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Legal Services Act 2007 (Appeals from Licensing Authority Decisions) Order 2011

Volume 728: debated on Monday 27 June 2011

Considered in Grand Committee

Moved By

That the Grand Committee do report to the House that it has considered the Legal Services Act 2007 (Appeals from Licensing Authority Decisions) Order 2011.

Relevant Documents: 23rd Report from the Joint Committee on Statutory Instruments.

My Lords, I ask that the Committee consider these two orders together. Both were laid before the House on 17 May and, subject to parliamentary approval, the orders will be made by the Lord Chancellor under the Legal Services Act 2007 on the recommendation of the Legal Services Board.

The Law Society and the Council for Licensed Conveyancers, both of which are currently approved regulators, have applied to become licensing authorities. The role of licensing authorities is to license legal service providers which are wholly or partly owned or controlled by non-lawyers—known in the 2007 Act as alternative business structures or ABSs. This will be possible only when Part 5 of the 2007 Act is commenced in full later this year.

Although not connected in subject matter, the two orders will allow the society and the council to put in place the necessary arrangements in anticipation of the new licensing regime. The order to be made under Section 69 of the 2007 Act will also make improvements to the two bodies’ existing regulatory arrangements.

Let me turn first to the Legal Services Act 2007 (The Law Society and the Council for Licensed Conveyancers) (Modification of Functions) Order 2011. The purpose of this order is to make changes to particular aspects of the functions of the society and the council to enable them to improve their regulatory arrangements both as approved regulators and, if designated as such, as licensing authorities. Since both are statutory bodies, those changes can be made only by legislation—in this case, Section 69 of the 2007 Act.

Let me explain what regulatory arrangements the order changes and why. Article 4 amends the Administration of Justice Act 1985 to allow the society to make rules requiring firms of solicitors to pay periodical fees to the society unconnected to any application for authorisation. This will allow the society to authorise solicitor firms on an indefinite basis. At the moment, the society can charge fees only when an application for authorisation or an application for renewal of authorisation is received, which is usually annually. Under the ABS regime in the 2007 Act, licensing authorities can charge periodic fees and license ABS bodies indefinitely. The change is intended to make the society more efficient and effective by harmonising the arrangements applicable to both types of firms, allowing it to operate a single system of regulation for both ABS and non-ABS bodies. Article 7 of the order makes similar provision for the council.

Article 5 gives the society the power to make compensation rules in relation to licensed bodies for a transitional period by extending its existing powers under Sections 36 and 36A of the Solicitors Act 1974. Without this power, the society would have to develop a separate set of compensation arrangements for ABS bodies. The society is currently reviewing its compensation arrangements for all the bodies that it regulates and it considers that it would be disproportionate and inefficient to set up separate compensation arrangements for ABS bodies while this review is under way. By December 2012, when these provisions come to an end, new long-term compensation arrangements will be in place for all types of solicitor firms, including ABS bodies, following the conclusion of the review.

Article 6 will allow the society to make rules about the recovery of costs in its role as a licensing authority. Such rules allow the costs of investigating a breach of its licensing arrangements to be recovered from the ABS body or persons closely connected to it—for example, its head of legal practice. Article 10 makes equivalent provision in relation to the council’s regulation of ABS bodies to ensure consistency between different licensing authorities.

Article 8 extends the council’s power to make rules about compensation arrangements to any reserved legal activity in relation to which it has the statutory power to act as a regulator. The council has applied to extend the reserved legal activities that it can regulate and these provisions will allow the council to extend its compensation fund to cover those additional reserved legal activities if its application is successful.

Finally, Article 9 amends the constitution of the council to change the balance of membership so that it will have a lay majority. At the same time, it changes the definition of “lay member” to exclude all lawyers, not just licensed conveyancers, while allowing any lawyer working in a firm regulated by the council to become a lawyer member of the council. Finally, it removes the specific requirement that two members are appointed to represent consumer interest. This will allow more flexibility in the range of interests represented by its lay membership while still allowing consumer interests to be considered.

Under Section 62(2) of the 2007 Act, there is a requirement that the Lord Chancellor may make an order under Section 69 only if the Legal Services Board has made a recommendation to do so. As required under Section 70 of the 2007 Act, the Legal Services Board has consulted widely on the provisions included in the order and on the draft order itself. It has worked closely with the society and the council to ensure that the order reflects their requirements before making its final recommendation to the Lord Chancellor. Both the society and the council consented to the recommendations being made, as is required in the 2007 Act. The Lord Chancellor has agreed that these amendments will benefit both bodies in terms of discharging their regulatory duties, both as approved regulators and, if designated as such, as licensing authorities. The Lord Chancellor would be content and has agreed to make this order should Parliament approve it. I therefore commend this first order to the Committee.

