the regulatory objectives whilst discharging its functions5, as are the approved regulators6. Any approach to the regulation of legal services, and thus to the reservation of legal activities to authorised persons, must meet these regulatory objectives. The following paragraphs therefore address each of the eight regulatory objectives in turn, and contemplate how reservation could be used to further each of them.

1.2 Protect and promote the public interest We referred in our first paper7 to the central importance of the public interest in regulation and quoted with approval a number of statements suggesting that regulation must be justified primarily in the public interest. Our analysis in Appendix 2 also shows how economic and regulation theory can support regulation in the public interest. Using ‘the public interest’ as a basis of, or justification for, action or regulation is therefore common, and difficult to argue against. But it does beg a question: what exactly do (or should) we mean by ‘the public interest’? Is it some form of Benthamite greatest good for the greatest number? Is it some inchoate notion of what is in society’s best interests? Is it, as Lord Hunt expressed it in his final report on regulation in legal services8, “an aggregation of the individual and corporate interests of everyone within a given territory within which it must be the role of government and its agencies to arbitrate as and when those interests conflict or collide”? The LSB, in its statement of the meaning of the regulatory objectives in section 1 of the Act, states that the public interest “includes our collective stake as citizens in the rule of law and in society achieving the appropriate balance of rights and responsibilities”9. Perhaps not surprisingly, the Board’s view is shaped in terms of legal services. However, in our view the public interest is a much broader concept – albeit underpinned by the rule of law, the broader legal system, and the administration of justice. For the purposes of this paper, we adopt Mayson’s approach to the meaning of ‘the public interest’, which is not confined to matters legal10:

The public interest concerns objectives and actions for the collective benefit and good of current and future citizens in achieving and maintaining those fundamentals of society that are regarded by them as essential to their common security and well-being, and to their legitimate participation in society.

5 Legal Services Act 2007, s. 3. 6 Legal Services Act 2007, s. 28. 7 LSI (2010a), para 5.7. 8 Hunt (2009), p. 32. 9 Legal Services Board (2010) The regulatory objectives, p. 3. 10 See Mayson (2011), para 5.

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION?

On this view, the public interest has two principal dimensions: the fabric of society itself; and the participation of citizens in society. The fabric of society is maintained by fundamental issues such as national defence and security; public order, the rule of law, and the administration of justice; protection of the natural environment; effective government; and a sound economy (including the free movement of people and capital). Participation is then secured and encouraged by public health, education, and welfare; access to justice and the protection of human rights and equality; and reliable personal, public and commercial relationships. The view taken by citizens of what is regarded by them as essential will change over time; and of course whether something is for the collective benefit or good of society is itself a matter of judgement. But governments, judges and regulators are, arguably, elected or appointed as the transitory arbiters of that judgement. For reasons we shall advance later (see paragraphs 1.10 and 2.4.1.1 below), our view is that the public interest should be the dominant objective of regulation and should accordingly shape both content and method.

1.3 Support the constitutional principle of the rule of law We have already seen (in paragraph 1.2 above) that the LSB regards the rule of law as part of the public interest. This ‘nesting’ of the regulatory objectives will be a recurring theme which makes it impossible to consider the achievement of one in isolation from the others. The most basic definition of the rule of law is generally agreed to be that no one is above the law11. Sir David Clementi, in his final report, wrote (2004: 15):

The rule of law embodies the basic principles of equal treatment of all people before the law, fairness, and a guarantee of basic human rights. A predictable and proportionate legal system with fair, transparent, and effective judicial institutions is essential to the protection of both citizens and commerce against any arbitrary use of state authority and unlawful acts of both organisations and individuals.

Lord Bingham offered the following, non-comprehensive, statement (2010: 8):

all persons and authorities within the state, whether public or private, should be bound by and entitled to the benefit of laws publicly made, taking effect (generally) in the future and publicly administered in the courts. The reference to public administration of laws in the courts is an interesting one. Genn refers (2010: 32) to “a modern paradox in which there is a proliferation of laws and regulation, accompanied by a reduction in adjudication”. The increasing use of mediation and some tribunals for adjudication (together with a lack of publication of their determinations) removes much of the fabric of transparency, certainty, consistency and dissemination of public decision-making in the application of legal rights. There has certainly been a sustained assault on the principle of justice ‘being seen to be done’. Lord Bingham then elaborated on the meaning of the rule of law by outlining eight sub-rules12, which provide a useful basis for this analysis: 1. The law must be accessible, intelligible, clear and predictable. 2. Questions of legal right and liability should ordinarily be resolved by application of the law and not the exercise of discretion.

11 Legal Services Board (2010) The Regulatory Objectives, p. 4. 12 He initially did this in a lecture (Bingham 2006) and subsequently in his book (Bingham 2010).

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3. The laws of the land should apply equally to all, save to the extent that objective differences justify differentiation. 4. The law must afford adequate protection of fundamental human rights. 5. Means must be provided for resolving, without prohibitive cost or inordinate delay, bona fide civil disputes which the parties themselves are unable to resolve. 6. Ministers and public officers at all levels must exercise the powers conferred on them reasonably, in good faith, for the purpose for which the powers were conferred and without exceeding the limits of such powers. 7. Adjudicative procedures provided by the state should be fair. 8. The state must comply with its obligations in international law, the law which whether deriving from treaty or international custom and practice governs the conduct of nations. Clearly a number of these are not particularly germane when contemplating the level of regulation required in the legal services market of England and Wales, such as those concerned with international law and human rights. Nevertheless, the rule of law is underpinned by an independent and effective legal system, which itself requires law and regulation. Lord Bingham’s first sub-rule makes the initial point that the law must be accessible, intelligible and clear. Barendrecht argues that monopolies within the legal system maintain the impenetrability of the law because of the complicated language used by lawyers13: “Why can it not be conducted in normal language?”. From this point of view, if the practice of the reserved legal activities was opened up to a wider group of providers, at least some amongst those would be likely to conduct their business in terms more easy to understand for their lay clients. However, an alternative view could be that the more experienced the lawyer, the more able they should be at explaining the law to their clients. At the root of this point, though, it seems that the general public should not expect to be able to understand the law they are bound by without the assistance of a lawyer, and indeed that it would be unusual for them to be able to do so. Although it may sound reasonable for a person to want to know what the law is without having to engage an intermediary, this information deficiency or asymmetry is unavoidable and inherent in the legal services market (cf. Appendix 2, paragraph 2.2.1). The situation is similar with many other liberal professions. To educate each consumer to the level where legal advice and representation were no longer needed would be too costly, and impractical14. The final part of the first sub-rule is that the law should be predictable. Bishop has suggested that, in a trial situation, qualified professionals could produce more valuable precedent through better- argued cases15. On this basis, reserving rights of audience only to appropriately qualified individuals might increase the level of consistency in the law, as stronger precedent is more easily relied on. The fifth sub-rule requires that ways must be provided to allow parties to resolve disputes without excessive cost or delay. The current system of reservation of certain legal activities might act either for or against this rule, depending on one’s viewpoint. According to theory (cf. Appendix 2, paragraph 2.4.2), monopoly rights enjoyed by legal practitioners will cause consumer welfare losses because of higher prices charged to clients and the likelihood that those extra costs will result in fewer smaller claims being pursued (OECD 2007: 33). Higher prices charged by monopolists do not easily contribute to the imperative of resolving disputes without excessive cost. In addition to this, the market entry restrictions imposed by reservation and qualification could limit the number of practitioners, which might artificially increase prices and the demand for existing lawyers. Further,

13 Barendrecht (2004), as noted by SEO (2008: 77). 14 This has further implications for another of the regulatory objectives – increasing public understanding of the citizen’s rights and duties: see paragraph 1.8 below. 15 Bishop (1989), as noted by OECD (2007: 24).

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION? limited availability of existing lawyers could result in delays before a case can be dealt with, again working against the intent of this sub-rule. On the other hand, proponents of regulation and reservation would argue that qualified lawyers provide a higher-quality service than non-lawyers16. From this standpoint, it could be argued that regulation in fact minimises the delays and costs associated with litigation: if only those who are suitably experienced are allowed to conduct litigation or appear in court, it is reasonable to assert that a dispute is more likely to be clearly and definitively decided first time round. By comparison, a non-expert might make mistakes that could result in delays, further litigation, mounting costs and possibly an unjust outcome. Supporting the rule of law therefore requires the effective and efficient administration and maintenance of the justice system: reservation of activities can contribute to strength, independence and effectiveness, but might bring potentially anti-competitive behaviour as part of the cost. We address later this apparent conflict of objectives (see paragraph 1.10 below).

1.4 Improve access to justice The LSB understands access to justice to be “the acting out of the rule of law in particular or individual circumstances” (Legal Services Board 2010: 5). As well as being inherently linked to the rule of law, access to justice is a similarly broad concept in so far as it is made up of numerous interrelated ideas 17. Genn suggests that access to justice, at its most basic (2010: 115),

is about access to procedures for making rights effective through state-sponsored public and fair dispute resolution processes. It implies equal access to authoritative enforceable rulings and outcomes that reflect the merits of the case in light of relevant legal principles. In its comprehensive study of this area, the Australian Government (2009: 62-63) identified five principles fundamental to access to justice:

• Accessibility: any initiatives should reduce the complexity of the justice system. • Appropriateness: users should be incentivised to resolve their disputes at the most appropriate level, and the justice system should be able to direct attention to the real causes of problems that manifest as legal issues. • Equity: the justice system should be fair and accessible for all, including those facing financial or other disadvantage. • Efficiency: outcomes should be delivered as efficiently as possible, recognising that this may include informal dispute resolution and prevention of disputes. The costs of dispute resolution should be proportional to the issues in dispute. • Effectiveness: different elements of the justice system should interact to deliver the best possible outcome. All elements should work towards delivering fair and appropriate outcomes, preventing and resolving disputes, and supporting the rule of law. These principles also resonate with Lord Bingham’s sub-rules and reinforce the strong and necessary connection between the rule of law and access to justice. Further, enabling citizens to resolve their dispute at the level most appropriate for them can be greatly helped by public legal education, which is discussed in more detail in paragraph 1.8 below.

16 This raises questions of what exactly we mean by ‘quality’: this is explored in Mayson (2010). 17 An in-depth consideration of access to justice is beyond the scope of this paper. It will be addressed in a new paper produced by the Legal Services Institute, due later in 2011.

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The correct role of regulatory influence on access to justice often polarises around the issues raised in relation to Lord Bingham’s fifth sub-rule – namely, whether reservation promotes or restricts access. We do not believe that there is yet an evidence base to suggest a conclusion one way or the other: we simply note, without further comment, the Parliamentary intention to encourage greater access to justice by liberating the legal services market from some perceived restrictive practices and structures. We further note, however, that in our view, the issue of reservation is neutral on whether those who provide legal services can be sufficiently free to innovate delivery and so improve access to justice: the structures and methods through which legal activities are provided do not, in principle, vary with reservation or non-reservation of the activity but rather attach to the entrepreneurial and professional awareness of the provider. This does not imply, of course, that the effects will be neutral or evenly distributed: a review of developments in the market for the services and products of optometrists demonstrates how uneven the effects might be. Nevertheless, the opportunities were equally available but differently taken.

1.5 Protect and promote the consumer interest The definition of ‘consumer’ in section 207(1) of the Legal Services Act 2007 is drawn widely, and will include both commercial and non-commercial users of legal services. The LSB has interpreted this as meaning “anyone who might have recourse to legal services because of a legal issue” (Legal Services Board 2010: 8), lending a very wide scope to this regulatory objective.

The Clementi Review described consumer interests as follows (2004: 16):

The consumer’s principal interests include higher quality and lower prices. In part this includes the giving of choice to an informed consumer. In this way the ultimate choice of whether to accept a risk is made by the consumer. The line between quality and price is one that the LSB is currently required to walk. One of the main arguments used to justify the reservation of certain legal activities is that it ensures the quality of service provided to consumers; on the other hand, the anti-competitive effects of such monopolies will drive up prices (cf. Appendix 2, paragraph 2.4.2). In deciding whether to preserve the list of reserved legal activities as it is, or add to or subtract from that list, the comparative effects on price and quality should be primary concerns. From the point of view expressed in the above quotation from the Clementi Review, one of the most important things a regulator could do to further the consumer interest is to secure better information for consumers about the choices open to them: indeed, Sir David Clementi referred to the asymmetry of information between provider and consumer18 and said that because of this the regulator “has a duty both to protect and further the interests of the consumer” (2004: 16). This also raises issues of where that burden should fall – not only in relation to enlightening a particular enquirer or client but also into the much broader arena of public legal education (discussed in more detail in paragraph 1.8 below). Indeed, given that the regulatory powers only bite on authorised persons, any regulatory compulsion to improve consumer understanding will have to be driven from among the regulated community (either by reserved activity or regulated person). In any event, it is worth observing (and accepting) that the vast majority of consumers will never be fully informed about the legal services market. Information asymmetries between consumers and suppliers are and will remain characteristic of legal services: the point was made in paragraph 1.3 above that to inform consumers fully would be so costly as to be impractical. Further, providing more and better information will add to the ‘search costs’ of consumers (cf. Appendix 2, paragraph 2.1) who will often be time-poor, irregular and inexperienced buyers of legal services who could be

18 Cf. Appendix 2, para 2.2.1 below.

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION? overwhelmed by the volume of information available to them: such high search costs could paradoxically become a barrier to reducing the information asymmetry between supplier and consumer. This is another reason why the collective benefit arising from focused, informed and experienced regulators is a welcome addition to the consumer protection armoury (cf. paragraph 2.4.1.3 below). In addition to better information for consumers, therefore, the Clementi Review ascribed a second duty to the legal services regulator: that when consumers are not sufficiently informed, a regulator should (2004: 16) “have powers to act in the market, for example, to prohibit oppressive marketing practices, raise or set standards, develop information/awareness programmes, resolve disputes and protect vulnerable groups”. Given that the most potent regulatory powers and consumer benefits are achieved through or as a consequence of reservation (see the discussion in paragraph 2.4.1.3 below), there is an argument that reservation would play a significant part in protecting and promoting the consumer interest. However, reservation is not a guarantee of quality (the complaints profile of the regulated community will attest to this), and will come at some additional cost. Historically (as Sir David Clementi’s review showed), it has also led to structures and cultures that have inhibited or discouraged innovation and the competitive quest for greater value for money for clients. Reservation and its effect on the consumer interest is therefore a balancing act: is greater assurance of quality worth the extra costs? To the extent that reservation and the associated costs will bring additional protections (as discussed in paragraph 2.4.1.3 below), there is not a simple trade-off between quality and cost. Further, as we say on a number of occasions in this paper, where reservation is justified, it does not follow that only lawyers (even without the historically restrictive professional rules and attitudes) should be the only ones authorised to offer the reserved activity.

1.6 Promote competition We set out in Appendix 2, paragraph 2.1 below the view from economic theory that perfectly competitive markets act as the underlying regulator in securing the correct outcomes in economic exchanges. However, the notion of perfect markets is a theoretical construct and they will not be found in the real world. Consequently, ‘market failures’ of various kinds will inevitably arise and regulation will be needed to address them in order to restore a degree of fairness. We are not therefore dealing with an either-or situation (that either regulation or competition is suitable for a given market); that would be an unduly simplistic view to take. Llewellyn has argued convincingly that competition can successfully co-exist with regulation (1999: 23):

The purpose of regulation is not to replace competition but to enhance it and make it effective in the marketplace by offsetting market imperfections which potentially compromise consumer welfare. Regulation and competition are not in conflict. Regulation has the potential to enhance consumer welfare both by reinforcing the degree of competition, and by making it more effective in the market place. Thus, regulation may be seen as a way of creating and sustaining consumer confidence within a market. Any loss of confidence could result in consumers either not buying at all, or only buying from a limited number of suppliers with whom they are already familiar; neither would provide scope for promoting competition. The LSB itself is in favour of competition in the legal services market, having stated that (2010: 9): “Individual providers of legal services should compete for capital and consumers, so as to drive better performance for both sides”. In the context of reserved legal activities, the very creation of a reservation leads to a barrier to

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION? entry (the need for appropriate qualification or licensing) and therefore in some way inhibits free competition19. However, assuming that the reservation is justified in the public interest20, once the threshold level for market entry has been achieved, there is no necessary incompatibility in then promoting competition among those who have been permitted to enter the market. Arguably, this is one of the principal objectives of alternative business structures and the new licensing framework. Perhaps the best way of assessing this regulatory objective is to consider balancing two public interest goals (reservation and competition) through the lens of competition law. Regulation (through reservation) would therefore be justified to protect consumers from unavoidable but sub- optimal market features (say, information asymmetry between provider and client). But where regulation is justified, it should be applied in the proportional manner advocated by the European Court of Justice21. Using this approach, a regulatory tool must achieve its stated aims in the manner least restrictive of competition. Creating a threshold level for market entry through reservation could be argued to meet this test if, once beyond the threshold, providers face the normal forces of competition (subject, of course, to the other requirements of competition law that apply to the behaviour of market incumbents, such as reviews of monopolies, cartels and other anti-competitive practices).

1.7 Encourage an independent, strong, diverse, and effective legal profession Although this is expressed as a single regulatory objective, the different ideas within it could be affected in varying ways by regulation. It consequently lends itself to being considered in four separate parts22. The LSB has offered its own interpretation of each of the four elements. In relation to independence, it says (2010: 11):

Independent primarily means independent from government and other unwarranted influence.... An independent profession serves to promote the principle that legal service providers should be free from inappropriate influence (financial or institutional) to act as an agent of the client, in their best interests. Ensuring the independence of the legal professions is an oft-cited reason for providing regulatory protection. For example, if rights of audience were not reserved to authorised persons appropriately qualified, they would face competition from providers who might not adhere to similar standards of independence and competence. Similarly, when the Administration of Justice Act 1985 raised the possibility of lending institutions being able to offer conveyancing services to their customers, concerns about conflicts of interest were voiced. In comparison to the relative independence of solicitors, it was thought that banks and building societies might not act in their customers’ best interests if they provided both mortgage and conveyancing services for the same transaction. Regulation has so far prevented this happening (although arguably it is also more economic for banks to refer the conveyancing work to independent solicitors). Thus, regulation potentially has a role to play in preserving the independence of legal services providers, as competition alone would be less likely to do so.

19 Or, as we would prefer, fair competition: see Appendix 2, para 2.1 below. 20 Sir David Clementi accepted that competition cannot be allowed to override other relevant factors when he wrote that the regulator should “encourage competition in the provision of legal services and the promotion of choice in both the number and type of providers, subject to the proper safeguard of consumers’ interests” (2004: 17, emphasis supplied). 21 Case C-309/99 Wouters et al v Algemene Raad van de Nederlandse Orde van Advocaten [2002] ECR I-1577. 22 Interestingly, Sir David Clementi’s formulation was “a confident, strong and effective legal profession” (2004: 17). It is also interesting to note that, given that one of the Act’s principal intentions is to bring new providers into the market through ABSs, this objective is framed in terms of the legal profession rather than of all authorised providers.

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The LSB considers a strong legal profession to be (2010: 12) “able to speak authoritatively on matters of relevance and is fully informed of consumer need and how to meet it. Its voice on law reform and the wider justice system should not be weakened through regulation”. Strength is therefore tied in with independence, because legal practitioners should be able to speak out without hindrance on issues they feel are important. Regulation might then play a key role in keeping the legal profession strong. Concentration of expertise and experience within a limited group should increase their understanding of client issues and need, and so place them in a strong position to speak authoritatively to government and regulators about the effects of law and regulation, and new proposals. The reserved legal activities give a monopoly to various authorised persons, and restrict competition to being just among those providers. When only a limited group of people can provide services that nearly the entire population will at some point need, it is not surprising that the profession has historically proven itself resilient. However, such monopoly rights might also mean that lawyers have less incentive to maintain their levels of efficiency and innovation, because they face such limited (and often homogenous) competition. This, if anything, has proved the Achilles heel that led to the Clementi Review, the Legal Services Act, and now the very real prospect of the market being opened up to a wider group of authorised persons. The connection between reservation and strength will not inevitably be diluted, but lawyers might have some rapid catching up to do to enable them to maintain their competitive position as against any new entrants. Indeed, if members of the legal profession positioned themselves better to address issues of efficiency and innovation, they might well find that they move closer to their clients and the issues they face, and are therefore able to speak with even greater authority and strength. A diverse legal profession is “one that reflects and is representative of the full spectrum of the population it serves so as to harness the broadest possible range of talent in the meeting of the regulatory objectives” (Legal Services Board 2010: 12). This is currently a pertinent issue following the Milburn report on fair access to the professions which concluded that (2009: 24) “law remains one of the most socially exclusive professions”. Qualitative entry restrictions in the form of minimum educational requirements could exclude market entrants from less privileged backgrounds (Panel on Fair Access to the Professions 2009: 22). The existence of reserved legal activities could also be excluding certain sections of society from participation. Regulation will therefore affect the extent of diversity within the legal profession. Where regulation (such as reservation) is intended to achieve public interest objectives (say, supporting the rule of law and the independence and strength of the legal profession), but contributes to a less-than-optimal outcome in another (diversity), the resolution of that tension is a balancing act, and will require the regulator to reach a judgement about the relative importance of one regulatory objective in relation to another: we offer a view on this in paragraph 1.10 below. Finally, the LSB suggests that an effective legal profession will be (2010: 12):

able to meet the changing needs of consumers and contribute to the meeting of the regulatory objectives. The profession’s effectiveness is as much defined by consumers’ expectations in it as it is by the professions and covers quality, access and value. The Board also suggests that quality comes from (2010: 12) “appropriate education, training and quality assurance mechanisms as well as a consumer driven, competitive market”. Quality can in part be assured by setting minimum training and market entry requirements; but these – by the very nature of the entry barriers and potential for reduced or weak competition that they create – can also compromise access and value. But as the LSB’s formulation implies, simply meeting requirements to enter a market is no guarantee of continuing competence and quality. The

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION? adoption by regulators of effective and relevant quality assurance, accreditation and monitoring schemes can also play a role in securing the effectiveness of providers. Quality, access and value will require a balance of minimum entry requirements and continuing assurance mechanisms, acknowledging that these will inevitably create some barriers to entry. It is therefore important that, in keeping with the objective of promoting competition (cf. paragraph 1.6 above), competition is encouraged among those who reach the minimum entry standards and are then shown to maintain or perform beyond them. An effective profession is not one that uses its privileged position to resist improvements and innovation in quality, access and value. Reservation might therefore contribute to an effective legal profession, but effective competition among those within the restricted market will still also be needed in order to assure quality, access and value to consumers.

