Legal Services Act 2007 (Functions of a Designated Regulator) Order 2008

rose to move, That the Grand Committee do report to the House that it has considered the Legal Services Act 2007 (Functions of a Designated Regulator) Order 2008. The noble Lord said: This order is presented under Schedule 22 to the Legal Services Act 2007. It will amend the new Section 9A of the Administration of Justice Act 1985, as inserted by Schedule 16 to the 2007 Act, to remove a restriction on the types of bodies which would satisfy the definition of legal services bodies, and which may therefore qualify to be recognised by the Law Society as suitable to carry on certain legal services. When commenced, new Sections 9 and 9A of the 1985 Act will allow bodies satisfying a management and control condition and relevant lawyer condition to become legal services bodies. The management and control condition is that at least 75 per cent of the managers, shareholders or holders of voting rights in the body must be legally qualified. The term ““legally qualified”” is defined to include bodies as well as individuals, but 75 per cent of the bodies’ owners and managers must be legally qualified individuals. Legally qualified bodies are therefore limited to two levels of ownership—the corporate body and its individual owners. It would not be possible for law firms to have multiple tiers of ownership, where law firms may own other firms, trust or service bodies which, in turn, own other organisations. Following discussions with the Solicitors Regulation Authority and the Law Society, it became clear that Section 9 of the 1985 Act, as currently drafted, does not restrict recognised bodies in this way and that some of the law firms they regulate currently have multiple tiers of ownership. Should Section 9A be commenced as drafted, bodies with more than two levels of ownership would be in breach of the Section 9A ownership requirements and would be forced to restructure in order to qualify as legal services bodies and thereby fall within the recognised body regime. This restructuring would be of great expense to those firms and would have caused an unnecessary restriction that does not currently exist. Firms are currently able to structure themselves in a way which is most effective and efficient for their operation, such as allowing easier transfer of ownership in the event of a partner leaving or retiring. Section 9A as currently drafted would have limited firms’ ability to structure themselves to meet their business needs. The proposed amendment to Section 9A will remove this restriction, allowing firms to realise the benefits of outside investment while maintaining the flexibility of the old regime. This order seeks to ensure that bodies with multiple tiers can continue to operate in their current structures and be recognised as legally qualified for the purposes of Section 9A. If those bodies then meet the management and control condition, and the relevant lawyer condition, they will satisfy the legal services body definition and may be recognised by the Solicitors Regulation Authority under Section 9 as suitable to carry on certain legal services. The order achieves this by removing the requirement in Section 9A(5) for qualifying bodies to be owned by legally qualified individuals in order to satisfy the relevant lawyer condition; by recognising partnerships which already exist and which continue to satisfy the Law Society’s relevant pre-commencement conduct rules as legally qualified for the purpose of satisfying the management and control condition; by recognising bodies corporate which already exist and which continue to satisfy the Law Society’s relevant pre-commencement conduct rules as legally qualified for the purpose of satisfying the management and control condition; and by giving the Law Society power to make rules expanding the category of what is to be legally qualified for the purpose of satisfying the management and control condition. These bodies must satisfy all the conditions in Section 9A in order to be ““legal services bodies””. These conditions are important as they make up some of the safeguards to ensure that legal services bodies do not go beyond what was envisaged under the legal services body provisions. They are, after all, bodies that provide legal services, are majority-owned by lawyers and therefore pose a lower regulatory risk. It is vital, therefore, that in removing the two-tier limitation on corporate ownership we do not allow full alternative business structures to emerge before the licensing regime set out in Part 5 of the Act is implemented. The 25 per cent limit on non-lawyer management and the requirement for those managers to be individuals will remain regardless of the number of tiers of ownership of a body. The bodies corporate defined as legally qualified in new subsection (6)(g)—that is, those recognised by the Law Society under Section 9 of the 1985 Act—have already undergone stringent Law Society regulation and recognition and satisfied the Law Society that they are suitable for carrying on solicitor services under current legislation. These bodies are also subject to the Law Society’s pre-commencement rules. The Law Society’s rules that may also permit recognition of other bodies as legally qualified are subject to consultation and a statutory approval process under paragraph 16 of Schedule 22 to the 2007 Act, which includes approval by the Lord Chancellor. The Solicitors Regulation Authority also published changes to its code of conduct on 17 October to take account of the proposed new provisions relating to legal services bodies. The consultation period for those rules closed on Monday, 10 November. Subject to Parliament agreeing this order, those rules will be subject to a robust approval process under Schedule 4 to the Courts and Legal Services Act 1990, which requires approval by the Lord Chancellor following consultation with the designated judges. Finally, all bodies must still satisfy the management and control and relevant lawyer conditions in order to be legal services bodies which may then be recognised as suitable to provide legal services by the Law Society. The procedure for achieving these changes is set out under paragraphs 1 to 4 of Schedule 22 to the 2007 Act, which enables the Lord Chancellor to make an order to modify the functions of a designated regulator or other body. Under paragraph 2 of that schedule, an order may be made by the Lord Chancellor providing that a recommendation has been made by the body to which it relates, and that the body has given its consent. In this case, the Law Society and Solicitors Regulation Authority both recommended on 1 October 2008 that an order be made and gave consent under paragraph 2(4) of Schedule 22. Before the formal recommendation was made, Ministry of Justice officials had been working with the Law Society and the Solicitors Regulation Authority to determine the content of the order. Other relevant stakeholders were also notified in advance of the formal recommendation being made, including the Lord Chief Justice, the Office of Fair Trading, representatives of consumer organisations and other approved regulators. The Ministry of Justice published the draft order on 6 October, seeking views from legal regulators, the profession and consumer groups by 17 October. Schedule 22 also provides that advice must be invited from the Office of Fair Trading and the Lord Chief Justice. On completion of the consultation period, a total of nine responses were received, all of which supported the order. During the consultation period, some small changes were made to highlight relevant amendments to legislation to indicate that a copy of the relevant pre-commencement conduct rules will be available on the Solicitors Regulation Authority website, and to remove the word ““qualified”” in the definition of ““legal partnership”” to avoid confusion. Under paragraph 3(7) of Schedule 22, if the order the Lord Chancellor intends to make differs from that which was published, he must publish a revised draft alongside a statement detailing the changes. This was done on the Ministry of Justice website on 24 October, and the Law Society and Solicitors Regulation Authority gave their consent under paragraph 2(4) of that schedule. This order is necessary to realise the benefits of legal disciplinary practices as early as possible by allowing recognised bodies to take on non-lawyer managers if they so wish. Those bodies must, of course, still satisfy the management and control condition and relevant lawyer condition that place appropriate conditions on ownership. The order ensures that existing bodies are not forced to restructure simply to carry on with their business; a position which would have been unfair and anti-competitive. I commend the order to the Committee. I beg to move. Moved, That the Grand Committee do report to the House that it has considered the Legal Services Act 2007 (Functions of a Designated Regulator) Order 2008. 29th report from the Joint Committee on Statutory Instruments.—(Lord Patel of Bradford.)