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Government Conclusions

Competition and regulation in the legal services market

A report following the consultation "In the public interest?"

July 2003



Introduction

This document sets out the Government's conclusions on the matters raised in the consultation paper, "In the public interest?". We published in May 2003 our report entitled "Responses to the consultation "In the public interest?". That set out only the analysis of the responses. We said then that the Government would decide how to take forward its policy in respect of the issues raised in the consultation. We now set out the way forward, both on those matters falling to the Government arising from the Office of Fair Trading report "Competition in professions" and on the review of the regulatory framework for legal services.

A list of the respondents and the questions asked in our consultation are appended to the earlier report.

This final report covers:

Any queries concerning this report may be addressed to:

Mrs Susan Samuel
Department for Constitutional Affairs
Legal Services Development Division
Selborne House
54/60 Victoria Street
London SW1E 6QW

Telephone: 020 7210 1454
E-mail: Susan Samuel

Further copies of this report can be obtained by contacting Mrs Susan Samuel at the address above or by telephoning 020 7210 1454.



Executive Summary

Our proposals

An independent review of the regulatory framework for legal services will be set up and will be tasked to report by December 2004.

At the same time, a Departmental led programme to achieve short and medium term improvements within the existing framework will run in parallel with the review.



Background

  1. The consultation paper "In the public interest?" was published on 30 July 2002. It Iooked at the issues falling to Government following the Office of Fair Trading's (OFT) report published in March 2001 entitled "Competition in professions". These concerned conveyancing and probate services, multi-disciplinary practices and employed solicitors, legal professional privilege and the Queen's Counsel system.

The OFT review

  1. "Competition in professions" was a report (the OFT report) by the Director General of Fair Trading (DGFT) and followed a review of restrictions on competition in the professions conducted by the OFT. Many of the challenges were levelled at the professional bodies but some fell to Government. The report questioned whether there should be fuller implementation of legislation opening up the conveyancing and probate markets and for changes where restrictions were not based primarily on professional rules.

  2. The OFT report noted that restrictions on competition may be justified if they are in the public interest. The report highlighted some of the potential anti-competitive restrictions found in the legal professions but it did not examine justifications for restrictions (e.g. countervailing consumer benefits).

Conveyancing

  1. The right to provide conveyancing services is currently reserved (by the Solicitors Act 1974) to solicitors, barristers, duly certified public notaries, and licensed conveyancers.

  2. The DGFT stated in the report that: "Fresh consideration should be given to implementing the parts of sections 34-52 of the Courts and Legal Services Act not so far implemented, with a view to increasing competition in the provision of conveyancing services. That Act provided for an exemption for authorised practitioners from the prohibition in the Solicitors Act on unqualified persons undertaking certain functions in relation to land transactions. There is currently little competition to solicitors in the provision of conveyancing services: solicitors have at least 95% of the market and licensed conveyancers have a very small market share. Implementation of the rest of sections 34-52 would allow, for example, banks and building societies to provide conveyancing services. This should increase competition in the market. That should also allow the efficient reallocation of the skills of some solicitors."

Probate

  1. Under section 23 of the Solicitors Act 1974, it is an offence for anyone other than a solicitor, a barrister or a duly certified notary public to take instructions for reward or to draft or prepare for reward the papers on which the grant of probate or letters of administration depend.

  2. The DGFT said in the report: "Fresh consideration should be given to the implementation of section 54 and 55 of the Courts and Legal Services Act to allow banks, building societies and insurance companies to provide probate services. Currently, such organisations may provide probate services when named as executors of a will, but they may not be instructed to act as agents of an executor. Implementation of sections 54 and 55 would be likely to increase competition in the market for probate services."

Multi-disciplinary practices and employed solicitors

  1. The Courts and Legal Services Act 1990 (section 66) repealed earlier legislation prohibiting Multi-disciplinary practices (MDPs) but did not prevent the Law Society from making rules prohibiting solicitors from entering such partnerships. Currently, solicitors may not enter into partnerships or incorporate with anyone other than solicitors. Employed solicitors (i.e. working for companies other than solicitors' firms) may only give advice to their employer and not to third parties, i.e. to their employer's clients. The Solicitors Practice Rules 4 and 7 set out these restrictions. Practice Rule 4 prevents solicitors from full participation in MDPs regulated by other professional bodies; Rule 7 prohibits solicitors sharing fees with non-solicitor professionals.

  2. The DGFT challenged the potentially anti-competitive restrictions on the creation of MDPs contained in those rules. Additionally, the report challenged the restriction contained in Practice Rule 4 on solicitors employed by non-solicitors acting for third parties.

  3. The OFT report "... . generally concluded that rules that prevent the establishment of MDPs restrict competition. For example they inhibit the formation of fully integrated practices bringing together accountants and lawyers; integrated property services practices that might involve surveyors; estate agents and solicitors; and financial services practices that might involve financial advisers in partnership with accountants and solicitors."

