Most unregulated legal services firms support “some aspects of regulation” for their areas but there is not a clear case for major reform, a report for the Solicitors Regulation Authority (SRA) has concluded.
Researchers also reported that 87% of SMEs preferred a regulated law firm, with two-thirds saying the same even if it meant higher fees.
At the same time, SMEs reported equally high levels of satisfaction (over 80%) with services provided by both regulated and unregulated providers – there was no statistically significant difference between the two.
The report said: “This may be explained by a significant proportion of unregulated providers in practice being regulated by a non-LSA [Legal Services Act] regulator (such as the Financial Conduct Authority) or engaging in voluntary membership of professional bodies.
“Furthermore, although the survey respondents did not report lower satisfaction with the quality of advice received from unregulated providers, consumers may not have consistent expectations regarding the quality of different providers or have a clear understanding of what high-quality advice is in practice.
“This information asymmetry means that there may still be a risk of a lower quality of advice from certain providers, despite reports of high overall satisfaction across consumers of unreserved legal advice.”
Researchers from Frontier Economics, The DataCity and BMG Research used artificial intelligence to identify unregulated providers from their websites, combining this with survey responses from 510 SMEs and 162 unregulated legal services providers, and in-depth interviews with 14 unregulated and seven regulated firms.
While 82% of SMEs said they knew whether their provider was regulated or not, only a third of legal services providers “indicated that they believed that their customers understand the difference”.
“Consumers may overestimate the protections available to them due to a lack of information about regulatory status or a lack of awareness about how to access relevant information.
“This points to a potential opportunity for regulators to improve the availability and transparency of information around regulation in the market.”
Both regulated and unregulated firms “expressed concern in interviews about low-quality providers who had lower standards (‘cowboys’ or ‘rogue traders’)”.
This “subset of unregulated businesses may give consumers bad advice and create a bad reputation for the market as a whole”.
Almost half of unregulated firms (46%) said it would benefit the market if legal services providers were regulated “in some way”, with 39% disagreeing – although the findings were skewed by 57% of will writers, who made up nearly a third of the sample, supporting regulation.
The report went on: “Most providers agreed that it would be beneficial to have more aspects of regulation in some areas, such as ensuring that training is done, that necessary qualifications are available and taken, and that providers are held accountable.”
In the report, Understanding the Unreserved Market, unregulated providers were estimated to have a total turnover of between £2.4bn and £2.9bn, and employ between 21,000 and 26,000 people across England and Wales.
“This indicates that unregulated services remain a small proportion of the overall legal sector (6-8% by turnover), despite there being at least 3,800 unregulated providers operating in the market.”
However, in sectors such as wills and probate, the unregulated sector was “more significant”, with 930 providers accounting for a quarter of all unreserved work.
Employment had the next highest total of firms, 410, accounting for 11% of the unreserved market, then mediation and family, each accounting for 9% of unreserved work.
The most common legal technologies currently used by unregulated providers were websites with interactive features (63%) and cloud storage (69%), with a smaller proportion using smart device apps (25%) and live chat/virtual assistants (23%).
Researchers said this suggests that the risk of “further digital exclusion in the medium term” due to the expansion of unregulated services was limited.
Like SMEs, consumers viewed regulation as important, with 74% of those who had not faced legal issues and 59% of those who had regarding it as “very important”.
Researchers said that, with over 60% of businesses expecting their legal needs to increase due to a downturn in the economy, the market share of unregulated providers could increase.
“On the other side, it creates a risk of more consumers seeking advice from non-professional sources (for example, from family and friends), or being unable to seek advice at all.”
Given the levels of satisfaction, the report said it was “not obvious” that making more areas of legal advice reserved would lead to an improvement in the overall quality of advice or service.
“Increasing the areas in scope of regulation may be associated with additional costs on providers. In some cases, it was thought this could have a potentially dampening effect on innovation and lead to price increases.
“This in turn could lead to some providers leaving the market, reducing the overall supply of legal services.
“Depending on the type of increased regulation, there is a further risk that the market will become more polarised with high-quality unregulated firms choosing to become regulated and lower-quality firms remaining unregulated.
“If additional regulation is too burdensome it could lead to consumers not seeking advice at all (due to increased prices), as opposed to obtaining potentially lower-quality advice, and could increase the proportion of individuals with unmet legal needs.”
Paul Philip, chief executive of the SRA, commented: ‘‘Price, quality, levels of protection and experience can differ greatly from one supplier to the next, whether regulated or unregulated, and what is the right mix for one consumer is not necessarily the right option for the next.
“Helping people to understand what their money is buying, and not buying, when they engage a legal services provider will help them make good decisions about the service that is right for them. That is all the more important as the non-regulated market develops.”
Dan Popov, associate director of Frontier Economics, added that the unregulated market represented a “significant fraction of the legal services sector” but was “not very well understood at present”.