LSB research: Firms see little value in what they spend on regulation

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16 September 2015

Moriarty: individuals saw benefits of compliance

Moriarty: individuals saw benefits of compliance

Regulation accounts for between 15% and 23% of the costs of law firms, money they would generally not bother spending if they were not required to, an indicative study by the Legal Services Board (LSB) has found.

However, the opposite was the case for lawyers practising as individuals.

The areas of regulation where the regulatory burden on firms was highest were professional indemnity insurance, professional development and information from the regulator.

Insurance was nearly double that of the next highest cost, but those who took part in the study recognised “that a significant proportion of total regulatory cost in that category would be incurred even absent this regulation, for other commercial reasons”. But other legal regulatory costs were seen primarily as a burden.

LSB chief executive Richard Moriarty said: “Based on the sample of practitioners who took part in this study, our findings indicate that professionals regulated as entities see legal regulatory costs primarily as a burden and would only undertake a small proportion of those activities for other regulatory or commercial reasons.

“By contrast, those regulated as individuals are more likely to say that they would continue to undertake aspects of legal services regulatory activity even if the specific regulatory requirement to do so were removed. They told us that this was because complying with the regulation met wider legislative requirements of doing business in England or Wales or was commercially advantageous to them.”

Forming part of the LSB’s ongoing cost of regulation project, the study was small, using financial information provided by 64 practitioners working across the market either as part of an entity or individually authorised – all but one of those in an entity were solicitors.

It looked at both total legal regulatory costs and ‘incremental’ costs – that is, costs incurred solely to comply with regulation. Known costs, such as practising fees and compensation fund contributions, were excluded.

The sample meant that the results could not be seen as representative, but Mr Moriarty said they “represent the first time that the ‘real world’ cost of regulation experienced by any practitioners in the legal sector has been quantified”.

For those individually authorised, the total cost of regulation as a proportion of practice costs associated with reserved activities was between 8% and 17%. Costs were highest for information requirements from the regulator, professional development, and indemnity insurance – with the first two judged largely to be incremental costs.

Further, nearly all costs associated with ongoing supervision by the regulator were reported as incremental costs.

Participants reported low incremental costs for the remaining categories of regulatory costs: indemnity insurance, consumer information disclosure, client account requirements, keeping up-to-date with regulations, and file retention requirements.

A larger piece of LSB research earlier this year that also forms part of the project found that many lawyers, particularly solicitors and barristers, complained about their practising certificate fees, but there were high levels of ignorance about what they were paying for.



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