  4. Such a restriction on the method of supply of a service is classified as an indirect entry restriction. The OFT report commented on how both the efficiency of and entry to the profession could be affected by the way supply is organised.

Legal professional privilege

  1. Legal professional privilege (LPP) is a privilege of the client. Confidential communications to and from a legal adviser for the purpose of obtaining legal advice and assistance are protected from disclosure in legal proceedings. It applies only to exchanges between clients and their legal advisers, and not to clients and other professional advisers.

  2. The DGFT argued that where the subject of LPP exchanges was advice that could equally be provided by a member of another profession, there was a case on efficiency and competition grounds for either reduction in the scope of the privilege of legal advisers, or a limited extension to others, in order to remove the distortion of competition that favours the lawyer. The OFT report recognised that possible wider consequences, beyond competition considerations, of extending privilege would need to be carefully weighed.

Queen's Counsel

  1. The purpose of Queen's Counsel (QC) is to function as a mark of quality and distinction in relation to legal expertise and experience, including advocacy, signalling to the public and to users the leaders of the profession in this respect. It is a mark of quality which identifies the top specialists in the field.

  2. The DGFT identified the Queen's Counsel system as a restriction not primarily based on professional rules. The DGFT challenged whether it was right for the Government to have responsibility for conferring on selected practitioners a title that enhances their earning power and competitive position relative to others. The DGFT remained concerned that there is no continuous quality appraisal to ensure the quality mark remains justified, that there was inadequate peer review on selection, and that the designation was not obtained by professional examination. The DGFT questioned the value of the system to consumers.



Our Consultation

  1. The OFT allowed a period of a year in which the professions could take action to remedy the restrictions found. At the end of that time, the issues remaining for Government all related to the legal profession. The Lord Chancellor's Department (now the Department for Constitutional Affairs) therefore consulted on the issues.

  2. We published the consultation paper "In the public interest?" on 30 July 2002. It was divided into five chapters:

    • Conveyancing: the use of existing statutory powers to open up the market to new providers
    • Probate: the use of existing statutory powers to open up the market to new providers
    • Multi-disciplinary practices and employed solicitors
    • Legal Professional Privilege
    • The Queen's Counsel System

  3. Furthermore, we announced in the consultation paper that the Government had decided to undertake a review of the regulatory framework for legal services. The Government decided to undertake a review because of the changing nature of the legal services market and because the current regulatory framework is complex and fragmented, with a wide range of regulators with overlapping powers and responsibilities. It does not, for example, always deliver to the public effective redress for bad service. The framework is patchy and does not cover some legal services or service providers.

  4. The Government made clear in the consultation paper that it is committed to ensure that the professions are properly subject to competition. In most cases, open and competitive markets are the best way to ensure that consumers get the best possible service. On all the issues raised in our consultation, the Government's position is that the market should be opened up to competition unless there are clear reasons why that should not be the case, such as evidence that real consumer detriment would result from such a change.

  5. Restrictions on competition may be justified if, for example, they are in the public interest. The OFT report highlighted some of the potential anti-competitive restrictions found in the legal professions but it did not examine justifications of restrictions (e.g. countervailing consumer benefits).

  6. In the consultation we sought evidence to enable us to address the OFT's concerns. By a number of questions, we sought information about the likely level of demand from other potential providers of legal services. We felt this information would be useful in gauging the speed with which change in the market might take place, but evidence of low demand would not in itself be sufficient reason to justify a decision not to open up the market.

  7. The consultation period closed on 22 November 2002 and we published an analysis of the responses in May 2003. The then Lord Chancellor announced that he would consult further on the future of Silk: the QC consultation, Constitutional reform: the future of Queen's Counsel, was published on 14 July 2003.



Our Conclusions

Conveyancing

  1. We looked at how conveyancing services are provided now; explained how implementation of the existing legislation would work (including what would need to be done to implement it); and asked what the likely 'take up' by new providers and benefits to the consumer might be if sections 34 to 52 of the Courts and Legal Services Act 1990 were implemented.

  2. Most responses to the consultation were from lawyers and the majority opposed introduction of the provisions.

  3. Most thought there would be a demand from new providers wanting to join the Authorised Conveyancing Practitioners scheme. But a significant proportion of respondents did not expect that to be sustained beyond an initial flourish.

  4. Most respondents did not consider that the Authorised Conveyancing Practitioner scheme provided enough safeguards to protect consumers, and took the view that Authorised Conveyancing Practitioners should be regulated to the same degree as solicitors. However, about a quarter of respondents considered the safeguards would be sufficient.

  5. Almost all respondents considered there would be a significant impact on solicitors' practices, with smaller high street practices, and those in rural areas feeling the pinch most. Again, most respondents felt there would be implications for access to justice, particularly for those living in rural communities.

  6. About two thirds of respondents considered there were more disbenefits to introducing the Authorised Conveyancing Practitioner scheme, with the remaining third taking the view that there would be a net benefit in introducing the scheme.

