Competition in legal services for individual and small business consumers is not working as well as it might, with lack of transparency over price and service the main problem, the provisional report of the Competition and Markets Authority (CMA) has found.
However, six months on from launching its study of the legal services market, the CMA has decided against moving to a formal investigation, saying it was “well placed to identify effective remedies” to the problems identified without one.
Instead it will look to improve information provision. Options range from requiring providers to publish prices to issues guidance on best practice principles for transparency.
“In addition, we are also exploring options on improving transparency on service quality, for example, through the publication of consumer feedback and complaints data.”
To improve transparency after consumers have engaged a lawyer, the CMA said it could look at revisions to the client care letter.
The CMA said that despite the large number of legal services providers, just 17% published prices online and “our preliminary view is that a lack of transparent information is limiting the ability of consumers to drive competition”.
This was also reflected by its survey findings that few consumers use the internet to search for providers.
The CMA recognised that there were “inherent difficulties” in signalling quality directly, with most consumers relying on previous experience or personal recommendations. “This is unlikely to drive effective competition and may make it more difficult for new providers to compete.
“Mechanisms for signalling quality indirectly through reputation, either through consumer feedback or through developing brands, are currently not widely used in this sector.”
There was also a lack of digital comparison tools and those that were trying to break into the market told the CMA that “many legal service providers do not see transparency in pricing or consumer feedback as in their best interest”.
As a result only a minority of individual consumers (22%, according to CMA research, and lower for SMEs) compare providers before choosing one.
“This may reduce the incentives for providers of legal services to compete. This lack of competition may mean some providers are able to charge higher prices when substantially cheaper prices are available for comparable services.”
The CMA said the rate of innovation was not fast compared to other sectors, with competition not providing strong incentives for providers to innovate.
Its provisional view was that legal services regulation did not create significant barriers to entry or distort competition between regulated and unregulated providers.
However, regulation did impose “significant costs” on providers that in some cases may be excessive relative to the benefits in consumer protection.
The report found that most consumers were unaware of the regulatory status of their provider or what this implied for consumer protection. But the CMA said it had not found that consumers were exposed to “material risks” as a result, in part because the limited evidence to date did not suggest that the quality of service from unregulated providers was lower than those that were regulated.
The authority said a wholesale change to the regulatory framework that led to extending the scope of regulation beyond the current reserved activities “without justification” risked harming competition. There would also be “significant design and transitional costs and a period of regulatory uncertainty”, while some change could be effected within the existing framework.
However, it said there “may be merit in a systematic review of which legal services and activities should be regulated and how, focusing on identifying where regulation is required because of consumer protection risks”.
Further, it acknowledged that an alternative regulatory model “may generate longer-term benefits to competition. We recognise that the emphasis on regulatory titles within the current regulatory framework may contribute indirectly to the lack of consumer awareness of legal service providers other than solicitors.
“It is therefore possible that an alternative regulatory model may improve competition if it is successful in reducing the emphasis on regulatory titles.”
The CMA also came out in favour of the legal regulators having “full independence” from the providers they regulate.
Senior director for the legal services market study, Rachel Merelie, said: “Consumers in this market are often not equipped with the right information before they make important purchasing decisions – which often come at critical points in their lives…
“Without greater transparency, individual and small business consumers find it difficult to compare and choose providers of legal services. For many of them this is an infrequent purchase and a lack of experience or prior knowledge makes it very challenging to assess what represents good value.
“As a result, they tend to rely on recommendations from family or friends in choosing providers without checking for themselves what the market has to offer. This is unlikely to drive effective competition.
“The lack of competition may remove a crucial incentive for such firms to compete on price and quality as well as innovate and may help to explain why there have been long-standing concerns over the affordability and accessibility of legal services.”
The CMA is now seeking views on its interim findings and must publish its final report by 12 January 2017. Comments should be made in writing by 19 August 2016.