Vices in England and Wales the Effects of Deregulating Legal Services in England And

TheThe EffectsEffects ofof DeregulatingDeregulating LegalLegal Ser- vices in England and Wales Services in England and Wales

March, 2021 1 | T h e e ffects of deregulating legal s ervices in England and Wales

Preface

About the authors

This report is written by Boston Consulting Group (BCG) engaged by The Danish bar and Law Society (“Advokatsamfundet”), The Norwegian Bar Association (“Advokatforeningen”) and The Swedish Bar Asso- ciation (“Sveriges Advokatsamfund”).

Objective

This report seeks to consolidate insights about the effects of the Legal Services Act on the market for legal services in England and Wales. It also aims to put those effects into appropriate context of the Scandinavian deregulation debate.

The report assesses the validity of competition arguments posited in favor of deregulating the legal services market. These arguments have been identified by BCG by studying the debate on deregulation in different countries, including Denmark, Norway, Sweden, USA, as well as England and Wales prior to the enactment of the LSA.

The report was written over a period of five weeks and is based on 10 expert interviews and publicly available information. Key sources of data and research include, but are not limited to, the Legal Services Board (LSB), the Competition and Markets Authority (CMA), The Law Society of England and Wales, and the Solicitors Regulation Authority (SRA). For several of the analyses in this report, publicly available information has been limited, and the findings should be read in this light.

For information or permission to republish please contact BCG at [email protected]

2 | T h e e ffects of deregulating legal s ervices in England and Wales

Contents

PREFACE ...... 2 1. SUMMARY ...... 4 2. BACKGROUND...... 6 3. APPROACH ...... 7 Four competition arguments for deregulation - ten underlying arguments ...... 7 Categorizations of arguments ...... 7 Limitations of the analyses ...... 8 4. CONTEXT ...... 9 The market for legal services prior to the LSA ...... 9 The LSA – the four initiatives ...... 10 The LSA – the need for further reform ...... 12 5. ARGUMENTS FOR DEREGULATION – THE EFFECTS OF DEREGULATING LEGAL SERVICES IN ENGLAND AND WALES ...... 13 5.1 THE MARKET ...... 14 5.1.1 Profitability ...... 14 5.2 THE PROVIDERS ...... 15 5.2.1 Number of providers ...... 15 5.2.2 Providers’ scale ...... 16 5.2.3 Alternative business structures ...... 17 5.3 THE CONSUMERS ...... 19 5.3.1 Prices ...... 20 5.3.2 Quality ...... 21 5.3.3 Transparency ...... 23 5.4 DEREGULATION RISKS ...... 24 5.4.1 Rule of law ...... 24 5.4.2 Geographical availability ...... 26 5.4.3 Regulatory burden ...... 28

3 | T h e e ffects of deregulating legal s ervices in England and Wales

1. Summary

The Legal Services Act (LSA) represented a major reform of the market1 for legal services in England and Wales. It was implemented between 2007-2010 and contained regulatory innovations to legal services, in particular regarding deregulation. This makes experiences with the LSA of interest to competition authorities in Scandinavia and elsewhere, where the deregulation of the legal services market has been on the agenda.

The effects of the LSA are explored in analyses of four key arguments for deregulation that are usually highlighted in debates and policy suggestions.

I. The market is expected to become more competitive, affecting both providers and consumers. Increased competition can typically be measured by a decline in profitability for the providers. II. Providers in the market are expected to benefit from more flexible business structures, while new providers benefit from lower barriers to entry. III. Consumers are expected to benefit from increased competition through lower prices, higher quality services, and improved transparency. IV. Deregulation risks related to a decline in rule of law, less geographical availability of legal services, and higher regulatory burden for providers, are not expected to materialize.

The validity of each of the four arguments has been analyzed based on the experiences from the LSA in Eng- land and Wales. Below is an outline of the findings of ten analyses underlying the four arguments.

I. The legal services market has not shown clear signs of increased competition, when looking at profitability for the providers. • Profitability: Increased competition on a market is typically measured by lower profitability for the providers. However, profitability does not seem to have decreased in the legal services markets in England and Wales. Data shows that profitability continued to grow proportionally to market revenue for the top 100 law firms (72% of the sector) after the LSA was implemented. II. Providers appear not to have benefited from lower barriers to entry, whereas they do seem to have benefited from the increased flexibility, when looking at scale and the adoption of the alternative business structure (ABS). • Number of providers: Deregulation of the legal services market lowers barriers to entry, ideally leading to more providers. However, the number of providers in England and Wales does not seem to have increased. Growth in number of providers was 1.9% p.a. before the LSA and 1.6% p.a. after implementation of the LSA. • Increased scale: An objective of deregulation is to increase efficiency for providers in a market with many restrictions as the case is for the legal services market in England and Wales. Increased scale for providers is a way to increase efficiency by utilizing economies of scale, leading to lower prices for the consumers. There are indications that the scale of providers has increased, as the top 100 law firms have increased their market share from 53% before the LSA to 72% after the LSA. • Broad adoption of the ABS: The aim of introducing new flexible business structures as part of deregulation is to benefit consumers by creating more choice and better services. The additional flexibility was expected to lead to a broad adoption of alternative business structures. These now

1 This report will use the term the “legal services market” when describing the entire legal services sector including all submarkets, regulated as well as unregulated. This is because this term is standard practice in most reports, analyses and evaluations covering the legal services sector. However, it should be noted that the legal sector is constituted of several legal services submarkets, and ideally should not be perceived as a single market.

4 | T h e e ffects of deregulating legal s ervices in England and Wales

comprise 10% of the regulated market corresponding to 4% of the total market which proves that ABS licenses have been useful to a sizeable share of providers. III. Consumers does not seem to have benefited from increased competition, when looking at price, service quality, and transparency. • Lower prices: Increased competition should ideally lead to lower prices across various legal services. But the LSB reports more price increases than decreases across 13 different legal services relative to inflation. • Increased quality: Higher quality of services for consumers as a result of increased competition in the market is typically a part of competition authorities’ deregulation objective. Consumer satisfaction has slightly increased since 2010, but other measures used to quantify quality, such as negligence claims and Solicitors Disciplinary Tribunal (SDT) cases, show varying conclusions. • Improved transparency: Increasing transparency for consumers is typically a part of the deregulation objective as the high complexity of the legal services market often leads to low transparency for consumers. Improvements have been made on price transparency, but this seems to be driven by other legislation than LSA such as the SRA’s transparency reforms. Several authorities in Eng- land and Wales point to persisting transparency issues regarding the differences between the types of provider and the related rights/protection. IV. It is unclear whether deregulation risks have materialized when looking at the rule of law, geographical availability, and the regulatory burden for providers. • Rule of law: An underlying premise in the deregulation debate is that deregulation should not negatively impact the rule of law. Overall, England and Wales’ World Justice Project ranking regarding the rule of law remained stable after the LSA, but sub-rankings such as ‘Civil justice’ and ‘Accessibility’ relevant to the legal services market have declined. Experts interviewed for this report see no rule of law issues caused by the LSA but confirm accessibility issues in the market. • Geographical availability: An underlying premise in the deregulation debate is that deregulation should not negatively impact the geographical availability of legal services. Data shows that the number of solicitors has grown in all regions in England and Wales except the East region. How- ever, this growth is caused by overall market growth, and when comparing the growth in number of solicitors per region to GDP growth per region the data indicates increased regional inequality. • Regulatory burden: An underlying premise in the deregulation debate is that deregulation should not increase the regulatory burden for legal providers. Regulatory burden is a broad concept that can be defined as direct costs (e.g. fees) and indirect costs (e.g. time spent). Data shows that the direct cost of practicing certificate fees have decreased slightly since implementation of the LSA, however driven by SRA, while the direct compliance cost of professional indemnity insurance (PII) renewal has remained stable with a minor increase. It was not possible to find data on time spent by providers to comply with regulation.