  7. Use of these provisions would require the setting up of a new regulatory authority (the Authorised Conveyancing Practitioners Board). The Board (which would comprise a chairman and 4 to 8 members) would be required to prepare detailed operating procedures and rules for approval by the Lord Chancellor. These would include:

    • arrangements for the authorisation of practitioners
    • regulations about the competence and conduct etc of authorised practitioners
    • arrangements for ensuring no conflict of interest arises
    • the setting up of a Conveyancing Appeals Tribunal to hear appeals from any person aggrieved by certain decisions of the Board
    • a Conveyancing Ombudsman Scheme
    • compensation arrangements
    • investigation, enforcement and intervention powers.

  8. The previous attempt to open up the market using sections 34 to 52 proved unsuccessful. The Authorised Conveyancing Practitioners Board was originally set up in April 1991 to operate the 'authorised practitioner' scheme. But in March 1992, the Lord Chancellor of the day announced that he had decided to postpone the implementation of the scheme because of a lack of demand from potential providers. The cost of running the Board was estimated to be around £900,000 in a full year (Report (Commons - Standing Committee D), 5 June 1990, column 264) - likely to be about £1.3 million annually today. If the scheme were implemented now, these costs would again fall to government.

We conclude

  1. That, because:

    • of the high set up costs that would fall to government (over £1 million a year);

    • of the effect of the proposals in adding to the "regulatory maze" for legal services;

    • the legislation was used in the early 1990s to set up the Authorised Conveyancing Practitioners Board but the take up was so limited that the Board was closed down; and

    • the conveyancing market is no longer a monopoly and is already competitive: (prices fell significantly in the 1990s when the solicitors' monopoly was broken by enabling licensed conveyancers to operate in the market. Providers are now ready to give fixed quotes to consumers who may shop around);

    the provisions should not, on balance and for practical reasons, be activated now, but that the independent review which is being commissioned to review regulation of the legal sector will be asked to consider more efficient ways of liberalising the market for conveyancing services.

Probate

  1. We looked at how probate services are provided now, explaining how implementation of the existing legislation, sections 54 and 55 of the Courts and Legal Services Act 1990 (CLSA), would work (including what would need to be done to implement it). We tried to gauge the likely 'take up' by new providers and benefits to the consumer. Given that the sections have quite different applications, the chapter in the consultation paper, which explained how the new arrangements would work, was in two parts.

  2. Section 54 CLSA provides for the right to undertake (for profit) probate work to be extended to other potential competitors such as banks, building societies and insurance companies, but that this section has not been brought into force.

  3. Section 55 CLSA would enable the Lord Chancellor, subject to an approval procedure set out at Schedule 9 to the Act, to add to the list of approved bodies whose members should be regarded as qualified to provide probate services (e.g. licensed conveyancers, legal executives or other body approved under Schedule 9 to the 1990 Act).

  4. Sections 54 and 55 CLSA would amend section 23 of the Solicitors Act 1974 by opening up the classes of institutions or persons who could undertake this (paid) work. Section 23(1) of the Solicitors Act 1974 prevents any unqualified person (i.e. persons other than a solicitor, barrister or duly certified notary public) from directly or indirectly, drawing or preparing for fee, gain or reward, any papers on which to found or oppose a grant of probate or letters of administration.

  5. The majority of respondents were solicitors who currently enjoy a near monopoly among professional providers of probate services. It is not therefore surprising that the majority of respondents were against change.

    • Most thought there would be a demand from new providers wanting to become authorised to provide probate services.

    • Most did not consider that there was sufficient protection for consumers included in the arrangements for authorising new providers under either section 54 or section 55 CLSA. Many thought that new providers should be regulated to the same degree as solicitors, and some considered that existing controls should be tightened. However, 10 to 20 per cent of respondents considered the safeguards were sufficient to protect consumers.

  6. Almost all respondents considered there would be a significant impact on solicitors' practices and access to justice, with smaller high street practices and those in rural areas feeling the pinch most. However, our analysis indicates that the likelihood of the solicitors' market share being significantly eroded and access to justice significantly reduced is small, provided firms of solicitors, including those in the high street and those in rural areas take steps to maintain or improve the quality of the service in line with customer needs and changing business practices.

  7. However, our assessment at Annex A suggests that solicitors are unlikely to lose more than 7 or 8 per cent of market share in this area over a decade as a result of market opening. That represents less than one per cent of solicitors' overall gross income, which we do not believe in itself should prove critical to the survival of significant numbers of firms, even small firms that may rely to more than average extent on probate related work. Prices may also fall, as they have in residential conveyancing as a result of market opening, but improved efficiency should cushion the impact on profitability.

  8. The argument that the protection provided under sections 54 and 55 may be inadequate, especially in being less rigorous than existing professional rules, is not, we believe, sustainable. It underestimates the protection that can be provided through the powers conferred by those sections. Further, we believe that the argument is weakened by the fact that there is no restriction on who may advise on and draft wills, or execute or administer them, but only on the intermediate step of probate, and by the fact that 30% of probate applications are from individuals working without professional help beyond published guidance and the assistance of Probate Registry staff.

