The global impact of the Legal Services Act 2007

As we mark the 10th anniversary of the Legal Services Act, those of us who have been knocking around the international legal services scene since the mid-2000s can be forgiven a wry smile.

When Sir David Clementi’s Review of the Regulatory Framework for Legal Services in England and Wales was first published in 2004, the sound of a sharp intake of breath could be heard around the world. With the sole exception of New South Wales, whose example had inspired the UK government to seek a radical rethink of lawyer regulation, there were widespread predictions everywhere else that the sky would shortly come crashing down and the legal profession in England and Wales, as we knew it, was finished. The subsequent Parliamentary debates on the then Legal Services Bill in 2006-7 stimulated much handwringing and even prompted a written warning from the German Bar to the UK’s Joint Parliamentary Committee considering the Bill.

The issues which caused greatest concern in many other jurisdictions were – the loss of self-regulation by the Law Society and Bar Council, the creation of the Legal Services Board which was suspected of being a front for government interference in the profession and the introduction of non-lawyer ownership through Alternative Business Structures. The latter was particularly horrifying to other jurisdictions. The spectre of “Bin Laden law”, a firm owned by terrorists, or McDonalds’ law”, a law firm owned by a fast food chain, offering divorce settlements with your fries, were familiar bogeymen. Conflicts of interest, falling standards, disappearance of an independent profession and the undermining of access to justice in England and Wales were all widely predicted.

So, it is interesting now to look at what has happened since 2007. Not only has the legal market in England and Wales avoided the disaster that was predicted by bar associations in other jurisdictions, but there is strong evidence that the Legal Services Act has shifted the global centre of gravity on lawyer regulation.

There are four ideas, in particular, which other jurisdictions have picked up from the LSA 2007:

  • Independent regulation;
  • Regulatory objectives;
  • Entity and risk based regulation;
  • Non-lawyer ownership.

Independent regulation

Independent regulation is a concept which now seems so entirely obvious it is difficult to understand what the objections might ever have been. The realisation has gradually dawned in many parts of the world that if you are a self-regulating professional body, the assumption that others will make, fairly or unfairly, is that you are also regulating in the interests of your membership rather than the public interest. Moves to distance or entirely separate regulation from representation in the legal world has therefore become increasingly common. The concept wasn’t invented by the Legal Services Act; the Australians and the Canadians separated their Law Societies’ representative interests from regulation to a greater or lesser extent in the late 1990s or early 2000s.

But the English legislation can, however, lay claim to having gone one step further leading to the creation of entirely new bodies with a far higher involvement of lay members in governance structures. Since 2007, Singapore, South Africa and Ireland have all passed legislation inspired to some extent by the English LSA, through which they have all created new independent regulatory authorities – independent in decision-making from both government and the legal profession. Others, such as Denmark and the Netherlands have put in place greater distance between representative and regulatory functions. And most recently, the State legislature of California has forced the Bar to separate its representative sections from its disciplinary functions and hive the former off into a new California Bar Sections Association.   Although the majority of legal regulators around the world are still old-school bar associations, when change does happen the direction of travel is only one way – towards the greater independence of regulation from other activities.

Regulatory objectives

Regulatory objectives were also a new idea in the LSA 2007. Again, it now seems to be a commonplace idea that those who are responsible for regulation should know why they are doing it. But when regulation was solely in the hands of the professional bodies in England and Wales there was a prevailing sense that regulation was purely about maintaining and raising standards. Whilst this sounds laudable enough, it was an approach which inevitably led to more regulation, introduced more cost into the system and reduced flexibility and responsiveness amongst legal services providers.

In contrast, section 1 of the LSA introduced a much wider range of objectives for regulation, including competition, access to justice, diversity in the profession and consumer interest alongside the more familiar concepts of public interest and the rule of law. However, what was as important, was that every decision by a legal regulatory body post-Legal Services Act had to be justified in relation to these objectives.