In summary, only a few of the benefits typically associated with deregulation, have materialized on the legal services market in England and Wales after implementation of the LSA. The most prevalent arguments, such as lower prices and better quality of legal services, cannot be proven to have materialized based on the data and evidence analyzed in this report.

5 | T h e e ffects of deregulating legal s ervices in England and Wales

2. Background

The Legal Services Act (LSA)2 represented a major reform of the market for legal services in England and Wales. It was implemented between 2007-2010 and contained regulatory innovations – in particular around deregulation - to legal services. This makes it of interest to competition authorities in many countries3. Experi- ences from the LSA are also relevant to the Scandinavian countries4, as there is political focus in these countries on increasing competition in the legal services sector. As shown in Exhibit 1, the deregulation agenda has progressed furthest in Denmark. The Danish competition authorities recently published recommendations for legal services market reform inspired in part by the LSA5. In Norway, political discussions were recently postponed but the LSA experiences remain relevant as discussions continue outside the political arena6. In Sweden, discussions are currently not ongoing but have in the past been focused on topics highly relevant to the LSA experiences, such as allowing for multidisciplinary partnerships7.

Exhibit 1 | Discussions about deregulation in England and Wales, Denmark, Norway, and Sweden

Discussions pre LSA Current discussions about legal market reform

England Denmark Norway Sweden and Wales

Ongoing. Reform Ongoing. Reform Paused. Reform Not ongoing. Reform Status of recommended by key discussed since 2013 - discussed but discussions are not political authorities incl. com- recent publication currently postponed currently ongoing but discussions petition authorities focuses on reform at least a year have been occurring inspired by LSA regularly historically

Focus on Focus on Focus on Previously competition and Focus of regulatory competition across discussions focused improving political complexity and services on MDPs and innovation via discussions competition in emphasizing high allowing Chinese owner-ship reserved services prices and profits walls deregulation

2 Act of the Parliament of the United Kingdom: The Legal Services Act 2007 (LSA) 3 Legal Services Board (2020): The State of Legal Services 2020, p. 15. 4 In this report “Scandinavia” is defined as Sweden, Norway, and Denmark 5 The Danish Competition and Consumer Authority (2021): Konkurrencen i advokatbranchen 6 Information provided by The Norwegian Bar Association 7 Information provided by The Swedish Bar Association

6 | T h e e ffects of deregulating legal s ervices in England and Wales

3. Approach

Four competition arguments for deregulation - ten underlying arguments

The effects of the Legal Services Act (LSA) are often mentioned in the deregulation debates as a point of ref- erence, but the LSA is rarely depicted in its full context. That is why this report seeks to contextualize and consolidate insights about the effects of the LSA on legal services in England and Wales. Specifically, the report will use the LSA to assess the validity of four key competition arguments with 10 underlying arguments observed in the deregulation debates8 (see Exhibit 2). The four key competition arguments are set out below.

I. The market is expected to be more competitive affecting both providers and consumers. In- creased competition can typically be measured by lower profitability for the providers. II. Providers in the market are expected to benefit from more flexibility regarding business structures, while new providers benefit from lower barriers to entry. III. Consumers are expected to benefit from increased competition through lower prices, higher quality services, and improved transparency. IV. Deregulation risks related to the rule of law, geographical availability of legal services, and the regulatory burden for providers, are not expected to materialize.

Exhibit 2 | Four competition arguments of deregulation and the underlying 10 arguments

1 Deregulation has reduced profitability making 2 Number of providers has grown at higher legal service profitability decline pace after deregulation

3 Providers have increased their scale since deregulation

4 Alternative business structures have been broadly adopted and changed the mix of providers LSA and ABS effects in England 5 The price for legal services is lower across and Wales on… 8 Risks related to the rule of law have not the different types of services materialized

6 The quality of legal services has increased 9 Risks related to geographical availability across legal services of legal services have not materialized

7 Deregulation has improved transparency 10 Risks related to an increase in regulatory for the consumer burden for firms have not materialized

Each of the 10 underlying arguments will be categorized as either “supported”, “not supported” or “unclear” by examining the evidence identified by BCG about the effects of the LSA via three lenses – data, context and causality as seen in Exhibit 3 below.

8 These arguments have been identified by BCG by studying the debate on deregulation in different countries, including Denmark, Nor- way, Sweden, USA, as well as England and Wales prior to the enactment of the LSA.

7 | T h e e ffects of deregulating legal s ervices in England and Wales

Exhibit 3 | Categorizing arguments via three lenses

Data Context Causality Are arguments supported Are arguments driven by Are developments in the by available data and the specific context in market driven by other research? England and Wales? trends than deregulation?

Argument The competition argument is considered relevant to the deregulation debate. supported Evidence identified by BCG in this analysis of LSA's effects is as would be expected

Support for The competition argument needs to be analyzed further to be deemed relevant to argument is the deregulation debate. unclear Evidence identified by BCG in this analysis of LSA's effects is not clear

The competition argument is not considered relevant to the deregulation debate, Argument not unless clear evidence to the contrary is identified. supported Evidence identified by BCG in this analysis of LSA's effects is not as expected

Data and research used in this report are from publicly available sources to ensure replicability. Interviews have been conducted with ten experts in England and Wales’ legal services market, including regulators, lawyers, and professors.

Limitations of the analyses

This report consolidates insights about the LSA and its effects on legal services in England and Wales9. Thus, the categorization of each argument is primarily relevant to those jurisdictions. Similar initiatives in other countries may render different results. This report does not intend to present policy suggestions, it merely seeks to inform the deregulation debate in Scandinavia. This report recognizes that the legal services market cannot de facto be perceived as a single market10. Instead, it consists of several different markets as many legal services are not substitutable. Due to the limited availability of data, the report does however in some instances look at the effects on the legal services market overall. This is an important precondition to keep in mind.

9 The analyses in this report are not independent estimates of the effects of deregulation. For example, statistical tests have not been conducted. 10 This report will use the term the “legal services market” when describing the entire legal services sector including all submarkets, regulated as well as unregulated. This is because this term is standard practice in most reports, analyses and evaluations covering the legal services sector. However, it should be noted that the legal sector is constituted of several legal services submarkets, and ideally should not be perceived as a single market. This is illustrated by LSB’s framework to monitor the legal services sector; LSB (2011): A framework to monitor the legal services sector

8 | T h e e ffects of deregulating legal s ervices in England and Wales

4. Context

The purpose of this chapter is to provide an overall understanding of the market for legal services in England and Wales, the Legal Services Act (LSA), and how the legal services market looks after implementation of the LSA, including the suggested new reforms.

The market for legal services prior to the LSA

The market for legal services in England and Wales was highly complex prior to the LSA11. Certain characteristics illustrating the complexity of the market were highlighted in the reports leading up to the LSA. These include: a fragmented regulatory oversight without guiding objectives; seven self-regulating entities; six reserved services, and restrictions on business structures12. Below is an outline of the situation prior to the LSA.

REGULATORY OVERSIGHT was conducted by several overlapping bodies, e.g. the Legal Services Ombuds- man, the Department for Trade and Industry, and the Master of the Rolls, without common guiding objectives or principles13. These overlapping bodies were further responsible for a complaints system that was inefficient and lacked transparency14.

SEVEN SELF-REGULATING ENTITIES were responsible for regulating and representing seven different types of law firms and lawyers15.