  9. Given that the arguments about access to justice and lack of sufficient consumer protection are not, in our view, persuasive, we can see no reason to deny the public the potential benefit of better and more cost effective services that increased competition, or the threat of it, may achieve.

We conclude

  1. For the reasons outlined above, that there is no sufficient risk of detriment to access to justice or to consumers to justify excluding new providers having access to the market through the implementation of sections 54 and 55 CLSA and that those sections should now be commenced. A full regulatory impact assessment will be published when the commencement order is laid.

Multi-Disciplinary Practices & Employed Solicitors

  1. We considered the restrictions in legislation that inhibit solicitors from developing new business models. We were concerned with sounding out the appetite for, and the possible effects of, possible change in the legislation, in regard to the provision by solicitors in England and Wales of legal services, with particular reference to new business models; and with sounding out the appetite for, and potential effects of, extension of the provision of legal services by employed solicitors.

  2. We sought views on whether the Law Society powers to regulate solicitors and solicitor partnerships should be broadened, to enable them to regulate non-solicitor partners and any business entity through which solicitors provide services, irrespective of its structure or ownership.

  3. The majority of respondents were providers of legal services rather than users of legal services which meant that user demand for new services was difficult to gauge. Appetite for change was mixed: for some solicitors providing services through new business models was seen as an exciting opportunity; for others a concept incompatible with the core values of the profession.

  4. A reduction in the number of solicitors' practices was predicted by respondents but it was seen that actual solicitor numbers would remain constant as more jobs became available in the firms created using new business structures. It was felt but not demonstrated that rural areas would suffer more from such a reduction in numbers of firms, with a risk to access to justice.

  5. Concern has been raised that larger firms will drop unprofitable publicly funded work. However, it is possible that more efficient methods of delivery of publicly funded work will develop through the 'new style' businesses, thereby achieving better value for money. There was no groundswell of opinion that provision of privately funded legal work would be detrimentally affected by the introduction of new business models, except possibly in some rural areas.

  6. Alternative business structures could increase competition in the market, by widening the potential supplier base and removing barriers to entry. The benefits of correctly regulated competition are well known: improved quality, lower costs, better choice.

  7. New business structures may open access to justice to people who would not presently utilise the legal system. Standards may be driven up and allow the law to be administered more efficiently. Prices should be lower through increased supply.

  8. Some users of legal services have indicated that provision of a range of professional services under one roof would assist them. Clients could save time and money if they could access a range of professional services such as legal, accountancy and tax advice from one provider. New providers, such as those already providing mortgage or estate agency services, may be in a position to provide a comprehensive "one stop" service that meets the needs of consumers. Large institutions also are likely to introduce modern and efficient business practices, and to make considerable investment in infrastructure. Such new structures could provide quicker, cheaper services in most transactions. Institutional providers may have better procedures for marketing and targeting of potential customers and a strong ethos of customer service.

  9. Although new providers may "cherry pick" straightforward/more profitable work leaving the rest to existing providers, in market terms, "cherry picking" has advantages: it is likely to allow the consumer with an uncomplicated requirement to obtain a service at a much more competitive rate. This practice is already widely operated, e.g. by insurance companies in the provision of motor insurance, and the commercial reality is that the market will not allow a need to go unmet.

  10. Alternative business structures may have positive benefits for solicitors. The number of women solicitors leaving the profession is high. The profession has difficulty attracting members from the minority ethnic communities. New business structures may provide employment with good terms and conditions, a commitment to family friendly policies and continual development, and prove attractive to people who are currently not interested in joining or remaining in the profession. Alternative business structures could provide a new avenue for trainee solicitors, exposing them to a commercial environment. Alternative business structures may be able to provide a more secure employment route and offer greater management opportunities.

  11. Concern was raised about the impact on high street practices. Our analysis indicates that the likelihood of the solicitors' market share being significantly eroded is small. Provided high street firms and those in rural communities take steps to improve the quality of the service on offer, the impact on them would likely be lessened.

  12. Questions have also been raised, for example, on conflict of interest and tying in of services, and whether such innovation would affect the status of solicitors in England and Wales given the issues of conflict, confidentiality and independence. Again, appropriate regulation is fundamental to meeting these concerns. The ethics, integrity and independence of lawyers employed in alternative business structures must be preserved in the public interest in any new framework of regulation.

We conclude

  1. The Government supports in principle enabling legal services to be provided through alternative business structures. Such new structures would provide an opportunity for increased investment and therefore enhanced development and innovation, for improved efficiency and lower costs. Appropriate regulation, adequate and stringent enough to protect both the interests of the public and the core values of the professions, is the key to the successful development of these new style businesses. Therefore, subject to such appropriate regulation, new business structures would be in the consumers' best interests.

