Law Society: “Piecemeal” SRA reforms could create “perverse incentives”

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16 June 2015


Law Society

The Law Society: no cost savings from third-party accounts

The Law Society has launched a sustained attack on plans by the Solicitors Regulation Authority (SRA) to introduce third-party accounts, allow referral fees in legal aid cases and remove the requirement on firms to carry out reserved activities.

The society criticised the regulator for taking a “piecemeal approach” to reducing regulation and giving “insufficient consideration” to the impact of the changes.

“There is a possibility that some of the changes may create perverse incentives for firms to exhibit behaviours which compromise professional principles.”

On third-party accounts, which the society said should have been the subject of a standalone consultation, Chancery Lane said: “There is no reason to believe that there will be any cost saving from firms being able to access third-party managed accounts, probably quite the reverse.

“There is also no reason to believe that it will represent any better protection against fraud. The present arrangements present no risk to the public as these are covered by insurance/the SRA compensation scheme.

“If the SRA has evidence or analysis to support a belief that such arrangements could reduce fraud compared to traditional client accounts, the Law Society would be interested to see it.”

The society said it would like to see more information and analysis on the impact of third-party accounts on the Compensation Fund, particularly what would happen in the event of a third-party managed account provider “collapsing and losing client money”.

On referral fees in legal aid cases, the society said it “believes strongly” that the current ban should stay in place. Chancery Lane said abolition could “introduce moral hazard” as the financial incentive conflicted with the “central duties of the lawyer to the court and as an officer of the court”.

The society went on: “In a dysfunctional market, referral fees can be ratcheted up so that the actual provider is left with very little and ultimately the legal service itself suffers.

“In terms of crime or any publicly funded work, the reputation of the profession would be adversely affected by payment for work.

“This is not a situation analogous to referrals from estate agents in conveyancing, for example, where a charge can be properly disclosed to the paying client.”

The society said there was a “strong economic argument” for not lifting the ban. “Most legal aid firms struggle to make this work cost-effective. If they had to make payments to referrers as well, that would damage their economic position further, and may impact adversely on quality.

“Many publicly funded clients are vulnerable individuals and lifting the ban would leave them open to exploitation and manipulation which again would impact adversely on the reputation of the profession.”

The Law Society said it could see “potential benefits and disadvantages” in removing the requirement on law firms to carry out reserved activities, particularly for some firms working in niche areas and rarely carrying out reserved work.

“However, it is difficult to understand how this would benefit firms that provide more standard services and there is a risk that this proposal may promote perverse incentives.

“We are aware of isolated instances where firms settle cases as a matter of policy before proceedings are issued. We would not want to create an environment where this is a business model encouraged by the regulator.

“The proposed change could provide a disincentive for some firms to operate in the best interests of their clients. Abolishing this rule may help to legitimise the activities of such firms and promote unethical behaviour.”

Abolishing the ban on referral fees in legal aid cases was strongly attacked by the Criminal Bar Association yesterday. Research has suggested little demand for third-party client accounts.

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