The logic of this approach has attracted attention from elsewhere, notably in the US, where the American Bar Association was inspired to adopt Model Regulatory Objectives to guide legal regulators in the US - mostly State courts or judicial bodies - in approaching their task. Section 1 of the LSA has also been lifted and transplanted with little alteration into the Irish Legal Services Regulation Act 2015. The European Commission has also recently proposed a Directive on a Proportionality Test for new professional services regulation. If agreed, this will require European professional regulatory bodies to justify new regulations and to ensure that the cost-benefit ratio is minimised. Such an exercise will require legal regulators to understand why they are doing what they are doing – or to have regulatory objectives - by any other name.  

Entity and Risk Based Regulation

The LSA 2007 has also influenced the way in which lawyer regulation is done in many countries. The Act introduced a two-tier approach to regulation for entities that had non-lawyer ownership, in order to separate commercial decision-making about the overall business from the legal practice itself. However, the argument was soon made that there should be no distinction on the regulatory demands made on traditional law firms and non-lawyer owned alternative business structures (ABS). Consequently, entity regulation for all was born. Although New South Wales had introduced some law firm management concepts into regulation along with Incorporated Legal Practices- its version of ABS - these were light touch by comparison with the route chosen by the SRA.  Whilst initially firms complained of the burden of entity based regulation, sitting as it did alongside regulation of individual practitioners, the SRA was able to demonstrate that it could use entity regulation to identify and manage risks within the legal market. It could take a more helicopter view of what was going on in 10,000 law firms, rather than simply look ex-post at complaints against 150,000 solicitors. It could anticipate major problems, for example emerging scams, to which law firms could be much more easily alerted under entity based regulation. But it could also help those who wished to innovate making it a smarter, more sophisticated regulator. 

Whilst there is no other regulator which has gone as deeply into entity regulation as the SRA, others around the world have picked up on some aspects of this approach. The concept of risk-based regulation, or proactive regulation, has huge appeal in many jurisdictions, especially in the common law world where complaints are more likely to be related to the handling of client money. Several Canadian provinces, notably Nova Scotia, have drawn on the experience of both England and Wales post-LSA and New South Wales. A caucus of US state regulators, including Illinois, Colorado and New Mexico have begun to embrace this different approach.

Non-Lawyer Ownership

Finally, perhaps the biggest idea in the LSA, was non-lawyer ownership. Again, this was not entirely new - by 2007 New South Wales already had two law firms listed on the Australian Stock Exchange. However, this could easily be ignored by the wider world since Australia’s legal market at the time had little direct interaction with the rest of the world in contrast with England and Wales, a jurisdiction which already cast a long shadow around the world. European Bars were particularly concerned that non-lawyer ownership introduced through the LSA might be forced on them through the principles of mutual recognition which underpin the European single market. The advent of non-lawyer ownership in England and Wales also attracted significant attention because there were potential new entrants and new funders circling the legal market at the time, eager to unlock what many believed to be great untapped commercial potential within the English legal sector.

As England and Wales’ great experiment with alternative business structures unfolded, others began to come under pressure to change. This, interestingly, does not appear to have been driven in most cases by the demands of the market, but rather by other policy objectives. In Singapore, for example, the government introduced some non-lawyer ownership as an experiment to demonstrate its willingness to innovate and with the objective of remaining internationally competitive. In contrast, the debate in Canada and the US focused more on what non-lawyer owned entities might, or might not do to improve access to justice. By mid-2017, there were 15 jurisdictions around the world which permitted some degree of non-lawyer ownership of regulated law firms by statute or equivalent regulations. Very few of these are anywhere near as liberal as the regime in place in England and Wales, so consequently the take-up of this model of legal practice has been much more limited elsewhere. Technology is likely to be a particularly big driver of non-lawyer interest in legal practice and those jurisdictions which have established structures to allow multi-disciplinary collaboration or ownership will be best placed to succeed in this new world.

Although the balance of opinion among bar associations and legal profession regulators remains negative towards models of non-lawyer ownership, the fact that it is even countenanced in some jurisdictions like in the US, is an illustration of how far the ground has shifted since the Legal Services Act was first enacted.

Conclusions

The above are just a few brief insights into the way in which the Legal Services Act has influenced others around the world and changed thinking on the big questions of: Who regulates lawyers? Why do they regulate? How do they regulate? And, who can participate in the legal services market?

If imitation is the sincerest form of flattery, the architects of the Legal Services Act – much criticised, widely seen as a temporary fix – can allow themselves a quiet smirk of satisfaction.