rose to move, That the Grand Committee do report to the House that it has considered the Legal Services Act 2007 (Functions of a Designated Regulator) Order 2008.
The noble Lord said: This order is presented under Schedule 22 to the Legal Services Act 2007. It will amend the new Section 9A of the Administration of Justice Act 1985, as inserted by Schedule 16 to the 2007 Act, to remove a restriction on the types of bodies which would satisfy the definition of legal services bodies, and which may therefore qualify to be recognised by the Law Society as suitable to carry on certain legal services.
When commenced, new Sections 9 and 9A of the 1985 Act will allow bodies satisfying a management and control condition and relevant lawyer condition to become legal services bodies. The management and control condition is that at least 75 per cent of the managers, shareholders or holders of voting rights in the body must be legally qualified. The term “legally qualified” is defined to include bodies as well as individuals, but 75 per cent of the bodies’ owners and managers must be legally qualified individuals.
Legally qualified bodies are therefore limited to two levels of ownership—the corporate body and its individual owners. It would not be possible for law firms to have multiple tiers of ownership, where law firms may own other firms, trust or service bodies which, in turn, own other organisations. Following discussions with the Solicitors Regulation Authority and the Law Society, it became clear that Section 9 of the 1985 Act, as currently drafted, does not restrict recognised bodies in this way and that some of the law firms they regulate currently have multiple tiers of ownership. Should Section 9A be commenced as drafted, bodies with more than two levels of ownership would be in breach of the Section 9A ownership requirements and would be forced to restructure in order to qualify as legal services bodies and thereby fall within the recognised body regime. This restructuring would be of great expense to those firms and would have caused an unnecessary restriction that does not currently exist.
Firms are currently able to structure themselves in a way which is most effective and efficient for their operation, such as allowing easier transfer of ownership in the event of a partner leaving or retiring. Section 9A as currently drafted would have limited firms’ ability to structure themselves to meet their business needs. The proposed amendment to Section 9A will remove this restriction, allowing firms to realise the benefits of outside investment while maintaining the flexibility of the old regime.
This order seeks to ensure that bodies with multiple tiers can continue to operate in their current structures and be recognised as legally qualified for the purposes of Section 9A. If those bodies then meet the management and control condition, and the relevant lawyer condition, they will satisfy the legal services body definition and may be recognised by the Solicitors Regulation Authority under Section 9 as suitable to carry on certain legal services.
The order achieves this by removing the requirement in Section 9A(5) for qualifying bodies to be owned by legally qualified individuals in order to satisfy the relevant lawyer condition; by recognising partnerships which already exist and which continue to satisfy the Law Society’s relevant pre-commencement conduct rules as legally qualified for the purpose of satisfying the management and control condition; by recognising bodies corporate which already exist and which continue to satisfy the Law Society’s relevant pre-commencement conduct rules as legally qualified for the purpose of satisfying the management and control condition; and by giving the Law Society power to make rules expanding the category of what is to be legally qualified for the purpose of satisfying the management and control condition.
These bodies must satisfy all the conditions in Section 9A in order to be “legal services bodies”. These conditions are important as they make up some of the safeguards to ensure that legal services bodies do not go beyond what was envisaged under the legal services body provisions. They are, after all, bodies that provide legal services, are majority-owned by lawyers and therefore pose a lower regulatory risk.
It is vital, therefore, that in removing the two-tier limitation on corporate ownership we do not allow full alternative business structures to emerge before the licensing regime set out in Part 5 of the Act is implemented. The 25 per cent limit on non-lawyer management and the requirement for those managers to be individuals will remain regardless of the number of tiers of ownership of a body. The bodies corporate defined as legally qualified in new subsection (6)(g)—that is, those recognised by the Law Society under Section 9 of the 1985 Act—have already undergone stringent Law Society regulation and recognition and satisfied the Law Society that they are suitable for carrying on solicitor services under current legislation. These bodies are also subject to the Law Society’s pre-commencement rules.
The Law Society’s rules that may also permit recognition of other bodies as legally qualified are subject to consultation and a statutory approval process under paragraph 16 of Schedule 22 to the 2007 Act, which includes approval by the Lord Chancellor. The Solicitors Regulation Authority also published changes to its code of conduct on 17 October to take account of the proposed new provisions relating to legal services bodies. The consultation period for those rules closed on Monday, 10 November. Subject to Parliament agreeing this order, those rules will be subject to a robust approval process under Schedule 4 to the Courts and Legal Services Act 1990, which requires approval by the Lord Chancellor following consultation with the designated judges. Finally, all bodies must still satisfy the management and control and relevant lawyer conditions in order to be legal services bodies which may then be recognised as suitable to provide legal services by the Law Society.
