Legal Services Act 2007 (Appeals from Licensing Authority Decisions) (Chartered Institute of Patent Attorneys and Institute of Trade Mark Attorneys) Order 2014

Lord Faulks Excerpts

Tuesday 1st July 2014 Grand Committee

Moved by

[Lord Faulks]

That the Grand Committee do consider the Legal Services Act 2007 (Appeals from Licensing Authority Decisions) (Chartered Institute of Patent Attorneys and Institute of Trade Mark Attorneys) Order 2014.

Relevant document: 2nd Report from the Joint Committee on Statutory Instruments.

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

My Lords, first, on the designation order, the purpose of the order is to designate the Institute of Chartered Accountants in England and Wales—ICAEW—as an approved regulator under the Legal Services Act 2007 for the reserved legal activity of probate activities. I should also say that, if this is approved, a further order will be laid in the near future to designate the institute as a licensing authority for probate activities, which will mean that it will be able to license alternative business structures. This should help to promote increased competition and innovation in the legal services market.

The Legal Services Act 2007 established a new regulatory framework for legal services. Among the key aims of the Act was to deliver a more effective and competitive market. The Act contains eight regulatory objectives which include protecting and promoting the public interest; protecting and promoting the interests of consumers; and improving access to justice. The Institute of Chartered Accountants in England and Wales is a regulator and professional membership body for the accountancy profession in England and Wales. It provides leadership and practical support to its UK and international members and professional standards are maintained through working closely with Governments, regulators and the industry. It also undertakes education and training to support students studying to become chartered accountants.

The institute applied to the Legal Services Board in December 2012 to be designated as an approved regulator for probate activities. It also applied simultaneously to be designated as a licensing authority for probate activities. During 2013, the Legal Services Board very carefully and rigorously tested the institute’s proposals against the criteria in the 2007 Act. The Legal Services Board has also taken care to assess that the institute has both the capacity and the capability to undertake a regulatory role in the legal services sector. The board took advice from the mandatory consultees, as required by the 2007 Act. These are the Lord Chief Justice, the Legal Services Consumer Panel and the Office of Fair Trading—now the Competition and Markets Authority. The board additionally consulted the Financial Reporting Council and the Insolvency Service.

The Legal Services Board took care to ensure that the governance arrangements proposed by the institute are suitably robust in ensuring that its regulatory arrangements are independent from its representative functions, which is a key element of the 2007 Act. This is an important point, on which concerns were raised during the consultation, but the board has tested this issue and is fully satisfied that the arrangements that the institute has set out for its new probate committee will allow it to exercise the regulatory functions in a way that is not prejudiced by the institute’s representative functions. The Legal Services Board is fully satisfied that the institute has in place the safeguards required to regulate authorised bodies and protect the providers and users of such bodies. The Government accept that assessment.

The Government recognise the importance of the legal services market and want to encourage its growth. We believe that designating a new regulator, which has the appropriate safeguards for consumer protection, will help to achieve this. As for consultation, some issues were raised when the proposals were consulted on. The then Lord Chief Justice had long-standing general concerns that regulatory competition would have a detrimental effect on standards. The Legal Services Board was aware of these concerns and addressed them by setting out how the 2007 Act aims to achieve a more effective and competitive market, thereby improving standards. The Legal Services Consumer Panel strongly welcomed the application by the institute but was concerned that the institute was initially not proposing to have a majority of lay members on the probate committee or disciplinary committee. In response to the panel, the institute redrafted its regulations so that the probate committee was made up of a majority of lay members. The Office of Fair Trading had no objections. The Law Society wrote to the Legal Services Board to express concerns, in particular, as I have already noted, about the governance arrangements being proposed by the institute. The Legal Services Board copied this letter to the institute, which responded in detail to all the concerns that the Law Society had raised. The LSB was content with the response and the governance arrangements.

As I have also already mentioned, the Legal Services Board consulted the Financial Reporting Council and the Insolvency Service. Both the Financial Reporting Council and the Insolvency Service noted that the institute takes its regulatory responsibilities very seriously and supported the applications.

I appreciate that some might argue that the Government should not be pressing ahead with this and that an accountancy regulator should not be permitted to regulate legal services. Some may even suggest that there will be a lowering of standards, or a diminution of consumer protection. We do not accept these arguments. The Legal Services Board is satisfied that there will be no lowering of standards or lessening of consumer protection, and the Government agree. I am satisfied that the Institute of Chartered Accountants in England and Wales will be a highly capable and effective regulator in the legal services market. Its entry to this field will help contribute to the growth of the legal services market and bring further innovations, leading to benefits to consumers of legal services.

