Legal Services Bill [HL]

My Lords, I beg to move that this Bill be now read a second time. The Legal Services Bill is an important landmark in the development, reform and modernisation of our framework for legal services regulation and provision. The Bill puts consumers’ interests at the heart ofthe regulatory arrangements. It provides for a Legal Services Board to provide strong, independent oversight with day-to-day regulation left to front-line regulators; statutory objectives for those with regulatory duties and principles for the legal profession; alternative business structures to enable lawyers and non-lawyers to work together on an equal footing to deliver legal and other services—external investment will also be possible; a single and fully independent Office for Legal Complaints; and a mechanism to protect consumers if new problems occur. I pay tribute to Sir David Clementi, whose independent review brought a refreshing new dimension to the debate and set the direction for change which has shaped the thinking of not only Government but the stakeholders. I also thank those members of Which?, the National Consumer Council, Citizens Advice, the Federation of Small Businesses, and the Office of Fair Trading who, through membership of our Consumer Advisory Panel, have helped to shape the Bill before your Lordships today. I would also like to record my appreciation forthe constructive way in which the leaders of the professional bodies—the Law Society, the Bar Council, and others—have approached this major programme of change. The Bill was published in draft earlier this year. I pay a genuine and particular tribute to the members of the Joint Committee on the draft Legal Services Bill, chaired by the noble Lord, Lord Hunt of Wirral, whom I am glad to see in his place. The committee carried out a very thorough scrutiny of the draft Bill against a pressing timetable. I consider that the Bill before the House today is now much improved as a result of the committee’s invaluable work. The law and lawyers will at some stage touch the lives of just about every member of our society.We have a duty to ensure that the regulatory arrangements are fit for purpose. Our analysis is clear. Three underlying issues have led us to conclude that change in this sector is long overdue. First, there is a lack of consumer confidence in the way in which complaints about lawyers are dealt with. This is rooted partly in the way in which complaints have historically been handled by the Law Society, with well documented problems over the speed and quality of complaints-handling dating back to the 1980s. But it is not the Law Society’s problem alone. We hear a great deal about how much better the Bar is at handling complaints. One third of complaints dealt with by the Bar are referred to the Legal Services Ombudsman for reconsideration. Consumers argue that the handling of complaints takes too long, focusing on technicalities rather than on providing quick and fair redress to the consumer. They argue that they can have no confidence in a system where complaints are dealt with by a lawyer’s own professional body. These public perceptions can have a corrosive effect on the reputation of the sector more generally. The second issue is the potentially restrictive effect of the way in which the professions operate. In March 2001, the Office of Fair Trading published a report, Competition in Professions, which argued that such restrictions had the potential to drive up costs and prices, limit access and choice, reduce value for money, and inhibit innovation in the supply of services. That is all to the ultimate detriment of the public. The third issue is what some have called the ““regulatory maze””, under which we see a widerange of oversight regulators with overlapping responsibilities and few clear objectives. In July 2003, following an analysis of the regulatory framework, my department published a report which concluded that the current regulatory system was, "““outdated, inflexible, over complex and insufficiently transparent””," and we recommended that an independent review be carried out. Later that month, I appointed Sir David Clementi to carry out that review. Sir David published his final report in December 2004. In his foreword, he observed: "““Nothing that I have learnt during the 18 month period of my Review has caused me to doubt the broad validity of the Government’s conclusion. The current system is flawed””." The problems are not restricted to oversight regulators. The legal professional bodies have contributed to the ““maze”” by failing to separate the exercise of their regulatory and representative functions until now. I congratulate both the Law Society and the Bar on their positive and proactive approach to this problem. They have already established separate regulatory boards to provide for a clear separation of these functions. I am very happy to see many members of those bodies watching in the Gallery today. While our proposals are based largely on those of Sir David Clementi, a number of stakeholders saw a need for further analysis to underpin some of his main recommendations. The department therefore commissioned leading academics to carry out independent research in the following specific areas: how to make an oversight regulator an effective partner of front-line regulators; drivers for, and benefits of, external financing of law firms; internal incentives under various ownership structures; and the competition impact of restrictions on various forms of partnerships. The academics presented