1.8 Increase public understanding of the citizen’s legal rights and duties Lack of information for consumers, and uneven distribution of information (or asymmetry) as between provider and client, offer particular challenges to the legal services market and approaches to regulation (see further Appendix 2, paragraph 2.2). They also present difficulties in improving access to justice (see paragraph 1.4 above) as well as protecting and promoting the consumer interest (see paragraph 1.5 above). If citizens are aware of their legal rights and duties, and of how to find, instruct and use providers of legal advice and services, there is likely to be greater consumer confidence in accessing legal services, and fewer conflicts and complaints arising between clients and providers; this should also encourage suppliers to provide higher quality, and improved access and value (Legal Services Board 2010: 13). However, there is a mountain to climb. Research has shown that one-third of the British population has experienced a civil justice problem, but many of those people take no action towards a resolution. It has also been estimated that approximately one million such issues go unresolved each year, resulting in widespread legal exclusion amongst those affected. Such exclusion results from uninformed members of the public not knowing where to turn for help, or thinking that nothing can be done about their situation (PLEAS 2007: 7). The fulfilment of this regulatory objective therefore largely hangs on effective public legal education (PLE), which has been defined as follows (PLEAS 2007: 9):

PLE provides people with awareness, knowledge and understanding of rights and legal issues, together with the confidence and skills they need to deal with disputes and gain access to justice. Equally important, it helps people recognise when they may need support, what sort of advice is available, and how to go about getting it. PLE has a further key role in helping citizens to better understand everyday life issues, making better decisions and anticipating and avoiding problems. PLE focuses on the early stages of a legal issue. Ideally, the public will be helped to avoid legal problems, but if issues do arise PLE will also aid more timely and effective responses23. It is important to note that PLE does not aim to teach people everything they might ever need to know regarding the law. The Public Legal Education Network explains that in addition to a basic knowledge about rights and responsibilities in everyday situations, a vital part of PLE is informing people about where to go to find more information and to seek further help (PLENet 2009: 4). It seems to us that tackling this regulatory objective will have to be a multi-faceted approach, which could start in secondary education, and extend to public campaigns mounted and funded by regulators as well as to local and personal ‘education’ carried out by providers in their everyday

23 See http://www.plenet.org.uk/what-is-public-legal-education/.

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION? interactions with actual and potential clients. The LSB, through its oversight role and dealings with approved regulators and licensing authorities, could encourage or impose requirements to carry out activities which contribute to greater public understanding. However, in the context of this paper, the role of reservation in securing this regulatory objective seems to us to be quite specific. The question is whether, as part of the regulation of authorised persons (that is, those who provide reserved legal activities), there should be any mandatory requirement on those persons to undertake any activities which fulfil the objective. In our view, there should not. The general professional duty to act in the client’s best interests (cf. paragraph 1.9 below) should not be extended to include a general obligation on providers to enlighten each client about broader legal rights and duties beyond those relevant to the current matter on which they are instructed. Further, although there might be some competitive advantage to be derived by providers who undertake a broader ‘educational’ role in the pursuit of new business or as part of their contribution to the local community, to require providers to do so would be to add costs to the supply of legal advice and representation that would create new (and in our view unjustifiable) barriers to entry. Providers should be allowed to make this judgement for themselves in the context of their own marketplace and of their own business and competitive interests.

1.9 Promote and maintain adherence to the professional principles The professional principles are defined in section 1(3) of the Legal Services Act 2007 as applying to authorised persons, who should24: act with independence and integrity; maintain proper standards of work; act in the best interests of their clients; maintain client confidentiality; and, when exercising a right of audience or conducting litigation, comply with a duty to the court to act in the interest of justice. Acting in the best interests of clients is too often, to our mind, used by lawyers as a justification for their actions when those actions in fact compromise independence, undermine the pursuit of justice, or run counter to the public interest. It is not necessarily in the clients’ best interests for their advisers simply to do their bidding; their ‘enlightened’ best interests might suggest that their advisers should act differently. Perhaps outcomes focussed regulation will encourage more enlightened action. The approved regulators publish their own codes of conduct which their members are required to follow. The Solicitors’ Regulation Authority25, the Bar Standards Board26, and the Chartered Institute of Patent Attorneys and the Institute of Trade Mark Attorneys27 have rules contained within their codes which exactly mirror the professional principles. The codes produced by ILEX Professional Standards28, the Master of the Faculties29, the Council for Licensed Conveyancers30, and the Association of Law Costs Draftsmen31 contain those of the Act’s professional principles that are applicable to their members’ work.

24 We note with interest that there is no explicit professional principle requiring authorised persons to act in the public interest, either in the Act or, for example, in the SRA Code of Conduct (in contrast to the Code of Ethics issued by the international Federation of Accountants which states that “A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest”). 25 Available at http://www.sra.org.uk/solicitors/code-of-conduct.page. 26 Available at http://www.barstandardsboard.org.uk/assets/documents/8th%20Edition%20of%20the%20Code%20of%20Conduct%2 0-%206%20October%202010.pdf. 27 Available at http://www.ipreg.org.uk/information/code_conduct.php . 28 Available at http://www.ilex.org.uk/pdf/IPS%20Code%20of%20Conduct%20May%2010%20final.pdf. 29 Available at http://www.facultyoffice.org.uk/Notaries4.30.html. 30 Available at http://www.conveyancer.org.uk/Rules.asp. 31 Available at http://www.alcd.org.uk/sites/default/files/CODE%20OF%20CONDUCT_0.pdf.

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Authorised persons therefore have a dual obligation: a legal requirement to comply with the Act’s professional principles as well as those set by their professional regulator. The Legal Services Act places a duty (in section 176) on authorised persons to comply with their regulator’s arrangements, and prohibits (by section 90) any non-authorised persons connected to a licensed body (that is, an ABS licensed to deliver one or more of the reserved activities) from interfering with such compliance by either that licensed body or an authorised person. Failure to adhere to the professional principles will be dealt with by an approved regulator or by the Legal Ombudsman. Complaints about inadequate service, such as unreasonable delays, breaches of confidentiality, and failing to keep the client informed or respond to telephone calls and e-mails, will be considered by the Legal Ombudsman: some of these will reflect the absence of proper standards of work or failure to act in the client’s best interests. The Ombudsman’s jurisdiction only extends to authorised persons (though it can include complaints about their actions in relation to non-reserved activities). Instances of professional misconduct, such as conflicts of interest, or improper handling of client money, are matters for the relevant regulatory body32. Eventual penalties depend on the gravity of the misdemeanour and range from a reprimand, through intervention in a practice, to being struck off the relevant register of authorised practitioners or firms, either temporarily or permanently. These procedures extend to all the rules within each code of conduct, not just those based on the Act’s professional principles. Nevertheless, it is clear that the regulators will take the necessary action if one of those principles is contravened, and so play a vital role in ensuring observance of this regulatory objective. The professional principles (and jurisdiction over any failure to adhere to them) only apply where there is an authorised person, that is, an individual or an ABS authorised in respect of one or more reserved activity. The notion of reservation is therefore critical to the achievement of this regulatory objective. The list and extent of the reserved legal activities at any given time is consequently of more than passing interest.

1.10 Primary and subordinate objectives? Although the regulatory objectives in the 2007 Act were stated at the time not to be in any order of priority, or to be interpreted or applied in such a way that some would have supremacy over the others33, we are in no doubt that ‘protecting and promoting the public interest’ should be the predominant regulatory objective. We are reinforced in this view by Sir David Clementi’s statement in his final report that (2004: 28): “In a regulatory body the public interest should have primacy”. In our first paper34, we also quoted with approval a number of other statements suggesting that regulation must be justified primarily in the public interest. Indeed, if regulation is not articulated and proven to be in the public interest, it rather begs the question of in whose interests it is made. There would be a strong possibility that regulation could be principally in the interest of consumers, providers or professionals, with consequent risk of regulatory imbalance or distortion that does not protect or promote the public interest.

32 See http://www.legalservicesboard.org.uk/about_us/office_for_legal_complaints. 33 See Hansard Official Report, HL Deb 9 January 2007 c. 129, Baroness Ashton of Upholland: “The Joint Committee recommended that the Explanatory Notes should make it explicit that the objectives were not listed in order of importance. We agreed with that, and the Explanatory Notes reflect it.” Paragraph 28 of the Explanatory Notes states: “The Act does not rank these objectives and principles in order of importance. The Legal Services Board, the Office for Legal Complaints and the approved regulators will be best placed to consider how competing objectives are to be balanced in a particular instance.” 34 LSI (2010a), para 5.7.

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We would therefore now advance the view that the regulatory objectives could – despite the Minister’s statement to the contrary – and, furthermore, should as an expression of policy, be divided into primary and subordinate objectives. In our judgement, the primary objectives are: protecting and promoting the public interest, supporting the constitutional principle of the rule of law, improving access to justice, and encouraging independent, strong and effective legal advice and representation35. Although not explicitly stated as a regulatory objective, we believe that it is implicit in the public interest, and in access to justice, that the effective administration of justice should also be promoted and protected. In our view, all of these elements are in truth manifestations of the public interest as defined in paragraph 1.2 above, hence our view that section 1(1)(a) should be the overriding primary regulatory objective. The rule of law is key to the security and well-being of society, and access to justice is a necessary platform to being able to assert one’s rights in accordance with the rule of law. Maintaining the rule of law also means that there should be an effective system of administration of justice, and that strong and independent legal advice and representation should exist to hold an over-bearing State, or other powerful agents, accountable within the law. The remaining regulatory objectives are unquestionably important. We believe that they contribute to the effectiveness of the primary objectives. In this sense, we might say that it is in the public interest that they are promoted but that they are not, in themselves, manifestations of the public interest in the way that the primary objectives are. From this standpoint, we would then suggest that some apparent conflicts between different regulatory objectives could be resolved by principle. For instance, we would suggest that where there is a conflict between promoting the public interest and promoting the interests of consumers, the former as a primary objective should take precedence over the latter as a subordinate objective. Similarly, promoting competition in the provision of legal services (as a secondary objective) should not compromise the public interest primary objectives. Perhaps more contentiously, we regard ‘encouraging ... [a] ... diverse ... legal profession’ as a desirable secondary objective36 not to be engineered at the expense of independent, strong and effective (and non-discriminatory37) provision of legal services as a primary objective. This conclusion allows the balancing act referred to in the Explanatory Notes (cf. footnote 33) to be carried out on a principled basis. It is this analysis which we would suggest supports our conclusions in paragraphs 1.6 and 1.7 above that reservation is justified to achieve the primary regulatory objectives, and that this outweighs arguments in favour of an absence of regulation which is intended to achieve the secondary objective of competition. It is also why we suggest in paragraph 1.7 above that (in our view) diversity in the legal profession, as a secondary objective, should not be sought at the expense of reservation to secure the primary objectives of independence, strength and effectiveness in the profession.

35 This last part of the sentence is deliberately not expressed in the language of the Act: we have omitted diversity (see later in the discussion of subordinate objectives). Further, we do not confine the public interest in this objective to the legal profession but rather attach it to the broader provision of legal services by those appropriately qualified or licensed, whether members of the legal professions or not. Clementi also thought that “a strong and effective legal profession … would help to ensure access to justice, the maintenance of a healthy supplier base for publicly funded work and continued support for pro bono initiatives, thereby serving the public interest” (2004: 17, emphasis supplied). 36 Without wishing to read too much into the point, we reiterate that diversity was not part of Sir David Clementi’s original conception of this regulatory objective: cf. footnote 22 above. 37 Those who provide legal services are still bound by the general laws of non-discrimination. To our way of thinking, positive discrimination to achieve diversity is still discrimination.

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2. Regulation by title, individual, entity, and reservation 2.1 Introduction This paper is principally concerned with reserved legal activities. However, those activities will be carried out either by individuals or entities. Once reservation is used, it is inevitable that there will be a mix of regulation by activity and by person. Even regulation by person will lead to that mix, since it needs to be clear what it is that the regulated person is entitled to do. There is not, however, a complete overlap of what a regulated person is authorised to do with the reserved legal activities. No approved regulator has the authority to regulate all of the current reserved activities38. This means that a person can only be authorised in respect of all reserved activities if they have chosen to become authorised by more than one regulator (as would presently be the case, for instance, of someone who is both a solicitor39 and a notary public). Further, once an authorised person has been licensed to practise, the appropriate regulator might then choose to exercise regulatory control over more of an authorised person’s activities than just those which are reserved. In this way, the protective cloak of regulation is extended further than the exercise of reserved legal activities. This leads to an additional burden on the authorised person (who becomes regulated in respect of activities that do not need to be carried out by an authorised person) as well as to the benefit of additional protection to the client (who gains the benefit of protection even when not instructing a practitioner in respect of a reserved activity). This multi-faceted approach to regulation adds some complexity – and possible confusion to consumers – but is probably unavoidable, given that regulation only by person or activity would not achieve the same degree of protection for clients and the public as now40. This Section examines the nature of regulation of person and activity, with a short detour first to consider the protection of the title often awarded to those persons who are authorised to conduct the reserved activities.

2.2 Regulation of title or status A title – often a professional one – is usually awarded to those who have successfully completed the qualification or licensing process sufficient for the appropriate regulators to allow a person to practise a reserved legal activity (and possibly more). We therefore find solicitors, barristers, legal executives, licensed conveyancers, and so on holding themselves out as such. This allows the public and clients to know (if they choose to enquire) the qualification of the practitioners with whom they deal. In some cases (though not in all), Parliament has chosen to add to the regulatory framework by protecting the title against misuse or appropriation by those not entitled to it. For example, it is an offence for someone who is not a barrister or solicitor to be pretend to be such (respectively, section 181 of the Legal Services Act 2007 and section 21 of the Solicitors Act 1974). We support the existence of such offences, given the public or consumer harm that might be caused by relying on the advice or services of someone who claims to be qualified and authorised as a barrister or solicitor when they are not.

38 The ‘matrix’ of approved regulators and the reserved legal activities that they are authorised to regulate can be found in the Appendix to our first report (LSI 2010a). 39 Even then, additional accreditation might be required – as, say, in the case of higher rights of audience. 40 At least in the absence of adopting a much wider approach such as that in the United States where the prohibition of those who are not suitably qualified from engaging in the ‘unauthorised practice of law’ effectively produces the overlap of legal advice and representation with those who are legally qualified.

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However, given that the holders of other titles have equivalent rights to conduct reserved legal activities, we consider that there is no justification for confining these ‘holding out’ offences to barristers and solicitors. If there is a potential public or consumer harm arising from the pretence to be qualified when one is not, it should logically apply to all who might claim to be authorised to carry out certain activities when they are not. We note that section 17(1) already makes it an offence “wilfully to pretend to be entitled to carry on … a reserved legal activity when … not so entitled” and “to take or use any name, title or description” with the intention of falsely implying that one is entitled to carry out a reserved legal activity41. However, the current offence of pretending to be a barrister or solicitor is not confined to reserved activities, and we believe that the same should hold for all individuals who are authorised persons and for regulated entities42. In summary, therefore, these provisions will play some part in protecting titles and status by deterring those who wish to take advantage of the regulatory gap as a non-authorised person offering non-reserved activities to the public from falsely claiming any professional status in their bid to attract custom. It may be that prosecutions for these offences are rare, perhaps questioning their utility; however, the deterrent effect of the existence of such offences (which are consistent with other regulated approaches to consumer protection) should not be underestimated. The protected title may also usually be legitimately used as part of the name of the firm. In some firms, there might be only one authorised person as principal supervising a great number of employees. The reserved legal activities are supervised by a solicitor who is suitably qualified, but the work is actually undertaken by employees who are not authorised persons 43. However, such a firm is allowed to describe itself as ‘[Principal] & Co, Solicitors’, implying that the firm is in some way larger than in fact it is, and that there is more than one solicitor when there is not. This does not seem consistent with more general approaches to the use of misleading advertising or descriptions. With the advent of entity regulation and ABS licences, the use of a professional title as part of a business name would seem to warrant some review.

2.3 Regulation of individuals and entities The Legal Services Act builds much of its regulatory framework around ‘authorised persons’. They are defined in section 18 as either those who are authorised by a relevant approved regulator to carry out a reserved legal activity44 or a licensed body (ABS) which is authorised by a relevant licensing authority to do so. An authorised person can therefore be an individual practitioner or an entity. We do not intend in this paper to identify the complete process of regulating authorised persons. Suffice to say that the statutory definition inevitably also brings the mix of regulation by person and activity referred to in paragraph 2.1 above. The ultimate sanction for any serious breach of regulations applying to regulated individuals or entities is to remove the right to practise (striking off or removal of licence). There is undoubtedly deterrent force in such potential loss of the ability to remain in business. However, the distinction

41 We wonder whether it might be argued that the use of the description ‘lawyer’, while not a protected title, if used by someone who holds no legal qualification or authorisation to practise a reserved activity would be caught by s. 17. 42 Interestingly, s. 74 of the Legal Services (Scotland) Act 2010 specifically makes it an offence to pretend to be a licensed legal services provider (the Scottish equivalent of an ABS): there is no offence under the 2007 Act of pretending to be a licensed body (ABS), or otherwise in respect of recognised bodies. 43 The provisions of s. 15 of the Act apply to employees, from which it would seem that, where reserved legal activities are provided to the public or a section of the public (whether for profit or not), both the principal or firm and the employee need to be authorised to “carry out” the activities: where work is done by employees under supervision, presumably for the purposes of the Act it is carried out in the name and with the authority of the principal or firm. 44 Cf. footnote 38 above.

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION? between reserved and non-reserved legal activities might dilute this deterrent power. An individual or entity that is no longer allowed (and therefore no longer regulated) to deliver a reserved activity (and any non-reserved activities that are consequentially regulated as part of the professional or licensed status) can still, of course, set up a new business delivering only non-reserved legal activities outside the framework of regulation. Unless, therefore, the reserved legal activities cover the most important life-events of consumers, and therefore bring them within the protection of regulation, the effects of this regulatory gap could still be acute in terms of potentially exposing consumers to advice from those who were not considered fit to practise in other areas of regulated legal activity.

2.3.1 Individuals Where an individual or an entity carries out reserved legal activities, the effect of the Legal Services Act is to apply regulation to them in both their individual and entity capacities. Individuals who are authorised to conduct a reserved activity are subject to the obligation in section 176(1) to comply with their authorising body’s regulatory arrangements45. This will include the appropriate codes of conduct (cf. paragraph 1.9 above). Intriguingly, the Act imposes no universal duty on authorised persons to comply with the professional principles in section 1(3), although it does impose such a general duty if they are managers or employees of an ABS (Schedule 11, paragraph 17(2)(b)). Individuals who are not themselves authorised persons, but who are managers or employees of an ABS, or have an interest (including an indirect or material interest) in it, are also subject to regulation as individuals. By section 90, they must not do anything which causes or substantially contributes to a breach by either the ABS itself, or any authorised person who is a manager or employee of it, of the duties imposed by section 176 on the entity or those authorised individuals. These regulatory obligations on individuals arise by virtue of a reserved legal activity being carried out. Beyond this, individuals who carry out a non-reserved activity may become subject to regulation: (a) as a consequence of becoming regulated as an authorised person, that is, by their own authorising body imposing requirements on them in relation to all activities carried out by them; (b) by submitting to an additional process of accreditation that requires certain conditions to be met or maintained in order to attain or retain accredited status; or (c) by becoming a member of an organisation (such as the Society of Will Writers or the Institute of Paralegals) that establishes and enforces its own self-regulatory framework but that presently has no regulatory standing and therefore no binding powers to sanction its members, other than by withdrawing rights of membership46. Any of these circumstances will add to consumer protection, but is not required by statute or the current regulatory framework (although where they are imposed by approved regulators, the requirements in (a) or (b) will, of course, be elements of its package of regulatory arrangements that have been approved as part of its designation as an approved regulator).

45 Regulatory arrangements are defined in s. 21 to include qualification, authorisation, practice, conduct, discipline, indemnity and compensation. 46 As with professional self-regulation before the Legal Services Act, and the separation of regulatory and representative functions, there is also no guarantee that such voluntary schemes of self-regulation will not be directed at serving the interests of members rather than those of consumers, and will not contain rules which restrict the ability of members and their firms to structure and access capital as they might wish or pursue innovation in the delivery of their services. Approval of voluntary rules by the Office of Fair Trading might go some way to reducing this risk; but the fundamental absence of regulatory force and binding and meaningful sanctions leaves these rules some way behind formal regulation.