The procedure for achieving these changes is set out under paragraphs 1 to 4 of Schedule 22 to the 2007 Act, which enables the Lord Chancellor to make an order to modify the functions of a designated regulator or other body. Under paragraph 2 of that schedule, an order may be made by the Lord Chancellor providing that a recommendation has been made by the body to which it relates, and that the body has given its consent. In this case, the Law Society and Solicitors Regulation Authority both recommended on 1 October 2008 that an order be made and gave consent under paragraph 2(4) of Schedule 22.
Before the formal recommendation was made, Ministry of Justice officials had been working with the Law Society and the Solicitors Regulation Authority to determine the content of the order. Other relevant stakeholders were also notified in advance of the formal recommendation being made, including the Lord Chief Justice, the Office of Fair Trading, representatives of consumer organisations and other approved regulators.
The Ministry of Justice published the draft order on 6 October, seeking views from legal regulators, the profession and consumer groups by 17 October. Schedule 22 also provides that advice must be invited from the Office of Fair Trading and the Lord Chief Justice. On completion of the consultation period, a total of nine responses were received, all of which supported the order. During the consultation period, some small changes were made to highlight relevant amendments to legislation to indicate that a copy of the relevant pre-commencement conduct rules will be available on the Solicitors Regulation Authority website, and to remove the word “qualified” in the definition of “legal partnership” to avoid confusion. Under paragraph 3(7) of Schedule 22, if the order the Lord Chancellor intends to make differs from that which was published, he must publish a revised draft alongside a statement detailing the changes. This was done on the Ministry of Justice website on 24 October, and the Law Society and Solicitors Regulation Authority gave their consent under paragraph 2(4) of that schedule.
This order is necessary to realise the benefits of legal disciplinary practices as early as possible by allowing recognised bodies to take on non-lawyer managers if they so wish. Those bodies must, of course, still satisfy the management and control condition and relevant lawyer condition that place appropriate conditions on ownership. The order ensures that existing bodies are not forced to restructure simply to carry on with their business; a position which would have been unfair and anti-competitive. I commend the order to the Committee. I beg to move.
Moved, That the Grand Committee do report to the House that it has considered the Legal Services Act 2007 (Functions of a Designated Regulator) Order 2008. 29th report from the Joint Committee on Statutory Instruments.—(Lord Patel of Bradford.)
The noble Lord will be grateful that I intend to be brief and do not intend to discuss the merits or otherwise of the order. After his clear explanation, I wish to make only one comment about the Explanatory Memorandum. I have on a number of occasions expressed concern about Explanatory Memoranda not being as clear as they might be and not assisting the House or the Committee much in understanding what is in an order. On this occasion the reverse is true. I am grateful for a very good Explanatory Memorandum which, in paragraph 7, goes as far as to say what is being done and why. I commend that paragraph heading to future Explanatory Memoranda and suggest that the Ministry of Justice and other departments should always bear it in mind; it would achieve a great deal. To have a paragraph such as paragraph 7, which makes quite clear what is being done and, more important, why, is of great benefit to those who have to scrutinise these orders. I thank the noble Lord and his department for doing that.
I join in congratulating the noble Lord on his appointment and I look forward to dealing with him frequently on Ministry of Justice matters. At the same time, I commiserate with him for having to take on board the Legal Services Act 2007, which is a highly contentious Act, particularly in the area in which he is now putting forward this order.
I do not suppose that when the noble Lord joined the Labour Party he ever thought that he would be supporting fat cat, international and City lawyers against the high street practitioner, who is no doubt familiar to him from where he comes from, as it is familiar to me having been a high street solicitor in my day. The Law Society’s briefing on this gives the game away. It states:
“The Law Society and the City of London Law Society”—
note that it is the City—
“consider that this restriction”—
the one outlined by the noble Lord—
“will have a specific impact on large and international law firms. Furthermore, with the advent of Legal Disciplinary Practices and in turn Alternative Business Structures, it is likely that firms will wish to innovate with more complex corporate structures. It would be a lost opportunity if law firms were unable to compete as effectively both nationally and globally by virtue of an inadvertent technical error”.
So the proposal supported by the Law Society is not supported in the interests of the consumer in the rural areas, the people who may be put out of business by the introduction of alternative business schemes and the legal disciplinary practices envisaged.