  2. The review of the regulatory framework should advise on how best new business entities (such as multi-disciplinary practices and corporate structures) should be allowed to provide legal services supported by an optimal regulatory framework. That framework will uphold the public interest and protect the ethics and integrity of lawyers providing services through such structures. Alongside the review, we shall work with the Law Society on how best to achieve progress in putting changes in place under current legislation as part of the Departmental led programme of work.

Legal Professional Privilege

  1. We sought to explore how the concept of Legal Professional Privilege (LPP) might be developed. The consultation paper put forward three options:

    the Government could:

    1. restrict legal professional privilege, and rely on litigation privilege alone, or other statutory privileges, to protect the interests of justice;

    2. affirm the public interest in preserving legal professional privilege, and against extending it further; or

    3. extend legal professional privilege, either by reference to the profession of the person concerned, or by reference to the nature of the communication.

    The OFT report clearly favoured option (c), although it expressed no preference for either of the possible 'frames of reference' mentioned. The OFT recognised that possible wider consequences, beyond competition considerations, of extending privilege would need to be carefully weighed.

  2. More than half the respondents to consultation expressed a preference for not extending LPP beyond its present scope. Of those who advocated extension of LPP, most would rather achieve this by according privilege to the advice given by members of designated bodies, as opposed to attaching it to the nature of advice given, irrespective of the profession of the adviser.

  3. The majority of those in favour of maintaining the status quo were from, or associated in some way with, the legal profession; most arguing for an extension of privilege came from, or represented, the other professions to which privilege could be extended. Even where respondents were in favour of extension, there was general difficulty in defining the possible extent of the privilege and the classes of advice to be covered.

  4. Protection given to accountants and tax advisers under the Taxes Management Act was believed to be insufficient and less extensive than that afforded by LPP. However, there was a lack of evidence that lawyers have a significant, if any, competitive advantage over other professionals.

  5. There are serious concerns as to the effects of increasing the rights of non-disclosure. The Government has concerns about extension because it would greatly extend the number of individuals who could avoid the reporting obligation in respect of suspicious transactions by citing LPP. There could be potential risk to the ability of the Inland Revenue and Customs & Excise to challenge tax avoidance schemes (leading to increased loss from tax avoidance). More generally, the withholding of potentially relevant evidence from the court should not, in the interests of justice, go further than absolutely necessary.

We conclude

  1. That there should be no alteration to the scope of LPP. There is no evidence that the existing privilege is significantly distorting the market in favour of lawyers and the drawbacks in terms of public interest would outweigh the removal of any minor distortions that may exist. In any event, more respondents preferred to keep LPP to its present limits. For those wanting extension, there was no concurrence in how this might be effected.

Queen's Counsel

  1. The OFT acknowledged that some restrictions surrounding the conduct of QCs had been removed some time ago and other improvements followed the Peach Report (1999). The OFT questioned the value of the QC award to consumers.

  2. In consultation, we sought evidence to enable us to address the OFT's concerns. The majority of respondents did see some benefit in a QC system, although the reasons varied. There was support for an appointment body independent of Government.

  3. The then Lord Chancellor, Lord Irvine, announced before the Lord Chancellor's Department Select Committee on 2 April 2003 that he would consult further on the future of Queen's Counsel. A consultation paper was issued on 14 July.

The Review of the Regulatory Framework

  1. In the consultation paper, we indicated that the first step in undertaking a review would be to settle the detailed parameters of the exercise and the machinery for completing it. Our analysis (the scoping study, at Annex B) has confirmed that the current framework is out-dated, inflexible, over-complex and insufficiently accountable or transparent.

  2. An indication of the maze-like nature of the current framework is the fact that the study identified 22 regulators. Some are primary regulators, such as the Law Society. Others have a role in overseeing the primary regulators' role, for example, the Legal Services Ombudsman. In addition, there is a range of major purchasers in the market who act as quasi regulators, for example, the Legal Services Commission. To complicate matters further, some regulation is of the service, irrespective of who provides it, while other regulation is based on professional status.

  3. The problems associated with the "regulatory maze" can therefore be seen in terms of regulatory proliferation, confusion and fragmentation. Further, the current structure has the propensity to create:

    • anomalies (such as that some services, such as legal advice, are regulated if provided by a solicitor or barrister, but not if provided by a non-lawyer),

    • gaps (some participants in the supply of legal services can be regulated but other important actors, e.g. immigration interpreters and intermediaries such as claims managers, are not),

    • difficulties of interface (e.g. solicitors providing non-incidental financial advice are regulated by both the Law Society and the Financial Services Authority), and

    • incoherence (e.g. quality assurance and complaints schemes are out of step, with different organisations applying different approaches to the same or analogous services).

  4. As discussed above, there are also now fundamental questions about the business structures through which legal services may be provided and how, for example, if we allow corporations to provide legal services they are best regulated (see section on Multi-Disciplinary Practices & Employed Solicitors), or how, if at all, claims management companies should be regulated. The fact that the current framework cannot accommodate new business structures or embrace new ways of doing business bodes ill for the future in what is a fast changing and dynamic service sector. Nothing short of a fundamental revision can, we believe, address these issues.