The purpose of the second order is to modify the functions of the First-tier Tribunal to hear and determine appeals from decisions made by the council in its capacity as a licensing authority, should it be designated as such. This order contains three key provisions. It modifies the functions of the First-tier Tribunal to enable it to hear appeals from decisions made by the council under Part 5 of the 2007 Act or the council’s own licensing rules. Secondly, it sets out the order that the First-tier Tribunal may make on appeals from decisions made under the council’s licensing rules; for example, it may uphold, substitute or quash the decision made by the council. The order that the tribunal will be able to make on an appeal against a decision made under the 2007 Act is set out in the Act itself. Finally, it modifies the 2007 Act so that appeals from decisions of the First-tier Tribunal can be made to the Upper Tribunal in accordance with the Tribunals, Courts and Enforcement Act 2007.

Under the 2007 Act, the Legal Services Board may only approve an application to become a licensing authority if there would be a body with the power to hear and determine appeals against decisions the applicant could make in its capacity as a licensing authority. The council has chosen to use the First-tier Tribunal as the appellate body for its licensing decisions rather than using its existing regulatory appeal body, the discipline and appeals committee. This order is needed for there to be an appropriate appellate body for the council’s licensing decisions. Without appropriate appeal arrangements, the council cannot be designated as a licensing authority. The Legal Services Board has obtained the consent of the Tribunals Service and the council to this order as required by the 2007 Act.

Following discussions between the Tribunals Service, the council and the Legal Services Board, it is anticipated that appeals from the council’s licensing decisions will be heard by members of the general regulatory chamber of the First-tier Tribunal, who have experience in regulatory matters. The licensing authority decisions which can be appealed are either set out in the Act itself, in Section 96—“Appeals from financial penalties”—and Schedule 13, or in the council’s licensing rules. Appealable decisions would include, for example, the refusal of an application for a licence and refusal to designate as a head of legal practice. This is in line with guidance issued by the Legal Services Board setting out what licensing decisions should be appealable. A memorandum of understanding between the Legal Services Board, the Tribunals Service and the council will be put in place and the arrangements monitored and reviewed at the end of the first year of operation should the council be designated as a licensing authority. As noble Lords might expect, there will be additional costs for the First-tier Tribunal and the council. The council has agreed to meet the establishment and running costs of the tribunal in setting up the new function. If the council is designated as a licensing authority, it will recoup the costs through the fees that it will charge to licensed ABS bodies.

Before making its recommendation to the Lord Chancellor, the Legal Services Board consulted widely on its proposal that the First-tier Tribunal would be an appropriate appellate body for licensing appeals. A draft recommendation and order accompanied its consultation. The Legal Services Board considered that the First-tier Tribunal was a cost-effective option since it has a well established structure, an administrative support function and considerable expertise in regulatory matters. The proposal is in keeping with its long-term objective of having one appellate body that will hear all licensing appeals since the jurisdiction of the tribunal can be expanded to accommodate appeals from future licensing authorities if that is so wished. It will support consistency in decision-making and is consistent with the regulatory objectives set out in the 2007 Act.

The order makes provision for the First-tier Tribunal alone to hear the council's licensing appeals. Noble Lords may wonder why the society, which has also applied to become a licensing authority, is not included. The society has opted in the immediate term to use a different appellate body, the Solicitors Disciplinary Tribunal, and the consultation on its proposals has recently closed. When a formal recommendation from the Legal Services Board is received, a further order will be brought before Parliament for approval. This order is one of the essential requirements that the council needs to have in place for it to become a licensing authority. If approved, it will provide individuals and businesses affected by the council's licensing decisions with an opportunity to challenge them in an independent and impartial tribunal. I commend both orders to the Committee.

My Lords, I confess to being slightly confused. The Minister has addressed the orders in a different order from that in which they appear on today’s Order Paper—and they do have different aspects. As I understand it, the Law Society and the Council for Licensed Conveyancers are content with the modification of functions order, but the SRA is not content with the other order, which covers appeals against licensing authority decisions. Therefore, we are dealing with both bodies in relation to one order and one body in relation to the other.