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2.3.2 Entities Entity regulation is a new feature of the regulatory landscape following the Legal Services Act. Of particular interest is the process of bringing new providers as entities into regulation through the issue of an ABS licence. Thus, the Heads of Legal Practice (HoLP) and of Finance & Administration (HoFA) of an ABS47 are required to ensure that the licensed body complies with the terms of its licence and to report to the licensing authority any failure by the ABS to do so (sections 91(1) and 92); the ABS must also have suitable arrangements in place to ensure that it complies with the duty on regulated persons to comply with their authorising body’s regulatory arrangements48, and that it maintains the professional principles in section 1(3) (paragraph 17(2) of Schedule 11). It must also ensure that it has suitable arrangements in place to ensure that its managers and employees who are authorised persons comply with their individual duty to maintain the professional principles as well as their duty under section 176 to follow their own regulator’s rules, and that its non-authorised persons comply with their individual duty under section 90 not to cause or substantially contribute to a breach of the section 176 duties on authorised persons in the ABS (paragraph 17(2) and (4)49). In addition to the statutory licensing framework, entity regulation by, say, the Solicitors Regulation Authority (SRA) or the Council for Licensed Conveyancers of ‘recognised bodies’ is also in place. As with individuals, this brings within the approved regulators’ reach all of the activities of these bodies, whether reserved or not (which the SRA maintains through the separate businesses rule, and intends to apply to ABSs – with some recent support from the Legal Services Consumer Panel50). We have considered the proposition that regulation through entities alone might be a preferable approach in some circumstances. However, given that entities can only act through the agency of human beings, the status of those individuals will always remain critical. Even where an ABS as a licensed body has been authorised in respect of one or more reserved legal activities, the Act nevertheless requires those activities to be carried on only through someone who is appropriately entitled (Schedule 11, paragraph 16). It seems to us that regulation will always be achieved through a mixture at both individual and entity levels.

2.3.3 Professional norms and cultures It is tempting to limit one’s conception of regulation to the level of formal rules and regulations. However, as part of the process of socialisation that membership of a profession and of professional services firms brings (whatever the Legal Services Act might say about professional principles and the need to promote and abide by them), there will among most51 members be a strong professional ethos and culture that guide and shape behaviour. These informal norms can be negative as well as positive – that is, they can restrict beneficial behaviour as much as they can discourage poor conduct. Thus, attitudinal resistance to innovation (such as access to external capital) can be just as powerful as formal rules and regulations that explicitly prevent it. Changing the formal regulations, therefore, might not be sufficient to

47 The extension of these positions to all entities regulated by the Solicitors Regulation Authority in the form of the Compliance Officer for Legal Practice and the Compliance Officer for Finance & Administration is to be welcomed, though this choice of titles signals in our view a significant – and regrettable – dilution of the importance and status of the role. 48 Cf. footnote 45 above. 49 See also Rule 8 of the Draft SRA Authorisation Rules for Legal services Bodies and Licensable Bodies. 50 See Consultation response: SRA: Architecture of change Part 2 – the new SRA handbook, paras 11 and 12. 51 Sadly, not all, otherwise disciplinary action, sanctions and striking off would never happen.

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION? encourage the behaviour that was formerly prohibited, given the deep-seated attitudes, beliefs and behaviours that accrue over time and within professional contexts52. What begins as a set of rules and code of conduct to guide the actions of individuals within a formal regulatory framework can therefore evolve into a strong sense of community with common values and behaviours that are regarded as acceptable or unacceptable within that community. Attitudes and behaviours are then shaped not so much by explicit formal regulation as by implicit norms. Much of the negative reaction of lawyers to the involvement of non-lawyers in the ownership of law firms or the delivery of legal services could therefore be interpreted as driven by the belief that these implicit norms will be missing and that ‘unethical’ behaviour will be more likely and more prevalent (even though the explicit requirements of the Act and the licensing framework are structured to replicate this professional ethos).

2.4 Regulation of activity Reservation is but one form of regulation by activity. For example, as we identified in our first paper (LSI 2010a, Section 3), there are some presently regulated but not reserved activities, such as immigration advice and services, claims management services, and insolvency practice. In addition, as with individuals (cf. paragraph 2.3.1 above), there are circumstances where otherwise non- regulated activities become subject to regulation because individuals or entities comply with the requirements of a regulatory organisation or accreditation process. This would include the regulation of non-reserved activities by an approved regulator or a licensing authority, as well as by voluntary self-regulating bodies. There are also other sources of regulation that apply to the activities of legal services providers. These are often part of the general law which apply to a number of businesses (such as competition law, ‘cooling-off’ periods in respect of pressure (door-step) selling, misleading advertising, and unfair contract terms). Our focus in this paragraph is primarily on reserved legal activities rather than these other forms of activity regulation. We consider in Section 3 below the specific legal activities that we suggest should, in the public interest, be reserved to authorised persons. This paragraph is concerned with the more generic issues and consequences of reservation. We must also emphasise that, in our view, where reservation can be justified, it does not follow that authorisation should only be granted to those who are legally qualified. Clearly, if the activity is sufficiently important to warrant reservation, authorisation should only be granted to those who are appropriately trained and accredited. But just as authorisation has recently been granted to some accountants to carry out probate activities (cf. LSI 2010a, paragraphs 2.5.6 and 2.5.7), so narrow authorisation could in the future be granted to those who are not necessarily more generally qualified as lawyers. Indeed, it is a premise of the ABS licensing framework that these entities, not owned by lawyers, might in the future be licensed to provide one or more reserved activities. Thus, whereas historically there might have been a factual correlation between lawyers and legal services (and reserved legal activities in particular), that is no longer the case.

52 The nature of this pervasive, and sometimes distorting, ‘normative environment’ is considered in detail in Mayson (2007), ch.5.

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2.4.1 The foundations of reservation For reservation to be a justifiable regulatory response, we believe that it is necessary to be satisfied on two out of three foundation issues that: (1) regulation, and reservation in particular, is in the public interest; and (2) either other responses are less effective; (3) or reservation affords a degree of additional protection to clients by virtue of their purchase of a reserved activity. There is also a further preliminary issue that must be satisfied. A reserved legal activity must be a ‘legal activity’ as defined by the Legal Services Act, that is, an activity which consists of one or both of the following (section 12(3)(b)):

(i) the provision of legal advice or assistance in connection with the application of the law or with any form of resolution of legal disputes; (ii) the provision of representation in connection with any matter concerning the application of the law or any form of resolution of legal disputes. The ‘mix’ of an authorised person with a reserved activity that we have referred to earlier means that the appropriate consideration in relation to reserved legal activities is not whether they should be reserved to lawyers, but rather who should be authorised to carry them out. From this perspective, the expression ‘authorised person’ is both apposite and correct, and the shorthand use of ‘lawyer’ for this might well be wrong. We now consider each of the three foundation issues identified at the beginning of this paragraph.

2.4.1.1 Regulation in the public interest We address the specific reservations in detail in Section 3. Our conclusion is that some of the current reservations can be justified in the public interest, and that some cannot; we also believe that there are some additional legal activities that should be considered for addition to the list. We reach this conclusion by applying the following line of thinking. Our approach to the issue of reserving legal activities is that such reservation must be shown to be in the public interest (applying the definition of ‘public interest’ adopted in paragraph 1.2 above). This leads us to advance the proposition that regulation by reservation can be justified to secure either, or both, of two goals53: (1) the public good, including advancing the primary regulatory objectives (cf. paragraph 1.10 above); and (2) protecting the consumer. In relation to the first goal, we would therefore incorporate the objectives of supporting the constitutional principle of the rule of law, including the effective administration of justice54; improving access to justice; and encouraging independent, strong and effective legal advice and

53 Lord Hunt of Wirral, in his final report, quoted with approval a similar formulation from the Institute’s submission (LSI 2009: 2-3) to his review: see Hunt (2009), pages 25-26. 54 In our view, the effective administration of justice is necessary to maintaining the rule of law and securing access to justice. It is therefore a public good in its own right, and is separate from what might be regarded as a broader consumer interest in cost-efficient administration. Efficiency (as represented by good quality and value for money) is certainly necessary for effectiveness, and can be achieved by providers other than lawyers; but effectiveness is not simply a consumer interest or consumer protection issue. Genn makes the point (2010: 16-24) that civil justice is a public good.

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION? representation. These are specifically ‘legal’ outcomes of the regulatory objectives. They are founded on a view of the law as an abstract set of rules and a system for upholding them. However, beyond this, society also needs to encourage reliability and stability in social relationships (which are central to good social order and commerce). We would therefore go further than legal outcomes, and suggest that this first goal should also extend to promoting and protecting the UK and its justice system as a legal forum, as well as to advancing the commercial interests of ‘UK plc’. There is much evidence that, in a global marketplace, the UK is regarded as a ‘safe’ place to do business, and English law is often the governing law of choice in multinational commercial transactions (see further Mayson, 2013).

Genn expressed this point very well in the following paragraph (2010: 3-4):

the machinery of civil justice sustains social stability and economic growth by providing public processes for peacefully resolving civil disputes, for enforcing legal rights and for protecting private and personal rights. The civil justice system provides the legal architecture for the economy to operate effectively, for agreements to be honoured and for the power of government to be scrutinised and limited. The civil law maps out the boundaries of social and economic behaviour, while the civil courts resolve disputes when they arise. In this way, the civil courts publicly reaffirm norms and behavioural standards for private citizens, businesses and public bodies. Bargains between strangers are possible because rights and responsibilities are determined by a settled legal framework and are enforceable by the courts if promises are not kept. Confidence in the English legal system is therefore critical to our continuing social stability, global competitiveness, economic success and tax revenues. In part, this confidence stems from the UK’s adherence to the rule of law, as well as from its reputation for an independent and impartial judiciary and the standing of the professional qualifications of its lawyers. In part, it is why we need free movement of and access to financial and human capital (itself a public interest issue: see paragraph 1.2 above) rather than professional regulations and norms that prevent or discourage such movement55. In relation to the second goal, we do not advance consumer protection as a generic justification for reservation. In our view, reservation is in the public and consumer interest in circumstances where, as a result of legal advice or representation, detriment to the consumer’s (a) liberty, (b) physical, mental, emotional or social well-being56, or (c) property, could arise, and for which compensation after the event would not represent an adequate or reasonable remedy. These matters are fundamental to someone’s ability to participate fully in society as an equal citizen (cf. paragraph 1.2 above). The issue for both goals, in essence, becomes for us one of a distinction between ‘assurance’ and ‘insurance’. Although compensation for imprisonment following a wrongful conviction is available, if that conviction is a consequence of the incompetence or poor service of the client’s advocate, after- the-event compensation is poor recompense for a situation that could have been avoided by more competent or better representation from the client’s lawyer. Monetary compensation cannot make good the damage done to a person’s well-being, reputation and personal life by time spent unnecessarily imprisoned. In this and other circumstances, regulating to ‘assure’ competence before the event is to us preferable to regulating only for complaint or compensation after it.

55 In our view, the ‘confusion’ of ownership and management of law firms (along with delivery of legal services) in the hands of lawyers has historically inhibited client choice, innovation and efficiency. 56 Our reference to the physical, mental, emotional or social well-being of the consumer is intended to capture circumstances in which the consumer is subject to actual or threatened physical violence, or suffers from mental illness or disability, or is going through some disturbing or traumatic event, and these conditions are the subject of the advice or representation. We do not intend to refer to consumers’ physical, mental or emotional well-being as a consequence of their reactions to the actions or decisions of their legal advisers!

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This is a particular dimension of ‘credence’ goods and services, where the consumer is rarely in a position to assess quality or utility until after consumption (see further, Appendix 2, paragraph 2.2.2 below). Of course, before-the-event ‘assurance’ will never eliminate all poor service or incompetence, and so both ‘assurance’ and ‘insurance’ might be required. Our concern here is to identify circumstances in which reliance on after-the-event ‘insurance’ should not be the only or principal response of a ‘decent’ society. Where reservation is justified in the public interest, we would not restrict approved regulators or reserved legal activities to regulate only those who hold broader legal qualifications. We see no reason in principle why, as now, the LSB should not approve a new regulator with powers only in respect of one reserved legal activity. The issue of whether a broader legal understanding or experience is necessary57 in the context of that activity is one to be weighed in the Board’s assessment of whether to recommend approval of the new regulator (cf. paragraph 13 of Schedule 4). Nor would we simply attach the authority to conduct a reserved legal activity to a professional qualification. We would suggest that the specific right to practise such an activity is granted as a separate authority in relation to each activity (say, by way of one or more endorsements to a practising certificate) when an approved regulator is satisfied that the practitioner’s competence has been suitably demonstrated and is manifestly current58. Further, we would suggest that, where the public interest justifies reservation, any issue taken to an adviser by a client that involves an activity that is reserved to an authorised person, should require that the adviser’s terms of business or letter of retainer state that this element of the client’s instructions must be performed by an authorised person and give the name and accreditation of the authorised person(s) who will be responsible to the client for that element of the work (in many firms, this could fall to the person who designated as the client partner or matter partner59).

2.4.1.2 Reservation is more effective There are two other responses that need to be considered in the assessment of whether or not reservation is more effective. In the context of legal services, the first response would be doing nothing specific and relying on the general laws applying to competition and business behaviour to deal with any consumer detriment. In general, these protections apply to behaviour in the acquisition of new business or in the conduct of business, and normally offer after-the-event restitution, compensation or sanction. As such, they tend to be focused on addressing consumer protection. As we explained in paragraph 2.4.1.1 above, this is only one of the circumstances in which we feel that regulatory intervention can be justified (the other being to secure a public good); and further there are situations in the provision of legal advice and representation where after-the- event responses to consumer protection are not sufficient.

57 This must be necessary, rather than desirable: one could always argue that it is desirable and sensible (and even rational) for a consumer to seek advice from a practitioner with the broadest possible knowledge and experience. But that desirability is not a matter for regulation: the necessity to regulate arises from a proper application of the need to avoid consumer detriment as described rather than a broader disadvantage arising from consumers’ foolishness, short- sightedness or penny-pinching. 58 This view is consistent with the approach we have advocated in relation to the education and training of solicitors: see LSI (2010b) for further elaboration. 59 The designated person would not necessarily be the Head of (or Compliance Officer for) Legal Practice, since this individual need only be authorised in relation to only one of the firm’s reserved activities (for HoLPs, see Legal Services Act 2007, s. 111(1) and Sch. 11, para 11(3)(b); for CoLPs, see Rule 8.5(g)(ii)(B) of the Draft SRA Authorisation Rules for Legal Services Bodies and Licensable Bodies); for any given client, the individual’s authorisation might not be the one for which notification is required.

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The second response would be other approaches to regulation (such as voluntary codes of conduct). As with the general law, too often these are focused on consumer protection issues and, in the absence of true regulatory enforceability, provide only after-the-event responses. In some circumstances, however, these responses lose their force. For example, there might be situations where there is a mandatory alternative. Some legal activities which are not reserved are provided by regulated individuals or entities other than authorised persons under the Act. Tax advice provided by chartered accountants would be an example. Under the regulatory framework applying to accountants, there will be mandatory obligations that certainly offer an acceptable alternative to the reservation of those activities. However, to the extent that these obligations only apply to non-reserved activities, the provision of those same activities by other providers who are not bound by the same obligations means that reservation still presents a uniform protection across the market rather than a patchwork of mandatory and voluntary approaches that are dependent on the consumer’s choice of adviser. In other words, the protection does not arise for all consumers because of regulation attaching to the activity but rather from the choice of adviser by the consumer. Our concern here is not that the regulatory effectiveness of obligations attaching to, say, chartered accountants, is any lower than that attaching to authorised persons – far from it, since we do not believe that this is the case. Our concern is that, if the activity in question is sufficiently important to the public interest or to consumers to warrant regulation, the nature or scope of that regulation (and therefore the degree of protection offered) ought not to rest on the serendipitous choice by the consumer of an adviser who might be an authorised person, a regulated but not authorised person subject to mandatory duties, an unregulated person subject to voluntary and minimally enforceable obligations, or an unregulated person subject to no obligations at all beyond the general law. We accept that reservation will create barriers to entry and so possibly limit competition, and will probably increase the costs of providers entering and remaining in the legal services market (and that those costs will in all likelihood be passed on to consumers). However, our view is that the public interest justification that underpins reservation outweighs these effects. We believe in, and support, competition in the provision of legal services – but not at the expense of securing the public good or the achievement of what we have identified as the primary regulatory objectives. We also believe that, again, consistent with the general approach that any form of regulatory intervention should be proportionate to the identified mischief and least restrictive of competition (cf. paragraph 1.6 above), the public interest justification for reservation should ensure that this form of intervention will secure public good or consumer protection, without necessarily or inevitably inhibiting competition or innovation among those who are authorised to deliver the reserved activity. This might present a particular challenge in relation to the regulation of multidisciplinary practices (MDPs), where the entity in question is also regulated in respect of some or all of its non-reserved activities by a body other than its licensing authority. Finally, we observe that this second fundamental issue is conceived by us as one part of an either-or formulation so that it might be possible to show that other forms of regulation (or indeed reliance on the general law) might be just as effective in dealing with the identified mischief or detriment but that the third – the additional protection that arises from reservation – succeeds in giving it the edge.

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION?

2.4.1.3 Additional protection We have already noted the regulatory gap in the legal services market of England and Wales, as a result of which consumers may find that, if they purchase a non-reserved and non-regulated legal activity from a non-regulated provider, there is no protection beyond that provided by the general law relating to the supply of services. With this in mind, if a consumer chooses (or is required to choose) a legal service provider who is subject to regulation by virtue of being an authorised person, it is helpful to consider what additional level of protection results from purchasing a reserved activity from an authorised person. To the extent that a dissatisfied client who has received incompetent or poor service from an authorised person could pursue an action in negligence, or use the general law relating to the sale of goods and services, this would leave the client in no better position than if engaging someone who is not authorised. The additional protection that is relevant to the current discussion arises by way of: (a) The professional principles (cf. paragraph 1.9) and the associated protection arising from them (see sections 90 and 176 of the Legal Services Act: paragraph 2.3.1 above), as well as the protection of client money. The professional principles apply to authorised persons; it is the authorisation to conduct a reserved activity that brings the provider with the regulatory framework that includes these principles and the obligation to comply with them. (b) The first-tier complaints and disciplinary processes that apply to providers of legal services if they are regulated by an approved regulator (see sections 21(1) and 122(1) of the Legal Services Act). The complaint does not have to relate to a reserved legal activity (although, of course, in the present context, that will be the case). However, as with the professional principles, it is the authorisation to conduct a reserved activity that brings the provider with the regulatory framework that includes the requirement for a complaints process. (c) Where the first-tier complaints process does not deliver an outcome satisfactory to the complainant (cf. section 126), then the issue may be referred by the complainant to the Legal Ombudsman (see Part 6 of the Act). The Ombudsman’s jurisdiction again extends only to those authorised to provide a reserved legal activity, although the complaint itself can relate to a non-reserved activity (section 128(1)). Issues that do not constitute professional misconduct (which must be referred by the Ombudsman to the relevant authorising body: section 143) will be dealt with by the Ombudsman, who has the power to require an apology, limit or require the refund of fees, award compensation for poor service up to the value of £30,000, and order rectification at the provider’s expense (cf. section 137). (d) The availability of indemnity and compensation arrangements that are a consequence of the providers of reserved legal activities being regulated or licensed by approved bodies (see sections 21(1) and 83(5)). These make a considerable difference to the protection available to clients who instruct authorised persons, because the mandatory nature of indemnity and compensation arrangements gives an aggrieved client much greater certainty of securing recompense if the practitioner provides wrong advice or defaults in some way. Given that one of the major justifications for reservation (cf. paragraph 2.4.1.1 above) is the inadequacy of after-the-event remedies of complaint and compensation, it is worth noting that not all of the additional protection offered is confined in this way (for instance, the Legal Ombudsman’s powers to direct rectification). Further, the possibility of these remedies, combined with disciplinary action and the potential loss of the right to practise, should also encourage the type of before-the- event competence and care that will increase the quality of these credence purchases.

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION?

The additional protection offered will apply to non-reserved activities as well as to reserved ones. However, this protection is not available at all until a service is provided by a person authorised in respect of one of the reserved legal activities. It is therefore the existence of reservation that brings these protections into being. Although there is some additional cost in funding these protections (such as the costs of training and authorisation, maintaining an internal complaints process, contributions to regulatory structures and compensation funds, and indemnity insurance premiums), we believe that the public benefits and before-the-event consumer assurance derived from reservation outweigh and justify these additional costs (even where they are passed on to consumers in whole or part). It remains important, however, that the secondary objective of encouraging competition and innovation in the delivery of legal services is then enabled by disallowing or removing other regulatory restrictions (such as those on permissible business structures and access to capital) that might drive up costs further or inhibit their reduction through scale-efficiencies or different ways of working. Where a consumer lacks knowledge, experience or power in pursuing a complaint against a professional adviser, there is a collective benefit to all clients in having a regulator impose and enforce codes of practice, and complaint and disciplinary procedures which individual consumers could not hope to match. This can include the ‘specialisation’ and deeper knowledge of the regulator in understanding when, and to what extent, any transgression or poor service has occurred; it will also include the structure and staffing of the regulator that has the knowledge and resources to take action against a practitioner; and it will also include the implicit power of the regulator to impose sanctions (including ultimately the removal of the right to practise) where the issue is serious and the complaint is not addressed promptly and properly60.