their work to the department in July 2005 and this informed the White Paper which we published in October of that year. As I have said, we have also had the benefit of pre-legislative scrutiny and have further refined our proposals in the light of the Joint Committee’s very helpful consideration. I shall now try to summarise the Bill. Part 1 sets out the statutory objectives. Regulators must have clear objectives to guide them in exercising their functions and to provide a basis on which consumers can hold them to account. Part 1 sets out these objectives and principles. They will apply to the LSB, approved regulators and the Office for Legal Complaints. Here we have moved further thanSir David’s recommendation and have refined his suggested objective of, "““encouraging a confident, strong and effective legal profession””" so that the Bill refers to, "““encouraging an independent, strong, diverse and effective legal profession””." ““Independent”” was added at the suggestion of the Joint Committee. ““Diverse”” was added to ensure that the board and approved regulators work together to remove the barriers that exist in the recruitment, retention and progression of legal professionals. We have also included a specific duty for the LSB to have regard to the public interest, again at the suggestion of the Joint Committee. Part 2 of the Bill makes provision for the new oversight regulator, the Legal Services Board, to provide independent oversight of legal regulatory bodies. While day-to-day regulation should remain with the professions, the LSB will have a range of powers available to oversee approved regulators. The Secretary of State will appoint the chair and members of the LSB, and will do so subject to oversight ofthe Commissioner for Public Appointments. The Secretary of State can also remove members of the LSB subject only to strict criteria set out at Schedule 1 to the Bill. The Joint Committee expressed concerns about this and suggested that such appointments and dismissals should be made only after full consultation with the Lord Chief Justice. While I can see whythat would give comfort to members of the legal profession, I have to say it gives little comfort to consumers, who rightly see the Lord Chief Justice, although he is a man beyond reproach, as another lawyer in the process. There is nothing unusual about the arrangement proposed in this Bill. The chair and board members of many other regulators may be appointed and dismissed by the relevant Secretary of State; for example, the chair of the Financial Services Authority has been appointed since its creation by the Chancellor. I see no evidence that the financial sector is either not independent or suffering as a result of that. The chair and members of the boards of the Competition Commission and the Office of Fair Trading are appointed by the Secretary of State for Trade and Industry, without the requirement for external consultation. Again, I see no indication that the UK is any less competitive as a result of that. Of course the Lord Chief Justice himself has been appointed by the Prime Minister for many years. Nobody has suggested that the judiciary lacks independence as a result. Part 3 of the Bill deals with activities described as ““reserved legal activities””. These are the activities that will come under the regulatory control of the LSB such as the provision of advocacy and litigation services. It provides for the offences of offering or providing these services when not entitled to do so. It provides, too, for alterations to be made to the list of these activities by affirmative order. This is an important change because under the present arrangements additional activities cannot be brought under regulatory control without primary legislation. This involves a delay which can mean that consumers remain unprotected for months or even years. Part 4 of the Bill sets out the arrangements under which the LSB will regulate ““approved regulators”” such as the Law Society and the Bar Council. This defines the regulatory and representative functions of approved regulators and importantly, at Clauses 28 and 29, provides for a proper separation in the exercise of these functions. While the LSB is prohibited from interfering in their representative functions it requires approved regulators to have internal governance arrangements that prevent regulatory decisions being unduly influenced by representative interests. The proper resourcing of regulatory boards is also required. This part of the Bill also provides the LSB with its range of powers. These are that the LSB may set performance targets relating to the performance of approved regulators and that it may monitor their performance, in Clause 30; exercise a power of direction over approved regulators, in Clauses 31 to 33; publicly censure an approved regulator, in Clauses 34 and 35; fine approved regulators, in Clauses 36 to 39; take over a function or functions of an approved regulator, in Clauses 40 to 43; and remove the designation of an approved regulator, in Clauses 44 to 47. These are significant powers but I believe that the LSB must have available to it the widest range of powers possible. There must be safeguards in the exercise of these powers, and I believe that the Bill provides for this. This part also sets out the purposes for which a practising certificate fee may be levied by approved regulators and provides for the level of these fees to be approved by the LSB, in Clause 50. It requires approved regulators to have rules to prevent conflicts with the rules of