The case for wholesale reform of the way legal services are regulated is even stronger than it was four years ago when the Competition & Markets Authority (CMA) last recommended it, the watchdog said today.
This is because of the growth of the unregulated sector, fuelled by technology.
The CMA praised the improvements made to date on increasing the transparency of the price, service and quality of legal services, but said there was more to do to increase “the intensity of competition between providers”.
Almost four years to the day since it published its legal services market study, the CMA has issued its update on the progress made.
The market study highlighted concerns with legal services regulation, stemming from the way that the regulatory framework is structured around professional titles and reserved activities, rather than according to the risk profile of the activities being undertaken.
It said this has the potential to restrict competition unnecessarily or lead to unnecessary costs for some legal services, and also leave a regulatory gap.
But its call for a review of framework of legal services was not taken up by the Ministry of Justice, (MoJ) even though it acknowledged the case for reform when responding to the initial report.
Today’s review said: “In our view there remains a strong case for wholesale reform. If anything, it is stronger now than at the time of the market study.
“This is because there are signs that the unauthorised sector has continued to grow through developments in lawtech and will continue to do so in the future, potentially accelerated by the trend towards greater remote service provision driven by the coronavirus pandemic.
“The increasing significance of the unauthorised sector exacerbates the issues arising from a regulatory framework that is aligned with professional titles rather than activities. The need to address this will become more urgent over time.”
The CMA said it was “broadly supportive” of Professor Stephen Mayson’s proposals in his independent review of legal services published in June; this called for a shift to activity-based regulation and said all providers of legal services, whether legally qualified or not, should be registered and regulated by a single regulator.
The CMA said: “In our view, the main question now is how to make progress towards the goal of a more risk-based regulatory framework. Our preferred approach would be for the MoJ to carry out a wholesale review in order to reform the [Legal Services Act 2007].”
In the meantime, the CMA recommended three actions within the existing regime which would help “deliver reform in stages”.
First was creating a mandatory public register of unauthorised providers for certain legal services and mandating that they offer redress options to consumers. The MoJ revealed recently that it is already considering this.
The second was that the Legal Services Board (LSB) should carry out a review of the reserved activities.
“If this review were carried out alongside the introduction of a register, activities removed from reservation could be added to that register in order to safeguard a continued degree of redress for such activities.
“This review would also help in clarifying what a more risk-based system focused on activities might look like.”
However, though the LSB has been investigating this issue, its draft business plan for 2021/22, published last week, said its view was that now was not the right time for a review.
The third issue was the independence of regulation from professional representation. The CMA noted that “significant improvements” have been made as a result of revised internal governance rules imposed on bodies like the Law Society and Bar Council by the LSB.
“While we still consider that wholesale reform may be the clearest and most comprehensive way to deal with this issue, we recommend that the LSB evaluate the impact of the revised internal governance rules before deciding on whether further measures are required and, if so, what they might be.”
On transparency, the CMA identified “clear signs of progress”, with many more firms now providing information on price, service, redress and regulatory status to help consumers shop around.
“However, while the evidence suggests that some customers are taking advantage of the changes, there is still work to do as there only appears to have been a limited impact on the intensity of competition between providers and on sector outcomes.”
The watchdog acknowledged that the new transparency rules have only been in place for two years and were likely to have a greater impact over time.
“However, to ensure they have the best chance of success, we also believe that it is important for the LSB and the regulatory bodies to continue to build on the reforms so far.”
In particular, more work was needed on providing information on the quality of legal services.
The CMA suggested too that the regulators move away from principles-based rules, saying that though they gave providers flexibility in how they provided price and service information to consumers, this made it more difficult for consumers to compare providers.
“Regulators should now aim to improve the clarity and comparability of information through better promotion of best practice, developing their approaches to monitoring and compliance and through refining the rules and guidance now in place.”
Other recommendations were that regulators should “drive improvements in product standardisation and pricing”, develop a single digital register of providers, and encourage digital comparison websites to get more involved in the legal market.
Andrea Coscelli, the CMA’s chief executive, said: “This is an incredibly important sector that people often turn to at a time of great need, which is why the CMA made recommendations to improve consumer outcomes, including through increasing transparency, as well as to address concerns about the way in which the sector is regulated.
“It is positive to see changes that have already been made, but more progress is needed.
“We encourage the Ministry of Justice, the Legal Services Board and other legal services regulators to continue to work towards reform and to make sure the sector works well for consumers long into the future.”