I see no reason to object in any way to the proposal that there should be changes, to the powers of, first, the Law Society to enable it to make compensation arrangements, and to those of the council. Both seek to provide a fund for people who are damaged either by Law Society-regulated bodies or Council for Licensed Conveyancers bodies. They will have a common fund, as I understand it, from which compensation can be paid.

I will raise a single point that was put forward by the Law Society in its parliamentary brief, namely its concern about arrangements to ensure that the prospective owners of alternative business structure firms are fit and proper persons.

It is important that the Government should make a commitment that the Rehabilitation of Offenders Act 1974 should not be allowed to stand in the way of the approval of those who wish to involve themselves in alternative business structures. I have had the experience in Hong Kong of appearing, instructed by firms which were essentially Triad-funded, with a front of a solicitor who did very little except ultimately go to jail. The warning was there: one cannot be too blasé in these alternative business structures. The noble Lord, Lord Bach, will know how I feel about alternative business structures, but those arguments seem to be a long way away from where we are today. Can the Minister address the question of whether an exception can be made so that the licensing authorities can stop individuals with criminal convictions from becoming involved in ABS firms, specifically after the 10-year period has passed when their convictions might be concealed for other purposes? That is my only point on this order.

On the order about appeals from licensing authority decisions, it seems appropriate that the First-tier Tribunal should act as the appellate body for appeals in relation to licensing authority decisions. We certainly supported the setting up of the new tribunal system, with the First-tier Tribunal and Upper Tribunal. They contain people of considerable and wide experience, not necessarily totally involved in this area but nevertheless well capable of dealing with the issues that would arise in appeals from licensing authority decisions. I am surprised that the Law Society has decided to opt out and follow its own method of appeal. From the Explanatory Memorandum, it seems that the issue that very properly concerned the Law Society was that of costs. The tribunal has only a limited power to award costs, and the Law Society seemed to take the view that there should be a wide discretion, as for tribunals in other areas, to award all the costs when an appeal is dismissed having been improperly brought. Is that the issue? To set up a separate body to take these appeals seems quite unnecessary. Can the Minister help us with where he is on that basis?

My Lords, I declare an interest as chair of the Legal Services Consumer Panel. I welcome these two orders, which appear a little technical—as, indeed, they are. But they are also important milestones on the road to seeing a new form of company opening for business which will help clients get access to good legal advice and enable “one-stop shops” to serve the needs of consumers. The Legal Services Act 2007 is a key piece of legislation introduced by the previous Government. It set up the Legal Services Board and the consumer panel which I have the honour to chair. That Act established independent oversight of the regulation lawyers. The Act clearly requires that such regulations should be in the interests of access to justice and the rule of law, and also be consumer focused.

The Act, as we know, set up the new legal ombudsman, which came intro operation in October last year. What is pertinent to today’s discussion is that it allows a new form of business, as the Minister has set out, combining law with other services in ways that we hope will better serve the needs of some clients in accessing particular types of service. As has been stated, the orders are part of the preparation for the introduction of the new business structures and are intended to ensure that the licensing authorities, which are the specialist parts of the approved regulators, will be ready to accept applications from October this year.

I, too, will start with the second order: like the noble Lord, Lord Thomas, I had them originally in the other order. The second order deals with appeals that are turned down by the new licensing authorities. It gives the First-tier Tribunal the remit to hear appeals from the Council for Licensed Conveyancers. This is a sensible, proportionate and appropriate regime. The noble Lord, Lord Thomas, said that he was surprised that the solicitors were not similarly covered. I very much regret that absence, and the fact that the Solicitors Regulation Authority did not accept exactly the same system for appeals against its decisions as a licensing authority on the same issue: namely, rejections of applications to be allowed to operate the new business framework. As other noble Lords have been said, the SRA prefers its own Solicitors Disciplinary Tribunal, for which, as we have heard, a separate order will come here in due course. I regret this because it will risk causing a delay to the desired 6 October start date. It will also mean, perhaps more seriously in the longer term, that there will be two tribunals dealing with essentially identical cases. It is in the interest of consumers, and more widely in everyone’s interests, that a single, consistent body of case law should develop about legal services regulatory matters. Despite the absence of the SRA, I nevertheless welcome the order, which allows for an efficient and cost-effective solution to regulation completely independent of the CLC.

On the first order, I simply note and welcome the proposed change in membership of the Council for Licensed Conveyancers, which, as the noble Lord, Lord McNally, explained, will provide for a lay majority. This is in line with the Act’s requirement for the Legal Services Board and also with the LSB’s internal governance rules for all front-line, approved regulators.