2.4.2 The nature and consequences of reservation The right to carry out a reserved legal activity can only be given by an approved regulator. The existence of an approved regulator will then ensure that clients have the benefit of the range of regulatory arrangements relating to qualification, authorisation, practice, conduct, discipline, indemnity and compensation (cf. section 21 of the Legal Services Act). As we indicated in paragraph 2.4 above, although reservation will mean that the relevant legal activity can only be carried out by an ‘authorised person’, it does not follow that the authorisation should only be given to someone who is legally qualified. However, it will be important that the appropriate approved regulators set suitable entry requirements by way of relevant training and fitness to practise, and that they assure consumers that the necessary expertise and experience is maintained by continuing professional development and quality assurance requirements. Once reservation is granted, and an approved person is entitled to deliver a reserved activity, a range of obligations on the practitioner and benefits for the client come into play. The consequential benefits for clients of the practitioner’s non-reserved activities also being subject to regulatory scrutiny and remedy should represent powerful incentives to an informed consumer. Further, the possibility that, for example, everything done by solicitors or barristers could (ultimately) be examined by a disciplinary tribunal or a court means that everything is more likely to be done to the same high standard rather than simply those elements that are reserved. There is also, accordingly, a powerful incentive for the practitioner to perform – supported by the peer pressure of expectation and norms (cf. paragraph 2.3.3. above) and the reputational risk arising from poor performance.

60 In the language of economic theory, this represents a ‘positive externality’: see further, Appendix 2, para 2.4.

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Reservation, then, becomes an element – albeit arguably the most important element (if only as a point of entry) – in a richer tapestry of regulatory obligations and influences, all of which can become mutually reinforcing and beneficial to the public good and to consumers.

2.5 Conclusion Regulation by title, person or activity can each secure some element of the public interest, and there is a degree of inevitability in more than one form working in tandem with another. Our contention is that the public interest can justify reservation of activity to authorised persons (though not necessarily always to lawyers) where: (1) this is required to secure a public good or protect the consumer (or both); and (2) either other responses are less effective; or reservation provides additional protection that supports (1). Reservation is one available response to a perceived justification for regulation, along with other general legal requirements and other law-specific regulation. The question for regulators is which response best serves the public interest. In any event, formal and explicit regulation will be implemented within a broader social and cultural environment with sets of expectations and norms, and with the additional impetus of providers wishing to avoid reputational risk. These extra- regulatory influences can work both to support and to frustrate formal regulation. Nevertheless, in our view, the binding nature of formal regulation (and its superiority to voluntary self-regulation) suggests that reservation should be pursued for the public interest reasons we have proposed, and that regulators should not be reticent about extending the regulatory net in this way. We now move on to consider in Section 3 specific legal activities where we believe these public interest requirements can met.

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3. Reservation in the public interest 3.1 Introduction We have asserted so far that, on our definition of ‘the public interest’, regulation by way of reserving certain legal activities to authorised persons can be justified on principle where this secures either or both of a public good or protects the consumer, and either other responses to regulation are less effective or reservation provides additional protection that supports the public good or consumer protection. It might be better always to instruct a lawyer to advise or represent on legal issues; but reservation requires the use of someone appropriately qualified and therefore reduces the client’s potential choice of adviser. The question here is the public interest justification for denying consumers that choice (or at least limiting it within a defined group of authorised providers). As we were at pains to point out in Section 2 above, where reservation to appropriately authorised persons can be justified, it does not follow in our view that those who are authorised must be legally qualified. The relevant issues become those relating to the entry ‘hurdle’ in terms of training and experience requirements, as well as ongoing training and quality assurance, and the codes of conduct that underpin the behaviour of practitioners in relation to clients and the broader market. We accept that this inevitably involves some barriers to entry and, by limiting consumers’ choice to those who are authorised, some restriction in competition. This is why the public interest requirement must be a robust test and, where it is met, the existence of barriers to entry and restricted competition are also justified. It is important that the regulatory ‘package’ arising from the reservation of a particular legal activity must, in its totality, be a proportionate response to the public interest issues and risks giving rise to the need to reserve. In each case where reservation to authorised persons is justified, we respect the right of any individual to represent themselves and therefore to carry out on their own behalf what would otherwise be reserved to authorised persons. However, where reservation is justified on a public good foundation (see paragraph 3.2 below), we believe that it is for good reason that only authorised persons and the client should be allowed to act. The current exemption in relation to “an individual who carries on the activity otherwise than for, or in expectation of, any fee, gain or reward” (other than, currently, in relation to rights of audience, the conduct of litigation, and the administration of oaths) should we think in future be applied only to those reserved activities justified on a consumer protection basis (see paragraph 3.3 below). We now explore the particular legal activities that could, on our assessment, satisfy these criteria. In other words, we are setting out where we believe that a case for reservation can be made: we are not necessarily saying that the case is made.

3.2 Public good reservations We suggest in this paragraph that a policy-based approach to regulation supports the reservation of certain legal activities to authorised persons in order to secure the public good (as elaborated in paragraph 1.2 above). Under this heading, we believe that the justification to reserve should be a policy decision supported by principle: this is different to the consumer protection reservations discussed in paragraph 3.3 below, which we suggest would need to be supported by evidence of risk or detriment to consumers. This line of thinking is consistent, for example, with Milne’s view that (1993: 49) “many judgments of the requirements of the public interest have to be based on reasons which are not decisive and evidence which is not conclusive”. It does, however, present difficulties for regulators who seek always to be ‘evidence-based’, and who rightly prefer decisions made on the basis of fact rather than the special pleading of factions. Nevertheless, implicit faith in the availability, reliability or determinative power of evidence to inform every decision will be misplaced.

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION?

3.2.1 Activities connected to the administration of justice and due process Our contention is that reserving to secure the public interest objectives and public good outcomes relating to the rule of law, the administration of justice, access to justice, and independent, strong and effective legal representation justifies the continuing reservation to authorised persons of: (1) rights of audience; (2) rights to conduct litigation (with associated legal professional privilege61); and (3) court-related reserved instrument activities (these are preparing an instrument relating to court proceedings in England and Wales: see Legal Services Act, Schedule 2, paragraph 5(1)(c) and (2)). For this purpose, ‘court’ includes the first-tier and upper tribunal (section 207(1) of the Legal Services Act). The conclusion that these activities should remain reserved is consistent with the view in the final report of the Royal Commission on Legal Services62 which suggested that the need for effective administration of justice is validation for the reservation of rights of audience (Chapter 18, with a particular emphasis on the skills required and independence) and the conduct of litigation (paragraph 19.17, which emphasises the knowledge and integrity of officers of the court), in that the proper discharge of these responsibilities assists in the smooth functioning of the court system. The continuation of these current reservations will, we believe, secure the public interest objectives and public good outcomes relating to the rule of law, the administration of justice, access to justice, and independent, strong and effective legal representation, as well as promoting and protecting the interests of the UK in general both commercially and as a leading global legal forum. The credibility and reliability of precedent in a common law system are vital to the underlying credibility of the legal system as a whole63 (which is important to achieving the regulatory objective of supporting the rule of law64). We hold the strong view that removing or diluting the requirement for these activities to be carried out by authorised persons would result in higher levels of self-representation and litigants-in-person, as well as – perhaps more disturbingly – by many paid but incompetent or inexperienced advocates. This, in turn, would create greater inefficiencies in the justice system as courts and judges were forced to deal with, and assist, those with little or no experience or competence65. Such inefficiencies could greatly reduce the efficacy as well as the cost-efficiency of the justice system, and potentially result in less credible and reliable justice and dispute resolution and in much poorer value for money to the public purse. While we support the right of individuals to represent themselves, we also support the exclusion of non-authorised persons (especially where they act for reward, but also where they do not66). For these reasons, we would not restrict this reservation only to criminal proceedings or where the liberty of the subject is at risk: the public interest in confidence in the effectiveness of the justice

61 We recognise the additional regulatory challenges connected with legal professional privilege, but do not seek to deal with them in this paper. 62 (1979) Cmnd. 7648 (London, HM Stationery Office). 63 See further the quotation from Copenhagen Economics (2006: 9) in Appendix 2, para 2.4.1 below. 64 Cf. paragraph 1.3 above and footnote 15. 65 Over time, as self-representation and other challenges to the smooth running of judicial lists increase, we might also expect that the number and quality of applications for judicial office could also decline. Work in Canada which looks to support ‘self-helpers’ as they navigate their way around the courts system might point to ways in which the overall efficiency (and cost-efficiency) of the system can be promoted. 66 There are (rightly, in our view) no exemptions for rights of audience or rights to conduct litigation being carried out otherwise than for or in expectation of any fee, gain or reward; indeed, we would remove the exemption that currently applies under Sch. 3, para 3(10) for court-related reserved instrument activities.

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION? system is much more extensive. The extra cost that would be borne by an individual consumer as a result of engaging authorised legal representation (as opposed to being a litigant-in-person or being allowed to instruct a non-authorised advocate) will be far outweighed by gains in a number of areas:

• the personal benefit to the individual consumer of being represented in court by someone trained to do so; • the gains made by all other consumers within the justice system in having that structure operating as effectively as possible and delivering reliable outcomes; • securing equality of citizenship and participation (cf. paragraph 1.2 above); • reduced costs to public finances through having a justice system that operates efficiently; and • the additional revenues brought into the UK that such a system would attract. These reservations would also achieve an additional customer protection benefit (cf. paragraph 3.3 below) in the purchase of ‘credence’ services (cf. paragraph 2.4.1.1 above and Appendix 2, paragraph 2.2.2 below). Incompetence or poor service in the delivery of these reserved activities could result in irreparable detriment to the client – such as incarceration, fines, a criminal record, loss of assets or access to children, and so on. These consequences might arise, for instance, from failing to obtain evidence or call witnesses, not calling expert evidence, failing to object to evidence, conducting a cross-examination that is not in accordance with instructions, asking questions that allow the introduction of otherwise inadmissible evidence, missing relevant deadlines, or problems with disclosure. Nor is proven incompetence in the exercise of rights of audience necessarily sufficient to overturn a judicial result. As Buxton L.J. explained in R. v. Day [2003] EWCA Civ 1060 at paragraph 15: While incompetent representation is always to be deplored; is an understandable source of justified complaint by litigants and their families; and may expose the lawyers concerned to professional sanctions; it cannot in itself form a ground of appeal or a reason why a conviction should be found unsafe. We accept that, following the decision of this court in Thakrar [2001] EWCA Crim 109667, the test is indeed the single test of safety, and that the court no longer has to concern itself with intermediate questions such as whether the advocacy has been flagrantly incompetent. But in order to establish lack of safety in an incompetence case the appellant has to go beyond the incompetence and show that the incompetence led to identifiable errors or irregularities in the trial, which themselves rendered the process unfair or unsafe. Lord Hoffman addressed the same point in relation to the conduct of litigation in the Arthur Hall case68 [2000] UKHL 38 at paragraph 34:

If a client could sue his lawyer for negligence in conducting his litigation, he would have to prove not only that the lawyer had been negligent but also that his negligence had an adverse effect upon the outcome. This would usually mean proving that he would have won a case which he lost. After-the-event restitution or compensation might be available, but in many of these circumstances does not, in our view, represent a justification for failing to assure before-the-event competence. In addition, it can prove challenging to establish negligence69, and this might deter otherwise worthy claimants from taking any action – especially where the consequences are not as dire as those suggested earlier. Further, for a consumer to rectify any harm caused by the negligent exercise of a reserved right, he or she will have to engage another lawyer to bring a claim. From the point of view

67 The Court of Appeal in R. v. Joshil Thakrar [2001] EWCA Crim 1096 developed the ‘safety of the conviction’ test, to be considered alongside a person’s right to a fair trial under Article 6 of the European Convention on Human Rights. Irrespective of the need to comply with the Convention, the public good of securing fair trials should be an important consideration in assuring the competence of those who represent both the prosecuting authority and the accused. 68 See Arthur J.S Hall and Co. v. Simons, and Barratt v. Ansell and Others (trading as Woolf Seddon (a firm)), and Harris v. Scholfield Roberts and Hill (conjoined appeals) [2000] UKHL 38. 69 See, for example, the cases cited in footnote 68 above.

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION? of the wronged consumer, this potentially raises the (off-putting) appearance of a conflict of interest – even if no such conflict in fact exists.

Finally under this sub-heading, we believe that there should be continuing reservation for: (4) the administration of oaths. The reliance that can be placed on oaths duly administered has many public good benefits in securing confidence and efficiency in the administration of justice (in relation, say, to affidavits), as well as in transactions and appointments (such as a change of name or power of attorney). This potentially avoids the costs and uncertainty of establishing or contesting what would be otherwise arguable statements. The possible consequences of an oath being improperly administered are as varied as the situations in which they are required, from a doctor embarking on his or her career to a witness giving evidence in court. In some situations rectification may be possible simply by the client involved swearing a valid oath70; in others, irreparable harm may have occurred. A significant part of the reliability of an oath and the credence which may be attached to it is a consequence of the standing of the commissioner for oaths who administered it. For this reason, there are criminal penalties attaching to forging or fraudulently altering a commissioner’s seal or signature, or knowingly tendering or using an affidavit having such a forged or fraudulently altered seal or signature71. While this may serve to punish the perpetrator involved, it will do little to rectify any harm caused to an innocent client or third party relying on or affected by the relevant document. Again, therefore, we support the continuation of this reserved legal activity to achieve the public good identified (as well as some incidental before-the-event consumer protection). There are, of course, many documents which are of public importance that do not need to be sworn (such as a passport application or a will); these documents are not currently subject to any form of reserved legal activity. Documents that are notarised (cf. paragraph 3.2.2 below) are also regulated separately. It seems to us that the special status of the administration of oaths should derive from the status of the person administering the oath being in some way an officer of the court or other public official. We are therefore not convinced that the authorisation should be extended (as now) to essentially all authorised persons. The training to discharge this reserved function seems to be superficial (at best), and the activity is often carried out with little regard for its solemnity and by those who often take the fee as a personal reward (even where they are employed by a firm). We therefore suggest that thought should be given to confining the authorisation to administer oaths to those authorised persons who are separately trained and accredited (for instance, by way of an endorsement to a practising certificate); and that the training for these primary reserved rights should include appropriate training for the administration of oaths. We support the absence of the exemption for services provided without reward (the nature of the oath and the value that must be attached to it suggest to us that oaths administered by unauthorised persons for free cannot be considered to carry the required degree of credibility or veracity). For the same reason, self-administered oaths would be a nonsense.

70 Every commissioner for oaths should state when and where each oath is taken (Commissioners for Oaths Act 1889, s. 5). Failing to make such a statement would therefore render an oath invalid, as would swearing an oath before a person who was not a commissioner for oaths or who was representing a party in legal proceedings in which the person swearing the oath was involved. 71 Commissioners for Oaths Act 1889, s. 8.

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3.2.2 Notarial activities We further believe that securing the effective administration of justice and global legal reputation within the UK, as well as protecting and promoting confidence in the global trading position of ‘UK plc’, justifies the continuing reservation to authorised persons of: (5) notarial activities. The existence of well-defined and enforceable property rights is also important for the proper and effective functioning of a market economy. So, in the context of the mandatory use of a notary, Van den Bergh & Montangie (2006: 8-9) point out (in language more familiar to economists: cf. Appendix 2, particularly paragraph 2.4.2 below):

Through the mandatory mediation of a [notary], the government aims at minimising the risk that transactions cause legal uncertainty, and thus attempts to minimise the negative effects on welfare. The [notary] acts as a compliance officer who will exert an ex ante control of the quality of the transactions. In this way ex post transaction costs, such as litigation costs are reduced or even totally eliminated. Obviously, this creates benefits for the parties involved, but the mediation of the [notary] transcends this micro-level, which is why it is classified as a public function. There are positive externalities for the community as a whole: the government saves resources, otherwise engaged in a more extensive judicial apparatus72, and third parties have more and correct information concerning a certain transaction. This quotation emphasises the public function of notarial activities, and in our view supports the proposition that they achieve a public good. The role of notarial activities assists international commerce, although private individuals may also make use of a notary’s services. Notaries verify the capacity of their clients to enter a transaction, confirm the identity of clients, and record of all this information; they maintain detailed records, including copies of all documents certified with copies of the relevant clients’ identity attached. This record-keeping forms a paper trail from each document verified through the notary to the client. Not only does this provide a certain level of reassurance for the other parties in a transaction, but it also serves a wider purpose in helping to combat international fraud. Due to the nature of the work of notaries, any error made is likely to be discovered after the fact. If a wrongfully certified document is accepted for use in a foreign transaction, problems may only arise in the future, after decisions have already been made based on the accuracy of that document. Similarly, if for some reason a notary’s records are needed to trace someone through a past document, that will be the time when any gaps in those records will appear. It is this status of notarial activities as ‘credence’ services that may provide some additional justification for their reservation (cf. paragraph 2.4.1.1 above and Appendix 2, paragraph 2.2.2 below). The reliance that parties to (particularly) commercial – and often international – transactions can place on notarised documentation allows trade, and the resolution of disputes, to be undertaken with greater confidence. Without regulatory force, confidence in the activities and promises of English participants in international trade could be compromised, to the detriment of the nation’s economic well-being. Given the nature and importance of notarial activities, and the credence that must be placed on the notary’s verification (and professional regulation and standing to back it up), we are surprised by the exemption in Schedule 3, paragraph 5(4) for individuals carrying out notarial activities otherwise than for or in expectation of a fee, gain or reward, and consider that this exemption cannot be justified on public interest grounds. There seems to us to be a stronger case in relation to notarial activities than there is for the administration of oaths (which has no such exemption). We also struggle to see that

72 We think it is unfortunate that such an obvious public good as the administration of justice should be regarded by economists as merely a ‘positive externality’: cf. Appendix 2, paras 2.4 and 3 below.

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION? an individual could credibly provide notarial services for themselves: the whole rationale of notarial services is independent verification.

3.2.3 Property-related reserved instrument activities In our view, it has become quite difficult to discern the ‘mischief’ that the property-related reservation is intended to address. Under the Legal Services Act, the concept of ‘reserved instrument activities’ means preparing any instrument of transfer or charge for the purposes of the Land Registration Act 2002, or making an application or lodging a document for registration under that Act. For this purpose, an ‘instrument’ includes a contract for the sale or other disposition of land (except a contract to grant a short lease within the meaning of s. 54(2) of the Law of Property Act 1925), but excludes wills and other testamentary instruments, agreements not intended to be executed as deeds (other than the contracts already mentioned), letters or powers of attorney, and transfers of stock that contain no trust or limitation (Schedule 2, paragraph 5(3) and (4)). The reservation also extends to preparing any other instrument relating to real or personal estate for the purposes of the law of England and Wales (Schedule 2, paragraph 5(1)). There are exemptions in respect of: (a) farm business tenancies where the activity is carried out by a Fellow of the Central Association of Agricultural Valuers, or a Member or Fellow of the Royal Institution of Chartered Surveyors (Schedule 3, paragraph 3(5) and (6)); (b) a person employed merely to engross the instrument or application (Schedule 3, paragraph 3(9)); and (c) an individual who carries on the activity otherwise than for, or in expectation of, and fee, gain or reward (Schedule 3, paragraph 3(10)). Before land registration (or for first registration of title73), there would have been a strong public interest argument for suggesting that those who verified title (and thereby ensured the buyer of good title to the property acquired) should be appropriately qualified and experienced. However, as we showed in our first paper (LSI 2010a: paragraph 2.4.2), the background to this reservation was rooted in the professional self-interest of avoiding tax rises rather than in any public interest. In fact, assurance could reasonably be sought both by the State (to provide substance to the State- backed guarantee inherent in land registration) and by the buyer (to provide greater certainty and security to the purchase). There are, therefore, public interest justifications (both public good and consumer protection) for the registration of title. They are expressed by the Land Registry in this way74:

• State-backed registration gives security of title, providing you better protection against claims of adverse possession. • Registration gives you greater certainty and security about what you own. • Once registered, you're in an ideal position if you decide to sell all or some of your property. Potential buyers increasingly expect land to be registered before buying. • It simplifies conveyancing, making transactions easier and potentially less costly for all involved.

These considerations are only relevant, of course, to registered title. However, if appropriate expertise would be justified in relation to first registration because of the requirement to investigate hitherto unregistered land, logically it should also apply to any other transactions and transfers relating to unregistered land. The potential complexity and uncertainty of unregistered title strongly

73 In fact, about 25% of land in England & Wales is still unregistered: www.landregistry.gov.uk. 74 See www.landregistry.gov.uk (register your land).

