The Legal Services Board has handed out a public censure for the first time, after finding that the Law Society had governance arrangements in place that could have interfered with the Solicitors Regulation Authority (SRA).
This was, the LSB said, a “serious breach” of its internal governance rules (IGR) and the censure reflected “the gravity of the findings”.
The Law Society’s actions undermined “the public interest in effective regulation of legal services”, the censure said.
The Law Society has also given an undertaking to produce a report by 30 November 2018 on the steps taken to remedy the situation.
However, though the arrangements provided the Law Society with opportunities to interfere with the SRA’s independence, the LSB said there was no evidence that it actually did.
At the same time, the arrangements did reduce the regulator’s effectiveness “to some degree”.
“The Law Society is a statutory approved regulator and as such should have appropriate compliance and governance arrangements in place to ensure that such breaches do not occur,” the LSB said.
“The fact that such breaches happened reflects very poorly on the way the organisation was governed at the time the breaches occurred.”
Speaking at a media briefing this morning, LSB chief executive Neil Buckley said it did not also issue a fine because there had been no direct impact on consumers.
The LSB launched its investigation  in February 2017, reviewing what had happened at the Law Society over the previous two and a half years.
A 103-page report found that the SRA was not allowed to design and manage the appointments process for its own board members, in breach of the IGR – although there was no evidence that any one was appointed who should not have been or vice versa.
Further, the Law Society’s oversight and monitoring arrangements for the SRA were incomplete, out of date, not transparent and not proportionate, the LSB said.
“The combination of multiple reporting demands and associated delay had a direct impact on the SRA’s efficiency.”
The censure said: “The LSB has considered the [investigation] report and formed the view that it discloses acts or omissions that, either individually or collectively, have had or are likely to have had an adverse impact on one of the regulatory objectives
“In particular, the Law Society failed to protect or promote the public interest.
“In addition, it considers that the failings of the Law Society are unreasonable. This view relies not only upon the nature of the matters identified in the report but also (1) the size and resource of the Law Society; (2) that the IGR and the statutory framework that underpins them has been in operation for a number of years; (3) the Law Society was aware of the significance that the LSB attaches to compliance with the requirements of regulatory separation; and (4) previous action taken in respect of another approved regulator [the Bar Council, back in 2013 ].”
Interim LSB chair Dr Helen Phillips said: “The complexity, ambiguity and burdensome nature of the Law Society’s monitoring and oversight arrangements for the SRA were unacceptable. Its actions have impaired the effectiveness of the SRA, thereby undermining the public interest in effective regulation of legal services.
“For a body which emphasises the importance of the rule of law this is a serious failing.”
She said that, last October, the Law Society changed its rules so that the SRA is now responsible for appointing its own board members. “However I am deeply concerned that the Law Society failed to do this in 2014 when the LSB amended the IGR to require it.”
She continued: “Therefore the LSB decided to take enforcement action against the Law Society in light of these breaches. Regulatory independence is fundamental to public confidence in the legal sector…
“This is the first occasion the LSB has used this sanction and it reflects the extent and significance of the breaches by the Law Society. We expect lessons to have been learnt from our findings so that such failings will never be repeated.”
Law Society president Joe Egan responded: “We have been in dialogue with the LSB and the SRA over this issue since 2016 and in the autumn of last year the society introduced, with the SRA’s involvement and the LSB’s approval, significant changes to its governance arrangements.
“The LSB report published today is a commentary on the situation before our governance changes were implemented in 2017.
“We are pleased that the report did not find that our historic governance arrangements had infringed regulatory independence, but we are disappointed that they felt the need to censure us when we have collaboratively tackled the issues they raised.
“We have undertaken voluntarily to report to the LSB on how our new arrangements are working.
“The changes to our governance are part of the ongoing reforms of the Law Society as we work every day to become even more relevant to members, working in the public interest.”
SRA chief executive Paul Philip said: “The LSB launched this review over a year ago and the Law Society has now made improvements to the way it operates. We are committed to working together constructively.
“The report shines a light on the challenges we face in making the current constitutional arrangements function. For many years we have pressed for full independence to secure public confidence.
“We understand the current legislative constraints but know there is more that can be done within the existing framework to ensure that the SRA is as independent as possible.
“We have already proposed that the SRA should be established as a separate legal entity within the Law Society group, as an interim measure.”
Dame Janet Paraskeva, chair of the Council for Licensed Conveyancers and also a former Law Society chief executive, said the LSB was right to issue the censure given the findings of its investigation.
“Effective independence and the clear perception of it is essential if clients and the public are to have faith in the ability of a regulator to be robust in its approach,” she said.
“However, we and others believe that much more could be done to entrench the independence of regulation even within the existing regulatory framework.
“We hope that the LSB’s review of the IGR will secure effective independence across all regulation of legal services because, as a truly independent regulator, we understand the strengths that gives us.”