My Lords, I support my noble friend Lord Thomas of Gresford in his comments about the Rehabilitation of Offenders Act. I recollect that, with the noble Lord, Lord Bach, we spent considerable time not only in debating the Legal Services Bill, as it then was, but in the previous Select Committee. One basis on which we took forward the notion of alternative business structures was that there should be a level playing field. I explain that by reiterating the fact that the Solicitors Regulation Authority, which was established by the Law Society to discharge the society’s regulatory functions, should have exactly the same powers to regulate ABS firms as it has already to regulate existing firms. We made several commitments at the time to reassure people about the new structures and affirm that there would be a level playing field between ABS firms and existing law firms. That is why we see a problem with the implementation of alternative business structures that is not dealt with through these provisions. Those are the arrangements to ensure that the prospective owners of ABS firms are fit and proper persons. Indeed, I could quote myself, Jonathan Djanogly MP or the noble Lord, Lord Bach, in stressing the importance of this key issue.

Despite all that background, the Government have not yet made the necessary amendment to the exceptions order under the Rehabilitation of Offenders Act to ensure that all criminal convictions, even those which would otherwise be spent, are disclosed by the potential owners of ABS firms. As my noble friend explained, if the necessary amendment to the exceptions order is not made, individuals who, for example, are imprisoned for up to two and a half years for offences of dishonesty would be able to conceal those convictions once 10 years have passed since the date of the conviction. This would mean that the SRA and other licensing authorities would have no power to stop individuals with serious criminal convictions for dishonesty from owning law firms.

These are the two points on which I would welcome an assurance. First, I look to my noble friend the Minister for a commitment that the necessary modification to the Rehabilitation of Offenders Act will be made. I understand that he may be pressed to say, “We’ll deal with that in a couple of weeks’ time”, but it would be wonderful if he was able to be more specific. Secondly, I seek an assurance that the provisions of the Legal Services Act allowing the external ownership of law firms will not be implemented until the necessary revision has been made.

My Lords, I served under the noble Lord, Lord Hunt of Wirral, on a Joint Committee looking at the draft Bill. I was not a Minister at the time that the Bill went through, although I took some part in it from the Back Benches, so while I have some form on this, I do not have as much the noble Lord. I thought at the time, and I think even more strongly now, that the Bill was a very significant piece of legislation indeed, one that is already beginning to have genuinely profound effects on all three branches of the legal profession.

I congratulate the board on what it is doing. It has done a fine job until now, but as with all changes, and some of these are fairly revolutionary, it is important that the details are right and particularly important that they must be introduced sensitively. That is why I strongly support what has been said by the noble Lords, Lord Thomas of Gresford and Lord Hunt of Wirral, about the point of the Rehabilitation of Offenders Act. I, too, will ask the question because it really is essential that the order is brought forward as soon as possible, and therefore before alternative business structure firms become a reality. Indeed, I am not going to be as shy as the noble Lord, Lord Hunt, about quoting the Minister’s colleague, who was an opposition spokesman when the Bill passed through the House of Commons. He said this:

“The effectiveness of fitness-to-own provisions is a crucial element of the public protections that need to be in place before external ownership of ABS firms can safely be permitted. It is essential to avoid the spectre of law firms being owned by criminal elements”.—[Official Report, Commons, Legal Services Bill Committee, 22/6/07; col. 300.]

If that was true then, it is certainly true now, and he is in a position, as is the noble Lord, to do something about it. It is important that the order amending the exceptions to the Rehabilitation of Offenders Act is brought forward, and we look forward to the noble Lord telling us, when he replies to the debate, precisely when it will happen. We do not oppose either of the orders, and—again, rather late in the day—I thank the noble Lord for introducing them so clearly.

I want to say a little more before sitting down. On the statutory instrument concerning appeals, as I understand it the Law Society’s concerns were around the point that appeals from ABS firms, which were regulated by the Solicitors Regulation Authority, would go to the First-tier Chamber, whereas appeals and decisions from other law firms would go to the Solicitors Disciplinary Tribunal, the SDT. Now the SRA has agreed to use the SDT for appeals to do with alternative business structure firms. That was apparently agreed in March this year, but there is some surprise that no statutory instrument has yet appeared to put that decision into effect. Finally—as I am sure the Minister will be relived to hear—when will that statutory instrument be brought forward, and why has there been a delay? I congratulate the Minister on bringing the orders forward.