other applicable regulators, in Clauses 51 to 53. It provides a power for the LSB to require information from approved regulators, in Clauses 54 and 55. And it provides for the Office of Fair Trading to make a report to the LSB where it is concerned about competition matters. In cases where the OFT and the LSB’s views conflict, the Bill provides for the Secretary of State to decide the matter after taking advice from the Competition Commission, in Clauses 56 to 60. There is also a provision for the LSB, where there is no suitable regulator and following an affirmative order by the Secretary of State, to act as an approved regulator, in Clauses 61 to 67. Finally, it provides a power, subject to affirmative order, for the Secretary of State to modify the functions of approved regulators in order that they may effectively discharge their regulatory responsibilities, in Clauses 68 and 69. I move from regulation to alternative business structures. Part 5 provides a means of increasing competition and choice for the consumer. Companies and firms will now be permitted to have different types of lawyers and non-lawyers working together on an equal footing and will be able to do so with the benefit of external investment. In the Bill these alternative business structures are termed licensed bodies. The Bill requires any firm or company with non-lawyer owners or managers to be licensed under Part 5 if it wishes to carry out reserved legal activities. These firms and companies will have to seek a licence, either from the board or a designated licensing authority, which must be an approved regulator, and will be regulated by licensing rules and by the requirements of Part 5. It is important to note that the Bill also allows practices with different types of lawyers, but no external managers or owners, to emerge in advance of the Part 5 framework being commenced. These ““legal disciplinary practices”” are not alternative business structures under the Bill, and will not be regulated under Part 5, but the fact that we are allowing them to emerge in advance of alternative business structures answers a key recommendation from the Joint Committee chaired by the noble Lord, Lord Hunt of Wirral. This also reflects the substance of Sir David Clementi’s proposals for alternative business structures. Mixed lawyer practices, a type of legal disciplinary practice, will come first. Alternative business structures, including multi-disciplinary practices, can then form the next step, but only where the board and licensing authorities judge that these can be regulated effectively. Sir David Clementi supported this approach in his evidence to the Joint Committee, saying: "““I think LDPs are walking and we should learn to walk before we get into the running and sprinting involved in MDPs, but I think it is right that the Bill does not preclude them and actually the Bill facilitates them””." The Bill provides a number of important safeguards, which also answer the Joint Committee’s concerns about the impact of non-lawyer ownership and management on legal services. These safeguards include: a focus on the work and professional conduct standards of lawyers within alternative business structures, and a duty on non-lawyers to refrain from causing breaches of these standards; requirements for a head of legal practice and head of finance and administration; approval requirements that must be met in relation to external investors; a power for licensing authorities to apply financial penalties, including an appeals procedure and arrangementsfor recovery of any penalties; the referral of employees and managers to appropriate regulators; arrangements for the disqualification of persons from being involved with alternative business structures; the suspension and revocation of licences; powersof intervention for licensing authorities; and arrangements for the avoidance of regulatory conflict. Additionally, we have accepted the Joint Committee’s advice that clients of alternative business structures firms should have the same rights to legal professional privilege in their communications with lawyers in these firms as they would if they retained traditional law firms. Clause 182(3) to (6) in Part 8 provide for this. Clause 182(1) and (2) maintain the privilege of certain authorised persons other than barristers or solicitors, currently provided for by Section 63 of the Courts and Legal Services Act 1990. Clauses 103 to 106 also provide that special kinds of bodies that represent a lower regulatory risk may be treated differently for the purposes of some of the normal requirements of the licensing regime. Such bodies include trade unions, not-for-profit bodies, community interest companies, and other low risk bodies with less than 10 per cent external investment or management. The lesser regulatory impact on those bodies is consistent with the Joint Committee’s recommendation. We should make it clear that we do not intend the Bill to regulate in any way lay trade union representation, whether whole or part-time in the workplace, nor to place additional burdens on those unions that provide legal advice or representation to their members. Part 6 deals with legal complaints. This part of the Bill provides for the establishment of a new and independent Office for Legal Complaints. This will provide quick and fair redress and will improve consumer confidence in the system. It also provides that every authorised person must have internal complaints handling arrangements, and approved regulators must set standards for that. We have accepted