• 1) ~85% of the regulated lawyers were solicitors16 regulated by the Law Society. A standard solicitor is responsible for providing legal advice, preparing legal documentation, and representing and/or defending a client’s legal interests outside a court. • 2) ~10% of the regulated lawyers were barristers17 regulated by the Bar Council. A standard barrister is responsible for offering specialist advice and representing clients in court or at a tribunal. • The remaining ~5% were split between 3) legal executives regulated by the Institute of Legal Executives, 4) trademark attorneys regulated by the Institute of Trade Mark Attorneys, 5) licensed conveyancers regulated by the Council for Licensed Conveyancers, 6) patent agents regulated by the Chartered Institute of Patent Agents and 7) notaries regulated by the Court of Faculties18. These types of lawyer are responsible for a specialized subset of the six reserved services. For example, conveyancers specialize in the legal aspects of buying and selling property.

11 As concluded by a pre-LSA White Paper published by the government: “The Government has concluded that it is outdated, inflexible, over- complex and not accountable or transparent enough”, Department for Constitutional Affairs (2005): The Future of Legal Services, p. 9 12 Sir David Clementi (2004): Review of the Regulatory Framework for Legal Services in England and Wales; Department for Constitutional Affairs (2005): The Future of Legal Services 13 Department for Constitutional Affairs (2005): The Future of Legal Services, p. 11. More than ten different bodies conducted regulatory oversight prior to LSA. 14 Department for Constitutional Affairs (2005): The Future of Legal Services, p. 17 15 Department for Constitutional Affairs (2005): The Future of Legal Services, p. 11 16 Assuming the solicitor population constituted the same percentage of the total population of regulated lawyers in 2007 as today - Legal Services Board (2021): Market Structure Dashboard 17 Assuming the barrister population constituted the same percentage of the total population of regulated lawyers in 2007 as today - Legal Services Board (2021): Market Structure Dashboard 18 Department for Constitutional Affairs (2005): The Future of Legal Services, p. 11

9 | T h e e ffects of deregulating legal s ervices in England and Wales

SIX RESERVED SERVICES were exclusively provided by regulated lawyers. They included (i) the right of audience (the right of a lawyer to appear and conduct proceedings in court on behalf of their client), (ii) litiga- tion (the resolution of disputes related to transactions or business deals), (iii) activities related to land and property registration including transfer of ownership, (iv) probate (creation and validation of wills, trusts and estate), (v) notary activities, and (vi) administration of oaths19.

RESTRICTIONS ON BUSINESS STRUCTURES meant that law firms could only organize their business as a single practice or in a partnership structure consisting only of lawyers. This meant that no non-lawyers could be included as owners or managers in a standard law firm. For example, an accountant could not manage, or be partner, in a firm of solicitors20.

These different characteristics of the market were documented in several reviews by both the government21 and independent reviewers22. It was these characteristics that were referred to when the market was criticized for being “outdated, inflexible, over-complex and not accountable or transparent enough”23. The main review, The Clementi Report from 200424, highlighted the concerns that guided the main objectives of the LSA. These initiatives will be presented in the following section.

The LSA – the four initiatives

The LSA consisted of four main initiatives and was seen as a temporary culmination in the ongoing effort to address the complexities of the market for legal services in England and Wales25. The four initiatives of the LSA addressed two of the key issues highlighted by The Clementi Report about the market for legal services in England and Wales: The high complexity of the legal system and the need for improved competition26. The four main initiatives were:

1. SIMPLIFY REGULATORY OVERSIGHT by creating a new independent oversight regulator called the Legal Services Board (LSB).

2. END SELF-REGULATION by creating new front-line regulators and requiring a clear separation of the regulatory and representative functions of the previous seven regulators.

3. SIMPLIFY THE COMPLAINTS SYSTEM by creating a new office for all legal complaints.

4. END THE RESTRICTIVE NATURE OF BUSINESS STRUCTURES and improve competition in the six reserved legal services by allowing the Alternative Business Structure (ABS). The ABS license was created to allow non-lawyers the possibility of owning and managing companies that provide reserved services as a whole or part of their business. The main rationale for removing the previous restriction on the business structures of law firms was to lower barriers to market entry and thus stimulate competition and innova- tion27. Companies with an ABS license are regulated exactly like law firms providing similar regulated

19 Department for Constitutional Affairs (2005): The Future of Legal Services, p. 82. In addition to the six reserved legal activities, providing immigration advice and services also required an authorization. 20 Department for Constitutional Affairs (2005): The Future of Legal Services, p. 117 21 Department for Constitutional Affairs (2005): The Future of Legal Services; Office for Fair Trading (2001): Competition in Professions 22 Sir David Clementi (2004): Review of the Regulatory Framework for Legal Services in England and Wales 23 Department for Constitutional Affairs (2005): The Future of Legal Services, p. 10 24 Sir David Clementi (2004): Review of the Regulatory Framework for Legal Services in England and Wales 25 This is the general perception of the LSA presented in expert interviews. 26 Sir David Clementi (2004): Review of the Regulatory Framework for Legal Services in England and Wales 27 Department for Constitutional Affairs (2005): The Future of Legal Services, p. 20

10 | T h e e ffects of deregulating legal s ervices in England and Wales

services, including the same conflict of interest rules28. Because alternative business structures are regulated as a law firm, the application process to become an ABS is lengthy and with strict requirements. The application process requires a wide variety of prepared documents and can take up to one year. Require- ments to the application documents include individual applications for every person who needs authorization, confirmation of compliance with money laundering rules, documents on financial projections, business plan, organizational structure, etc. For the individual applicants wanting to become an external owner or manager in an ABS, there is a ‘fit-and-proper’ test requiring full disclosure of a range of information that could disqualify the person to become involved in legal services29.

As seen from Exhibit 4 below, the LSA was adopted in 2007 and the LSA became fully effective with the establishment of the Legal Services Board in 2010. Between 2011-2015 the effects of the LSA were allowed to play out. The first alternative business structures were approved in 201130, the first law firms became publicly listed in 2015, and the majority of the Big Four (Deloitte, E&Y, KPMG, and PwC) had all converted their legal departments into alternative business structures by 201531.

After 2016, several reviews of the LSA have been conducted. Most of them conclude that the LSA did not fully succeed in its objectives, prompting the need for new reform32. Most notably, the LSB and the Competition and Markets Authority (CMA) stated the need for further reform by concluding that there had been only limited improvements in the legal services market following implementation of the LSA33. The recommendations for new reform are explored in the following section.

