Competition in the legal market and a government ready to act

Posted by Dan Bindman, Associate Editor, Legal Futures

Dreaming spires: could university reform herald the future for legal services?

Dreaming spires: could university reform herald the future for legal services?

The government’s consultation on universities reform, published in November, in which plans are revealed to enable competition in the sector, may hold clues to its hopes and expectations for the legal profession.

Much of the language of the green paper is about “removing barriers” to competition in higher education, similar to that used in November by the Chancellor of the Exchequer when he promised a consultation on boosting competition in the legal services sector, due to take place this spring.

Further scrutiny of competition in legal services will come from the Competition and Markets Authority (CMA), which last month announced a study in response to concerns about how well the sector serves small businesses and consumers, citing the now-familiar evidence that the overwhelming majority of consumers and businesses are unimpressed with the cost-effectiveness of lawyers.

Both competition-focused reviews will precede a broader review of the Legal Services Act 2007 promised by the Lord Chancellor, Michael Gove, to take place during this Parliament.

Higher education makes a useful analogue to the legal sector in the sense that it has long been resistant to market innovation. The English universities green paper, published by the Department of Business, Innovation and Skills, Fulfilling our potential: Teaching excellence, social mobility and student choice, makes it clear that this government has no qualms about shaking up the higher education system in order to give opportunities for new providers of university-level education, “that innovate and present a more compelling value proposition”.

The paper says: “Widening the range of high-quality higher education providers stimulates competition and innovation, increases choice… and can help to deliver better value for money. Our aspiration is to remove all unnecessary barriers to entry into higher education.” It pledges to allow new providers to secure the title of ‘university’ and obtain degree-awarding powers much quicker and more easily than at present.

There is a parallel with the intention to make competition in legal services easier for new entrants. The Chancellor’s boosting competition paper, published at around the same time as the green paper, pledges: “The government will further reduce barriers so that it is easier for alternative business structures (ABS), such as supermarkets and estate agents, to offer legal services like conveyancing, probate and litigation in England and Wales.”

Underlying the planned shake-up in both sectors is a firm belief that competition is the key to both reducing costs and raising quality. There has been little evidence so far of ABSs having a downward effect on prices, but they have been shown to be more innovative than conventional law firms.

Much of the higher education reform seems to be aimed at strengthening the government’s control of publicly-funded research grants in order to make the universities sector more responsive to the needs of the wider UK economy.

By contrast, some areas of the legal services sector will be viewed as already functioning well, notably large commercial firms of solicitors and their barrister colleagues. The CMA estimates legal services have a turnover of £30bn and the government is likely to be wary of regulatory changes that could harm UK law brands.

But, equally, the government may regard the market failure that leaves small business unable or unwilling to engage lawyers as an inefficiency that needs remedying in the wider economic interest. If relatively simple interventions such as lowering barriers to ABS and making legal regulators structurally independent from lawyers’ representatives do not have the desired effect in reducing unmet legal need, ministers may have no alternative but to confront the deficiencies of the 2007 Act, perhaps in the forthcoming Gove review.

Of course they will need to be careful, in their desire to heighten competition, to heed the pivotal role played by lawyers in the justice system – their duty to the court, to uphold the rule of law, and so on; the things that differentiate lawyers from other participants in the purely commercial sphere.

The so-called ‘regulatory gap’, an asymmetry which means regulated lawyers carry a regulatory burden when conducting the same activities as a non-regulated businesses that face none of this oversight, provides a disincentive to entrepreneurialism and stifles innovation by law firms, says well-known market commentator Professor Stephen Mayson.

Tackling this anomaly could be key to unleashing competition in the sector, as well as providing much-needed avenues of redress to buyers of non-regulated services.

Relatedly, addressing the anachronistic list of legal activities reserved to lawyers by the 2007 Act – which include rights of audience, the conduct of litigation and so on – plus other activities regulated as a result of subsequent legislation, such as immigration and insolvency, could be key to removing distortions in the functioning of the market.

While they are at it, the government could also deliver certainty on the question of whether a single super-regulator in place of the current 11 approved regulators would ease the regulatory burden.

However, perhaps the most elegant solution to the regulatory gap problem – extending reservation to all legal services provided for gain – would have the effect of levelling the field, but would not sit well with a government whose instinct is always to deregulate. An indication of this reluctance came when Chris Grayling, then Lord Chancellor and justice secretary, comprehensively rejected the Legal Services Board’s recommendation to extend reservation to will-writing, despite the backing it received from every side of the issue.

While acknowledging the existence of consumer detriment without regulation, he gave several reasons why he was reluctant to proceed with the “last resort” of adding will-writing to the list and so add “to the complexity of the regulatory landscape”. Chief among them, work was “ongoing” in the Ministry of Justice to address the question of “how the legal services regulatory landscape might be simplified”. Three years later there has been no word on progress.

The same reluctance to intervene was also evident in the MoJ’s inaction following its call for evidence later in 2013, when it backed away from major reform of the 2007 Act, citing the lack of consensus among stakeholders on the way forward.

The government may be hoping that if it waits long enough, technology will transform the sector, making structural reform unnecessary. But, as Professor Mayson has suggested, 2016 “is not the year of artificial intelligence and robots in law”, even as their potential for the future is becoming apparent.

When 87% of consumers and SMEs say they are satisfied with the cost-effectiveness of lawyers, instead of just 13%, the government can rightly conclude the legal services market is functioning well. The higher education green paper suggests it will not shrink from using whatever levers are at its disposal to disrupt the existing market in pursuit of this goal.

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