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION? suggests that appropriate expertise should be applied in transactions involving transfers and other dealings in unregistered real estate. This would offer consumers confidence in the competence of the practitioner as well as a degree of protection in an otherwise potentially uncertain and complex process. For these reasons (and to fulfil public good objectives in relation to registered land, and consumer protection objectives in relation to unregistered land), we can see a case for continuing the reserved instrument reservation in respect of (a) preparing any instrument for the purposes of first registration under the Land Registration Act 2002; (b) making an application or lodging a document relating to first registration under that Act; and (c) preparing any other instrument relating to unregistered real estate in England and Wales. We also accept that, in these circumstances, the reservation should logically extend to the preparation of the contract for the sale or other disposition of the land in question. However, even in relation to registered land, there are further – and broader – justifications that merit exploration. First, despite the Land Registry’s reference to the State-backed guarantee of title, there are still overriding interests, local land charges, and possibly other obligations or restrictions which could affect the value of the property or the ability to use it. There are, therefore, potential (and avoidable) risks to the client that are not covered simply by registration of title, and the involvement of appropriately qualified and experienced advice would reduce the risk of consumer detriment arising from ill-advised transactions or inadequate representation. Second, in the quotation earlier, the Land Registry suggested confidence and efficiency of process as benefits of title registration. We agree in principle with that view, subject to the caveats in the preceding paragraph. But there is a further dimension to confidence and efficiency of process that arises from the involvement of authorised persons (solicitors and licensed conveyancers). At the point of completion, there will often be a mortgage to be discharged on the property being sold. The buyer will need to know that title to the land will pass without being subject to that financial charge. There is a timing issue: until sellers receive the buyers’ funds from the sale, they are not in a position to discharge their secured loans, and therefore could not give the assurance of unencumbered title. This conundrum is usefully solved by the seller’s conveyancer giving an undertaking to the buyer that the funds received will indeed be used to discharge the mortgage. On the basis of that undertaking, the buyer should have the confidence to complete even though at the moment of completion the property has not yet been released from the mortgage. Further, both the buyer and seller can have confidence that their money in the hands of their respective authorised conveyancers is protected by the approved regulators’ arrangements for the protection and repayment of client money if the conveyancer absconds with it. If there was any danger that the ‘chain’ of simultaneous conveyancing transactions might break down, the efficiency of the conveyancing process and transfer of title to real estate could be compromised to the detriment of society at large. Confidence in the conveyancing market, and its efficiency, is therefore underpinned by the undertakings of conveyancers. The standing of the practitioners as authorised persons (whether solicitors or licensed conveyancers, or others in the future) is crucial. Their undertakings are binding as a professional obligation75, and are backed up by professional indemnity cover and compensation

75 See the SRA Code of Conduct, rule 10.05 (and the draft OFR Code of Conduct, ch. 11), and the Licensed Conveyancers’ Conduct Rules 2009, rule 4.4.7 (and Guidance Note 2). In addition, the court will normally require a solicitor (and, presumably, a licensed conveyancer) to perform an undertaking (though it does have power to order instead that the solicitor make good any loss arising from a failure to perform): Clark v. Lucas Solicitors LLP [2009] EWHC 952. Conveyancers need to be very careful in offering undertakings: if the conveyancer has undertaken to discharge the outstanding mortgage in full then, subject to the discretion of the court, the undertaking must still be fulfilled even if the proceeds of sale are insufficient to meet the debt or the conveyancer has not received the proceeds of sale.

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION? fund arrangements. The Solicitors Code of Conduct 2007, in rule 2476, defines an undertaking as “a statement made by you or your firm to someone who reasonably relies upon it, that you or your firm will do something or cause something to be done, or refrain from doing something. The undertaking can be given orally or in writing and need not include the words ‘undertake’ or ‘undertaking’”. The conveyancing ‘chain’ simply could not work if every party had to be physically at the same place at the same time, simultaneously exchanging bankers’ drafts. The public good of an efficient and reliable property market therefore depends on the credibility and enforceability of conveyancers’ undertakings. We do not believe that this should arise merely as an incidental (or coincidental) benefit of the conveyancer being an authorised person in respect of a different reserved legal activity. The public interest suggests to us that the assurance should arise as a direct result of a relevant reservation.

We are therefore of the view that the current reservation is too narrowly drawn: (a) In relation to registered land, we are now convinced by a justification founded on consumer protection. The ‘guarantee’ of title registration is incomplete with risks to the quality of the title and the enjoyment of the property potentially compromised by inadequate investigation or representation. There is also risk of fraud and practitioners absconding with purchase money or proceeds of sale. Regulation offers either or both of an assurance of competence or additional protections of the type outlined in paragraph 2.4.1.3 above. (b) On even stronger ground, however, in our view, is the public good in the effective and efficient operation of the housing market, in confidence in land registration, and in some protection to consumers engaged in transactions involving unregistered land. The purpose of reservation here is not directly the validity of the contract, or completing the land registration process; it is to protect the public (economic and social) interest in the credibility and reliability of the property market (including the significant contribution to this of conveyancers’ undertakings, as discussed above77). Accordingly, if reservation is to secure the public good objective in (b) (as well as offering consequential protection to the client, based on the importance of the transaction, the asymmetry of information between adviser and client, and the consequences of poor advice or dishonesty, referred to in (a) above), then the reservation needs to be drawn differently and more broadly than at present. It may well be that the public interest in public good benefits and consumer protection coincide on this issue: much will depend on the rules of conduct and discipline that apply to the authorised conveyancers and enforce their undertakings, as well as the existence of indemnity and compensation arrangements that are sufficient to cover the value of the property concerned78. To be effective, all of these provisions rely on enforcement powers (rather than voluntary self- regulation, from which rogues could easily exclude themselves), and this tips the balance in favour of reservation79.

76 The new OFR Code of Conduct includes an almost identical definition (the differences are in style, not content). The Licensed Conveyancers’ Conduct Rules are also similar (see Guidance Note 2, para 1). 77 It must follow that all authorised persons for the purposes of this reservation – including, in the future, entities holding ABS licences – should be able to offer similar confidence in their undertakings through professional obligations, indemnity insurance and compensation fund arrangements, and the LSB and licensing authorities would need to assure themselves that is the case. 78 Unlike bank deposits, where consumers are able to split their cash among a number of banks to gain the advantage from each of the €100,000 protection, conveyancing transactions cannot be split. The dependence of each client on the scope and enforceability of their conveyancers’ compensation arrangements is therefore key to consumer confidence. 79 More accurately, perhaps, the balance is tipped in favour of regulation (of some kind) rather than reservation (in particular): there are other regulatory schemes which require parallel protections to those found for lawyers (see the Compensation Act 2006, for example) that could be applied to the regulation in this area. However, given that

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In our view, (b) above is the better foundation for reservation. To achieve these broader objectives, one approach would be to extend the reservation to:

(6) conveyancing services. These could be defined along the lines of section 11 of the Administration of Justice Act 1985: “the preparation of transfers, conveyances, contracts and other documents in connection with, and other services ancillary to, the disposition or acquisition of estates or interests in land”, and would include the grant and assignment of leases (other than short leases). As with court-related reserved instrument activities (cf. paragraph 3.2.3) and notarial activities (cf. paragraph 3.2.2 above), given the reasons advanced here for a public good justification for the reservation of conveyancing services, we would advocate withdrawing the current exemption in paragraph 3(10) of Schedule 3 for individuals who carry out the relevant activities otherwise than for or in expectation of any fee, gain or reward. The reasons for the reservation are connected to the authorised status of someone acting on another’s behalf: these are not achieved by someone who is not authorised, and the absence of reward does not seem to us to outweigh the public interest in the need for reservation. This would not, of course, prevent someone who is authorised acting without reward.

3.2.4 Immigration advice and services Immigration advice and services are currently regulated, but not reserved, activities. Under the Immigration and Asylum Act 1999, ‘immigration advice’ relates to a particular individual in respect of the following matters, provided that it is not given in connection with representing an individual before a court in criminal proceedings or matters ancillary to criminal proceedings (section 82(1)): (a) a claim for asylum; (b) an application for, or for the variation of, entry clearance or leave to enter or remain in the United Kingdom; (c) unlawful entry into the United Kingdom; (d) nationality and citizenship under the law of the United Kingdom; (e) citizenship of the European Union; (f) admission to Member States under Community law; (g) residence in a Member State in accordance with rights conferred by or under Community law; (h) removal or deportation from the United Kingdom; (i) an application for bail under the Immigration Acts or under the Special Immigration Appeals Commission Act 1997; and (j) an appeal against, or an application for judicial review in relation to, any decision taken in connection with a matter referred to above. ‘Immigration services’ means making representations in connection with one or more of these matters, on behalf of a particular individual, either (a) in civil proceedings before a court, tribunal or adjudicator in the United Kingdom, or (b) in correspondence with a Minister of the Crown or government department.

property-related reserved instrument activities are already reserved activities, and we are proposing an extension of that reservation, we believe that reservation can be justified.

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We reported in our first paper (LSI 2010a, paragraph 3.2) that the suggestion in the Legal Services white paper that these activities should become reserved80 was not pursued for policy and pragmatic reasons. However, we are of the view that there is now a strong case for change. First, the public interest must be defined by reference to a State or territory81, and the right of individuals to participate in society is an integral part of whose public interest is at stake and by reference to which conception of ‘the public’ it is framed. It is therefore in the public interest that advice and representation in relation to a citizen’s status should be given only by those appropriately qualified. This will help secure the public interest in ensuring that only those entitled to the benefits of citizenship have the rights attached to it, but also that those who are entitled are able to participate fully and equally (cf. paragraph 1.2 above). Second, the implementation of the Legal Services Act has seen the Law Society, the Bar Council and the Institute of Legal Executives become qualifying regulators under the Immigration and Asylum Act 1999 and, subject to each regulator’s rules, solicitors, barristers and legal executives continue to be authorised to provide immigration advice and services (see paragraph 2 and Part 3 of Schedule 18 to the Legal Services Act). The LSB has become82 the authorising body to designate other approved regulators under the Legal Services Act as qualifying regulators under the 1999 Act (see paragraph 3 of Schedule 18); it has also assumed the oversight regulation of qualifying regulators from the Immigration Services Commissioner. Thus, the regulation of those who are authorised to provide immigration advice and services in England and Wales is now the responsibility of the LSB. To have a parallel but largely identical regulatory framework applied by the same regulator is confusing to consumers (and possibly even to members of the regulated community). We posit that the public good suggests that only those who are legitimately entitled to settle in our society83 should expect the public interest to further their interests as part of the collective. The question of establishing who is or is not so entitled should accordingly be founded on the advice and representation of those who are suitably authorised to provide it. We therefore suggest that a strong case can be made (as originally indicated in the legal services white paper) that (7) immigration advice and services should become reserved activities. Given that the notion of reserved legal activities is specific to England & Wales, we see no difficulty in having the same activities regulated as reserved activities within this jurisdiction, but regulated differently (though by a different regulator with comparable powers) in Scotland and Northern Ireland. There would also be a consumer protection benefit (as intended by the 1999 Act) in that those seeking to clarify or confirm their immigration or asylum status should not be represented by those who are not appropriately trained and qualified. After-the-event complaint or compensation is likely to be a most inadequate remedy for someone denied a right to enter or reside, or who is wrongly deported to a country in an asylum case, as a result of incompetent or ineffective advice or representation. As before, we would not suggest that, as a reserved activity, immigration advice and services should necessarily be restricted only to those who are legally qualified, or that self-representation should

80 Cf. Department for Constitutional Affairs (2005) The Future of Legal Services: Putting Consumers First, Cm. 6679, Appendix B. 81 This is explicit in Lord Hunt’s formulation of the public interest, and is implicit in ‘citizens’ and ‘society’ in ours (see para 1.2 above). 82 See the Legal Services Act 2007 (Commencement No. 10) Order 2011 SI No. 720, effective from 1 April 2011. 83 For the purposes of this paper and reservation, we would confine this to England and Wales.

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION? not be allowed. However, we do not believe that there should be any exemption for those who are not authorised choosing to act without reward.

3.3 Consumer protection reservations There are some aspects of ‘public good’ reservation covered in paragraph 3.2 above that might equally be conceptualised as consumer protection reservation, often on the basis of the before-the- event assurance provided for these ‘credence’ services (cf. paragraph 2.4.1.1 above and Appendix 2, paragraph 2.2.2 below). For example, rights of audience could be included here, on the basis that they protect the client’s physical, mental, personal, social or economic well-being (cf. paragraph 2.4.1.1 above). Similarly, advancing a public good rationale in relation to real estate transfers could lead to a broader reservation than we currently have, with consequential consumer protection benefits (cf. paragraph 3.2.3 above). We suggested at the beginning of paragraph 3.2 above that reservation justified by the public good should be granted as a matter of principle and that evidence of actual or potential consumer risk or detriment. We believe that reservation to provide consumer protection is different, and that such evidence is needed as part of the justification. Evidence will be needed of the specific risks and detriment, and the implications for consumers of those risks or detriment arising. This might include, for example, circumstances in which consumers are widely known to receive incompetent or sub-standard advice and representation; where there are known to be providers preying on vulnerable consumers, providing services where they are not required, or in combinations or at prices that take advantage of the vulnerability; and where there are instances of providers absconding with client money. In probably all of these instances, ‘rogue traders’ will not be concerned to bring themselves within any self-regulatory framework, and will actively arrange their businesses either to avoid or ignore mandatory regulation. If risk and detriment is known to exist and, in these and similar circumstances, consumers are offered no mandatory alternative which would allow them to check the authorisation of advisers, they are knowingly left to the devices and deviance of an unregulated market. The question in this paper is whether, as a matter of public interest, there are some legal activities that are so important to consumers, or the need to protect them so evident, that they should not be left to market forces and the general principle of ‘buyer beware’, or to the application of general consumer law and trading standards protection.

3.3.1 Will writing To the surprise of many, will writing is not presently reserved to authorised persons or, indeed, regulated at all – except when it is carried out by someone who is an authorised person in respect of a reserved activity and consequently regulated in the provision of all services by their approved regulator (cf. paragraph 2.4.1.3). The LSB has started a process of considering the case for reservation in relation to will writing, and the Consumer Panel has recently published its report and recommendations84.

3.3.1.2 Legal Services Consumer Panel investigation and report To assist the Legal Service Board’s investigation into the market for will writing, the Legal Services Consumer Panel instigated a call for evidence, which closed in December 2010. A number of interested parties submitted replies. Bodies representing different providers of will-writing services,

84 See Legal Services Consumer Panel (2011).

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION? including solicitors, will writers, paralegals and banks, each put forward their sides of the argument. Possibly more impartial responses were also received from consumer groups, Citizens Advice and the National Consumer Federation. The Institute of Paralegals voiced its concern that regulation should only be implemented where there is evidence that it will solve the problem under consideration (2010: paragraph 1), making the point that “the solicitors profession has shown that even with heavy and prolonged regulation, the rump of problem practitioners at the tail end of the Bell curve do not go away” (2010: paragraph 7). The Institute of Paralegals considered that the majority of consumer trouble arises in relation to commission-based selling of wills, and that attention should be focused on that problem (2010: paragraph 5). They further suggested that if regulation is found to be justified, it should attach to the activity and not the practitioners involved (2010: paragraph 3). The Institute of Professional Willwriters argued that there is as much evidence of poorly written wills from solicitors as there is from will writers85. They explained (2010: 9-10):

The IPW believes this is because there is no mandatory requirement to study the subject of Wills to become a solicitor or to remain as a solicitor. A consumer is just as likely to be advised by a solicitor who is untrained in Wills as he is by a Willwriter who is untrained in Wills. We are delighted that this point has been recognised by the Legal Services Board Consumer Panel in its report Quality in Legal Services and will no doubt be an issue that is considered in the sector-wide review of education and training requirements which is being supported by the Legal Services Board. There seems (perhaps unsurprisingly) to be a defensive trend running through the responses from bodies representing will writers, as if they consider reservation to mean that only solicitors will be able to draft wills. However, it seems reasonable to assume that, if will writing were to become a reserved activity, a representative body for will writers would apply to become an approved regulator under the Legal Services Act 2007, which (if the LSB approved the application) would allow its members to be granted rights to continue their work. The Law Society conducted its own survey into consumer knowledge of the will-writing market (2010: Annex A). It found that 61% of respondents thought that will drafting was always subject to regulation, and 93% thought it was important for will writing to be properly regulated (2010: 15). When asked which was the most important quality for a will writer (from a choice of appropriate regulation, maintenance of high professional standards, and low cost), 55% of respondents chose regulation, whilst only 11% picked low cost (2010: 16). The Society of Trust and Estate Practitioners (STEP) also undertook its own survey in August 2010. It expressed the view that better protection was needed for consumers after finding that 75% of its members had come across instances of “incompetence or dishonesty in the will-writing market in the last 12 months”86. In its submission to the Consumer Panel, the British Bankers’ Association disputed that there was ‘substantial evidence’ of any harm to consumers resulting from the will-writing services offered by banks (BBA 2010: paragraphs 1-2). It also argued against being grouped together with unregulated

85 For some commentators, this fact (that providers who are authorised persons in respect of some other reserved activity, but still fail to act competently or decently in relation to will writing) is sufficient to argue that regulation is not proved to be effective and should therefore not be extended to will writing. To us, this rather misses the point that, at least with authorised persons whose reserved and non-reserved services are subject to some regulatory oversight, there is some prospect of competence, intervention, disciplinary action and recompense; where will writing is carried out by those who are not subject to any regulatory framework at all, there can be no such prospect – except by voluntary submission to membership of a self-regulating body (such as the Society of Will Writers or the Institute of Professional Willwriters), where the ultimate sanction is merely removal from membership, rather than removal from the market by withdrawal of the right to practise or offer a regulated activity. 86 See http://www.step.org/default.aspx?page=1645.

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION? will writers because of the banks’ status as regulated bodies, as well as the availability of the Financial Services Ombudsman for complaints made against them. The BBA addressed the particular concern of the LSB regarding the bundling together of will writing and estate administration services by arguing that consumers make a free choice to appoint a bank as their executor: “there are many other providers in the market”; they also stated that all costs are made clear before any obligations are entered into (BBA 2010: paragraph 3). The BBA contended that in simpler cases it is not always necessary to use a qualified professional to prepare a will. However, they did concede that will-writing staff should at least be supervised by someone with a qualification similar to that provided by STEP87. The only body that considered whether a person should be able to prepare their own will was the National Consumer Confederation, which stated that the right to act for oneself must be maintained if will writing is made a reserved legal activity (2010: 3). This would be in line with the other reserved activities that can be performed on their own behalf by the consumer88. One of the main arguments against regulation of will writing is that consumers will have to bear the extra costs of regulation incurred by providers. In its response, Citizens Advice addressed this point by stating (2010: 10):

We have no evidence to suggest that unforeseen consequences of regulation would be disproportionate when weighed against the danger of failing to regulate. Citizens Advice also suggested that, rather than being a reserved legal activity in itself, will writing could be added on to the probate activities reservation (2010: 9). However, the current reservation of the application for the grant of probate or letters of administration is in our view the most contentious reservation (see paragraph 3.2.2 below) and so the most difficult to justify. We therefore could not support simply adding will writing to the reservation of probate activities as it currently stands. Neither Citizens Advice nor Co-operative Legal Services (2010: 2) saw any difference between the level of problems experienced with wills written by solicitors and those prepared by will writers. In a survey of over 50 charities conducted by Remember a Charity, of those respondents who had seen a will that they would classify as poorly drafted (as opposed to being contentious), 49% said these wills originated with will writers whereas 31% had seen a poor will that was drafted by a solicitor (Remember a Charity 2010: 1). However, 100% of respondents to Remember a Charity’s survey supported regulation of the will-writing sector (2010: 1). In its response, Co-operative Legal Services (2010: 3) employed a line of reasoning that is in line with our own thinking:

As indicated above these issues are not restricted to solicitors or to un-regulated will writers. That said however, CLS is in favour of the regulation of will writing. This is because of the importance of a will and the potential consequences of getting it wrong. Under the current system, if a solicitor “gets it wrong” the client or those administering an estate have a clear course of redress and the security of knowing that the provider is covered by professional indemnity insurance. These vital protections do not necessarily exist in the unregulated sector. Some providers might have insurance, some may not. With recent reports indicating that the number of contested wills has risen by 38% in the past year alone, it is even more important that wills and testamentary documents are drafted correctly and to the highest standard. The CLS concluded by voicing a preference for will writing to become a reserved activity (2010: 3).

87 In 2011, the first diploma-level STEP Certificates in Will Preparation will be awarded. For further information, see http://www.step.org/default.aspx?page=1613. 88 Cf. para 3.1 above.

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Having considered the submissions made to it, and the results of shadow shopping, the Consumer Panel’s report is clear in its findings and recommendations: there is evidence of consumer detriment, poor quality wills are being prepared by those who are currently authorised persons and those who are not, and that reservation of will writing is their preferred approach.

3.3.1.2 The case for reservation We agree with the Consumer Panel’s conclusions and recommendations and believe that a strong case can be made that reservation to authorised persons should be extended to: (8) the preparation of a will or other testamentary instrument; and

(9) the preparation or lodging of a power of attorney. Our proposal is not based on broad consumer protection issues – such as pressure (door-step) selling or cold calling, inappropriate bundling or pricing of services, misleading advertising, and the like – which can be covered by other approaches and for which reservation could very easily be argued to be a disproportionate and unnecessary response. Rather, our view is that reservation is justified on the basis that, as a result of unregulated provision, detriment to the consumer might be caused by incompetent, inadequate or biased advice or an invalid will or one that does not properly give effect to their intentions. This detriment is well illustrated in the Consumer Panel’s report, and might also arise, for example, from: the adviser failing to address the tax consequences of testamentary dispositions resulting in avoidable or higher-than-necessary tax liabilities to the estate; the adviser failing to consider the legitimate claims of some potential beneficiaries, resulting in post-death disputes and cost to the estate; or the adviser failing to ensure a valid execution (when, for example, the attestation is witnessed by a beneficiary). Given that many failures of advice and representation in these circumstances will only come to light when the clients have died and can no longer articulate or clarify their intentions, or execute a valid will, after-the-event compensation is not, in our view, an adequate or reasonable remedy and will almost certainly involve the estate in some cost and inconvenience. Although it would be possible to regulate against the inappropriate ‘bundling’ of estate administration into will-writing engagements, reservation gives rise to an alternative approach. By bringing will writing into reservation to authorised persons, the professional principles in section 1(3) of the 2007 Act and an approved regulator’s conduct rules will come into play (cf. paragraphs 1.9 and 2.4.1.3). Rather than regulating separately against inappropriate bundling or charging, authorised persons who provide will-writing and estate administration services would be obliged to act in the best interests of the client and could therefore be called on to justify to a regulator any bundling of services or charges made. Given that such an issue is only likely to arise after the testator’s death, there will always be an element of retrospective remedy. The advantage of reservation is to provide some assurance to the testator that such inappropriate action is less likely with regulated providers and that his or her executors and beneficiaries will have some recourse. Finally, in the public interest of parity of treatment within the United Kingdom, the recent power in Scotland to regulate will writing (see the Legal Services (Scotland) Act 2010, Part 3, Chapter 2) also supports reservation in England and Wales. We do not suggest that authorisation should only be granted to lawyers. Further, in the case of simple estates, authorised support will often not be required. We would therefore continue to support testators being able to draw up their own wills89, as well as an exemption for individuals

89 In this context, we would not regard as “preparation” for the purposes of this reservation any off-the-shelf will templates (whether paper-based or online) that are completed wholly by the testator with no interaction or advice (other than any offered by individuals without reward).