I share the interest of the noble Lord, Lord Henley, in the Explanatory Memorandum and how full it is. It is full because it contains all kinds of verbiage in order to conceal the precise reason why the order is being brought forward. It includes a revealing extract from Chapter 5 of the Legal Services Bill Full Regulatory Impact Assessment, first published in November 2006, with a supplementary memorandum in 2007. When that was considered in the regulatory impact assessment it was stated:
“There is a risk that the anticipated increase in the level of competition in the legal services market could lead to the withdrawal of some inefficient suppliers of legal services from certain areas of the market”.
That is, your high street family solicitor. It goes on,
“In particular, inefficient suppliers on local high streets and in rural areas may be forced to close down under the pressure of greater competition from lower cost providers. This raises the potential risk of reducing consumer choices and could have an adverse effect on access to justice”.
That was the argument that the Liberal Democrats put forward during the passage of the Bill. It is all very well permitting large firms to come into the market and provide capital when they are not lawyers so as to put out of business the lawyers who currently provide services. I know that north Wales in particular is an area served by the high street. The local supermarket, the AA or organisations of that sort, which have absolutely nothing to do with the provision of legal services or with law, may come forward and provide capital that the partners in large firms will eagerly grasp. The large firms of 200 or 300 partners will happily sell out a share and take the money from large organisations, but you cannot do that if you are a small local solicitors' office.
To say that these are innovations in the legal services market driven by greater competition, leading to new ways of legal services being delivered to consumers in rural areas, is just marketing speak; it has nothing to do with how the legal profession should organise itself. There was an attempt in that regulatory assessment to say that if you bring in outside firms, such as supermarkets or insurance companies, to provide legal services on the side, you will widen the opportunities for more women and people from lower income groups and different ethnic groups. I do not believe that; that is just being—to use a phrase that is over-used—politically correct, by going to these areas and saying that we will do a great deal more for these people.
So what is the order all about? It amends an Act of Parliament. Let us realise its significance; it is not just the ordinary type of order, but one that actually changes the Act of Parliament that was passed, despite Liberal Democrat opposition, in 2007. That is its purpose. Why does it want to do that? Because it got it wrong. As the Explanatory Memorandum says, there are too many legally qualified persons required under Section 9A of the amended 1985 Act, which, in dealing with the legal disciplinary practices, still required that outside influences be limited to 25 per cent of the firm. That meant that the existing arrangements under the 1985 Act were being superseded in a way that did not appeal to the large corporate solicitors’ firms to which I have referred. Let us make no mistake about it, this changes an Act of Parliament in favour of the big guns and against the interests of the local solicitor who provides services to people on the ground.
I am putting down a marker to see how legal services operate in the next five or 10 years. It may be that the Law Society and the City of London are onside, but I want to see whether the services provided to ordinary people throughout this country, outside the conurbation of London and outside commercial lawyers, will be affected. I believe that they will and that there will ultimately be a reaction against the changes introduced by the 2007 Act and these additional changes to that Act made by this side wind.
Of course, today we are considering only the draft order—and we, the Liberal Democrats, will have to consider how we approach the full order when it comes before the House. Again, let me welcome the noble Lord, Lord Patel, into this hornets’ nest, and I hope the buzzing is not too loud to drown out what I am saying.
I am not sure how to thank the noble Lord, Lord Thomas, for his warm welcome. I shall begin by looking at some of the issues. I thank the noble Lord, Lord Henley, for his comments about the Explanatory Memorandum. As someone new to this area, I found it helpful and commend his points about paragraph 7, which explains what we are doing and why we are doing it. It provides an important lesson for us all and should be contained in future briefing notes.
This is a complicated but important issue. The order ensures that we do not restrict unnecessarily the organisational structures of bodies. Some bodies have already demonstrated that they are fit to provide legal services through the current recognised regime, and it would be improper to restrict them even further simply to allow them to be regarded as legally qualified. If such bodies wish to become legal services bodies under new Section 9 of the 1985 Act, they still have to satisfy the conditions set out in Section 9A. Strong safeguards therefore remain in place for non-lawyer management of firms.
I have read transcripts in Hansard of what the noble Lord, Lord Thomas of Gresford, said during the passage of the Act. It is clear that he is well experienced in these matters and I cannot begin to rehearse many of the arguments that he then put forward. Suffice it to say that the provisions apply also to small firms—for example, to allow partners in small firms to recognise secretaries and non-qualified people who do routine tasks. The legal disciplinary practice is supported by consumer groups and the Federation of Small Businesses. It does not represent an attempt to establish a full ABS; no external investment is allowed.
I know that those explanations will not completely reassure and satisfy the noble Lord because of the many cases that he has put forward, but his arguments are well heeded and heard and are once again on record. I hope that noble Lords will in the mean time agree that the order is an appropriate solution to this matter.
On Question, Motion agreed to.