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

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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 [2]).

“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“A rigid approach to implementation of the soon-to-be-outdated rules would put SRA regulated firms at a disadvantage to potential new entrants.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 [3]), 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.