The dispute between CILEX and its regulator opens the door to a single regulator for the legal profession, another of the regulators has cautioned.
The Costs Lawyer Standards Board (CLSB) also highlighted the risk of its profession being overly reliant on employment by firms regulated by the Solicitors Regulation Authority (SRA).
The CLSB was ranked as the best performer in the Legal Services Board’s 2022 assessment of all the legal regulators.
It has now published its first Risk Outlook, highlighting external forces – political, economic and social – bearing on the costs law market and beyond the CLSB’s control.
With legal sector regulation an area of political risk, it said: “The politics between legal regulators may become more of an issue as the consequences of the move by CILEX to re-designate its regulatory powers from CILEx Regulation to the SRA opens up the potential for a move towards a single legal regulator and could increase interest in regulatory shopping.
“Given that around half of all costs lawyers work in solicitors’ firms, the view of solicitor employers of the net benefit of hiring costs lawyers, as opposed to other forms of regulated lawyers, may become more relevant.”
At the same time, the report reckoned that the current wider political environment meant legislative reform of legal regulation was unlikely for at least five years and more likely 10.
“The implication is that any efforts towards reform of the regulation of the legal sector will need to be achieved within the framework of the existing Legal Services Act.”
The CILEX issue came up again as an economic driver of risk: “The continued existence of CILEx Regulation (CRL) is currently at risk due to a decision by CILEX to re-designate its regulatory powers.
“An important contributory factor to this decision has been the inability of CRL to gain the necessary recognition from financial institutions that would allow CILEX regulated entities to access important areas of the market (such as panel recognition by mortgage lenders) due to its internal capacity and relatively limited entity regime.
“This cautionary tale illustrates the challenges and expense of entity regulation within smaller parts of the legal profession.”
The CLSB is investigating the possibility of entity regulation in the wake of a report last year that recommended strengthening the position of costs lawyers as “independent actors in the sector”.
The outlook noted a “supply-side risk posed to the costs law market from the collapse of certain types of firms” regulated by the SRA, such as Pure Costs, that were employers of significant numbers of costs lawyers.
“If costs lawyers are over-dependent on SRA-regulated entities for employment, this not only exposes costs lawyers (and by extension the CLSB) to the risk of entity failure but suggests that there might be services that costs lawyers could be providing to solicitors’ firms – or to organisations and individuals whose interests might diverge from those firms’ profit motivation – that are not currently on offer due to a lack of independence of costs lawyers from the solicitors’ profession.”
The outlook said that, while traditional sources of litigation work for costs lawyers were areas like high-value commercial disputes and large-scale personal injury claims, “market analysts see plenty of new growth areas for litigation over the next few years”.
These included areas of regulatory uncertainty – “for example in the food sector (around insects and cannabidiol (CBD)), carbon neutrality claims and shareholder activism, healthcare litigation and business crime – intellectual property and data protection disputes “as the complexity of Brexit begins to set in”, and ongoing post-Grenfell litigation relating to building regulations and cladding, including insurance aspects.
Also with potential was the increasing number of investigations and public enquiries, particularly managing their costs for the various parties to them, an “anticipated explosion of consumer debt as a result of the cost-of-living crisis”, and new growth in third-party funding and innovation in how firms wanted to fund cases, coupled with new entrants into the funding market.
The CLSB said the challenges for the costs market were whether there was a sufficient number of costs lawyers “to contribute meaningfully to these developments” and “whether existing costs lawyers are sufficiently specialist/flexible to adapt to these new demands”.
If not, it went on, “there may be a risk that unregulated costs advisers fill the void, notably around consumer debt issues”.
The regulator also noted the growth of supply-side attempts to manage costs more effectively, such as law firms’ “ongoing interest” in legal project management, the entrance of new suppliers encouraging clients to focus on costs at an earlier stage, the roll-out of e-billing beyond a pilot stage and the extension of fixed costs.