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Who regulates? Competition and regulation in the legal sector

Kumar: CMA needs to address impact of quasi-regulatory initiatives [1]

Kumar: CMA needs to address impact of quasi-regulatory initiatives

Posted by Sheila Kumar, chief executive of the Council for Licensed Conveyancers [2]

Regulation is put into place because markets are not perfect. Legal services are infrequent purchases for most people, so the asymmetry of knowledge and power between provider and consumer is especially marked.

Consumer education makes only a limited impact in relation to understanding ‘distress purchases’, which include the vast majority of private client work.

The Council for Licensed Conveyancers (CLC), the specialist property law regulator that I lead, was established by the government to introduce competition in the legal sector by establishing a new profession. From the outset, the CLC’s focus was on pre-emptive regulation in the consumer interest, supporting firms in achieving compliance and facilitating the development of innovative new business models. This is clearly in the consumer interest.

Thirty years later and the conveyancing market has been transformed by more competition in the shape of more providers, by huge developments in IT and changes in marketing. The Legal Services Act 2007 extended across the legal sector freedoms that licensed conveyancers already enjoyed in relation to outside investment in firms and non-lawyer partners.

The Act means that all of the legal services regulators now have an objective to promote competition in the provision of legal services, as the CLC has always done. Competition now faces both ways – not only in the provision of legal services but also in the law firm’s choice of regulator. In this respect, what is referred to in shorthand as ‘competition’ is in reality the evolutionary process allowing specialist service-based regulation to be a genuine choice for all specialist property law firms and consumers of their services.

Despite this progress, the Competition and Markets Authority’s study of legal services – publication of which is due very shortly – is timely. Approaches have grown up that set out with good intentions but that may now have a negative impact on competition, market entry and the consumer interest. They also raise questions about quasi-regulatory activity that escapes the rigour of the Legal Services Board’s oversight. In essence we might ask, ‘who regulates?’

There are three main areas of concern in relation to conveyancing alone.

First, the impact on flexibility and innovation in practice of the handbooks and protocols produced by organisations other than regulators. They are developed outside the oversight of the LSB and so are not subject to the rigour of the regulatory objectives or tests of proportionality and effectiveness. They are developed by representative bodies or others with the intention of promoting best practice and de-risking processes, but we cannot measure their effect for good or ill.

Second, the impact of lender panels on market entry. As clients, mortgage providers are perfectly entitled to choose who they wish to represent them. The effect of all of the mortgage lenders operating similar criteria for panel membership though is that they effectively control market access.

A conveyancing practice that is not able to take on mortgage work will simply not be able to flourish even though their regulator has confirmed that they are fit to deliver legal services.

Third, the quasi-regulatory burden created by accreditation schemes. The Conveyancing Quality Scheme (CQS) was created by the Law Society in large part in response to panel management schemes’ impact on solicitors firms. CQS aims to demonstrate to lenders that its members are sufficiently specialised and expert in conveyancing to undertake work for them.

It is notable, however, that CQS membership does not guarantee access to lenders panels. However, it is a necessary condition for such access and so is essentially another barrier to market entry and a quasi-regulatory burden – in terms of both membership fees and compliance costs – for firms already subject to regulation by the SRA.

Licensed conveyancers are subject to no such additional burden, happily, as they are by their nature specialists and thus did not cause lenders the same concerns as mixed practices.

Each of these three – handbooks and protocols, lenders’ panels, and accreditation schemes – create regulatory burdens and limit market access without being subject to the regulatory objectives of the Legal Services Act 2007 or the oversight of the Legal Services Board. Nor are they subject to the government’s requirement that new regulations be accompanied by the abolition of existing regulations.

As such, we cannot know whether the measures they put into place are proportionate and effective, whether they promote or damage the consumer and public interest or whether they promote the provider interest. Lawyers speak of the regulatory burden, but it is often not clear to them where those burdens originate as recent LSB research has shown.

As an example of a small step that can be taken to improve matters, the CLC has encouraged lenders to raise with us any concerns they might have about individual firms or the market place in general so that we, as the approved regulator, can take appropriate and proportionate action within the regulatory framework.

We have been pleased that lenders have praised our approach and we hope that we can continue to grow co-operation so that the answer to the question ‘who regulates’ can clearly and unambiguously be ‘the regulators’.

We hope that the CMA market study will address the impact of quasi-regulatory initiatives. Whether or not it does, we also hope that the Legal Services Board will want to take steps itself to ensure the better functioning of the legal services market and support us in our work to continue to reduce the regulatory burden on lawyers in our mission to foster innovation and growth.

The three examples I have given all relate to our specialism of property law. If similar concerns arise in other fields with the same sort of frequency, there is indeed a very great deal of work to be done in the public, consumer and lawyer interest.