the Joint Committee’s advice that the OLC will operate a scheme with the word ““ombudsman”” in the title. There will be a chief ombudsman and assistant ombudsman making decisions on individual cases. The Bill provides for the OLC to levy an additional charge on respondents when a complaint is made; a ““polluter pays”” levy. That is an important measure. It will act as an incentive on providers to place more emphasis on client care and settling complaints ““in house”” before they reach a stage of no return for both parties. The Bill provides that an ombudsman may make orders for redress of up to £20,000. While consumers have argued that the level of redress should be set at a higher level, the highest level of redress in the legal sector is currently £15,000; which is for the Law Society. Implementation of the proposals in the Bill will take some time. We have therefore set the level of redress for the OLC at £20,000, but the Bill allows the limit to be altered by negative order of the Secretary of State following a recommendation from theLSB, its consumer panel, or the Office for Legal Complaints. The Bill also recognises the importance of the legal professions in continuing to discipline their members and provides for any matters of professional misconduct to be referred by an ombudsman to the approved regulator concerned for consideration of disciplinary action. Some have argued that the OLC should have the power to delegate the handling of complaints to approved regulators. I do not consider that would command consumer confidence. However, I do think it is right that an ombudsman should be able to seek expert assistance, and that is enabled by paragraph 15 of Schedule 15. There have been concerns that there should be an appeal from decisions of an ombudsman. Our aim is to strike a balance between quick, informal redress on the one hand and the rights of the parties to challenge the result on the other. The model that we have chosen, based on the Financial Ombudsman Service, does just that. It combines both adequate protection for the parties’ human rights with a swift and fair redress system. We envisage the scheme having an internal review mechanism, so that parties can challenge a caseworker’s recommendation and request that an ombudsman reconsider that recommendation. We do not think that an external appeal mechanism is required—it is not required by Article 6(1) and it is not a feature of ombudsman scheme best practice. That approach is supported by Which?, which, in its evidence to the Joint Committee, said: "““We support the view that there should be no external appeal body for decisions of the OLC, providing consumers still have the right to go to court””." Consumers will have the right to go to court and judicial review will be available to both parties. Part 7 provides for the LSB to publish guidance about the operation of the Bill or the regulatory arrangements generally. It provides for the LSB to enter into voluntary arrangements with the intention of improving standards of service and promoting best practice in connection with the carrying on of any legal activity. It is right that those who are subject to regulation should pay the cost of that regulation, as in Clauses 166 and 167. The alternative, that the changes should be funded through general taxation, does not seem appropriate. The Bill therefore provides for the LSB to make rules providing for the imposition of a levy on approved regulators, bodies designated under Section 5(1) of the Compensation Act 2006, or any other persons prescribed by the Secretary of State by order. Parts 8 and 9 provide for amendments to existing legislation to align it with the provisions of this Bill. The rules of the Solicitors Disciplinary Tribunal are to be subject to oversight of the LSB. The courts will be able to make a costs order in civil cases in favour of a party whose legal representation has been provided on a ““pro bono”” basis. Any such awards will be at the discretion of the court and will be paid directly to a designated charitable body established to administer moneys to organisations who undertake ““pro bono”” work. Also, the Bill will give effect to the Legal Profession and Legal Aid (Scotland) Act 2006, once enacted, which provides for new arrangements for handling complaints about lawyers in Scotland and removes functions from the existing Scottish legal services ombudsman. Those parts contain arrangements for the parliamentary control of orders and regulations made under the Bill. Overall, these measures will help to restore consumer confidence in the handling of complaints and regulation generally. They will enhance competition by enabling lawyers to provide services in new ways. They will sweep away the decades of piecemeal reform, putting in its place a new regulatory system with clear statutory objectives and a single and independent regulator which is fully and publicly accountable. I realise that the proposals I have set out represent significant reforms. But I believe they are essential to ensure that consumers can have confidence that there is a modern, flexible, transparent and independent system of regulation in place that can and will act to protect their interests. I apologise for taking so long, but the provisions of the Bill are complicated. While it is right that over the coming months we should consider the detail ofthese proposals, I hope we can agree that there is a compelling case for change. I commend the Bill to the House. Moved, That the Bill be now read a second time.—(Lord Falconer of Thoroton.)