Legal Services Act 2007 (The Law Society) (Modification of Functions) (Amendment) Order 2012

Lord McNally Excerpts

Tuesday 20th November 2012 Grand Committee

Moved By

[Lord McNally]

That the Grand Committee do report to the House that it has considered the Legal Services Act 2007 (The Law Society) (Modification of Functions) (Amendment) Order 2012.

Relevant document: 8th Report from the Joint Committee on Statutory Instruments.

[The Minister of State, Ministry of Justice (Lord McNally)]

My Lords, the purpose of this order is to remove the provisions of the schedule to the Legal Services Act 2007 (The Law Society and The Council for Licensed Conveyancers) (Modification of Functions) Order 2011 which bring to an end the Law Society’s powers to make compensation arrangements for licensed bodies on 31 December this year. The Legal Services Act 2007 sets out a framework for the regulation of legal services in England and Wales. Part 5 of the 2007 Act sets out arrangements under which licensing authorities, which are legal service regulators that have been designated for this purpose under the 2007 Act, may license firms which are partly or wholly owned or controlled by non-lawyers, to provide legal services or a mixture of legal and non-legal services. Such firms are known as licensed bodies and are sometimes referred to as “alternative business structures”.

The Law Society was designated as a licensing authority under the Legal Services Act 2007 on 23 December last year. Under the 2007 Act, Section 83 requires all licensing authorities to have compensation arrangements in place to protect consumers of licensed bodies. Noble Lords may remember that one of the provisions of the 2011 order was to extend the Law Society’s existing powers in relation to compensation arrangements under the Solicitors Act 1974 to allow it to make rules about compensation arrangements for licensed bodies. However, this extension of powers was to apply only for a transitional period, which will end on 31 December this year.

During the Committee debate on the 2011 order, I mentioned that the sunset clause was included in the 2011 order. This was because the Solicitors Regulation Authority, the regulatory arm of the Law Society, had announced during the drafting stages of the 2011 order that it was undertaking a review of its compensation fund and expected that new long-term compensation arrangements would be in place by the end of December 2012 for all types of solicitors, including ABS bodies, following the conclusion of the review. The SRA only issued its first ABS licences in March 2012, which was later than had originally been envisaged at the time the 2011 order was laid, and sufficient information is not yet available. The SRA therefore asked that the current arrangements be extended and asked for a further Section 69 order to be made. Following discussion with the Legal Services Board, the oversight regulator for legal services, the LSB consulted on the issue in June 2012 and made its recommendations to the Lord Chancellor in August. Having considered the responses to that consultation, it recommended that the sunset clause should be removed. A new sunset clause has not been included under this order so as to avoid imposing an artificial deadline on the development of alternative compensation proposals which may not be in the best interests of consumers or practitioners.

Although the SRA has committed to review the current compensation arrangements over the next two years, that review may result in changes to the current arrangements. Without knowing what those arrangements will be, it is difficult to estimate how long any changes may take to implement. The Legal Services Board will monitor the review and expects the SRA to provide public indications of its progress.

I am sure that noble Lords will appreciate the importance of enabling the existing compensation arrangements set out in the 2011 order to remain in place beyond the end of this year. That will ensure that the Law Society, a statutory body that requires a statutory basis for its compensation fund, can continue to comply with the requirement to have licensing rules about compensation arrangements and, critically, ensure that consumers of ABS firms have continuous access to compensation. I therefore commend this draft order to the Committee and I beg to move.

[Lord Beecham]

My Lords, I ought to declare an interest as a member of the Law Society and as a virtually non-practising solicitor, who in his professional career has no doubt contributed significantly to the assets of the compensation fund without, as I recall, having to draw down from it, no doubt to the satisfaction of my former clients.

The Solicitors Regulation Authority makes the Circumlocution Office look like a model of efficiency, to judge by the delays in its approach to this matter. It does not seem to have thoroughly mastered the implications of the complex structure that has been created as a result of the formation of alternative business structures, to use the jargon that the Minister referred to. Many of us have reservations about these new bodies but, be that as it may, they are with us and they certainly have to be regulated—in particular, there has to be proper provision for compensation where things go wrong.