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION? acting otherwise than for or in expectation of a fee, gain or reward90. As a reservation for consumer protection, consumers should be allowed to make a free choice whether or not to gain the benefit of protection by instructing an authorised person.

3.3.2 Probate and the administration of estates The current reservation of the preparation of papers for the grant of probate or letters of administration is in our view the most contentious of the current reservations and so more difficult to justify. As with reserved instrument activities in relation to the transfer of real estate, we believe that the current reservation is inappropriately drawn. We can see no reason based on public good for reserving simply the preparation of probate papers. Under the current reservation, the only part of the entire process of dealing with an estate that is reserved to authorised persons is preparing papers on which to found or oppose a grant of probate or of letters of administration91. But there are numerous tasks and processes that must be completed during the administration of an estate. Amongst these are activities that appear more obviously open to abuse than that which is reserved, such as collecting the assets due to the estate, releasing monies to pay any debts, or preparing the estate accounts. From a consumer protection viewpoint, it is difficult to account for these steps in the probate process not being reserved to authorised persons, while the preparation of papers to apply for a grant of representation is. Although problems might arise in relation to contentious probate, or estates involving foreign assets, we are not convinced that these, by themselves, represent a strong enough argument to support reservation. In these circumstances, a sensible executor or administrator would probably seek professional advice. The strongest reason for any probate reservation lies, in our view, in the protection of the estate’s assets from maladministration or misappropriation by someone carrying out estate administration for reward. It is a consumer protection justification. We note with interest that the ‘administration’ of an insolvent company’s ‘estate’ is a regulated (though not currently reserved) activity (cf. paragraph 3.3.3 below): to regulate this while not regulating the administration of a deceased person’s estate seems illogical. The risks to the assets in the hands of those who are not suitably qualified or regulated are arguably no different. The equivalence of processes, as well as the public interest in the efficiency of these State-authorised collections and dispositions of property, coupled with consumer protection for creditors and beneficiaries, could provide a strong base for comparable regulation in both cases. Interestingly, if part of the rationale for reservation is the benefit of compensation fund arrangements that arise from being an authorised person, this might inhibit the authorisation of chartered accountants, for whom there are no such arrangements (even though the ICAEW is the largest licensing authority of insolvency practitioners, who also collect assets). As with reserved instrument activities, therefore, our view is that the current reservation is too narrow. On this basis, we think that a strong case can be made for the extension of probate activities, and that, in the public interest of consumer protection, the broader process of (10) the administration of an estate following a grant of probate or letters of administration

90 We would not wish to see this exemption being available to those who offered free will writing in expectation of being appointed as executor: such bundling seems to us to imply that the will is written clearly in some expectation of future reward. 91 We note that the equivalent Scottish process of ‘confirmation services’ is similarly narrowly drawn: cf. Legal Services (Scotland) Act, s. 90(2).

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION? should be included within the reserved legal activity (a conclusion that would be supported by Lord Hunt of Wirral92). Arguably, this case is weakened by insolvency practice being regulated rather than reserved; but this does not weaken the case for regulation, only the choice of regulatory approach. We suggest that the public interest requires relative parity of regulation and protection, even if the choice of approach is not identical. As with will writing (cf. paragraph 3.3.1.2 above), we do not suggest that authorisation for the administration of estates should only be given to lawyers. Further, in the case of simple estates, administration by authorised persons will often not be required. We would therefore continue to allow executors and administrators to carry out the relevant activities, and would support an exemption for individuals administering estates otherwise than for or in expectation of a fee, gain or reward.

3.3.3 Insolvency practice Insolvency practice is currently a regulated, but not a reserved, activity. It is an offence to act as an insolvency office-holder without being authorised as an insolvency practitioner. Acting as an insolvency office-holder includes acting as a liquidator, administrator or administrative receiver, trustee of a partnership, trustee in bankruptcy or under a deed of arrangement or in a sequestration, administrator of a deceased insolvent estate, or as a nominee or supervisor of voluntary arrangement.

Authorisation is given by a recognised professional body, or by the Department for Business, Innovation and Skills (through the Insolvency Service as an executive agency, which also acts as the oversight regulator for insolvency practice). The Insolvency Act 1986 applies across the UK; for England and Wales, the relevant recognised professional bodies are: the Law Society of England and Wales, the Institute of Chartered Accountants of England and Wales, the Insolvency Practitioners Association and the Association of Chartered Certified Accountants.

At one level, it is difficult to see why the distribution of assets of a ‘deceased’ company or business, or of an individual in financial distress, should be regulated when the estate of a deceased human being is not (unless the deceased was insolvent). We suspect that the potential mischief that could give rise to reservation of the administration of estates, and the benefits to be derived from reservation, could apply with equal force to insolvency practice. There are assets to be collected and distributed, the value of the ‘estate’ to be preserved, the risk of assets being misappropriated, and the potential claims of the ‘beneficiaries’ to be met93.

The strong case for reservation of insolvency practice arises from its current regulation and similarity to other reserved activities. However, while perhaps a logical extension, we also suspect that it would be resisted. In one sense, the extension is not necessary to achieve the benefits of regulation since insolvency practice is already regulated. Further, the professional obligations that apply to those authorised by the approved regulators are also imposed on those who practise as insolvency practitioners, either by the same regulators acting as recognised professional bodies or by other such bodies using very similar regulatory arrangements.

92 See Hunt (2009), p. 81. 93 One principal difference could be that executors and administrators of estates collect the deceased’s assets and distribute them to beneficiaries in accordance with a will or the rules of intestacy; insolvency practitioners not only collect and distribute assets, but also have to apportion them among creditor ‘beneficiaries’ when there is not enough available for distribution to satisfy their legitimate claims.

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The case for reservation of insolvency practice does not appear to us to be strong enough (even assuming that reservation in England & Wales and separate regulatory oversight by the LSB did not in any way conflict with or create inconsistencies when compared with the regulatory oversight of other recognised professional bodies by the Insolvency Service).

3.3.4 Claims management services Although the previous Government expressed an intention to add claims management to the list of reserved activities94, this addition was not included in the Legal Services Act 2007. Claims management services can only be provided by those who are authorised under the Compensation Act 2006 or who are exempt. There are exemptions, for example, for lawyers, those subject to FSA regulation, charities and not-for-profit advice agencies, unions, and individuals who are not acting for reward. The range of claims covered by the Compensation Act 2006 is broad and includes claims for: personal and criminal injuries; industrial injuries disablement benefits; employment-related payments, wrongful or unfair dismissal, redundancy, discrimination and harassment; housing disrepair; and in relation to financial products or services (paragraph 4(3) of the Compensation (Regulated Claims Management Services) Order 2006 SI No. 3319). In section 4(2) of the Compensation Act 2006, ‘claims management services’ are defined as “advice or other services in relation to the making of a claim” for compensation, restitution, repayment of other remedy or relief, whether the claim can be made in legal proceedings or under a compulsory or voluntary scheme. This is elaborated in paragraph 4(2) of the Compensation (Regulated Claims Management Services) Order 2006 to mean advertising for or otherwise seeking out claimants, advising claimants or potential claimants, making referrals, investigating claims, and representing claimants. This will mean that some claims management services would qualify as ‘legal activities’ under the Legal Services Act (cf. paragraph 2.4.1 above) and some would not. Given that reservation can only be extended to activities that are legal activities, claims management services would not present a straightforward case. However, we feel somewhat uneasy that those elements that are definitely legal activities (namely, “advising a claimant or potential claimant in relation to his claim or cause of action” and “representation of a claimant (whether in writing or orally, and regardless of the tribunal, body or person to or before which or whom the representation is made)”: paragraphs 4(2)(b) and (e) respectively of the 2006 Order) should be regulated but not reserved. There seems to have been a Parliamentary wish to regulate claims management activities – and particularly (and rightly) the claims-farming, referral and investigation elements where there was previous evidence of malpractice by unregulated businesses – which has, in the process, also been extended to incorporate the provision of legal advice and representation. As a result, authorised persons under the Compensation Act (who need not be lawyers but who are nevertheless subject to satisfying the regulator that they are competent and suitable to provide regulated claims management services) are able to provide legal advice and representation under a parallel regulatory framework. The purpose behind the Act would clearly satisfy a consumer protection rationale for public interest reservation. As the Parliamentary Under Secretary of State for Constitutional Affairs (Baroness

94 Department for Constitutional Affairs, The Future of Legal Services: Putting Consumers First (2005), Cm. 6679, Appendix B, Section 7.

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Ashton of Upholland) said in a written ministerial statement when the Bill was introduced95, the purpose of the legislation is:

to provide effective protection for consumers and to tackle the bad practices that have been a common feature of the claims management sector. Regulation will be applied to initially to areas where consumers are most at risk – personal injury, criminal injuries compensation, employment, housing disrepair and claims for redress in relation to the mis-selling of financial products such as endowment policies.

The Bill will provide for regulation that is effective, proportionate to the risk involved, and creates the minimum burden necessary. The Bill will deliver a level playing field of consumer protection so that whomever a consumer seeks advice and assistance from they can expect a quality service and proper mechanism for redress if a problem arises. However, although a good case for reservation might be made, a regulatory framework under the Compensation Act 2006 already exists to protect consumers in relation to claims management services. We take the view that the totality of claims management services as defined under the 2006 Act do not qualify as ‘legal activities’ under the Legal Services Act, and could not therefore simply become reserved as a package of advice and services. Further, if some claims management activities remained subject to the regulatory regime of the Compensation Act, while the legal activities elements became reserved under the Legal Services Act, there would potentially be a need for some businesses to apply to different regulators in order to continue providing the same range of services as now. Where the provider of claims management services is already subject to regulation by an approved regulator under the Legal Services Act, it might be possible to regulate all of their claims management services as a by-product of reservation. While we are persuaded that there is potential consumer detriment or other mischief arising from the delivery of legal advice and representation by other providers authorised only under the Compensation Act, the case for reservation still appears to be difficult to sustain. Given that the range of claims management services as defined are subject to regulation, the response to potential or actual consumer detriment arising from the legal activities element of them would seem to lie in more effective regulation and action by the regulator under the Compensation Act. Only if this is seen to be failing systematically could there be said to be a clear justification for removing the legal activities element of claims management services from that regulatory framework and making them separately subject to reservation and regulation under the authority of the LSB. With the mischief identified by Parliament addressed by the Compensation Act, pursuing a potentially complex ‘tidying up’ to add some claims management services to the list of reserved legal activities would not on the face of things seem to satisfy any public interest (that is not already being met) or a cost-benefit test.

95 See http://www.dca.gov.uk/legist/compensation_wms_lords.pdf.

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4. Conclusions As we noted in our first paper, the origins of many of the reservations of legal activities are remarkably obscure. We expressed the view that the often non-existent, and sometimes limited, evidence of Parliamentary consideration and debate at the time the reservations were created or confirmed provides little basis for suggesting a common policy rationale that justifies their existence. Instead, what we most often found was statutory confirmation of then current practice without any exploration of continuing justifications for reservation. Occasionally, there is evidence of a consultation or review leading to recommendations that are adopted by Parliament (such as the Royal Commission’s suggestion that the conveyancing reservation should be extended to the contract). What we tend to hear, therefore, are after-the-event rationalisations and justifications for reservation, based on the proponents’ or opponents’ views of what should happen. In our view, this does not provide a sound basis for the LSB to propose adding legal services to the list of reserved activities or removing current activities from the list. Further, we believe that it would be unwise to consider any particular legal activity for inclusion or exclusion in the absence of a broader set of criteria that could be generally applied. In this second paper, we have therefore reviewed the public interest basis on which the reservation of legal activities to authorised persons might be justified. We have concluded that: (1) the meaning of ‘the public interest’ should be broadly interpreted; (2) in meeting the regulatory objectives in the Legal Services Act, those objectives could be divided into primary and subordinate objectives, where the primary objectives directly support the public interest and in any conflict among the objectives the primary objectives would prevail over the subordinate; (3) reservation can be justified on the basis of the public interest in securing public good (as a matter of principle and without further evidence) and consumer protection (where sufficient evidence exists to support it); (4) the current reservations for rights of audience, the conduct of litigation, court- related reserved instrument activities, the administration of oaths, and notarial activities can be justified in the public interest; (5) a strong public good case could be made for the current property-related reserved instrument reservation to be broadened to include all conveyancing services; (6) a strong public good case could be made for immigration advice and services to become reserved legal activities; (7) a strong consumer protection case could be made for the preparation of wills and powers of attorney to become reserved legal activities; (8) the current probate activities reservation is too narrow; a strong consumer protection case can be made to replace it with a broader reservation applying to the administration of estates; (9) there is no or insufficient justification for adding either insolvency practice or claims management services to the list of reserved legal activities; (10) where reservation is justified, authority to practise a reserved legal activity should not be confined to those who hold a professional title and, for those who do, it should be conferred separately by way of accreditation or endorsement to a practising certificate; and (11) if the work for any client involves a reserved activity, the provider should be obliged to inform the client that this is the case and name the authorised person(s) who will be responsible to the client for that work.

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This paper has been prepared by:

Professor Stephen Mayson, Director, Legal Services Institute Olivia Marley, Policy Assistant, Legal Services Institute

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Appendix 1: The LSB’s powers to amend the reserved activities

1. Introduction The idea of reserved legal activities is pivotal to the regulatory regime laid down by the Legal Services Act 2007. The notion is central to the definitions of authorised persons, exempt persons, approved regulators, and alternative business structures (ABSs). The powers bestowed on the Legal Services Board by the Act to add to or remove from the list of reserved activities are therefore far- reaching. For example, if an ABS provides just one reserved activity to the public and that activity is removed from the reserved list the body will no longer need to be licensed as an ABS. The following paragraphs set out the method through which alterations may be made to the list of reserved legal activities, and the various processes that the parties named must adhere to.

2. Additions to or removals of the reserved legal activities Section 12(1) of the Legal Services Act 2007 lists the six currently reserved legal activities96, which are explained in greater detail in Schedule 2. Further to this, the Act lays out the various procedures through which activities may be added to, or removed from, this list.

2.1 Extension of the reserved legal activities The power to extend the list of reserved legal activities rests with the Lord Chancellor, who may do so by way of an order (section 24(1)). An activity must first satisfy the Act’s definition of being a ‘legal activity97’ before it can become reserved. The power to extend may only made after receipt of a recommendation for action from the LSB (section 24(2)). Schedule 6 outlines the procedure that the LSB must follow in order to arrive at such a recommendation (see paragraph 3 of this Appendix). Any recommendations must be made by the LSB in a report to be both published and provided to the Lord Chancellor, specifying the Board’s decision and the reasons behind it (Schedule 6, paragraph 16). From receipt of the report, the Lord Chancellor has 90 days to consider it, decide whether to make an order, and publish his decision (section 24(4)). If the Lord Chancellor decides not to make an order to extend the reserved legal activities, the published notification of that decision must contain the reasons behind it (section 24(5)).

2.2 Activities ceasing to be reserved legal activities The LSB also has the power to recommend that an activity should cease to be reserved, in line with the procedures set out in Schedule 6 (section 26(1)). The Lord Chancellor must consider any such recommendation, but is not authorised to give effect to it by the Act (section 26(3)). Because no procedure exists within the Act to implement a recommendation that an activity should cease to be reserved, the Lord Chancellor would have to pursue this by other means, such as through primary legislation or a regulatory reform order98.

96 These are: the exercise of a right of audience; the conduct of litigation; reserved instrument activities; probate activities; notarial activities; the administration of oaths. 97 See para 2.4.1 above. 98 Explanatory Notes to the Legal Services Act 2007, para 120.

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If the Lord Chancellor disagrees with the recommendation, he must publish a notice stating this decision and the reasons behind it (section 26(4)). Without the Lord Chancellor’s agreement, therefore, the list of reserved legal activities cannot be reduced.

3. Procedure through which the LSB may arrive at a recommendation The LSB must follow the same procedure for both a ‘section 24 investigation’ (regarding an extension of the reserved legal activities) and a ‘section 26 investigation’ (reduction of the reserved legal activities). Anyone may request in writing that the LSB conducts an investigation into a legal activity (Schedule 6, paragraph 2). If such a request comes from the Lord Chancellor, the Office of Fair Trading, the Consumer Panel, or the Lord Chief Justice, the Board is under an obligation to conduct preliminary inquiries to determine whether a full investigation is appropriate (Schedule 6, paragraph 3). The preliminary inquiry period is the period of three months from the date of receipt of the request, but it may be extended up to a maximum of four months if the Board publishes written reasons for that extension (Schedule 6, paragraphs 3 to 7). If a request for an investigation is made by anyone other than these four parties (or if the LSB otherwise considers it appropriate to do so), the Board may choose whether or not to carry out preliminary inquiries (Schedule 6, paragraph 4(1)). As part of its preliminary inquiries, the LSB may seek advice from either or both of the OFT and the Consumer Panel, who must respond within any reasonable time period set by the Board (Schedule 6, paragraph 5(1) and (2)). In preparing their advice, the OFT should pay particular attention to possible effects on competition within the market for reserved legal services that the proposed changes would have, whilst the Consumer Panel should consider the likely impact on consumers (Schedule 6, paragraph 5(3)). Either body may request information from any person to assist in the preparation of their advice to the Board (Schedule 6, paragraph 5(4)). The LSB may also request an opinion from the Lord Chief Justice. If it has already requested information from either the OFT or the Consumer Panel or both, it must wait until the period for the submission of their responses has ended, and provide a copy of those responses to the Lord Chief Justice for consideration (Schedule 6, paragraph 6(1) and (2)). He in turn must respond within any reasonable timescale set by the Board, and pay particular attention to the likely effects of the proposed changes on the courts system (Schedule 6, paragraph 6(3) and (4)). The LSB must consider and publish any advice provided by any of these three parties (Schedule 6, paragraph (7). The LSB may refuse a request to hold a full investigation after conducting its preliminary inquiries. To refuse such a request from the Lord Chancellor, the OFT, the Consumer Panel or the Lord Chief Justice, it must have consulted with the latter three parties and either have received advice from them, or the time period for the submission of that advice must have expired (Schedule 6, paragraph 8(2) and (3)). The Board must also have provided the Lord Chancellor with a copy of any advice given to it by these parties, and gained his consent to its refusal of the request (Schedule 6, paragraph 8(2) and (4)). If the LSB chooses to hold a full investigation into either extending or reducing the list of reserved legal activities, it must notify each of the four parties, and within that notification provide both reasons for its decision and a description of the following procedure (including any relevant time limits) (Schedule 6, paragraph 9). The investigation period runs for 12 months following notification of the LSB’s intention to conduct an investigation (Schedule 6, paragraph 11(1)). This may be extended up to a maximum of 16 months after consultation with the OFT, the Consumer Panel and the Lord Chief Justice; reasons must be given for the extension (Schedule 6, paragraph 11(2) to (5)). The Board is entitled to set

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION? rules regarding the submission of written and oral evidence and representations but must, so far as is practical, consider all submissions made in line with those rules (Schedule 6, paragraph 12). The LSB may pay the reasonable costs of any person providing oral evidence in line with these rules (Schedule 6, paragraph 18). After publishing a provisional report, the LSB should determine whether to hear any further evidence. In particular, it should exercise its own rules in a way that allows practitioners of the legal activity under investigation to make representations on the provisional report (Schedule 6, paragraph 13). The LSB should consider this evidence specifically, and any other information that it considers relevant (Schedule 6, paragraph 15). The final reporting period commences on the date of publication of the provisional report and runs for three months, but may be extended by the LSB on notice to the OFT, the Consumer Panel, and the Lord Chief Justice up to a maximum of five months (Schedule 6, paragraph 17). Within that period, the Board must publish a final report, and provide a copy to the Lord Chancellor. This report should contain: the Board’s decision; reasons behind that decision; any recommendation to be made for the purposes of sections 24 or 26 of the Act; and, if a recommendation is to be made, what the Board considers should be the wording of the relevant provision or order (Schedule 6, paragraph 16). Whilst activities are under consideration for becoming reserved, the Lord Chancellor may allow, by order, provisional designation of approved regulators and licensing authorities (section 25).