The way forward

The Review of the Regulatory Framework for Legal Services and the Departmental Led Programme

  1. As stated in the consultation paper, the Government is concerned to ensure that clients have ready access to independent legal advice. It is for the providers of legal services to decide how they organise to best meet the needs of their clients, taking into account the legislation. Competition offers the client the best opportunity to make a choice in the services he needs, according to what represents best value to him. The ability to be able to provide services through the widest range of delivery structures is believed to favour competition, drive down costs and prices, open up access and choice, and provide better value for money. However, to make a choice, the client needs information about the different kinds of practitioner and the services they offer, and confidence that they are subject to adequate standards of competence and conduct.

The Review of the regulatory framework for legal services

  1. In the consultation paper, we indicated that the first step in undertaking a review would be to settle the detailed parameters of the exercise and the machinery for completing it. Our study has confirmed that the current framework is out-dated, inflexible, over-complex and insufficiently accountable or transparent; it has limited capacity to adapt to a rapidly changing landscape.

  2. Our study has shown that the current framework does not meet the demands of today's market place and the needs of consumers, for example, in the area of complaints handling, or general expectations about transparency and accountability. Without prejudice to the outcome of the review, the fact that the regulatory framework for legal services represents one of the last examples of a self-regulatory system in which primary accountability in most important respects is to the regulated providers through their trade associations rather than the public, is one reason for a review. Government has therefore decided that a thorough and independent investigation without reservation is needed.

  3. The terms of reference are:

    "To consider what regulatory framework would best promote competition, innovation and the public and consumer interest in an efficient, effective and independent legal sector.

    To recommend a framework which will be independent in representing the public and consumer interest, comprehensive, accountable, consistent, flexible, transparent, and no more restrictive or burdensome than is clearly justified.

    To make recommendations by 31 December 2004."

  4. The investigation will be undertaken by an independent person who commands public confidence but who is neither a practising lawyer nor a judge. The reviewer will be tasked with reporting by the end of 2004. The review will be supported by a secretariat.

  5. The issue of how multi-disciplinary practices can operate in the legal services market will fall to the review. The Government accepts in principle that new business entities such as multi-disciplinary partnerships and corporate bodies should be allowed to provide legal services. The review's terms of reference will enable the reviewer to advise on how such entities are best regulated.

  6. In considering how such entities, including corporations such as banks etc, may enter the legal services market, the review will be asked to examine more efficient ways of liberalising the market for conveyancing and other services.

The Departmental Led Programme

  1. The Departmental led programme, in which we expect other departments, as well as OFT, to participate, will seek to achieve improvements within the current legal services framework.

  2. It will pursue short to medium term initiatives to modernise the legal services market, to render it more accountable, transparent and competitive. Our focus will be on competition and on regulatory improvements to ensure that the legal services in England and Wales are provided on a competitive footing, within a framework that supports the public interest and clients' needs.

  3. The first step in that programme will be to exercise statutory powers to open up the probate market. The next targeted measure is the carrying out of a competition/regulatory audit of existing arrangements to identify quick gains, followed by action to garner real improvement on the ground.



Annex A

The Impact of Implementing Sections 54 and 55 of the Courts and Legal Services Act 1990 to open up the market for the provision of probate services

Objective

  1. This note assesses the market impact of implementing Sections 54 and 55 of the Courts and Legal Services Act 1990. Consistent with the provisions of the Competition Act 1998, and the Government's obligations under EU competition law, such action would increase competition in the market for probate services by removing an existing restriction which reserves part of that process to solicitors, barristers, or duly certified notaries public.

  2. It would encourage new providers to enter the market, potentially benefiting consumers by increasing their choice among providers, and by applying upward pressure on the quality of service and downward pressure on prices.

Background

  1. Under Section 23 of the Solicitors Act 1974, it is an offence for anyone other than a solicitor, a barrister, or a duly certified notary public, to take instructions for reward or to draft or prepare for reward the papers on which a grant of probate or letters of administration depend.

  2. In his Report 'Competition in Professions' published in March 2001, the Director General of Fair Trading suggested that consideration should be given to implementing Sections 54 and 55 of the Courts and Legal Services Act 1990 to increase competition in the market for the provision of probate services by authorising new providers, including banks and building societies, and members of other professional bodies.

  3. The Government is committed to ensure that the professions are properly subject to competition, since open and competitive markets are the most effective way of ensuring that consumers get the best possible service. Markets for professional services should be opened to competition unless there are strong reasons to the contrary, such as evidence that real consumer detriment might result from such a change. The Government therefore undertook to consult on those issues raised by the Director General that fell to it to address, and published a consultation document "In the public interest?" in July 2002. A summary of responses was published this May.

  4. This proposal to implement Sections 54 and 55 of the Courts and Legal Services Act 1990 is as suggested by the Director General.