It appears that the SRA is to review these compensation arrangements as part of what it calls a root-and-branch review in two years’ time. The Law Society concedes that it would be sensible to extend the time during which the present arrangements continue, but it is far from certain that the SRA has the necessary resources to conduct that review thoroughly and properly. Perhaps the Minister could indicate what assurances he has received about the resources and the timeframe and whether the MoJ will be in regular contact with the SRA to try to ensure that a timetable is agreed and kept to. It is clearly important, given the likely growth of these new structures and the potential for claims to arise in the mean time, that the system is improved as rapidly as possible. As I say, it is not clear—to the Law Society, at any rate—that the SRA is in a position to do that. There are other problems with the SRA, with which the Minister is no doubt familiar, but those are not a matter for discussion today.

In the Law Society’s view, there is also a case for looking at the compensation fund as a whole. The society has for some time been calling for a review to look at the impact of the new structures and whether it is still appropriate for there to be a single fund covering both types of practice—traditional solicitors’ practices and those of the new structures. The new structures will, of course, embrace non-solicitors as well as some solicitors and they may reach out into areas other than traditional legal practice, so there is a question whether the scheme would apply to non-legal activity and so on. All this seems to be somewhat vague at the moment.

The Law Society also points to the need to consider the impact of a recent decision by the authority to transfer the cover for non-applied firms from a risk pool to the compensation fund. That apparently exposes the fund to a new type of claim relating to negligence and negligent actions.

There is also a question of whether the present management arrangements are up to dealing with these complex new positions. I acknowledge that none of this is the direct responsibility of the department, but given that the department, under the previous Government and now under the current Government, is establishing the framework, it is surely necessary for the department to take an active interest to ensure that a satisfactory position is achieved. We do not want a position in which either the legal profession is paid, as it were, for the possible errors of the new structures, or in which people find it difficult to obtain compensation when they should have it. While it is obviously necessary for this extension to take place, I urge the Minister to indicate that his department will be conscious of the need to ensure, as far as it can, that the SRA carries out what is expected of it within that timescale and no later and that it has adequate professional and technical resources to do the job.

[Lord McNally]

My Lords, I thank the noble Lord, Lord Beecham, for that response. I am aware of his long and detailed knowledge of the solicitors’ profession, so I was trembling a little that I was going to be baffled by professional science. He indicated, I must say, a slight irritation on my part that one looks pretty silly when one puts in a sunset clause then has to come back and say, “Please, lift it”. The intention was good—it being thought that the presence of a sunset clause would produce a sense of urgency in the Solicitors Regulation Authority—but that was, perhaps, overoptimistic. Not putting in another sunset clause is common sense—better that we tell them to get on with it—and I fully take his point that my department should take a close interest in the matter. The review is primarily a matter for the SRA and details of the review will be in its strategic plan. However, the Legal Services Board, the oversight regulator of the legal services framework, has indicated that it expects the SRA to report on progress. I assure the noble Lord that I will keep an eye on progress, because I do not want to come back here to tell him that there has been none.

The SRA has assured us that it is now in a better position to complete a fundamental review of its compensation arrangements, which will determine the best solution for the compensation arrangements, not only for ABSs, but for traditional firms. It is therefore too early at this stage to get any views to dictate the outcome of the review. The SRA will note the irritation from all bodies—the Law Society, the LSB, the MoJ and the Official Opposition—and I hope that that, even more than a sunset clause, will spur it to action. Work on the review has started and the detailed scope of the project has been developed. The SRA held a meeting with the LSB to discuss and agree the detailed scope and the project scope and methodology has been approved by the financial protection committee, a sub-committee of the SRA board. A summary of the scope and methodology will be published on the SRA website in December 2012.

The project has now entered a research phase and initial meetings with stakeholders are being held. The SRA is committed to transparency of research in this area and has undertaken to publish information and research findings throughout the project. The SRA was able to dedicate policy resources to the compensation arrangement review from June 2012. However, data-gathering started earlier, in spring 2012. I can assure the Committee that work is now under way, and I and the MoJ will continue to keep a very close interest in progress.

Motion agreed.