I turn now to the appeals orders. Noble Lords may be aware that the licensing regime for alternative business structures, as contained in the 2007 Act, became operational on 6 October 2011. In brief, alternative business structures are bodies that carry on reserved legal activities and are partly or wholly owned or controlled by non-lawyers.

In relation to that regime, as I have said previously, the ICAEW has applied to the Legal Services Board to be designated as a licensing authority. The Chartered Institute of Patent Attorneys—CIPA—and the Institute of Trade Mark Attorneys—ITMA—also made a joint application to the Legal Services Board to be designated as licensing authorities. Members of the Committee may be aware that the Legal Services Board made recommendations on 6 December, and earlier this year the Minister responsible for legal services agreed to make the following orders designating the Chartered Institute of Patent Attorneys, the Institute of Trade Mark Attorneys and the Institute of Chartered Accountants in England and Wales as licensing authorities under the Legal Services Act 2007.

In accordance with that Act, before CIPA, ITMA and ICAEW can be designated as licensing authorities by order of the Lord Chancellor, it is necessary for there to be an appellate body with the power to hear appeals against its decisions made in relation to alternative business structures.

The purpose of these orders is to make provision for the First-tier Tribunal to act as the appellate body for the purpose of appeals from those three bodies in their capacity as licensing authorities. As required by the 2007 Act, these orders are made on the recommendation of the Legal Services Board, following public consultation.

In summary, the two appeals orders make provision: for the First-tier Tribunal to have the power to hear appeals from the decisions of ICAEW under Part 5 of the 2007 Act and its licensing rules and to hear appeals from the decisions of CIPA and ITMA, acting jointly or separately, under Part 5 of the 2007 Act and their licensing rules; for the orders that the First-tier Tribunal may make on appeals from decisions made by those bodies under their licensing rules; and for modifying the Legal Services Act 2007 so that these appeals fit into the existing structure of onward appeals from the First-tier Tribunal to the Upper Tribunal.

These orders have been brought before the House at the earliest opportunity, following recommendations from the Legal Services Board on 2 May. If approved, the orders will provide individuals and businesses that are subject to licensing decisions of the Chartered Institute of Patent Attorneys, the Institute of Trade Mark Attorneys and the ICAEW with an opportunity to appeal those decisions through an independent and impartial appellate body. I beg to move.

[Lord Beecham (Lab)]

My Lords, having safely navigated the rather stormy waters of the Second Reading of the Criminal Justice and Courts Bill yesterday, it is a pleasure to renew acquaintance with the Minister over these crucially important statutory instruments. One or two questions occur to me about them.

The first is that we are talking effectively about alternative business structures, which are clearly well regulated. I do not know whether this is possible, but supposing that within a single alternative business structure you had both lawyers and accountants, what would be the appropriate framework? Would the professional body of which an individual within such a structure might be a member have a jurisdiction? Or is there an overarching mechanism for the structure as a whole as opposed to the individuals who work within it?

Secondly, grants of probate are issued to executors. My understanding is that if the executors chose to employ someone who is not part of a regulated profession, of course none of these safeguards would apply. Is it the intention of either the Government or the relevant bodies—I presume it would certainly be that of the latter, but it would also be sensible for the Government—to promote the use of properly regulated structures for these purposes? Having said that, I mentioned to the Minister before we began this Committee that I know of a solicitor who many years ago charged something like £90,000 in fees on an estate that was valued at just over £100,000. The regulatory body disposed of him in due course, but he was nevertheless guilty of an offence and seriously defrauding his client. The existence of a regulatory body itself does not necessarily mean that everything will be well.

There is one other matter, which may be slightly tangential. I am assuming that other accountancy bodies may be in a position to apply to be recognised for the same purposes as the chartered institute. In that connection, I have some involvement with an organisation called the Association of International Accountants. It is a non-commercial relationship; I just happen to know some of the people involved and I was recently asked to host a dinner in this House in lieu of my noble friend Lord Sawyer, which I did. The organisation is having some difficulties, not in this particular context, but in the more general context of being recognised for certain other purposes. It may not be possible for him to give me one at the moment, but I would like an assurance from the Minister that, if such a body were to apply to be recognised for the same purposes as the chartered institute, the same process that the chartered institute has successfully undergone would be available to it.