Risk Assessment

  1. Currently there is a restriction on anyone other than a solicitor, a barrister, or a duly certified notary public preparing for reward papers on which grant of probate or letters of Administration depends. Leaving this restriction in place potentially disadvantages consumers because it restricts competition, limiting potential consumer choice and implying higher fees than if restrictions were lifted.

  2. Implementing Section 54 would allow banks, building societies, insurance companies, and trust companies to provide probate services for a fee. Some banks already administer estates using panel solicitors to prepare papers. Although there are doubts about the extent to which new providers would wish to enter the market, implementing Section 54 would reduce present disadvantages to consumers by encouraging incumbent providers to become more efficient and to reduce fees. Introduction of limited competition for solicitors in the market for conveyancing has had this effect, even though solicitors still retain a 95 per cent share of that market.

  3. Implementing Section 55 would allow professional or other bodies to authorise their members to provide probate services for a fee. Although there are again doubts about the extent to which new providers would seek to enter, the potential for competition could similarly increase pressure to improve efficiency and to reduce fees in probate and associated work, advantaging consumers.

  4. Implementing both Section 54 and Section 55 would put mutually reinforcing pressure on incumbents.

  5. Any increase in risks to consumers because of lower professional standards will depend on how new providers are regulated. The Department for Constitutional Affairs will seek to protect the consumer's interest as far as is possible, consistent with the provisions of Section 54 and Section 55. It is also relevant that thirty per cent of applications for grant of probate are made by persons without professional assistance other than from published guides, and the Probate Office reports that a significant proportion of applications from solicitors have to be returned because of errors or incomplete information.

Scaling the issue

Introduction

  1. In 2001 there were just over 250,000 grants of representation. 30 per cent of applications came from persons, who presumably felt comfortable in doing the work themselves with the help of published guides. This includes a very clear guide by the Probate Office, now available on the internet as well as in print. A general growth in confidence in using internet based guidance argues for a further increase in the proportion of personal applications. These have increased by a half from 20 per cent of all applications only a decade ago, and the guidance covers complex as well as straightforward cases, for instance where there are complicated family trees, and high worth estates where there are a range of assets to value. This increase is despite a general, increasing and potentially offsetting tendency of consumers to employ service providers as family incomes and wealth increase.

  2. According to data from the Law Society's 2002 survey on sources of fee income, the value of all probate, wills and trust work undertaken by solicitors and their firms amounted to some £750m. Of this we estimate that some £40m relates to the preparation of papers seeking Grants of Representation, the work reserved to solicitors at present, and that a further £400m comes from the associated, and often "follow on", work of administering estates. £400m is roughly 4 per cent and £40m less than a further one half of one per cent of solicitors' gross fee income.

  3. Opening the market to competition could put downward pressure on fees for preparing papers, and somewhat lower regulatory standards applying to new entrants offers some further potential for lower fees for this part of the work, which Law Society evidence suggests an average of some £200 per case. Potentially more important is that the present restriction gives existing providers an entry point advantage in securing follow on work in administering estates.

  4. A central issue in this Assessment is how much of the market might pass from solicitors and their firms to new providers. The consultation exercise showed some interest from a limited number of potential new providers.

Opening the Market

  1. Looking first at the preparation of papers, opening the market to competition among professional providers could put downward pressure on associated fees. Somewhat lower regulatory standards applying to new entrants might offer some further potential for lower fees. However, given that solicitors now earn less than half of one per cent of their gross fee income from the preparation of papers, the direct impact of this on solicitors' gross fee income seems unlikely to be more than a small fraction of one per cent, most of which would accrue to other providers. Users of these services would benefit from reduced charges. Even if lower regulatory standards were to result in difficulties for some, consumers should stand to gain overall.

  2. Potentially more important is that the restriction on preparing papers for reward gives solicitors an entry point advantage in securing follow on work in administering estates. This work is more extensive and roughly ten times more valuable in total than the preparation of papers. Remembering that it is already potentially open to anyone to administer estates, we now look at the potential impact of removing this entry point advantage.

Section 54

  1. Relevant to Section 54, the clearing banks already administer estates for some of their clients, calling on solicitors in panels to deal with the initial grant of probate. The overall numbers of cases handled this way seems to be small. We know, for example, that one major clearer deals with only 8-900 cases a year in this way out of a potential market of some 250,000. Assuming this is not atypical, it is unlikely that the banks use their own employees to administer more than 2 per cent of all estates each year. Given that they already have the panel mechanism to deal with the entry point restriction, it is not clear why a potentially small difference in cost of other agents' preparing papers would encourage them to compete more aggressively if Section 54 commenced.

  2. Reinforcing this argument, we were told by the British Bankers Association in an interview connected with the consultation that banks usually pass their clients' estate administration work as well as probate to firms of solicitors, and do this because solicitors' costs are lower than those they could match internally.

  3. If the banks have not found it worthwhile to penetrate the market for administering estates in any greater depth, it is even more striking, and just as relevant, that insurance companies and building societies have not so far chosen to enter. Since the solicitors panel mechanism has also been open to them - insurance companies already use the device in other areas - they appear to regard probate and the administration of estates as too far removed from their core businesses to be an attractive use of their competitive strengths.