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Appendix 2: Approaches to regulation 1. Introduction While there might be some special attributes of legal activities that could suggest that the presence or absence of regulation should be considered as a special case, the ultimate approach to the regulation of legal services needs to be consistent with general theories of regulation. We therefore take this opportunity to summarise different approaches to and facets of economic and regulation theory in order to be able to position and justify our thoughts within a broader regulatory context.

2. The role of fully competitive markets 2.1 The need for fair markets There is a view derived from economic theory that provides a foundation for much contemporary thinking about regulation. It is that efficient, perfectly competitive, markets will lead to the correct outcomes, and that accordingly perfect competition is to be regarded as the underlying regulator. Although often expressed as a product of ‘free markets’, it seems to us that entirely free markets are a theoretical construct and do not exist in the real world, and would in any event be capable of manifesting distortions that would not necessarily be welcome. The goal would be better expressed as seeking ‘fair markets’. In the context of this paper, our suggestion is that what is perceived to be fair should be judged by reference to the public interest. Further, given that there is not one market, but several, fairness and the public interest also suggests that there should be comparability across markets, so that some are not subject to regulation where, in comparable other markets, competitive forces are allowed to prevail or the nature or extent of regulation is not comparable. Particular regulation is therefore justifiable in the public interest where it is needed to address ‘market failures’ – that is, where the market can be said to be producing results that cannot be described as fair. The role of regulation should therefore be to correct any failures that would lead to consumer detriment (Llewellyn 1999: 21). The influence of ‘market failure’ thinking on approaches to regulation has led to a number of regulatory interventions to correct such perceived failures. The rationale for these interventions is that regulation to avoid market failure is in the public interest. The European Parliament has expressed a view that any market failures or imperfections that are reducing consumer welfare can provide a basis for regulation99:

From a general point of view rules are necessary in the specific context of each profession, in particular those relating to the organisation, qualifications, professional ethics, supervision, liability, impartiality and competence of the members of the profession or designed to prevent conflicts of interest and misleading advertising, provided that they give end users the assurance that they are provided with the necessary guarantees in relation to integrity and experience, and do not constitute restrictions on competition. If, as suggested above, a free market for legal services would lead to some ‘failures’ in the market, that would in turn suggest that there is a basis for some degree of regulation. It may also be the case that there might even be a consumer demand for regulation, despite the extra costs it will involve. Llewellyn (1999: 31) has highlighted a number of issues that may cause a rational consumer demand for regulation, such as reducing the ‘search costs’ of finding appropriate suppliers and doing business with them, lack of information on the consumer’s part, a preference for protection before the event rather than action after it, and the requirement of an extra layer of assurance about the transaction being entered into.

99 Resolution on Market Regulations and Competition Rules for the Liberal Professions, 16 December 2003.

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION?

Regulation can be applied either before or after the event. Before-the-event (ex ante) regulation dictates rules about who can act in a market, what they can do, and how they can do it (Collins 2006: paragraph 2.6). It thus aims to set certain standards before any transactions are entered into with consumers. After-the-event (ex post) regulation provides for remedies against professionals who have breached professional rules or service commitments (Collins 2006: paragraph 2.9), and so can only act after a problem has arisen. Ex ante regulatory measures are generally perceived as being inherently anti-competitive, because they form barriers to entry in the market to which they are applied. For this reason, there should be a compelling consumer or public interest need to warrant such restrictions, such as the inadequacy of monetary compensation for harm caused. It seems logical that measures to ensure that a market functions properly can only be justified if no other measures are available that would have a similar purpose but less severe effects on competition. In essence, theory suggests that market failures are attributable to deficiencies in information, to inhibitors of perfect competition, and to ‘externalities’ and that these failures warrant some form of regulatory intervention.

2.2 Deficiencies in information Underlying the notion of perfect competition is the idea that each party to a transaction has all the information necessary about the quality of the service on offer to make fully informed, comparative decisions. However, this reflects a perfect world rather than the real one, and the market for legal services ‘fails’ in some significant respects.

2.2.1 Information asymmetry A lack of information on the part of the consumer is usual in the provision of legal services. Consumers may be unsure of what service they require, or even if any is required at all (SEO 2008: 18). An essential feature of this sector is that the practitioner is required to display a high level of technical knowledge, which the consumer may not possess (European Commission 2004: 9-10). Consequently, a situation arises where the practitioner knows the quality of the service he is offering, while the consumer does not. This is known as asymmetric information. Information asymmetry is generally perceived as a negative, but unavoidable, feature of professional services. Arguably this asymmetry is not necessarily simply a negative in itself, but rather an inevitable side-effect of something positive – namely, the division of labour into smaller parts with higher levels of specialisation, and the accompanying increase in productivity. As SEO explains (2008: 15):

A lawyer with experience in a particular field or sector learns more from each successive case than one with no such background. It is thus more efficient to use the specialist than to divide the work between two lawyers. And once he [or she] has specialized, the lawyer’s market power only increases in comparison with the customer’s. Although specialization may invoke market power, it is not a ‘bad thing’ that needs to be addressed by government action; it is not a type of dominance one would want to eliminate. The practical implications of information asymmetries are that a consumer may be led by his practitioner into a number of different scenarios, most obviously the risk of unknowingly paying high prices for low-quality services. There is also the possibility that a consumer may receive a good quality of service, but nevertheless pay more for it than necessary because the practitioner has provided a higher quality than that required in the circumstances. For example, this could occur when a solicitor has performed more routine tasks that could have been carried out more cheaply by a paralegal, but which are therefore billed to the client at the solicitor’s rate. Alternatively, a

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION? consumer may be provided with services that he does not even need, such as being advised to pursue an unmeritorious claim. These problems arise because a lawyer is responsible not only for diagnosing his client’s legal problem, but also then providing the solution. Without any regulation, all of these situations will result in the same outcome: gains made by the provider at the expense of the consumer, who has to bear excessive costs. Such costs for consumers may then lead to fewer purchases of legal services. This in turn would create concerns about access to justice for those consumers who are priced out of the market. Improving access to justice is one of the regulatory objectives of the Legal Services Act100, and the exclusion of any members of society from the market for legal services works against the public interest, and as such the possibility of this happening is grounds for some regulatory intervention.

2.2.2 The challenge of assessing quality The fundamental problem with asymmetric information in legal services is the difficulties it raises for any consumer trying to assess the quality of the service on offer. Quality in this sense should be interpreted broadly (OFT 2009: 16), including not only the legal information being immediately provided but also taking into account factors such as customer service and a client’s personal circumstances101. When assessing the quality of an economic good or service, it is useful to differentiate between search, credence and experience quality characteristics. Search goods, such as an item of clothing, may be assessed at low cost to the consumer before purchase. The quality of experience goods, for example a restaurant meal, can be determined after purchase through a reasonable period of use (Llewellyn 1999: 34). In contrast, credence goods exhibit extreme information asymmetry. Their quality may only be ascertained some time after purchase, if indeed this ever becomes possible. One example of a credence good is an annual car service (LECG 2000: 10). Another is a will. These quality characteristics largely determine the level of transaction costs for the consumer. These costs, in particular those known as search and information costs, tend to rise from search through experience to credence goods (Llewellyn 1999: 35). For a lay consumer to gain access to all the information required to make a fully informed assessment of a credence good would be prohibitively costly. Legal services can be classified as having features of both experience and credence goods. Credence characteristics are displayed for two main reasons. First, clients often cannot properly assess the quality of the advice they are given since it involves knowledge that they do not possess. Second, the quality of a legal service may not always correspond directly with its outcome. For example, a case may be won due to extraneous circumstances (such as the poor performance of another party’s witnesses), or lost despite a diligent lawyer’s best efforts, making it impossible for the client to determine fully his practitioner’s input (Copenhagen Economics 2006: 8). SEO (2008: 17) suggests that ‘win-loss’ statistics may act as an indicator of quality, by correcting an imbalance between quality and market share (as a lawyer who loses many cases might also tend to lose market share). However, this is not a hard-and-fast rule and does not disclose everything about a lawyer’s performance or the service provided. The information asymmetry therefore continues to exist, to the potential detriment of the consumer. Information asymmetries affect different types of consumers of legal services to varying extents. The European Commission (2005: 4-5) differentiates between the characteristics and needs of business users, the public sector and households. Corporate clients often have higher levels of

100 See further, para 1.4 above. 101 See also Mayson (2010).

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION? information about quality, as they are likely to make repeat purchases and be able to monitor the service they receive using experienced employees. The public sector could be considered to be similar in this respect. Households or private clients, and many small businesses, are likely both to purchase legal services infrequently and to be less able to monitor the quality of service when it is received. The case for protection through regulation is therefore stronger in the latter situation (LECG 2000: 32-33).

2.2.3 Bounded rationality Linked to the notions of quality and information asymmetry is that of bounded rationality, or rational ignorance. Individual consumers will inevitably have cognitive limits on their ability to collect and process the information necessary to make fully informed choices, either because they do not possess the expert knowledge necessary to make such decisions, or because they are not intellectually capable of dealing with such complexities102. The idea of bounded rationality suggests that it is efficient for consumers to collect and process information about a subsequent purchase only up to the level where the benefits of having that information are equal to the costs incurred in collecting it (SEO 2008: 16). It would be too costly for a consumer of legal services to contemplate and assess every incident that could possibly arise during his relationship with his legal service provider (Llewellyn 1999: 36). Therefore, even if none of the deficiencies in information described above existed, consumers would still be constrained in their decision-making processes. This in turn may justify a certain level of regulatory intervention if the regulator is better informed and equipped to process the necessary information (SEO 2008: 16).

2.2.4 Agency costs Two forms of what economists identify as ‘agency costs’ may arise: adverse selection and moral hazard. If consumers are incapable of determining the quality of the service being provided to them, they will only be prepared to pay an average price for the uncertain, and therefore presumed average, service. Over time, this will cause providers of a high-quality service to exit the market after being unable to achieve a fair price for what they offer, leading to a further reduction in the average quality of service available (Paterson et al. 2003: 29). A report for the OFT (2001: 11) has noted that, in this situation, a firm providing a high-quality service may even hasten its own end by cutting prices to compete with cheaper rivals, if consumers interpret that action as evidence of low quality. Consumers are, therefore, actively and adversely selecting against high-quality providers. This results in a market that has generally reducing quality and price – Akerlof’s (1970) so-called ‘market for lemons’. However, a number of reasons have been put forward to support the argument that adverse selection would have little effect in the market for legal services. Most obviously, all lawyers must meet minimum educational standards, which automatically deselect those without that education from the consumer’s range of choices. The availability of a forum for complaints from consumers103 will also have a disciplinary effect on the profession and encourage non-hazardous behaviour, as will the possible use of conditional fee arrangements. The high level of importance placed on a good reputation for lawyers further acts as a strong tool in reducing adverse selection problems (Copenhagen 2006: 24-25). In addition, the nature of the legal services market itself solves some of its information asymmetry, in that at least in contentious matters quality issues do not solely

102 In the area of legal services with which we are primarily concerned, this raises issues of access to justice and public legal education (cf. paras 1.4 and 1.8 above). 103 In England and Wales, the newly formed Legal Ombudsman has fulfilled this function from 6 October 2010.

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION? concern the practitioner representing a given client, but rather they are comparative to the lawyer representing the opposing party (SEO 2008: 19). Whilst adverse selection is based on a consumer’s ability to choose a certain quality lawyer, and therefore comes into play before an agreement is entered into between lawyer and client, the second agency cost of moral hazard arises after that agreement has been made (Copenhagen 2006: 23). Moral hazard emerges when businesses can control the quality they provide to consumers. If consumers cannot determine for themselves the quality they are receiving, there is an incentive for businesses to save costs by providing lower quality whilst still charging high prices (OFT 2009:19). Every relationship between a principal and an agent involves this risk of moral hazard, or opportunistic behaviour. Since a client may require his lawyer to decide whether, and if so what, service is required, as well as providing the solution to the client’s problem, there is real scope for supplier-induced demand with resultant higher prices (SEO 2008: 18). If a lawyer’s income is maximised in a way that does not correspond with his or her client’s best interests, or information asymmetries prevent fair bargaining between the two parties, moral hazard will be a problem (Paterson et al. 2003: 17). In the legal profession, this problem can arise in several ways: a lawyer may pursue cases that do not need to go to court, advise his client to litigate where it is not wise to do so, or simply not be sufficiently thorough in performing basic duties (Copenhagen 2006: 22-23). The overall result of agency costs is that overall consumer welfare is reduced: both consumers who want high-quality goods and services, and sellers of them, would be better off if they were able to do business together, but the market for them to do so may no longer exist as adverse selection and moral hazard result in higher quality providers leaving the marketplace (OFT 2009: 23). One function of regulation should therefore be to lay down common standards that all firms are confident will be equally applied to their competitors. Llewellyn (1999: 28) explains:

These standards might not need to be higher than each firm would agree to, and would willingly accept, if they had confidence that all competitors would accept them. Regulation can have a positive and beneficial effect of breaking a grid lock by offering a guarantee that all participants will behave within certain standards. In this respect, regulation does not necessarily apply standards that are regarded as unreasonable by the industry but serves the purpose of breaking the grid lock.

2.2.5 Addressing deficiencies in information Perfectly competitive markets assume access to full information and the ability to make decisions based on that information. This further assumes or requires a high degree of access to information and consumer understanding. Ultimately, there may be little that the regulation of professional services can (or should) do to improve consumer understanding and the ability of clients to process all the information that might be made available to them. However, there are many things that regulation can do to reduce the scope and incentives for continuing asymmetry of information. In large measure, provisions for disclosure encourage access to information and the reduction of asymmetries in its distribution. Llewellyn’s (1999: 32-33) starting point is the agreement by economists that disclosure of relevant information by service providers is essential for consumer protection. The question that then arises is: to what extent should this be voluntary, and to what extent mandatory? Left to their own devices, practitioners may not disclose sufficient levels of information for consumers to make fully informed choices. The arguments put forward for mandatory disclosure requirements are the possibility of easier comparisons between products and therefore lower transaction costs; that standardised information will help consumers make choices; and that consumers may be unsure what information they actually require regarding a certain transaction. The conclusion drawn is that mandatory disclosure requirements may only be harmful if for some reason they prevent service providers from

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION? disclosing the same level of information as would have been released without any compulsion. A sensible path to take would therefore be to set minimum levels of mandatory disclosure requirements, and follow this up with encouragement for further voluntary disclosure. In an arguably perverse (or at least patronising) approach, the historical – and, in many jurisdictions, still current – standpoint is that asymmetry of information can be reduced by not allowing practitioners to tell their potential market anything (or very little) about their services, by imposing advertising bans or restrictions. Arguments exist both for and against these types of constraints. Reasons in favour of at least some form of restriction on advertising include not encouraging consumers to make decisions they are not competent to make and preventing ‘charlatans’ from obtaining business through false or misleading advertisements (OECD 2007: 43). In addition, it has been suggested that advertising bans may prevent adverse selection (Van den Bergh & Montangie 2006). If certain providers advertise low fees for lower quality, consumers may be unwilling to pay higher fees to higher quality providers because they will not be able to ascertain the difference between the two practitioners, and so the higher quality providers will be forced to leave the market. However, a simpler restriction on fee advertising may prevent this, rather than an outright ban. The same authors point out that, as the quality of legal services can only be assessed in the long term, consumers will not be able to verify the truthfulness of quality-based advertising, thus leading to some calls for regulation of the content of advertisements (Van den Bergh & Montangie 2006: 61). Perhaps the least convincing ground for advertising restrictions is that they in some way preserve the dignity of a profession, and that integrity and independence would be undermined by the outward appearance of overt competition between professionals (Van den Bergh & Montangie 2006: 62). The opposing case, against advertising restrictions, is simpler but more effective: economic theory suggests that advertising enhances competition by informing consumers about the different products available to them, and so enables them to make better purchasing decisions (European Commission 2004: 13-14). In terms of addressing the fundamental asymmetry of knowledge and experience as between the practitioner and the client, advertising restrictions deliberately prevent the client from gaining access to the information needed to make a fully informed decision about which provider to instruct. The only conclusion to be drawn from this must surely be that the client cannot be trusted to reach the right decision with full information and that no clients should ever be put into such an unfortunate position! Another factor proposed by Stigler (1961) is that, although consumers could gather information themselves, advertising can substitute for a large amount of searching efforts by a large group of consumers. In this way, advertising may lead to a considerable reduction in searching costs (OECD 2007: 43). It is also worth noting that advertising is usually a key tool for new firms attempting to enter a market, and for this reason advertising restrictions can also act as a barrier to entry (European Commission 2004: 13). SEO (2008: 43-44) provide a useful conclusion to the debate:

From a social perspective, advertising should be allowed when it is productive, that is, if it conveys important and relevant information to consumers concerning the services. There is no reason to suppose that advertising of legal services should be different than those generally applied to other experience and credence goods services. The challenges arising from assessing quality and addressing agency costs are typically founded on the proposition that the transaction costs of individual consumers in assuring quality are too high (and would in any event lead to potentially wasteful duplication or repetition of enquiries and judgments), and that it is therefore more cost-effective in the interests of overall social welfare for these facets of professional services to be assured on a collective basis. This is usually achieved by a regulator setting appropriate qualification and entry requirements (such as licensing or certification), and perhaps by setting and enforcing appropriate quality standards and price levels. These are before-the-event assurances.

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Qualitative entry restrictions are an example of before-the-event regulation in legal services, which seek to ensure a certain level of competence amongst providers before they are allowed to practise. The rationale is that, because consumers of legal services cannot determine the quality of the service a lawyer is offering, at the very least they should be assured every legal practitioner has undergone a certain minimum level of education and training104. The Chairman of the OFT has expressed the opinion that this type of regulation is suited to information deficiency problems (Collins 2006: paragraph 2.6):

Ex ante regulation can solve some information-related market problems inherent in the professional services sector, as it is primarily designed to alleviate the risk of parties offering services they are not competent to carry out, and to improve the incentives that members might otherwise have to offer poor quality services or to induce unnecessary demand. The fact that poor quality legal services can have such serious, and possibly irreversible, consequences for the consumer justifies intervention in the market that qualitative entry restrictions cause. In addition, regulators might also choose to offer after-the-event opportunities for complaints and compensation. The downside of the availability of compensation is the ‘free-rider’ problem, which entails either clients pursuing claims that have no merit or which they could not otherwise afford to do, or firms being less assiduous in their business activities knowing that the cost of defaults will be picked up elsewhere. Consumers might also be tempted to behave less prudently in choosing a practitioner if they have the assurance of compensation for a poor quality service (Llewellyn 1999: 29). The use of before-the-event regulation is problematic in economic and regulatory theory because it inevitably creates barriers to entry. As a consequence, there might be fewer entrants to the market than would otherwise be the case, resulting in local monopolies or advice deserts. A policy that knowingly introduces such barriers must therefore satisfy a stiff public interest test. Further, the level of qualification or quality standards set might be higher than an efficient market required. This could lead either to higher prices than consumers should objectively need to pay for the services required (which might then result in fewer purchases – creating an issue of access to legal services or to justice), or to higher establishment costs for providers, thus potentially discouraging providers from entering the market. In a bid to balance the need to protect consumers without imposing too great an anti-competitive burden, we agree with the EU Commission suggestion that any entry requirements should be proportionate to the complexity of the work that needs to be undertaken by the professionals in question. This is an important consideration in the context of regulation – particularly of the reserved activities – because if the level of qualification is higher than needed for carrying out those activities, a number of possibly unwarranted consequences follow105.

2.3 Lack of competition Where the approach to regulation has an underlying premise that competition in the relevant marketplace is perfect, any prohibition or inhibition on competition clearly undermines that premise. In all but monopoly markets, there will be some form of competition: the question for regulation becomes one of whether there is enough for the market to operate effectively. As Paterson et al. suggest (2003: 19): “a decrease in levels of competition will lead to wealth transfer

104 Whether the current training process for solicitors actually does result in competence to practice in all areas is addressed in LSI (2010b). 105 Many of the issues are explored in LSI (2010b).

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION? from consumers to producers.” To put it another way: competition will tend to reduce prices within a market, and lack of competition will allow suppliers to charge higher prices to their customers. Low levels of competition mean that there will be little incentive for firms to innovate and find new ways to operate more efficiently. The end result will be that consumers will have to bear higher costs. As with higher costs resulting from deficiencies in information, this may result in the public consuming fewer legal services (and those who sit just outside the threshold for legal aid will often be the worst affected). As discussed in paragraph 2.2.1 of this Appendix, this creates issues regarding access to justice. It is important to observe that the current monopolies in the legal services market created by the existence of reserved legal activities are the consequence, rather than the cause, of regulation. Although lack of competition is one of the three main ‘failures’ identified in the legal services market, it cannot be fixed only through regulation because regulatory intervention is itself causing the restriction of competition. As SEO put it (2008: 17): “Without government regulation, there would be no lawyers’ monopoly.” We noted earlier (see paragraph 1.6 above) that regulation can co-exist alongside, and be used to enhance, competition. It is not the case that there is only ever space for just one or the other in a given market (and certainly not in the market for legal services).

