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The Cost of Regulation in the Legal Profession

02 January 2013

The Legal Services Board ("LSB") was created by the Legal Services Act 2007 and became fully operational on 1 January 2010.

The LSB is an independent body, responsible for overseeing legal regulators in England and Wales to ensure that regulation in the legal services sector is carried out in the public interest. It oversees ten separate bodies who are approved regulators, including: The Law Society, The Bar Council and the Solicitors Regulation Authority, which themselves regulate the circa 120,000 lawyers practising throughout the jurisdiction.

The Government's response to the Public Administration Select Committee report 'Smaller Government: Shrinking the Quango state' suggested that periodic triennial reviews are carried in relation to of non-departmental public bodies, such as the LSB, with a view to ensuring that the Government is delivering an efficient and effective service to the public. In particular, The Cabinet Office suggested that there are two principal aims of carrying out a triennial review of the LSB: firstly, to provide a 'robust challenge of the continuing need for its form and functions'; and secondly where the LSB is needed, the Government will assess 'whether appropriate control and governance arrangements are in place to ensure that the body is operating in line with Government policy including good corporate governance, openness, transparency and accountability'.

The report on the first triennial review published in July, congratulated the LSB for the way in which it has complied with statutory requirements. It concluded that it is fulfilling the role it was created to perform. However, the report suggested that there was room for the LSB to improve in five key areas. The LSB has subsequently announced that it does not intend to fully implement the five recommendations. For example, the LSB has rejected the report's recommendation that it should hold open board meetings, stating that this would inhibit the 'free and frank' provision of advice and debate amongst Board members. The LSB also expressed reservations a requirement that it should publish a record of all items of spending over £500, saying that this would 'place an administrative burden on our team'.

In responding to the Ministry of Justice's review, the LSB has called for an 'open debate' within the legal profession, regarding the on-going cost of regulation. David Edmonds (Chair of the LSB) states "we think the time is right for an open debate on the cost of regulation. We will continue to be rigorous in managing our own costs, but these are but one small component of the total costs that practitioners have to bear in order to practise". The LSB has now set out full details of the research that it intends to carry out, in its draft business plan for 2013/14. The LSB announced that this work is important because by "understanding more clearly the costs imposed by regulation on the legal services market we hope to stimulate a longer-term programme of work aimed at simplifying legal services regulation".

The research aims to identify the totality of costs that practitioners face simply in order to be able to practice. This includes the cost of practising certificates (including elements of non-regulatory 'permitted purposes'), insurance and compensation, and compliance costs.

In 2012 the Law Society (encompassing both its representative work and regulation through the Solicitors Regulation Authority) raised £103.5m. Approximately 24% of this - £25m, went to the Law Society for the cost of work that is not regulatory in nature including giving support and advice about practice management, promoting human rights and public legal education and “the promotion of relations between the approved regulator and relevant national or international bodies, governments or the legal professions of other jurisdictions.” The remainder of the practising fees goes to the Solicitors Regulation Authority (51%), the LSB/OLC (19%) and the Solicitors Disciplinary Tribunal (3%), with 3% going into a contingency fund.

Whilst there has been some cynicism in the legal press that by calling for a debate the LSB is again simply attempting to justify its own existence - both the Law Society and the Bar Council having recently called for the LSB's role to be reined back – many practitioners, however, will welcome a debate on costs of regulation. The proposal for debate comes at a significant juncture for the provision of legal services in the UK. There is real appetite in the market to learn lessons from the financial services sector, which recently saw a 11.9% hike in regulatory fees (including the cost of funding the FSA, FOS, FSCS and MAS). There is a significant risk that if such increases are replicated in the legal services market, many of the benefits of liberalisation associated with Alternative Business Structures will be lost. Ultimately, as the LSB acknowledge, disproportionate regulation hinders innovation and growth and the cost is simply passed on to purchasers of legal services.