Legal services regulation reform: consultation analysis

Part 3(D) Business Structures

Introduction

The consultation document set out the current legislation around the acceptable business structures and ownership rules for legal service providers. Currently 51% (i.e. a majority stake) of the business must be held by regulated professionals. This differs from the model in England and Wales, where solicitors and barristers are able to operate in a variety of business structures that their Scottish counterparts are not - thus impacting the latter's ability to be competitive and sustainable. The consultation set out the possible benefits of removing the 51% majority stake rule and sought feedback on this.

Question 42

Q42. To what extent do you agree or disagree that the 51% majority stake rule for Licenced Legal Services Providers should be removed?

Base: 75

There was a clear divergence of views for this question. Of those who indicated their level of agreement, just over half (52%, n=39) agreed that the 51% majority stake rule for Licenced Legal Services Providers should be removed, compared to 48% (n=36) who disagreed.

Reasons for Agreement

Of those who agreed, many suggested that removal of the 51% majority stake rule would be of significant benefit to smaller companies in Scotland:

"There is evidential support for the argument that a relaxation of ownership rules helps to sustain the supply of legal services in rural areas and to make previously small or solo practices more viable." (Organisation, Profession, Other)

A few respondents also commented that the existing limit was unnecessary:

"There is no evidence that the public interest or consumer protection requires a limit on 'non-lawyer' involvement. The assertion (usually by lawyers) that those who are not lawyers will inevitably and somehow interfere with or influence the independence of those who are is simply not proven." (Individual)

Amongst organisations there was a commonly held belief that the change would encourage competition and innovation within the sector:

"By relaxing this requirement, it will likely encourage more cost efficient, innovative businesses which complement the provision of reserved activities with new technologies to enter the market." (Organisation, Consumer Body/Panel)

"Allowing ABS [Alternative Business Structures] without overly restrictive authorisation processes or overly tight requirements will unleash that innovation and bring it within the regulatory system… A lesson from England and Wales is that this innovation will spur a significant increase in multi-disciplinary practice." (Organisation, Legal Service Provider)

Some respondents drew comparisons between Scotland and other countries, claiming significant evidence of success via Alternative Business Structures:

"There is now a long track record of the successful operation of ABSs in England and Wales without such restrictions." (Organisation, Legal Service Provider)

"We believe that any risks to the operation of ABSs from a relaxation of this ownership rule are minimal, as demonstrated by the experience in England and Wales." (Consumer Organisation, Public Body/Sector)

Some respondents also felt that increased flexibility in corporate structure could save money and benefit end users:

"Lifting this restriction would allow for efficiencies and streamlining of processes, which may result in reduced costs and increased choice for consumers." (Consumer Organisation, Public Body/Sector)

Reasons for Disagreement

Many respondents disagreed with the removal of the 51% majority stake rule, but called for a reduction in stake percentage rather than removing such a requirement outright:

"…consideration should be given to reducing the 51% majority." (Organisation, Law Society of Scotland)

One respondent was concerned that their response to this question might be misunderstood. It is possible that these same sentiments were felt by others faced with the only options to 'agree' or 'disagree':

"For avoidance of doubt, I think it should be removed and replaced with a much lower figure. However, I'm concerned that a response to say agree removed will be interpreted as being in favour of no limit." (Individual)

Indeed, many of those who disagreed remained in favour of some kind of restriction/regulation:

"The question for the Scottish Government is not 'should this happen?' it is 'should we regulate this?'" (Organisation, Legal Service Provider)

Some respondents felt that there was currently no need to change this rule, while others felt there was not enough evidence to necessitate change:

"The reality is that there is no evidence… that this is an issue. The current legislation allows the percentage to be changed by regulation and it would be prudent to leave things as they are at this stage to await evidence that this is providing a barrier to entry to the legal services market." (Individual)

Many of the comments from individual respondents who disagreed showed concerns that implementing this change may negatively impact on service and consumer confidence:

"I believe it is important for the profession and consumer confidence that the 51% rule continues to apply." (Individual)

"Law firms should be owned and controlled by qualified lawyers to protect the public." (Individual)

"Trust in the legal profession may be diluted if non-lawyers are allowed to control law firms." (Individual)

Four focus groups were also asked to comment on the 51% share business structure. Several attendees were against reducing this ownership share due to concerns over the impact which greater corporate ownership might bring, with others who were neutral about the proposed reduction also expressing the same concerns about how this would work and the potential pitfalls. For example, respondents were worried that solicitors may find themselves experiencing conflicts of interest or being compromised, and/or that this may impact the types of business they are able to do. It was also felt there was a risk of unintended consequences from reductions in the ownership share, as well as difficulties in how this would work together with entity regulation.