28 The Law Society (2019): Alternative business structures 29 Examples include disclosure of criminal charges, previous disciplinary action, bankruptcy information and other material information of interest; The Law Society (2019): Alternative business structures 30 The Legal Services Board (2021): Market structure dashboard, ‘Alternative business structures in England and Wales’ 31 E&Y, KPMG and PwC all had converted their legal departments into ABSs by 2015. Deloitte obtained an ABS license in 2018: The Law Society Gazette (2018): Deloitte gets its legal license 32 The Competition & Markets Authority (2020): Review of the legal services market study in England and Wales; The Legal Services Board (2020): The State of Legal Services 2020; Stephen Mayson (2020): Reforming Legal Services – Regulation Beyond Echo Chambers 33 The Competition & Markets Authority (2020): Review of the legal services market study in England and Wales; The Legal Services Board (2020): The State of Legal Services 2020

11 | T h e e ffects of deregulating legal s ervices in England and Wales

Exhibit 4 | Timeline illustrating the background for the adoption of the LSA and its effects in the market

2001-2005 2006-2010 2011-2015 2016-2020

Legal market analyzed and Legal Services Act drafted Legal Services Act Evaluations and next found too complex and implemented affecting market steps – further reform

2001: OFT maps complexity and 2006: Draft of LSA published 2011: The first ABSs approved 2016: LSB and competition suggests reform is needed authorities (CMA) publish reports about success/failure 2007: LSA is adopted 2015: First UK law firm publicly 2004: Clementi review presents listed recommendations for reform 2020: CMA and independent 2010: The LSA becomes fully reviewer publishes reports 1 effective with establishment of 2015: Majority of the big four concluding need for a reform 2005: Government white paper – Legal Services Board (LSB) accounting firms have obtained confirms Clementi results ABS license

1. E&Y, KPMG and PwC all had converted their legal departments into ABSs by 2015. Deloitte obtained an ABS license in 2018 Source: The Competition & Markets Authority (2020): Review of the legal services market study in England and Wales; The Legal Services Board (2020): The State of Legal Services 2020; Stephen Mayson (2020): Reforming Legal Services – Regulation Beyond Echo Chambers; The Law Society Gazette (2018): Deloitte gets its 7 Copyright by © 2019 BostonConsulting Group. rightsAll reserved. legal license; Department for Constitutional Affairs (2005): The Future of Legal Services; BCG analysis

The LSA – the need for further reform

The LSB and CMA concluded in their market evaluation reports, that there have been improvements in the market since implementation of the LSA, but that the market for legal services in England and Wales remains highly complex. The LSB and CMA together with an independent review carried out by Professor Stephen Mayson34 point to four main drivers of the need for further reform35.

1. The LSA was only partially successful in addressing the complexity of the legal services market. While implementation of the LSB decreased complexity related to regulatory oversight, the representative and regulatory bodies were separated, and two additional types of regulated lawyers added additional layers to the regulatory landscape. 2. The LSA was only partially successful in addressing competition, which is still inadequate. 3. There still is insufficient price and quality transparency for consumers. 4. The growing unregulated market increases the need for consumer protection. The unregulated market consists of providers who are not authorized and regulated under any specific legal services regula- tion36. Unregulated providers are in particular present on the market for legal technology, e.g. online will providers, that increasingly are taking up market share37.

34 The University College London (UCL) launched in 2018 an independent review of the legal services regulation in England and Wales led by Professor Stephen Mayson. 35 The Competition & Markets Authority (2020): Review of the legal services market study in England and Wales; The Legal Services Board (2020): The State of Legal Services 2020; Stephen Mayson (2020): Reforming Legal Services – Regulation Beyond Echo Chambers 36 LSB segments unregulated providers in three segments: Wills and estate administration, divorce, and intellectual property; The Legal Services Board (2016): Unregulated legal services providers – research summary 37 The Competition & Markets Authority (2020): Review of the legal services market study in England and Wales, p. 108

12 | T h e e ffects of deregulating legal s ervices in England and Wales

To address these issues, the CMA, the LSB, and Stephen Mayson propose numerous regulatory changes for a future reform. Examples include the creation of a mandatory public register for unauthorized providers, defin- ing standardized legal products such as services packages as well as improving providers’ price and quality disclosures by way of a ‘transparency mark’38.

Reform in England and Wales are currently postponed due to the finalization of Brexit and due to COVID-19.

5. Arguments for deregulation – the effects of deregulating legal services in England and Wales

The following sections will present the assessment of the four key competition arguments and the 10 underlying arguments usually highlighted in the debate about deregulation. As seen in Exhibit 5, two of the arguments are categorized as “supported”, three are categorized as “not supported”, while the evidence for the remaining five arguments is “unclear”.

Exhibit 5 | 10 key arguments for deregulation and their assessment

10 key arguments for deregulation Categorization of arguments

I. The Market 1 Deregulation has reduced profitability Argument not supported

2 Number of providers has grown at higher pace Argument not supported II. The Argument supported Providers 3 Providers have increased in scale

4 Alternative business structures have been broadly adopted Argument supported

5 The price of legal services is lower Argument not supported III. The 6 The quality of legal services has increased Consumers Support for argument is unclear 7 Deregulation has improved transparency Support for argument is unclear

8 Risks to the rule of law have not materialized Support for argument is unclear IV. Other deregulation 9 Risks to geographical availability have not materialized Support for argument is unclear risks 10 Risks to regulatory burden have not materialized Support for argument is unclear

38 The Competition & Markets Authority (2020): Review of the legal services market study in England and Wales; Stephen Mayson (2020): Reforming Legal Services – Regulation Beyond Echo Chambers; The Legal Services Board (2020): The State of Legal Services 2020, p. 38

13 | T h e e ffects of deregulating legal s ervices in England and Wales

5.1 The Market

Increased competition on a market is typically measured by lower profitability for the providers. Therefore, competition authorities often make the argument that deregulation will reduce profitability of legal services39.

The following section presents an analysis on profitability.

5.1.1 Profitability

Competition authorities often cite excessive profits among law firms as a main argument for deregulation and a sign of insufficient competition. Thus, one would expect to see a reduction in profitability in the legal services market in England and Wales after implementation of the LSA.

Exhibit 6 | Profits per full equity partner and market size (revenue): profits correlate with market revenue growth

Profits per full equity partner and market size (total revenue) Top 10 2005 = index 100 Top 11-100 200 Market size

First ABS registered

150

100 2005 2010 2015 2020

Source: PwC (2009-2020): Law Firms' Survey; ONS: Index of Services time series 15 January 2021 "9.1 - Legal activities TOTAL

As Exhibit 6 shows, profits and market revenue have been correlated both before and after implementation of the LSA with 2008 being an outlier40. A clear effect from LSA on profits would cause a change in correlation between growth in profits and market revenue, but there is no observable change. Interviews with two practicing lawyers indicate that profitability is under pressure in some instances. However, this is not seen in the data.

39 A decline in profit can mean an absolute decline or a relative decline, where a relative decline is when the profitability stills grows but a lower rate. 40 Indications that this is driven by the financial crisis.

14 | T h e e ffects of deregulating legal s ervices in England and Wales

Based on the above analysis, the argument that deregulation has reduced profitability is categorized as not supported. The available data shows that profitability continued to grow proportionally to market revenue for the top 100 law firms (72% of the sector) after the LSA was implemented.

5.2 The Providers

To ensure more choice and better services for consumers, the number of providers should ideally increase, which partially depends on flexibility regarding business structures. Hence, competition authorities often cite lower barriers to entry for new providers and increased flexibility for existing providers as arguments for deregulation.

The following section presents three analyses regarding number of providers, scale of providers and alternative business structures.

5.2.1 Number of providers

Part of the rationale behind the creation of the ABS license was to lower the barriers to market entry for the benefit of new providers, ideally leading to more providers in the market. Thus, one would expect to see an increase in the number of legal service providers in England and Wales after implementation of the LSA.

While the ABS license has lowered barriers to market entry to the regulated market, as more types of companies can be approved to perform services previously reserved for traditional law firms (also confirmed by interviews with four experts with experience from The Law Society41, the SRA and private practice) the increase in the number of legal service providers in England and Wales remain to be seen.

As Exhibit 7 below shows the annual growth rate of new legal service providers was 1.9% annually before the LSA was implemented and the first registration of an ABS took place in 201142. After implementation of the LSA and the first registration of an ABS, the growth rate of new legal service providers was 1.6% annually. Thus, the growth rate of new legal service providers has remained largely stable before and after implementation of the LSA. A clear effect of the introduction of the ABS license on the number of legal service providers would be expected to cause a change in the growth rate after implementation of the LSA. This effect on the number of legal service providers has not been observed.