There is a feeling on the part of the Association of International Accountants that the two main accountancy bodies in this country—the chartered institute and whatever the appropriate body is for certified accountants—are, in one particular area, effectively operating a duopoly from which this association is excluded. I asked a Written Question about this some time ago, to which I received a not terribly helpful reply from the point of view of the association. An assurance that they would be treated on an equal footing in terms of passing whatever tests are necessary to be included in this would perhaps be of some comfort to them. Having said that, I cannot see anything to object to in these orders and we are perfectly content to see them go through.

[Lord Faulks]

My Lords, I am grateful for the questions that I have been asked by the noble Lord, Lord Beecham, who rightly says that regulation and discipline are no absolute guarantee against unprofessional, to put it mildly, practice on the part of a professional in whatever their particular role is. The Legal Services Board has been given by Parliament the task of approving as a regulator these various bodies. As your Lordships will be aware, the scope of their activities is limited. In terms of protection of the consumer, it was important that the effective arrangements were in place to ensure that members co-operated with the legal ombudsman. The Government also had to be satisfied that appropriate client protection arrangements were in place for any body designated as an approved regulator. The Legal Services Board undertook a detailed analysis and was satisfied with the arrangements of the probate compensation scheme, and the requirement for all authorised firms and accredited probate firms to hold professional indemnity insurance. That should protect someone in whatever particular professional role they perform within an alternative business structure.

In terms of these now multidisciplinary practices, there may well be lawyers working with what one used to regard as an accountancy firm. As I understand it, their work within the accountancy firm would be regulated in the way of the accountancy firm licensed to perform these particular activities, but if they were solicitors, for example, their activities would also be regulated by the Solicitors Regulation Authority as the disciplinary body. In so far as there can be protection for the individual, that will be ensured by these new arrangements.

[Lord Beecham]

In view of what the Minister has said, it is right that there should be professional indemnity insurance but that is basically for professional negligence. Certainly, the Law Society—as I know from the experience of having to contribute to these things—has occasionally to step in, not just in cases of professional negligence but also in cases of dishonesty, to compensate the clients of solicitors. Is it a condition of these bodies being recognised as regulatory bodies that they should assume responsibilities in that context of compensating those who have been defrauded of their entitlement as opposed to in claims for professional negligence? Again, it may not be possible to answer that question now but it would be interesting to find out.

[Lord Faulks]

I think that it would. I would be happy to write further with details about the arrangements. As I understand it, the Legal Services Board needed to be satisfied of the capacity for individuals to be compensated if mistakes were made in non-contentious probate. For historical reasons, probate is a reserved activity; hence the need for this whole process. The Legal Services Board was satisfied about professional indemnity insurance.

If I sound somewhat hesitant, the noble Lord will appreciate that Parliament has designated the Legal Services Board as the regulator. This is not directly the Government’s approval; it is the Legal Services Board’s approval. They have created this body, and the body has gone through the process. The Government have to be satisfied that the Legal Services Board has gone through the necessary process of consultation and satisfied itself of the adequacy of protection, for example, for consumers, and all the other aspects to which I referred in opening, but they do not have a separate governmental role. We do not think that there has been any inadequacy in the process of this approval. Essentially, the Legal Services Board, having been given that task, has satisfied itself. If an individual chooses a regulated person to undertake their probate, they naturally have protection and redress. As the noble Lord says, individuals have the choice of whether to undertake their own probate, in which case they do not, which is a matter of consumer choice. Further to what I said about lawyers and accountants within a single ABS, that will, of course, depend on which regulator licensed the alternative business structure. However, I understand that entity regulation applies over individual regulation, although, as I say, the individual may have some additional professional obligations of the sort that I described.

I do not think that I can answer from the Dispatch Box the other question that the noble Lord asked in relation to international firms. However, I will try to write him a more helpful letter than the one that apparently he received on a previous occasion.

[Lord Beecham]

I am grateful to the Minister for that. However, to be clear, the Association of International Accountants is not just a body of international accountants; it is a body with many UK members and some overseas members as well. It is therefore not operating solely in the international sphere. However, as I say, I am grateful to the noble Lord for his offer.

[Lord Faulks]

I hope that, subject to my providing further information by letter, I have satisfied the noble Lord. The debate has enabled me to put on record the importance of the alternative business structure and of the Government encouraging growth and innovation in the legal services market generally through these means. The order designated the ICAEW as a new approved regulator, which demonstrates our commitment to it. I hope that the debate has demonstrated the importance of the appeals order, which naturally needs to exist to support the effective operation of the ABS scheme. The appeals orders form a key component of the licensing arrangements. I commend these orders to the Committee.

Motion agreed.