2.3.1 Entry barriers Any restrictions or requirements that create barriers to entry (such as qualifications and quality standards) or barriers to exit (such as run-off insurance) on the face of it inhibit competition. Entry restrictions can largely be grouped into two categories: qualitative, which only allow those with appropriate qualifications and experience to practise; and quantitative, which seek to preserve access to that service (European Commission 2005: 10). Entry restrictions to the legal professions in England and Wales now tend to be the former, but quantitative measures still exist within some professions106 in other jurisdictions (Van den Bergh & Montangie 2006: 46). Despite the reduction of competition that entry restrictions cause in the legal services market, they are commonly justified by various positive effects. Qualitative restrictions aim to secure a minimum quality standard for services provided. As noted above, information asymmetries prevent consumers from being able to judge the quality of the service being provided. Qualitative entry restrictions should reduce information asymmetries, exclude low-quality suppliers, and increase the average quality level within the market. It could be argued that less stringent forms of regulation may suffice if there are consumers who wish to purchase low-quality services at a lower cost. However, there appears to be some consensus that consumer welfare will decrease if untrained professionals are allowed to practise (Van den Bergh & Montangie 2006: 47). This goes some way to justifying the inherent risk taken with any qualitative entry restrictions: that is, that members of the profession may set the entry restrictions above the necessary level in order to limit the numbers of new professionals entering the market and keep prices artificially high. However, it is also worth noting that a 2001 report for the OFT considering competition in a number of professions (including

106 For example, quantitative restrictions on pharmacists in an area of northern Spain – despite constituting a restriction on the freedom of establishment within the meaning of Article 49 of the Treaty on the Functioning of the European Union (the EU Treaty) – were held by the European Court of Justice not to be precluded by Article 49 in joined rulings of 1 June 2010 in José Pérez, María Gómez v Consejería de Salud y Servicios Sanitarios (C-570/07) and Principado de Asturias (C-571/07). The basis of the decision was that the restrictions were “justified by the objective of ensuring that the provision of medicinal products to the public is reliable and of good quality” (para 64), were “appropriate to the aim being pursued” (para 103), and did not go beyond what was necessary to achieve that aim (para 112).

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION? solicitors and barristers) found no evidence of such behaviour by the professional bodies included in the study107 (LECG 2000: 119).

2.3.2 Conduct of business In addition to entry restrictions, restrictions or requirements on how business is to be conducted within a market (such as standard fees or minimum pricing, prohibitions on advertising, or access to external capital) may also have an effect on ‘free’ competition. Restrictions on advertising and fee setting have been identified as the ‘least defensible’ of the possible conduct restrictions, because of the lack of an obvious link with service quality (LECG 2000: 119). Fixed fees may take the form of either minimum or maximum prices. Either type will compromise the ability of suppliers to compete. The main theoretical argument for minimum prices is that they aim to guarantee a certain level of quality. However, weighing against this is the effect they can have on competition, especially as other less restrictive measures may perform the same function (OECD 2007: 54). Another basis for fixed minimum fees is their use in assuring the confidence premium for members of a profession. SEO (2008: 42) explain:

The confidence premium is closely related to the concept of credence good. For legal services, the quality uncertainty is replaced by trust or confidence in the professionals…. The confidence premium is the reward for the professional not to cheat on the client. It is a way to protect the confidence. It is much like trademarks: it builds up goodwill. This notion perhaps seems somewhat outdated. There is also an obvious flaw – as SEO continue:

The problem is, however, that professions may abuse the fee regulation by acceptance of the rewards for their monopoly without enforcing high standards. Moreover, even in the absence of abuses, it seems very difficult to determine the appropriate size of the confidence premium. In contrast, fixed maximum prices appear much less restrictive of competition than their minimum counterparts. They could act to reduce the ‘double monopoly mark-up problem’, for example, by limiting the fees for legal services paid by consumers who have to pay separately for a barrister and solicitor. They can also assist in combating moral hazard, by preventing excessive fees for lower quality services (OECD 2007: 54). But it is unlikely that these benefits would outweigh the major problem with fixed maximum fees: “they may have the effect of leading to a leveling of prices towards the maximum fee and thus have an effect equal to that of a fixed price” (Van den Bergh & Montangie 2006: 57). Pressure from competition authorities has resulted in fixed fee schedules in professional services worldwide becoming increasingly uncommon. In 2004, the European Commission found that recommended fees existed only in a few professions within certain Member States, and the United Kingdom was not one of these (European Commission 2004: 11-12). However, other restrictions are still in force within our jurisdiction, with varying effects on competition and consumers. An empirical assessment for the OFT showed that (LECG 2000: 28):

professional restrictions can and do have a detrimental impact on competition and on the prices charged to consumers. It is important to note, however, that it is not possible to generalise about the impact of restrictions on competition. Each restriction or set of restrictions in each profession requires separate analysis.

107 This was despite an overall finding that there were distortions in competition across all the professional groups included. For the legal professions, these were in areas including legal professional privilege, third-party perceptions of solicitor-advocates, business structures, advertising restrictions, and the QC system (LECG 2000: 120-122).

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At this point, either the quest for perfect competition or the need for regulatory intervention has to be justified because of the apparent conflict between them. Neither is inherently right or wrong; but the answer certainly depends on the philosophy or policy underlying the regulatory decision- making process.

2.3.3 Addressing lack of competition Much of the distortion of perfect competition said to arise in legal services could be argued to be the consequence of anti-competitive regulation imposed on providers. We have already suggested that the imposition of entry requirements and quality standards can lead to consequences that discourage full competition. In addition, for example, restrictions on advertising prevent providers from raising their profile and attracting clients in ways common for almost all other forms of commercial enterprise108. Empirical research has shown the negative effects for consumers that can be caused by undue regulation of advertising and licensing. Lower quality and higher prices have resulted from over-regulation of professional services in certain cases, and positive effects have flowed from the relaxation of anti-competitive restrictions in others (European Commission 2004: 9). Similarly, restrictions on permissible business structures can limit access to capital that would be regarded as a natural business process for other ventures. Despite this, all professions impose some form of regulations on their members in relation to the way in which they can organise their business (Van den Bergh & Montangie 2006: 66). Further, restrictions on business structures can also inhibit cost-efficiency and innovation (which could otherwise lead to lower prices, or to higher quality at the same price, both without any necessary reduction in returns by way of profit). On the other hand, such restrictions can bolster lawyers’ duties in respect of, say, avoiding conflicts of interest109, as well as reinforcing their independence as advisers (for instance, by not allowing non-lawyer ownership or investment in law firms) and their personal responsibility for advice given (by not allowing or restricting limitation of liability through incorporation). The dearth of empirical evidence in this area provides no basis from which to draw any meaningful conclusions (Van den Bergh & Montangie 2006: 69). The European Commission has expressed the opinion that business structure restrictions may be more justifiable in professions where there is a need to protect practitioners’ personal liability or independence. However, this view is tempered by the Commission’s usual proportional approach (2004: 17):

There might however be alternative mechanisms for protecting independence and ethical standards which are less restrictive of competition. In some markets, stringent ownership restrictions might therefore be replaced or partially replaced by less restrictive rules. As with many aspects of regulation, what we are faced with here is a tension between a public interest need to address deficiencies in information leading to regulation that might compromise the public interest need to encourage perfect competition. The resolution of this tension is inevitably a balancing act. Rather than being a problem in itself that regulators should aim to fix, the lack of competition in legal services is a factor that should be taken into consideration when addressing other issues in that market. For example, OECD (2007: 53-54) has suggested that, rather than activity reservations, title protection may act to preserve the status attached to lawyers whilst also allowing competition by

108 We are conscious in using the expression ‘commercial enterprise’ that there are still many lawyers, some professional bodies and some regulators who hold the view that the practice of law cannot be characterised as such. This is not a view that we regard as tenable, if it is intended as a polarisation of the regulatory debate between law as a profession or as a business. It is, and can properly be, both. 109 This is a significant concern to many in the current debate about whether self-employed barristers should be allowed to move away from the requirement to practise individually in chambers to a partnership model.

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION? other providers – each with their own titles protected. They argue that this arrangement could also lessen information asymmetries, as consumers would have an idea from a title what level of quality and price to expect.

2.4 Externalities 2.4.1 Costs and benefits to others Externalities are ‘a particular form of market failure’ (Llewellyn 1999: 9). In the language of economists, they are the effects of transactions on those who are not parties to them. Externalities can be either negative or positive: negative externalities represent a cost to one or more third parties, while positive externalities represent a benefit. For example, if a poor service is provided to a client who has engaged a solicitor to draft a will, this could negatively affect third parties, such as family members, who were intended to be beneficiaries under that will. In this way, overall social welfare is diminished (Van den Bergh & Montangie 2006: 27). Copenhagen Economics (2006: 9) provide a useful example of some positive and negative externalities that may arise from a trial:

lawyers are involved in uncovering ‘case law’, thus creating value for other[s] … who will learn the current ‘case law’ without paying for it. At the same time, the result of a trial can have a pre-emptive effect for other businesses and citizens. Thus lawyers’ work in courts creates a positive value for others apart from the client…. If a client is subject to a wrong ruling because he did not use a lawyer, he will suffer a loss, but the economic loss for society of a wrong ruling can be far greater. The client does not have to pay the losses that will arise elsewhere in the economy because a wrong ruling gives wrong guidance in other cases. The consumer of a legal service will not be directly affected by any externalities from his transaction. Their effects will fall on those who are not parties to the transaction. However, it is apparent that positive externalities work against the client’s interest, at least indirectly, because a third party will enjoy a benefit that the client is paying for. So, taking the example of a lawyer involved in a trial that develops the common law: the client will pay all of the lawyer’s fees even though some advantage is gained by those who in the future will use the law as it has been progressed. In contrast, a negative externality works against the public interest but in favour of the client. A cost will arise out of the transaction between a lawyer and his client that has not been accounted for in the fees agreed between those two parties. However, this cost will be borne by whoever beyond the immediate transaction or dispute is affected and not by the client. Negative externalities create more instantly recognisable difficulties. For example, if a lawyer negligently drafts a commercial contract (depending on the error made), not only his client may suffer but also the other party to the contract and possibly third parties on both sides. The effects of positive externalities are harder to quantify. Since the nature of a positive externality is such that the client does not reap the benefit, he or she will not take that benefit into consideration when deciding whether or not to enter into a transaction with a lawyer. The client may therefore decide that the costs of a legal service do not outweigh the benefits to him, but by not purchasing that service possible advantages to third parties to the transaction are lost. Consequently, such externalities are likely to be under-produced (Rubenstein 2004: 14) because the consumer who bears the full cost of a transaction does not receive all the benefits thereof. The cost of negative externalities that can be generated by poor quality may therefore justify some form of regulatory intervention in the legal services market (SEO 2008: 20). There are also factors other than regulation that will deter lawyers from delivering poor-quality service, such as harm to their reputation and liability for negligence (LECG 2000: 12). However, liability rules act only after the harm has occurred, whereas regulation of entry and quality aims to promote acceptable

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION? standards before the event, and therefore to stop incompetent practitioners from entering a market. It has been argued that only regulation of quality in combination with possible liability claims will assure quality of standards in legal services and therefore solve the problem of externalities (OECD 2007: 23).

2.4.2 Addressing externalities In a perfectly competitive market, the prices charged and paid for a service will reflect all positive and negative effects – in other words, the potential externalities will have been ‘internalised’ into the transaction. However, these side-effects are not accounted for, or internalised, in the original agreement between lawyer and client are therefore detrimental either to the public or the consumer interest. Protecting and promoting both of these interests are regulatory objectives of the Legal Services Act110, and therefore some form of regulation can be justified to further those aims. Regulation that is intended to address externalities should therefore focus on avoiding negative effects or creating positive effects (or both). If there were no regulation of the providers of legal services (or, more accurately, given the existence of the ‘regulatory gap’ referred to in our first paper (LSI 2010a), where the providers of legal services are not subject to regulation), the potential negative externalities relate to costs on society generally. These might take the form of greater costs on the courts system because of a greater number of claims arising from wrong advice or inadequate service, or because of losses suffered by clients as a result of such advice and service. There are two regulatory approaches that have been used to address such externalities. The first is the use of entry and accreditation requirements, which might also be combined with the use of quality standards and compensation. As we have seen (cf. paragraph 2.2.5 of this Appendix), these before-the-event and after-the-event approaches are also designed to address other forms of market failure. These measures are intended to assure clients that those who provide legal advice and services are competent to do so, and that there can be some redress if the advice given or service received falls below the standards expected. However, within the structure of legal services in England and Wales, such regulation is in essence voluntary. Not all legal activities are regulated, so that only those providers who have chosen to qualify as lawyers will be subject to some form of regulation of the type described here. Historically, of course, almost all legal services delivered to clients have in fact been provided by those who have chosen to qualify. This has resulted in clients being afforded a significant degree of protection. However, the implementation of the Legal Services Act 2007 brings into sharper relief the distinction between those activities that must be provided by those who are authorised and those that need not. An emphasis on competition and markets is much more likely to encourage those who are not legally qualified to enter the market and provide legal services that are not required to be delivered by authorised persons. This leads, therefore, to the second regulatory approach to addressing externalities. This is to reserve certain activities to those who are appropriately qualified or authorised – the idea of ‘reserved legal activities’. To those who seek perfect competition, such reservations are inherently anti-competitive. The very notion of reservation is the creation of a monopoly on provision, and arguably artificially raises demand for the services of those who carry the monopoly right. Further, the existence of reservations imposes a burden and obligation on consumers: they are effectively

110 Legal Services Act 2007, ss. 1(a) and 1(d) respectively: see further, paras 1.2 and 1.5 above.

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION? told by a regulator that their choice of provider is limited, and they must be sure that they only instruct someone who is appropriately qualified111. Many arguments have been advanced in favour of reservation. It may help to preserve the provision of so-called universal services, namely those that are considered sufficiently important that every citizen should have access to them, but in certain areas may prove unprofitable to provide without some monopoly rights. Further, there is a belief that the reservation of certain services will result in greater specialisation by practitioners, and therefore a better service for consumers (Van den Bergh & Montangie 2006: 41), or benefits to society at large (cf. paragraph 3.2.2 above). However, from an economic perspective, the idea of awarding monopoly rights to a certain group of people with the aim of maintaining quality of service is ‘outdated’ (SEO 2008: 77). The main argument against any monopoly is that it causes welfare losses, firstly due to higher prices charged by the monopolist, and secondly because those extra costs make it improbable that smaller claims will be pursued. This issue will affect poorer members of a society most acutely (OECD 2007: 33). Empirical evidence of the effects of reservations on either price or quality of service within a market is sparse. A small number of studies considered conveyancing in England and Wales after the Administration of Justice Act 1985 paved the way for licensed conveyancers to enter the market; prices did not simply fall after their entry, as may have been expected. Solicitors’ fees were found to have fallen before the extension, as if in anticipation of the increased competition112 (Farmer et al. 1988). After licensed conveyancers entered the market, fees were found to be lower in areas where they were most active; but these coincided with areas where fees had been lower originally (Gillanders et al. 1992). A later study covering the same areas as the first then discovered that, whilst solicitors’ fees had risen in the intervening period, so had those of licensed conveyancers. In areas where both types of practitioner operated, the fees of licensed conveyancers had risen faster than those of solicitors, making them more comparable (Love et al. 1994). Overall, it seems difficult to draw any overall conclusions, although the trend does seem to be for lower prices with greater levels of competition (OECD 2007: 37-38).

3. Public goods We make the point in this paper that there is a ‘public good’ dimension to legal services. We also observed in footnote 72 above that we regard it as unfortunate that economic theory usually characterises these public goods as ‘positive externalities’. We therefore wish to address this group of benefits separately. Public goods are defined by way of two distinguishing features: non-exclusiveness and non-rivalry. Non-exclusiveness means that it is not possible to prevent anyone from using the good or service. Non-rivalry means that use by one consumer does not prevent use by another, and therefore the marginal costs of that extra consumer are zero. SEO (2008: 19-20) provides the example of flood defences as a public good, and note that without regulation nothing or too little would be done to preserve those defences as consumers would be reluctant to contribute financially on an individual basis. Information can normally be classed as a public good because it can be supplied to third

111 In this context, the imposition of bans on advertising appears even more bizarre: consumers can only use those who are appropriately qualified, but then those who are appropriately qualified are prevented from letting consumers know the exact nature of the advice and service that can be delivered! Simply allowing professionals to appear in directories or listings might ensure that potential clients at least know who has passed the minimum threshold for delivering a reserved service, but does nothing to allow those clients to make informed choices about which practitioner to instruct in their own assessment of their needs and best interests. 112 It is possible, of course, that there are other explanations for a fall in prices – such as greater competition among solicitors following the removal of the professional restriction on advertising, or the adoption of information technology to improve staffing, processes and the cost base of law firms.

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION? parties without incurring any further costs. However, the individual nature of the information a lawyer will provide to his client means that it may not be easily applicable to another client’s situation, and therefore is not totally non-rivalrous. In spite of this, the importance of a functioning legal system within society means that there is a general consensus that in so far as legal practitioners may influence that system, their services contribute public goods (Paterson et al. 2003: 16). As mentioned above, legal professionals can create positive effects for both third parties and society as a whole. Although individual legal services in themselves are generally not public goods, they are a factor in the notion of ‘legal security’, which can be classified as such. For example, lawyers play a vital role in the proper administration of justice. It has been argued that qualified advocates reduce the burden on judges and produce higher-quality precedents than would non-lawyers. Moreover, lawyers make a significant contribution to legal certainty in property rights, through contracts, conveyancing and probate, and with that the overall health of the economy (OECD 2007: 24). It is this contribution to the public good of legal security that may provide an additional foundation for regulation of the legal services market.

4. Private interest theories The economic term ‘rent’ is used to represent the difference between the cost of producing a good or service and the sales revenue generated from it – that is, what most people regard as ‘profit’. ‘Rent seeking behaviour’ therefore refers to behaviour aimed at increasing financial gains. Whilst competition eliminates or dissipates rents (Paterson et al. 2003: 19), they may be increased by either market or regulatory failure, which results in wealth being transferred from consumers to suppliers (SEO 2008: 26; Paterson et al. 2003: 19). In contrast with the public interest theories of regulation discussed above, there is another school of thought – the private interest theories – that maintains that regulation at least partly combats rent-seeking behaviour by the professions. When compared to public interest approaches, private interest theories are usually regarding as being ‘contra- regulation’ (Paterson et al 2003: 17). The main line of thinking in these theories is that special interest groups representing the professions lobby political bodies and influence regulation in order to increase rents for themselves (SEO 2008: 26). The notion of ‘regulatory capture’ suggests that regulators will be inclined to provide for the interests of the regulated profession rather than for the public interest. OECD (2007: 25) explains:

This is not because government officials are corrupt but because they must rely on information provided by the industry to enact regulation. The professions may abuse their information advantage to prevent the government, which exercises regulatory oversight, from striking down disproportionate anti-competitive rules. As the professions have a large number of members, a cartel amongst them would be difficult to organise. Furthermore, cartels do not survive where there are no barriers to entry in a market. Regulation can act to organise professionals and impose such barriers, thus making cartel-like behaviour easier to sustain (OECD 2007: 25). In situations where the public interest would be furthered by regulation, regulatory capture becomes more difficult to detect (OECD 2007: 26). If there is a sound public interest need to maintain quality in a profession characterised by information asymmetries, it may be impossible to determine if quality levels are being artificially maintained at a level higher than is socially optimal. SEO (2008: 27) note that rent seeking has been empirically proven with regard to lawyers in the USA (Winston and Crandall 2007). However, the mere existence of regulation does not prove rent-

LEGAL SERVICES: WHAT IS THE CASE FOR RESERVATION? seeking behaviour, since the restrictions in place may simply be acting to promote the public interest. Realistically, the public and private interest theories of regulation cannot be independent of each other, and only a combination of both will fully explain the current regulation of professional services (OECD 2007: 26).

5. Conclusion The existence of a tension between a desire for competition and a recognition of the need for some regulation of professional services is widely accepted. So, Van den Bergh & Montangie suggest that (2006: 10):

on the one hand [regulation] is necessary for the market of professional services to work at all but, on the other hand, it obstructs competition. Establishing a workable level of competition requires, in short, striking a balance between these two opposite effects of regulation. Similarly, the EU Commission refers to the “potential tension between, on the one hand, the need for a certain level of regulation in [the liberal] professions and, on the other, the competition rules of the Treaty” (2004: 5). But there need not be a choice between competition law and regulation as separate ideas. Their different features should be used together as tools working to achieve the same end113. To those who might be tempted to think that this is an either-or debate, Llewellyn suggests (1999: 23) that the “purpose of regulation is not to replace competition but to enhance it and make it effective in the marketplace by offsetting market imperfections which potentially compromise consumer welfare”. He continues:

Regulation and competition are not in conflict. Regulation has the potential to enhance consumer welfare both by reinforcing the degree of competition, and by making it more effective in the market place. The European Court of Justice has developed the Wouters test to determine whether a regulatory measure in a profession contravenes competition law. The three stages are: first, to take account of the public interest goals of professional regulation; second, to consider whether the measures in question are necessary to achieve those goals; and third, to ensure that the restrictions in place are proportional114. The European Commission has echoed the need for proportionality on countless occasions since, and this is something that regulators of the legal profession should take heed of. The thrust of the ‘public interest’ theories of regulation is that regulation to avoid market failures is in the public interest and justified. Further, it is justified in order to produce public goods that are of value to society generally. An ideal market for legal services should ensure that any restrictions on competition are justified in the public interest, and proscribe any rent-seeking behaviour that does not benefit the wider society (OECD 2007: 30).

113 The idea of concentrating on a policy mix rather than on one specific type of enforcement has been discussed, for example, in relation to financial institutions (Llewellyn 1999) and to the monitoring of fish stocks by Department for Environment, Food and Rural Affairs (Baldwin and Black 2007). 114 Case C-309/99 Wouters et al v Algemene Raad van de Nederlandse Orde van Advocaten [2002] ECR, I-1577.

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