41 The independent professional body for solicitors in England and Wales. 42 The Legal Services Board (2021): Market structure dashboard ‘UK legal services market – Total number of enterprises’- includes all legal service providers, which means regulated providers and unregulated providers

15 | T h e e ffects of deregulating legal s ervices in England and Wales

Exhibit 7 | Total number of companies in the legal services market: growth rate has remained stable

Thousands of companies

40 First ABS registered 1,6 % 1,9 % 30

0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: LSB (2021): Market structure dashboard ‘UK legal services market

The argument, that deregulation has increased the number of providers is therefore categorized as not supported, as available data show no observable change in the number of providers.

5.2.2 Providers’ scale

An objective of deregulation is to increase efficiency for existing providers in a market with many restrictions as the case is for the legal services market in England and Wales. Increased scale for providers is a way to increase efficiency by utilizing economies of scale, which may lead to lower prices for the consumers. Accord- ingly, in the light of deregulation, consolidation is seen as a good thing, as long as it does not result in any company having substantial market power43. It should be noted that an increase in scale of providers does not exclude an increase in number of providers in a market with sufficient market growth (cf. section 5.2.1), as consolidation may happen in only one part of the market. This analysis does not examine the correlation between the number of providers and scale of providers. Instead the objective of this analysis is to clarify, whether there has been an increase in the scale of the legal service providers in England and Wales following implementation of the LSA.

As Exhibit 8 below shows, the market share of the top 100 law firms has increased significantly from 52 % in 2010 to 63 % in 2015 to 72 % in 202044. This means the scale of providers has increased since implementation of the LSA and the registration of the first ABS in 2011.

43 More consolidated providers have been mentioned by competition authorities in both the Norwegian and Danish political debate about deregulation; The Danish Competition and Consumer Authority (2021): Konkurrencen i advokatbranchen 44 The best available data in terms of size of providers is from the Liberum report (2020): Legal Services: The Consolidators

16 | T h e e ffects of deregulating legal s ervices in England and Wales

Exhibit 8 | Market share of top 100 law firms: significant increase between 2010-2020

Market share (%) of top 100 law firms

First ABS 72 % registered 70

63 %

52 % 50

0 2010 2012 2014 2016 2018 2020

Source: Liberum report (2020): Legal Services: The Consolidators, p. 21

Unfortunately, the data does not cover the years before implementation of the LSA. Such data would be useful, as a potential change in the growth rate of the top 100 law firms’ market share post-LSA, would indicate LSA’s effect on the scale of providers.

While the consolidation of law firms may be attributed to the LSA, the increase in scale of providers can also be driven by consolidation taking place in the legal services market among the major law firms independently of the LSA. This possibility is supported by the fact that consolidation is a key trend in the legal services market in other countries, for example Canada, USA, and Denmark45. In fact, three experts interviewed for this report (two regulatory experts and an expert with experience from The Law Society) all suggest that the consolidation would have happened regardless of the LSA.

Regardless of the issue of causality, the data shows that the scale of providers has increased after implementation of the LSA. Thus, the argument that deregulation has had an increasing effect on the providers’ scale is categorized as supported.

5.2.3 Alternative business structures

The aim of introducing new business structures as part of deregulation is to benefit consumers by creating more choice and better services. The underlying assumption is that legal service providers would benefit from increased flexibility because current business structures are too restrictive. Such restrictions have a negative

45 BCG analysis of consolidation trends in the legal services markets globally.

17 | T h e e ffects of deregulating legal s ervices in England and Wales impact on providers’ operations and the competition in the market46, and in the end on consumers. New business structures that allow non-lawyers to own companies that provide reserved services increase competition for the benefit of consumers. For the LSA to result in more choice and better services for consumers, the adoption of ABS licenses needs to be broad across legal services after implementation of the LSA.

As Exhibit 9 below shows, the growth of new ABS licenses obtained by companies peaked in 2015 after a slow start following implementation of the LSA in 2010.47 Today there are 1456 companies with an ABS license. This constitutes 10 % of the regulated providers, i.e. providers that are authorized and regulated under a legal services specific regulation, and 4 % of all providers, i.e. regulated as well as unregulated providers (the total market)48.

Exhibit 9 | Number of new ABS licenses from 2011-2020: ABS growth peaked in 2015 and now compromise 4 % of the total market

Number of new ABS licenses (regulated providers)

300 256 219 189 192 200 170 149 137 111 100 76

1 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Accumulated 77 266 415 671 890 1082 1252 1389 1456 number of ABSs Share of regulated Historical data not available providers 10% Share of all providers 0% 0% 1% 1% 2% 3% 3% 4% 4%

Alternative business structures mainly operate in markets for consumers, such as “probate”, “residential conveyancing” and “injury”, as exhibit 10 below shows49. These are typically smaller companies, and expert interviews with a regulatory expert and a legal practitioner confirm that the ABS license opportunity has especially

46 Sir David Clementi (2004): Review of the Regulatory Framework for Legal Services in England and Wales, p. 105 47 The Legal Services Board (2021): Market structure dashboard, ‘Alternative business structures in England and Wales’. No data available for Q4 2020 – extrapolation based on previous 5 years 48 The Legal Services Board (2020): The State of Legal Services 2020 – Narrative Volume, p. 16 49 The Legal Services Board (2017): Evaluation: ABS and investment in legal services 2011/12-2016/17 – Main report, p. 16

18 | T h e e ffects of deregulating legal s ervices in England and Wales been popular and adopted by smaller practitioners. The main reason these companies obtain an ABS license is to allow for non-lawyer ownership and to expand into reserved services50.

Exhibit 10 | ABS activity based on services: most activity is in probate and conveyancing

% af total number of ABSs with revenue within service area ABSs can be active in many service areas and therefore the percentages does not sum to 100 %

Wills, trusts and probate 47% Other products and services 33% Conveyancing - Residental 28% Conveyancing - Commercial 27% Corporate structuring and finance 23% Injury 23% Employment 21% Family 19% Property, construction and planning 15% Intellectual property rights 9% Crime 8% Immigration and nationality 5% Welfare and benefits 2% Consumer problems 1% Civil liberties 1% 0 10 20 30 40 50

When looking at larger companies, all the Big Four (Deloitte, E&Y, KPMG, and PwC) have converted their legal advice departments to alternative business structures with the intention of providing reserved services as part of a holistic business services offering, which was not possible prior to the adoption of the LSA.

Considering the 10% ABS license adoption among regulated providers, corresponding to 4% adoption among all providers, as well as the fact that the Big Four have adopted the ABS license, the argument that the adoption of the ABS license is broad is categorized as supported.

5.3 The Consumers

Competition authorities typically cite the expected benefits for consumers as a main argument for deregulation. The following section presents three analyses regarding the expected benefits for consumers: lower prices, higher quality services, and improved transparency.

50 The Legal Services Board (2017): Evaluation: ABS and investment in legal services 2011/12-2016/17 – Main report, p. 18

19 | T h e e ffects of deregulating legal s ervices in England and Wales

5.3.1 Prices

One of the most prevalent arguments made by competition authorities for deregulation of the legal services market is that increased competition leads to lower prices for consumers. Thus, it is expected that prices for various legal services would decrease in England and Wales following implementation of the LSA.

As Exhibit 11 below shows, prices increased more than inflation for seven services 2015-2017, while prices decreased for four services, resulting in a net change of increased prices for three services. During 2017-2020, prices increased and decreased for the same number of services. Notably, in both 2015-2017 and 2017-2020, price increases were larger in magnitude than the decreases. The data is collected by LSB across 13 services in three practice areas and shows that overall, there have been more price increases than decreases, when adjusted for inflation since 201551.

