Legal services regulation reform: consultation analysis

Part 3(E) Entity Regulation

Introduction

The Roberton Report set out that entity regulation should be introduced, which is enabling and flexible, to support more innovative business models and assist with regulating presently unregulated individuals, and to provide more transparency and greater risk based regulatory oversight. A broad description of what may be described as an entity should be set out in legislation to allow the regulator to adapt this description over time without the need for further legislation.

The consultation sought views on entity regulation and how this might operate.

Question 43

Q43. To what extent do you agree or disagree that entity regulation should be introduced?

Base: 84

The majority of respondents (80%, n=67) agreed that entity regulation should be introduced. This was mainly for consumer protection given that consumer expectations of legal services are that such services emanate from a 'firm' (or entity) rather than from an individual solicitor, etc:

"…consumers often believe they are contracting with a law firm, rather than an individual… They expect the firm to deliver an adequate service, and to take responsibility for anything which does not go to plan, regardless of who carries out the work. From a consumer perspective, entity regulation makes sense." (Organisation, Consumer Body/Panel)

Many respondents commented on the fact that if individuals are regulated, so too should entities be, for fairness, credibility and consistency. Entities should be accountable for the failings of those legal service providers whom they employ, it was felt:

"… there are… elements of organizational culture or incentives that operate to shape the behaviour of staff (whether lawyers or not)… it is important therefore for regulators to be able to address their attention to entity-level requirements and concerns, and to be able to hold certain key individuals to account for entity-level failures or contravention as well as for purely person ones." (Individual)

There were several mentions of business culture being important, particularly where non-regulated individuals within a firm take decisions or have an input (for example non-lawyer owners). Respondents argued that regulation needed to cover all legal service activities, regardless of who has input, and therefore, entity regulation was required:

"The current individual regulation model is out of date and needs to change to allow, for example, a regulator to take action about business culture. The model for ABS and traditional legal services businesses in terms of entity regulation should be the same and that means review of the 2010 ABS provisions." (Individual)

"The current powers of the [Law Society of Scotland] to regulate entities, under the 1980 Act, are mainly restricted to the obligation to undergo financial inspections and the requirement for firms to have professional indemnity in place… Entity regulation [recognises] that many of the decisions are not taken by an individual solicitor and often increasingly by individuals who are not currently regulated, for example, paralegals. Entity regulation also recognises the increasing diversity and innovation in legal practice in terms of individuals providing legal services, legal technology and new business models." (Organisation, Professional Body, Law Society of Scotland)

However, amongst those who agreed with the proposal, or who were non-committal, there were concerns about Third Sector and not-for-profit organisations (with Women's Aid and Citizens' Advice Bureaux being typical examples), who may offer free advice and be on limited budgets. It was also noted that such organisations might also be regulated via other bodies/sectors or mechanisms. Thus it was argued that including 'entities' in regulation would require clear understandings and definitions of what constitutes an 'entity'. Some were also concerned about 'throwing the baby out with the bathwater' by replacing rather than supplementing individual regulation with entity regulation:

"… we must emphasise that entity regulation should not in any way replace or dilute the regulation of the individual… To ensure a coherent approach to hybrid regulation, it would therefore be appropriate that regulation rests with a single body. If there were to be separate regulators for entities and individual solicitors, this would create additional levels of complexity in the regulation framework and confusion amongst consumers" (Organisation, Professional Body, Law Society of Scotland)

Few disagreed with the proposal, with most supporting the concerns voiced by the Law Society of Scotland above, namely that the proposal may be "cumbersome and unworkable" (Individual) and needed more justification.

Four focus groups were also asked about entity regulation, with most attendees agreeing that this was appropriate and needed. It was argued that firms should have some responsibility/accountability for their solicitors and be subject to some form of regulation, particularly around quality assurance and complaints. A few did caution around how this would be implemented, however, with costs noted to present a challenge to single operators/small firms, and issues around how this should be handled for the in-house sector. A few others were generally against the idea of entity regulation as they felt that such a system, of joint several liability, would be unfair and difficult to enforce in disputes that went to court.

Question 44

Q44. To what extent do you agree or disagree that all entities providing legal services to the public and corporate entities should be subject to a "fitness to be an entity" test?