My Lords, I have said before that, as a non-lawyer there is nothing more daunting than facing the noble Lord, Lord Bach, who, as he confessed, was the Minister responsible when the key legislation was—

I am sorry to interrupt. The noble Lord was not listening with his usual attention, or else I was particularly inarticulate. I served on the Joint Committee under the noble Lord’s chairmanship as a Back-Bencher, and was indeed a Back-Bencher when the legislation went through, so I cannot be held to blame or praise for the legislation itself.

I now fully understand. I will have to look at the noble Lord’s CV: I had always assumed that he had ministerial responsibility going back well over a decade.

I am delighted that the noble Lord assumed that, but he was wrong. There was a gap in the middle.

In any case, both the noble Lord, and the noble Lord, Lord Hunt, fill me with fear on this.

I am sorry about presenting these matters as separate orders; I was only following orders, as they say. I am pleased that the contributions have been, in the main, supportive and that it is agreed that the initial legislation and what we are trying to do now take us forward into a new era of legal service provision. In that respect, I was particularly reassured by the fact that the noble Baroness, Lady Hayter, from her position as spokesperson or defender of consumers in these areas, found them useful.

My heart, too, sank when I saw that, despite all the consultation and so on, we had ended up with two lines of solutions, whereas one would be much more preferable. We will continue to use our good offices to encourage regulation and lines of appeal in this area to be as simple and clear as possible. I share with the Committee that, the other day, I had the great honour of meeting the Vice-Minister of Justice for the People’s Republic of China. In a matter of general discussion, he asked me quite out of the blue if I could explain to him the regulatory system for our barristers and solicitors. The brief mentioned about nine different organisations, with any multiple of them having lines of appeal. I ended up by assuring the Vice-Minister of the absolute integrity and independence of the various branches of our legal profession and that I would write to him.

That was the question I was going to ask. I thought the noble Lord would say that he would write to him.

Yes, in Mandarin and with a suitable chart. We hope that the orders go some way along the line of trying to get some order into these things.

On the matter of the missing orders, they are being drafted. We are undertaking further consultation. At this stage, the draft standing order relating to the society is not finalised. Until it is, it cannot be approved to be laid before Parliament. As the order is subject to the affirmative resolution procedure, it will require parliamentary debate and approval before the order can be made. We will be back, folks.

Quickly, on the Rehabilitation of Offenders Act, that again is under review. The point that was made is being taken on board. The Law Society Council will have arrangements in place to consider fitness of owners. They are set out in its licensing rules. The Law Society Council has asked for the Rehabilitation of Offenders Act to be extended. An order has been laid before the House adding the head of legal practices and head of financial administration to be covered by the law. Again, I note what has been said here. These are serious matters and areas that need to be tidied up as we go through the process of bringing the ABSs on board and getting the right lines of appeal.

I am just seeing if there is anything else that I have either not understood or not covered. A draft order will be debated in the House next week. We are aware of the additional requirements sought for owners and managers. The matter is being discussed at the moment so, again, watch this space. I thank the contributors to the debate. I hope that this has been enough clarification. If I have missed things I will write to noble Lords.

My noble friend Lord Thomas raised the point about what the solicitors did not like. The Law Society did not sign up because of a principal concern that changes were needed to the First-tier Tribunal general regulatory chamber rules to allow a general power to award costs. The LSB has asked the tribunal procedures committee to consider changes to its costs rules but, on 1 March 2011, the committee came to the preliminary view that the rules in their current form were adequate to determine whether one party or another should pay costs. The Law Society has not consented to this order. As was said, it has made provision in its proposed licensing rules for the Solicitors Disciplinary Tribunal to be the appellate body for its licensing appeals.

Before the Minister leaves that point, will he give us an assurance that he will take on board the point made by the noble Baroness, Lady Hayter, that it is quite wrong that there will be one way of appealing for ABS firms and another for Law Society-regulated firms? As she said, it is very important that there should be a common body that creates precedents on which people in future can advise and act.

As a lay man, I was impressed that it was a consumer champion who made that point. Certainly I will take it on board. I know that in trying to get agreement one has to make sure that the profession is protected and that there are proper guarantees that these matters will not be repeatedly revisited. It is also important that, in getting through the negotiations, consideration is given to the consumer and to securing the clearest and most understandable forms of regulation. As I said when I read my brief, my heart sank a little when I saw that agreement had not been reached and that the bodies were going off in different directions. That was not the initial aim of the Act or the direction of travel that we want. Therefore, I hope that those responsible in the professions will note what has been said in this debate. I will report back to noble Lords and see whether we can help push these things in the right direction.

Motion agreed.