Exhibit 11 | LSB data on price changes across 13 surveyed services: more prices have increased than decreased since 2015

>10% increase >10% decrease Price changes for select services 0-10% increase 0-10% decrease adjusted for inflation between… No change in price 2015-2017 2017-2020 Sale of freehold Sale of leasehold Purch. of freehold Purch. of leasehold

Conveyance Sale & purchase Uncontested Uncontested response Uncontested w/ kids Divorce More complex Standard will Complex will

Lasting power of att. Wills/

Probate Grant of probate Net change +3 increases No net change

The price development seen in the LSB data above is supported by the Office for National Statistics (ONS) overall price index for legal service providers52. However, this data does not show differences between different types of providers, making it less applicable when analyzing the impact of the LSA on prices.

Based on the above analysis, the argument that price for legal services is lower is categorized as not supported as more prices have increased than decreased since 2015.

51 The Legal Services Board (2021): Prices dashboard 52 Office for National Statistics (ONS): Legal Services – Services producer price inflation time series (SPPI)

20 | T h e e ffects of deregulating legal s ervices in England and Wales

5.3.2 Quality

Higher quality of services for consumers as a result of increased competition in the market is typically a part of competition authorities’ deregulation objective. Thus, it would be expected that measures for quality of legal services would improve after implementation of the LSA.

The quality of legal services is difficult to quantify. Firstly, because quality is a perceived measure. Secondly, because many aspects play into how legal services quality should be measured. LSB uses a framework of eight measures53 as proxies to quantify quality in their market evaluation reports. In LSB’s market evaluation report from 2020, a limited overview of the quality development of legal services is provided, using two of the eight measures, consumer satisfaction and professional negligence claims (see Exhibit 12 below).

Exhibit 12 | Consumer satisfaction and negligence claims: consumer satisfaction has increased slightly since 2012 but number of negligence claims has also increased

Consumer satisfaction Number of % of consumers satisfied with quality negligence claims

100% 150

100 1. Consumer satisfaction 82% 76% 2. 1st Tier service complaints, 68 3. 2nd Tier service complaints 49 50 4. Professional Negligence Claims 5. Conduct complaints 6. Rejection rates for processes 0% 0 7. Quality mark schemes 2012 2014 2016 2018 2020 8. Insurance claims

As illustrated by Exhibit 12, consumer satisfaction with the quality of legal services increased from 76% in 2012 to 82% in 2020, indicating a slight increase in quality, or at least the perception of quality54. Consumer satisfaction is the broadest overall measure to evaluate quality and thus the most relevant measure used by the LSB to examine the status of quality in the legal services market in England and Wales.

The volume of professional negligence claims is another proxy used by the LSB to evaluate quality, and here the data shows a slight increase in claims since 2012 (see Exhibit 12). The LSB uses the data on professional negligence claims to illustrate the development in quality, but also states that the data after 2016 is not fully comparable with previous years due to changes in data collection practices55. However, the observed increase in yearly negligence claims does not change if only looking at the data from 2016 and onwards. It should be

53 The Legal Services Board (2016): Evaluation: Changes in the legal services market 2006/7 – 2014/15 – Main report, p. 130 54 The Legal Services Board (2020): The State of Legal Services 2020 - Evidence Compendium, p. 64 55 The Legal Services Board (2020): The State of Legal Services 2020 - Evidence Compendium, p. 69

21 | T h e e ffects of deregulating legal s ervices in England and Wales noted that the number of claims is in absolute numbers and thus fails to show a potential correlation to the development in total market activity.

A third measurement that can be used as a proxy to quantify quality is the development in the number of SDT cases, which are complaints cases at the Solicitors Disciplinary Tribunal (SDT)56. While the LSB does not directly link professional conduct to quality of legal services in their market evaluation report from 2020, unprofes- sional conduct must indicate the quality of legal services for consumers. As illustrated by Exhibit 13 below, the number of SDT cases decreased from 2012 to 2015, and then slightly increased from 2015 to 2019, showing a significant overall decrease. It should be noted, as with negligence claims, that the number of cases is in absolute numbers and thus fails to show a potential correlation to the development in the total market activity.

Exhibit 13 | Development in number of SDT cases: decreasing volume of SDT cases

Number of cases at the Solicitors Disciplinary Tribunal (SDT) 250 219

200

150 129 125 96 100

0 2012 2013 2014 2015 2016 2017 2018 2019

As illustrated in the above analysis, the different measures used as proxies for quality show varying conclusions. A clear effect of the LSA on the quality of legal services would result in an increase across all quality measures. As concluded by the LSB, this effect cannot be observed, as quality is stable at a high level57. Interviews with experts further confirm that the effect of the LSA on quality is unclear. A competition expert highlights that there are more types of services and that they are offered in more ways than before, indicating an increase in quality or at least an increase in options for consumers. A legal practitioner states, that there are significant differences between the different submarkets, and that the effect overall is difficult to assess. Based on the above analysis the support for the argument, that the quality of legal services has increased, is unclear. While there has been a slight increase in consumer satisfaction with quality since 2010, other measures relevant to quantify quality show varying conclusions. There has been a slight increase in professional negligence claims but a decrease in number of SDT cases. Interviews with experts confirms that the quality development is difficult to assess.

56 The Legal Services Board (2020): The State of Legal Services 2020 - Evidence Compendium, p. 75 57 The Legal Services Board (2020): The State of Legal Services 2020 – Evidence Compendium, p. 64

22 | T h e e ffects of deregulating legal s ervices in England and Wales

5.3.3 Transparency

The high complexity of the legal services market often leads to low transparency for consumers, particularly in relation to pricing and consumer rights/protection58. Accordingly, increasing transparency for consumers is typically a part of the deregulation objective and referred to by competition authorities as a way of increasing competition in the market59.

There are several aspects of transparency, and there is no standard framework to quantify it. LSB focuses on price transparency, while the CMA and Stephen Mayson focus on transparency regarding type of provider and the rights/protection associated with the provider60. One of the main objectives of the LSA was to improve transparency regarding consumers’ legal complaints. The availability of quantitative data regarding transparency is limited.

PRICE TRANSPARENCY According to the LSB, 64% of consumers felt there was a lack of price transparency in 202061, but also states that price transparency has seen some improvements. This is most likely driven by SRA’s transparency reforms and not the LSA62. According to the SRA, price transparency will continue to increase as the transparency reforms take effect.

TRANSPARENCY REGARDING TYPE OF PROVIDER Stephen Mayson indicates in his legal services market evaluation report from 2020, that transparency regarding type of provider remains low despite efforts to improve transparency as more types of providers are available: “it seems an unreasonable burden to expect consumers to navigate the complexities of reserved and non-reserved activities, or to understand which title-holders are authorized for which activities..” 63. Three interviews with two regulatory experts and a practicing lawyer confirm that consumers are struggling to understand the differences between the types of provider and the related rights/protection. After implementation of the LSA the legal services market in England and Wales remains highly complex with nine types of regulated lawyers, the new ABS, and a growing unregulated market. The persisting transparency issues regarding type of provider in the legal services market in England and Wales is one of the main drivers of the need for further reform64.

TRANSPARENCY REGARDING LEGAL COMPLAINTS Improving transparency for consumer complaints was one of the four main objectives of the LSA with the new office for legal complaints that created a single, independent office for complaints towards legal professionals. It has not been possible to identify data to measure the effect on transparency for consumer complaints for this analysis. However, the new office for legal complaints must have improved consumers’ transparency of the complaints system.

