LSB: current financial protection regime risks giving clients "false confidence"

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9 October 2012


Kenny: consumers might assume legal transactions are zero risk

Compensation arrangements for consumers involved in legal transactions that go wrong are outdated and need to be improved, the Legal Services Board (LSB) has said.

In a letter to the Legal Services Consumer Panel (LSCP) requesting that it conduct research and then advise on the subject, LSB chief executive Chris Kenny said the board wanted existing financial protection measures, including compensation, assessed alongside the question of what risk consumers should reasonably bear themselves.

He said: “As many such arrangements have been in place for several years, it is the board's preliminary view that the current regulatory solutions for meeting these risks may not necessarily reflect a good current understanding of what is an appropriate level of consumer risk.”

Also, the LSB is concerned that consumers might “take false confidence” from the existence of the present regulatory arrangements and assume all legal transactions were “zero risk” He added: “That in turn may lead them to be less discerning about the type of adviser they use and, as a result, end up taking more risks that they might with other significant transactions (for example investment decisions).”

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Mr Kenny said the LSCP should not include fee levels and consumers challenging bills or compensation for redress awarded by the Legal Ombudsman within the scope of its research, and asked that it work with the Solicitors Regulation Authority, which is conducting its own review of its compensation arrangements.

Last month the LSCP commissioned qualitative research under the banner “Risk and the role of regulation” – including financial protection – to be based on soundings from focus groups of recent consumers of legal services. The final report is due by Christmas.

In its specification, the panel floated the possibility of compulsory legal insurance, similar to motor insurance, although it recognised the “numerous” problems this could cause, including that “recourse to legal advice may become excessive because it is unrestrained. This would then push up costs for insurance further”.

It also raised the idea of making compensation funds with high limits mandatory for all forms of legal advice, while acknowledging that the likelihood of higher advice costs means this model “is not optimal”.

In a separate development, the LSB has also asked the LSCP to carry out research into how regulators could improve “consumer empowerment” – which the board admitted has been “a key part of the not-for-profit sector’s raison d’être over the past 30 years”.

In a letter to the LSCP chair, Elisabeth Davies, Mr Kenny said: “Our vision is for a market that works better for consumers and providers alike. One element of this is having empowered consumers, able to choose a quality service at an affordable price.

“The more consumers are able to choose and use legal services with confidence, the less that prescriptive and restrictive regulation is required and the more that the regulatory objectives are secured.”

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