Base: 85

Again, the majority of respondents (89%, n=76) agreed that all entities providing legal services to the public and corporate entities should be subject to a "fitness to be an entity" test. It was felt this would give consumer confidence and protection, as well as consistency in practice:

"This would ensure that each entity satisfies the necessary conditions to be able to provide legal services, bringing consistency and avoiding any disparity and associated issues that may arise by having differing regulatory requirements. This in turn would provide consumer confidence." (Organisation, Professional Body, Law Society of Scotland)

However, given the confusion over what constitutes an 'entity', as noted in Q43, two respondents were critical of the words 'entity' and 'test':

"Please get rid of this word 'entity'. It has no meaning… Specify the types of business structures that are recognised, accepted, permitted. Be clear. This just confuses everyone and especially consumers." (Individual)

"It is difficult to see what such a test might mean, as well as how to reflect in an appropriate and timely way the inevitable (and possibly frequent and short-notice) organisational changes in ownership, investment, leadership, management and staff." (Individual)

Question 45

Q45. To what extent do you agree or disagree that, as all lawyers providing legal services will be regulated - entity regulation should engage only those organisations who employ lawyers where those organisations are providing legal services for a profit - with the exclusion that when that legal service is in the context of an organisation whose main purpose is not to provide a legal service (for example banking) then regulation would remain at the level of an individual lawyer only and no entity regulation would apply?

Base: 79

Although the reaction to this proposal was more mixed compared to Q43 and Q44, two thirds (66%, n=52) agreed that entity regulation should engage only those organisations who employ lawyers and provide legal services for a profit. It was felt this was a proportionate measure as there was no need to introduce entity regulation for large organisations who employ their own in-house lawyers for advice (but do not advise clients) - however, it was noted that individuals should still be regulated.

There were mixed views, however, around whether not-for-profit organisations should fall within the entity regulation requirements. Some felt they should not need entity regulation in order to ensure that free legal advice could still be provided by the third sector and not-for-profit groups:

"This seems an appropriate but proportionate response to the potential risk to consumers. Many people who access free advice and support on legal matters from third sector and not-for-profit groups would be unlikely to seek it elsewhere. We would be concerned about any changes that could affect people's ability to receive free advice and support." (Organisation, Consumer Body/Panel)

Others felt that any organisations which provided legal services to consumers should be subject to entity regulation, including non-profit organisations. It was felt that this was needed to provide consistent standards and consumer confidence, and bearing in mind the often vulnerable status of their client group. However, it was also acknowledged that any cost implications or licencing fees would need to be proportionate:

"We do believe that all organisations providing legal services directly to consumers should be regulated at entity level and be licensed to provide those services, including non-profit providers. This would provide a harmonious level of entity regulation which would further promote consumer confidence and ensure consistent quality and standards are applied. Those consumers who access non-profit legal services are often the most vulnerable and it is therefore crucial that they are afforded the same level of protection, and can expect the same level of service and standards, as those able to access for-profit providers. However, we do recognise the limited resource of many non-profit providers and the significant need to provide access to justice for all and the important role these providers play in that. We therefore believe that, in bringing forward proposals for the licensing of entities, a proportionate approach is taken to any licensing fee to be introduced and applicable to non-profit providers. More flexible, permissive regulation." (Organisation, Professional Body, Law Society of Scotland)

A few felt that this was a decision for the regulator to take.

Whilst it was stressed by some that legal services offered in-house should remain regulated only at the individual level, others criticized the consultation document for using the example of banking as an organisation 'whose main purpose is not to provide a legal service' or to operate for no profit. Several respondents felt that this sector should be included in entity regulation:

"Banks provide arguably legal services in winding up estates, why should the relevant part of the organisation providing that service escape regulation?" (Individual)

"… banks employ banks of 'lawyers' to represent them and their interests so entity regulation should apply." (Individual)

Those against the proposal tended to argue that either any organisation who offered legal services, whether for profit or not, and regardless of sector, should be subject to the same regulation, or that defining in- and out-of-scope entities would be difficult or that entity regulation would be unworkable in practice, and that individual level regulation was sufficient:

"If you provide legal services at all - you should be regulated." (Individual)