Based on the above analysis the support for the argument, that deregulation has improved transparency for consumers, is unclear. Price transparency has improved slightly, but this is driven by transparency reforms and not by the LSA. The suggested reform indicates that transparency regarding the type of provider remains low and this is confirmed by legal experts. The new office for legal complaints is expected to have had some positive impact on consumers’ transparency of the complaints system.

58 Stephen Mayson (2020): Reforming Legal Services – Regulation Beyond Echo Chambers, p. 47 59 Increased transparency is typically mentioned by competition authorities in the political debate about deregulation and have for example been referred to by the Danish competition Authorities. 60 The Competition & Markets Authority (2020): Review of the legal services market study in England and Wales; Stephen Mayson (2020): Reforming Legal Services – Regulation Beyond Echo Chambers 61 It has not been possible to identify historical data on price transparency. The Legal Services Board (2020): The State of Legal Services 2020 – Evidence Compendium, p. 42 62 SRA Transparency rules (2020): One Year Evaluation 63 Stephen Mayson (2020): Reforming Legal Services – Regulation Beyond Echo Chambers, p. 47 64 Competition & Markets Authority (2020): Review of the legal services market study in England and Wales; The Legal Services Board (2020): The State of Legal Services 2020

23 | T h e e ffects of deregulating legal s ervices in England and Wales

5.4 Deregulation Risks

An underlying premise in the legal services deregulation debate is that deregulation is to be implemented without negatively impacting the rule of law, geographical availability, and regulatory burden for providers65. On the other hand, practicing lawyers and bar and law societies in many countries are concerned that the risks will indeed materialize.

The following section presents three analyses regarding the rule of law, geographical availability, and regulatory burden. 5.4.1 Rule of law

An underlying premise in the legal services deregulation debate is that deregulation is to be implemented without negatively impacting the rule of law. Therefore, one would expect to see no decline in the rule of law in England and Wales after implementation of the LSA.

The rule of law is difficult to quantify, as it is a complex and broadly defined principle. However, the independent organization The World Justice Project (WJP) has developed a methodology to quantify the rule of law, which is considered a leading methodology on the subject66. The methodology covers eight categories, not all directly relevant to the legal services market. To assess the impact of the LSA on the rule of law, it is important to focus on the rule of law aspects related specifically to the market for legal services. The WJP recommends focusing on the category ‘Civil justice’ for this purpose67. This category measures whether ordinary people can resolve their grievances peacefully and effectively through the civil justice system. A subcategory to the ‘Civil justice’ category is the ‘Accessibility’ category, which covers the accessibility and affordability of legal advice and representation – both relevant to the deregulation aspects of rule of law (see Exhibit 14 below).

Exhibit 14 | World Justice Project’s Rule of Law Index measures the rule of law on eight different categories

Eight different categories used to determine Civil justice category measures the functioning the state of rule of law in a country of the legal system and market

1. Constraints on government powers Category (7) civil justice - measures the functioning of the civil justice system: 2. Absence of corruption • 7.1 Accessability and affordability of using the legal system • 7.2-7.4 No discrimination, corruption, government influence • 7.5-7.6 No unreasonable delay, effectively enforcement 3. Open government • 7.7 Accessibility, impartiality, and effectiveness of alternative dispute resolution mechanisms 4. Fundamental rights Subcategory (7.1) – measures accessibility and affordability of: 5. Order and security • Civil courts and whether people are aware of available remedies 6. Regulatory enforcement • Legal advice and representation • Fees, including whether these are unreasonable • Other procedural hurdles 7. Civil justice According to the WPJ, category (7) civil justice is the relevant category to consider when examing the legal system and 8. Criminal justice market

65 These assumptions related to deregulation risks are often not discussed as explicitly in the deregulation debate as potential benefits 66 The World Justice Project (WJP): Rule of Law Index. WJP provides data for all of the UK. However, England and Wales make up 94 % of the legal services market in the UK and the data is still considered relevant for England and Wales separately. KPMG (2020): Contribution of the UK legal services sector to the UK economy, p. 7 67 Information obtained through dialogue with WJP.

24 | T h e e ffects of deregulating legal s ervices in England and Wales

As Exhibit 15 below shows, England and Wales’ overall position on WJP’s rule of law ranking has remained stable at a relatively high level in recent years, ranked 12 among a total of 102 countries in 2015 and 13 among a total of 128 countries in 2020. Thus, compared to other countries and from a broad overall perspective, England and Wales have only minor concerns in relation to the state of rule of law based on the WJP data.

Exhibit 15 | UK’s WJP rule of law ranking and sub-rankings: decline in ‘Civil justice’ and ‘Accessibility’ since 2015

WJP rule of law measure UK - Overall Top 5 countries - Civil justice 0=worst, 1=best UK - Civil justice Top 5 countries - Accessability UK - Accessability 1.0

Rank: 12/102 Rank: 13/128 0.8

Rank: 13/102 Rank: 17/128 0.6 Rank: 31/102 Rank: 79/128 0.4

0.0 2015 2016 2017 2018 2019 2020

As Exhibit 15 shows, England and Wales’ ranking on ‘Civil justice’ has declined slightly, from being ranked 13 among a total of 102 countries in 2015 to being ranked 17 among a total number of 128 countries in 2020. More noticeably, England and Wales’ rank on ‘Accessibility’ has declined significantly from being ranked 31 among a total number of 102 countries in 2015 to being ranked 79 among a total number of 128 countries in 2020. In terms of regional ranking, which covers EU, EFTA and North American peers, England and Wales’ are ranked 23 among a total of 24 countries on ‘Accessibility’ to civil justice. This decline is substantial. The introduction of the ABS license was expected to improve the accessibility to legal services, but a market expert states that the market has not seen the expected improvement in accessibility due to alternative business structures, and other regulatory experts mention worse accessibility of legal services in England and Wales, confirming the data from WJP. The reduction in accessibility is most likely driven by a reduction in legal aid support from the government caused by a legislative change in 2013 rather than the LSA68. Apart from accessibility, the rule of law has not been perceived as challenged when discussing the effects of the LSA on the legal services market with experts from the private practice, the SRA and other regulatory bodies.

It is important to note that The Rule of Law Index is a perception-based measure, based on surveys of house- holds, legal practitioners, and experts69. The WJP data is the best available data on the rule of law relating to the legal services market, but the data is only available from 201570. While the WJP data is a useful indicator on the rule of law development in England and Wales, it is not sufficient to make a clear conclusion given the complexity of the rule of law principle. This combined with the ambiguity on the topic of rule of law in expert

68 The Legal Aid, Sentencing and Punishment of Offenders Act 2012’s legal aid provisions came into effect on 1 April 2013 and took many areas of law out of scope. 69 The World Justice Project (WJP): Our work 70 Ideally, to assess the effect of implementation of the LSA, data from before the implementation would be required.

25 | T h e e ffects of deregulating legal s ervices in England and Wales interviews means that further analysis would be needed to reach a definitive conclusion regarding the rule of law.

Based on data identified for this analysis, the support for the argument that negative effects on measures of the rule of law have not materialized after deregulation, is unclear. England and Wales’ overall ranking in relation to the rule of law has remained stable after the LSA, but sub-rankings relevant to the legal services market have declined, most significantly in the area of ‘Accessibility’. Experts see no rule of law issues caused by the LSA but confirm that the LSA did not solve accessibility issues.

5.4.2 Geographical availability

An underlying premise in the legal services deregulation debate is that deregulation is to be implemented without negatively impacting the geographical availability of legal services. Therefore, competition authorities would desire to see no decline in the geographical availability of legal services in England and Wales after implementation of the LSA.