  4. It is not clear why this view should change, even if Section 54 might encourage them to look at the issue, if they have not already done so, or to consider it afresh. Any difference to them in the costs of preparing papers would have very little impact on the overall cost of offering probate and administration.

  5. Given these arguments, it seems highly unlikely that triggering Section 54 would lead to more than a doubling of the 2 per cent of estates administered internally by banks and the like, and this only over a period of years, say a decade. The administration of more than 95 per cent of estates would remain with solicitors, or with private individuals and others who already do this work.

Section 55

  1. Commencing Section 55 would provide for professional or other bodies to be approved by the Lord Chancellor to grant rights to prepare probate papers by their members. This would allow solicitors' clerks, who already do most of the work in preparing papers and in administering estates, to set up separately to offer these services. Others might seek to enter, recruiting and organising such individuals in the hope of achieving a sufficient volume of work to build successful businesses. The Council of Licensed Conveyancers have already indicated some interest among their members in entering this market, were they allowed.

  2. To understand how the market for probate services might develop, there is an interesting parallel with the impact of licensed conveyancers on their market. Licensed conveyancers have secured only 5 per cent by value of the market for conveyancing since 1987 when the first licenses were issued. However, allowing for inflation, and using data from the Law Society's 1999 research paper on conveyancing, the average cost of conveying a £65,000 house had fallen by a quarter between 1989 and 1998. This may taken as some indication of how prices might be expected to fall in the market for probate and related services.

  3. There are two important brakes on the likelihood that consumers will choose to move in any number to buy services from bodies who enter as a results of commencing Section 55. This will be so even if, in practice, many of those doing the work are likely to be attracted from solicitors' offices, where they will have been doing similar, if not the same kind of work. The first is that solicitors are trusted to do this kind of work, giving them the protection of a strong existing brand not shared by the new entrants. The second is that the administration of some estates is tied up with the drawing up of trusts and the conveying of property, where the solicitors' brand again comes into play.

  4. These considerations make it unlikely that new entrants enabled by the commencement of Section 55 will achieve more than new entrants who are not solicitors have done in the market for conveyancing. This points to no more than a 5 per cent of loss of market share by solicitors by value over the next decade as a result of implementing Section 55.

Sections 54 and 55 together

  1. What overall effect might commencing Section 54 and Section 55 have together? Remembering our estimate that some £440m of solicitors' gross fee earnings comes from preparing letters for probate and administering estates, we concluded above it is unlikely that more than 5 per cent of this market would fall to new entrants because of Section 55 over a decade. And we thought that banks and others tempted to compete further because of Section 54 were unlikely to want to achieve more than a similar share, again after a decade, a loss to solicitors of only a further 2 or 3 per cent at most of the market.

  2. Since these effects are additive, we think commencing the two sections together would be unlikely to impact on solicitors' gross fees by more than some £35m in today's prices after a decade because of loss of market share. This is significantly less than one per cent of their total gross fee income. The impact on some smaller firms who depend to a greater extent on probate and the administration of estates could be more significant, especially for firms that have built their business around this type of work. But this should not be exaggerated. Law Society data shows on average that firms with between 2 and 12 partners derive between 10 and 11 per cent of their gross fee income from probate, wills and trusts, as compared with 7 per cent for all firms of solicitors.

  3. There will also be some further reduction in fee income because of the lower prices we expect from greater competition. By analogy with price reductions for conveyancing as a result of market opening, the impact could be greater than that resulting from loss of market share. But since this will be a spur to greater efficiency, the loss of income because of lower prices need not imply any reduction in profits. On the contrary, greater efficiency could secure an increase in profits, as well as limiting the potential loss of market share.

  4. As to present profitability of work in probate, wills and trusts, the Law Society's 2001 Business Survey says that 86 per cent of respondents weighted by size of firm perceive this area of work to be profitable, a proportion exceeded only by commercial property and other commercial work. Even after the fall in prices because of market opening reported above, 65 of respondents said that residential conveyancing was still profitable, with 28 per cent saying that this work broke even, presumably after all costs have been met.

  5. Putting this assessment of scaling effects in perspective, the loss in share anticipated over the next ten years from market opening is less than the loss of share solicitors have absorbed over the past decade because of the increase in personal applications. There is no evidence that this increase in personal applications has been widely perceived as a competitive threat. The difference in announcing commencement of Section 54, Section 55, or, more potently, both together, would be to urge solicitors to look hard at their efficiency, and at their fees. This would be to the benefit of the economy overall because of improved productivity, and to the benefit of consumers in reduced costs and better service in this area. In addition, if it became widely known that solicitors were offering better value for money in this kind of work, it is far from inconceivable that they might recover part of the market share they have increasingly lost to personal applications and follow on work in the administration of estates.

Market Intelligence Unit
Legal Services Development Division
Department for Constitutional Affairs

27 June 2003



Annex B

Scoping Study

 


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