Edmonds calls for SRA flexibility on pre-ABS deals with investors to level playing field

Edmonds: the less we restrict commercial decision-making in the market, the better


The chairman of the Legal Services Board has called on the Solicitors Regulation Authority (SRA) to be more flexible in its approach to law firms which are looking to do deals with external investors before alternative business structures (ABSs) become a reality on 6 October 2011. 

In a major speech, David Edmonds also suggested that the rules which prevent solicitors having unregulated separate businesses carrying out unreserved legal work are anti-competitive. 

His address to the law firm general counsel and risk management forum organised in London by the Hildebrandt Institute focused on the importance of lawyers having the same level of commercial freedoms as new entrants to the legal market. It follows the recent decision of the SRA to hold a firm line against firms that seek to pre-empt ABSs (see story). 

“A starting point for the LSB is that the less we restrict commercial decision-making in the market, the better,” Mr Edmonds said, observing that many firms are considering how best to position themselves in the new landscape. 

He continued: “One of the opportunities for law firms is to attract new investment. Examples of the preparations already going on across the market include firms reaching agreements with external funders to that effect. In view of this, we have encouraged the SRA to adopt a more outcomes-focused approach to entities seeking to enter into such commercial arrangements prior to 6 October 2011. This is something that we consider important in order to ensure that it is able to consider informal applications for licences in the run-up to possible designation as a licensing authority for ABS.” 

He said this was important for two reasons. “Firstly, a pragmatic concern that the current strict approach risks a loss of transparency on what is happening in the market. Firms will seek to avoid SRA scrutiny… Secondly – even more importantly – that level playing field between lawyers and market entrants demands that existing players be entitled to the same level of commercial freedoms as new players. 

“A rigid approach to implementation of the soon-to-be-outdated rules would put SRA regulated firms at a disadvantage to potential new entrants. This may also have a chilling effect on the market. This has potential not just to damage the interests of practitioners but also to hinder those of consumers as well.” 

Mr Edmonds moved on to discuss unreserved legal activities and the fact that they become subject to regulation when delivered by a solicitor. “The LSB’s priority is to address consumer detriment through proportionate and targeted interventions. This necessarily involves focusing on the activity rather than the title of the person carrying it out. The effect of these rules on solicitors is to prevent them from creating separate units within their business to deal with unreserved activities – having the effect of limiting their freedom in the market. The anti-competitive impact of this is to unnecessarily narrow choice and the range of options available for consumers.” 

Mr Edmonds also signalled a lack of enthusiasm for increasing the scope of reserved activities, as recently called for by the SRA. “There would be a high burden to overcome before we challenge the settlement reached by Parliament on the services which ought to be subject to reservation,” he said. “In any case, reservation is a blunt instrument and there ought to be other more tailored and flexible interventions that can be employed to protect the interests of consumers.” 

Work is now underway to create a coherent policy and intellectual framework on reserved legal services, driven in part by the work of Professor Stephen Mayson (see story), while the board has also commissioned Professor George Yarrow of the Regulatory Policy Institute at Oxford University to conduct research into the economic rationale for regulation of legal services. It is also conducting consumer research to understand the outcomes that regulation, or other solutions, should seek to protect for consumers.


    Readers Comments

  • I rather suspect that whilst there are many firms who would like external investors there are very, very few willing investors so it may not be the biggest issue in the world.

    But, am I understanding the approach on “reserved legal activities”? If I can do all my work, or almost all, as a separate and (hopefully soon) unregulated business then I am out of the Law Soc, not regulated by the SRA thank you and my PI cover costs reduce by about 90%.

    I shall run a small law business (IF I have to) to do the small bits which are still reserved work.

    The SRA won’t have any “customers” left soon….

  • The speech may be clearer or I may be misunderstanding but this points to something of a problem in the LSBs approach.

    It seems to me quite difficult to argue that the profession should not be regulating the unreserved activities of its members. It would be open to any lawyer facing disciplinary or complaints proceedings to argue that any deficient task is not within the ambit of reserved activities and therefore professional rules do not apply. This might extend as wide as the giving of any legal advice (so long as any deficiency did not extend into, for example, the conduct of litigation after that advice). Would any personal injury case settled pre-issue be subject to regulation? To give another example, would (say) insurance requirements only need to be complied with in respect of reserved activities?

    This area is rendered doubly problematic by the quite technical way in which some reserved activities are defined.

    One of the interesting idea in Clementi was that regulators might compete with each other to provide the ‘best’ regulation (thereby protecting their brand). If they are not free to regulate their members it is difficult to see anything other than a race to the bottom occurring. The public will not reflect kindly on professions or regulators who decline to regulate professions when they are doing one activity but not the other.

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