It is challenging to find data illustrating the change in geographical availability of legal services in England and Wales over time. The SRA provides an overview of the number of solicitors across the regions in England and Wales (see Exhibit 16 below)71. Since solicitors constitute ~85 % of regulated lawyers72, the data is somewhat representative for regulated legal services despite only covering one type of lawyer.

Exhibit 16 | Practicing solicitors by England and Wales regions over time: number of solicitors increasing in almost all regions

Change in number of solicitors based on region of North employment from 2009 to 2019 East North +4% West Decrease +21% Yorkshire and 0-10% increase the Humber 10-20% increase +15% 20-30% increase +11% East +11% >30% increase Midlands +6% West Midlands Wales -1% East

Greater +57% +14% London South West South East +40%

71 The Law Society (2019): Statistical report, p. 15 72 The Legal Services Board (2021): Market structure dashboard

26 | T h e e ffects of deregulating legal s ervices in England and Wales

As Exhibit 16 illustrates, the solicitor body has grown across all regions from 2009 to 2019 except for the East region. This indicates that the overall geographical availability of legal services has not been negatively affected by the LSA. However, the growth is higher in the metropolitan and wealthy regions of London (40%) and South West (57%) than in other regions. Comparing the growth in number of solicitors per region to GDP growth per region can help illuminate potential inequality effects from the LSA.

Exhibit 17 below illustrates such a comparison. Data shows that regions with the largest metropolitan areas in England and Wales (Greater London, North West, and Yorkshire & the Humber) all have solicitor growth rates significantly closer to GDP than the regions with less metropolitan areas (East, North East, and Wales)73. South West is an outlier, being the region with the highest solicitor growth rate despite not containing any of the largest metropolitan areas in England and Wales. Regardless, the data overall indicates that geographical availability is becoming relatively lower in non-metropolitan regions.

Exhibit 17 | Growth in number of solicitors compared to GDP growth across regions: metropolitan regions outgrowing rural

Heat map showing growth in number of solicitors compared to GDP growth across regions, percentage points North North East West -16 Metropolitan area -10 Yorkshire and Outlier the Humber -11 0ppt-10ppt difference 10ptt-20ppt difference East West Midlands >20ptt difference Midlands -17 Wales -20 -21 East -28

+19 Greater South West -15 London South East -4

Overall, exhibit 16 and 17 show that while all regions in England and Wales experience growth in number of solicitors, the differences in growth relative to GDP indicate increased regional inequality. An interview with a regulatory expert confirms that the consolidation happening in metropolitan and wealthy areas leads to a relative change in the share of legal service providers across regions.

Based on data identified for this analysis, the support for the argument that negative effects on the geographical availability of legal services have not materialized after deregulation, is unclear. The number of solicitors

73 Law Society (2019): Statistical report, p. 15; Office for National Statistics (ONS) Local Authority: Gross Domestic Product (GDP); Office for National Statistics (ONS): Population of the UK by country of birth and nationality

27 | T h e e ffects of deregulating legal s ervices in England and Wales grew across most regions from 2009 to 2019. However, the relative growth in metropolitan and wealthy regions is higher than other regions, indicating rising regional inequality of geographical access to legal services.

5.4.3 Regulatory burden

An assumption often made by competition authorities related to deregulation of ownership is that other types of regulation will not significantly worsen the regulatory burden for providers. Hence, implementation of the LSA and the introduction of the ABS license should not have caused an increase in regulatory burden for providers in England and Wales.

Regulatory burden is a broad term covering a range of activities such as mandatory filings, reporting, and compliance. It can be measured by direct costs (e.g. practicing certificate fee and professional indemnity insurance (PII)) and indirect costs (e.g. time spent to comply with regulation).

It is challenging to find data illustrating the change in regulatory burden for providers of legal services in Eng- land and Wales over time. LSB has published some data on direct costs74, whereas it has not been possible to find data on indirect costs (time spent) for this analysis.

DIRECT COSTS The data published on direct costs by the LSB covers the development related to practicing certificate fees and professional indemnity insurance (PII). Exhibit 18 below illustrates the development of the cost of practicing certificate fees since 2012 for the different types of regulated lawyers such as solicitors and barristers. The practicing certificate fee is a relevant data point because it covers the maintenance of the regulatory system i.e. 1) the costs of frontline regulators, 2) the representative costs (where applicable), and 3) the costs of external bodies such as the LSB and the Legal Ombudsman75. Hence, an increase in regulatory burden would be reflected in the practicing certificate fee. It is an individual annual cost and therefore the amount is not comparable to the payments required of authorized law firms76. Data shows that the costs related to the practicing certificate fee have decreased overall between 2012-2019. For solicitors, the development in costs have decreased 4% annually, while most other regulated lawyers have seen increasing costs, for example barristers with 2% increase annually77. Solicitors account for ~85% of the market and therefore solicitors’ decrease in costs drives the overall reduction in costs for the practicing certificate fee.

74 The Legal Services Board (2020): The State of Legal Services 2020, p. 132 75 The Legal Services Board (2020): The State of Legal Services 2020, p. 132 76 SRA (2021): Fee policy 2019/2020 77 “Others” in Exhibit 18 include CILEx and CLC. The Legal Services Board (2020): The State of Legal Services 2020, p. 133

28 | T h e e ffects of deregulating legal s ervices in England and Wales

Exhibit 18 | Development in practicing certificate fee costs for solicitors, barristers, and other types of lawyers: overall decrease between 2012-2019

Development in practicing certificate fees Solicitors Barristers Others 2012 = 100, adjusted for inflation

150%

100%

50% Solicitors account for 85 % of the market – this decline drives an overall reduction in direct costs

2012 2013 2014 2015 2016 2017 2018 2019

Source: LSB (2020): The State of Legal Services 2020, p. 133

Another direct cost referred to by the LSB is the compliance cost constituted by the professional indemnity insurance (PII), which is perceived as one of the primary compliance costs for providers amounting to ~5% of law firms’ annual turnover78. LSB refers to the Law Society’s survey from 2015-2017 on solicitors’ firms’ professional indemnity insurance (PII) renewal costs. As seen on Exhibit 19 below, compliance costs relating to PII premiums remained stable with a slight increase for solicitors’ firms on 0.1 % when looking at the PII renewal costs as a percentage of turnover from 2015-201779.

78 The Legal Services Board (2020): The State of Legal Services 2020, p. 134 79 The Legal Services Board (2020): The State of Legal Services 2020, p. 135

29 | T h e e ffects of deregulating legal s ervices in England and Wales

Exhibit 19 | Development in direct/compliance costs (PII) for solicitors’ firms: remained stable with a minor increase

Development in professional indemnity insurance (PII) renewal cost Solicitors’ firms % of turnover

5.5%

+1% 5.0% 4.9% 4.8% 4.8%

4.5%

4.0% 2015 2016 2017 Source: LSB (2020): The State of Legal Services 2020, p. 135

INDIRECT COSTS It has not been possible to find data on time spent by providers to comply with regulation. However, interviews with two regulatory experts indicates that the indirect cost of time spent has slightly increased due to market challenges that requires additional regulation thus increasing the burden for providers, e.g. measures to address the low transparency for consumers.

Based on available data, support for the argument that the regulatory burden for law firms has not worsened after deregulation is unclear. Analysis shows that the direct costs related to practicing certificate fees have decreased overall since implementation of the LSA, however driven by SRA and not LSA. Direct compliance costs related to professional indemnity insurance (PII) have remained stable with a minor increase. It was not possible to find data on time spent by providers to comply with regulation but interviews with experts indicates that the indirect cost of time spent has slightly increased for providers.

30 | T h e e ffects of deregulating legal s ervices in England and Wales