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OFT Response 2003

 

(Source)

 

Consultation on the future

regulatory framework for legal

services in England and Wales

 

Response from the Office of Fair Trading

June 2004

 

Title: OFT722.pdf

 

© Crown copyright 2004

This publication (excluding the OFT logo) may be reproduced free of charge in any

format or medium provided that it is reproduced accurately and not used in a

misleading context. The material must be acknowledged as crown copyright and the

title of the publication specified.

 

CONTENTS

Part

Page

1 Introduction 1

2 Implications of proposed regulatory models for competition

4

3 Alternative business structure

12

4 Consultation document questions

23

Annexe

A Competition scrutiny of legal professional rules by the OFT under

the Courts and Legal Services Act 1990 (CLSA)

33

B The OFT's role in competition scrutiny in financial services 34

Office of Fair Trading 1

1 INTRODUCTION

1.1 The Independent Review of the Regulatory Framework for Legal Services in

England and Wales provides a major opportunity for radical consideration of

how current arrangements for the regulation and provision of legal services

can be improved. The Consultation Paper, issued on 9 March 2004, asked for

responses to fundamental questions both about the future regulatory structure

of the profession and about new business structures that would allow greater

choice, for both consumers and professionals, in the provision of services. We

welcome the opportunity to contribute to this review. The legal professions

need reform to improve competition and choice for their customers.

1.2 The terms of reference for the review underline that the promotion of

competition and innovation is central to the identification of a regulatory

framework and business structures that will best serve the public and

consumer interest. This has also been a key theme in recent work by the

Office of Fair Trading (OFT) in the area of professional services. Since January

2000 the OFT has been conducting an ongoing review of competition in

professions. A significant part of our work in this area has involved a focus

upon restrictions on competition in the provision of legal services in England

and Wales. The OFT is also involved in work in Scotland to address restrictions

on competition in the provision of legal services in Scotland.

1.3 In March 2001, the OFT published a report Competition in professions1. The

central purpose of that report was to highlight restrictions on competition in

professions whatever their origin: professional rules; statute or custom and

practice. Where restrictions had their origin in professional rules, we brought

these to the attention of the profession concerned and called on the profession

to either justify continued restriction or remove it. Where restrictions were

identified which could not readily be addressed by the professions or by the

OFT through the application of competition powers, we called on government

to address these. In a subsequent progress statement published in April 20022,

we noted that while a number of the restrictions identified in the earlier report

had been removed or justified, others remained to be addressed. It is a

welcome feature of the present independent review that it takes forward a

number of the important outstanding issues identified in the OFT's work on

1 OFT 328 Competition in professions, published March 2001, at paragraph 50, reproduced

here for convenience at Annexe A. The report is available on the OFT website at

www.oft.gov.uk

2 The OFT 385 Competition in professions Progress Statement, published April 2002, available

at www.oft.gov.uk

2 Response on review of regulatory

structure of legal services

June 2004

competition in the legal professions. In particular, the review addresses

regulatory barriers to change.

1.4 An important theme in the OFT's work on competition in professions relates to

competition scrutiny of professional rules. Current arrangements for

competition scrutiny of rules of the legal professional bodies involve the OFT in

both an enforcement capacity under the Competition Act 1998 (and, as from

May 1 2004, under similar provisions in EC law3) and in an advisory capacity

under the Courts and Legal Services Act 19904.

1.5 At Chapter B, the consultation document sets out possible regulatory models

and at Chapter D it considers governance and accountability issues in relation

to these models. The choice of regulatory model will clearly have a significant

impact on the key objective of ensuring that future regulation promotes

competition and innovation. One important aspect of this will be to ensure that

whatever model is selected guarantees proper competition scrutiny of future

rules. Any change in the regulatory model will have implications for the

respective scope of competition enforcement and advice in relation to rules

governing the supply of legal services. A related and even more important

aspect of the choice of regulatory model is the implications of the model for

competition. One main area of focus in this response, therefore, is the

implications of the proposed regulatory models for competition scrutiny and for

competition. These issues are considered in Chapter 2 of this response.

1.6 Among the most significant restrictions on the provision of legal services that

remain to be addressed are restrictions on choice of business structure. In

most cases the origin of the restriction was a rule or rules of the legal

professional bodies. It remains a key theme of our work on these issues that it

was not for the OFT (or for any other regulator) to seek to specify how

professionals should supply services. In our view, the manner in which goods

and service are supplied is generally best determined by producers competing

freely for the custom of consumers. Where others - especially suppliers acting

collectively - restrict the way in which services are supplied they should be

3 These changes are introduced by EC Council Regulation 1/2003, the 'Modernisation'

Regulation. Modernisation provides a new framework for the enforcement of European

competition law by decentralising the application of European law: national competition

authorities and the courts of the Member States will apply Articles 81 and 82 of the EC Treaty

alongside the European Commission. A European Competition Network has been established to

co-ordinate enforcement by the various national authorities. Further, Modernisation abolishes

the system of notifying agreements for exemption under Article 81(3) and the exclusive

competence of the European Commission to apply Article 81(3).

4 See below Chapter 2, paragraphs 2.3 to 2.5.

Office of Fair Trading 3

called on to justify the restriction or remove it. The current consultation, and in

particular Chapter F, marks a significant step in the review of such restrictions.

Issues relating to alternative business structure are therefore a major area of

focus in this response. These issues are addressed below at Chapter 3 of this

response.

1.7 In Chapter 4 we respond to those questions set out in the consultation

document that are relevant to the work of the OFT. In the main, and to avoid

repetition, answers refer to the relevant paragraphs of Chapters 3 and 4.

4 Response on review of regulatory

structure of legal services

June 2004

2 IMPLICATIONS OF PROPOSED REGULATORY MODELS FOR

COMPETITION

Introduction

2.1 The choice of regulatory model will clearly have a significant impact on the key

objective of ensuring that future regulation facilitates and promotes

competition, innovation and the public and consumer interest. One important

aspect of this will be to ensure that whatever model is selected guarantees

proper competition scrutiny of future rules. This is important in order to ensure

that rules do not unnecessarily restrict competition, for example where they

may serve the interests of suppliers rather than those of users of legal

services. Any change in the regulatory model will have implications for the

way in which competition scrutiny is achieved. A related and even more

important aspect of the choice of regulatory model is the implications of the

model for competition itself. There are a number of aspects to this. One of

these is the question of who regulates; whether the model should rely primarily

on professional bodies or should look to an independent regulator, and what

role if any should be reserved to government. Another important question

recurring throughout the chapters that relate to regulatory models is whether

and to what extent one should seek to regulate by activity rather than by

profession; how one addresses this issue may have important implications for

competition.

Current arrangements for competition scrutiny

2.2 Current arrangements for competition scrutiny in the context of the

professions involve the OFT in both an advisory and an enforcement capacity.

In relation to advisory responsibilities, general powers are now contained in the

Enterprise Act 2002. These replaced and expanded on the powers contained in

the Fair Trading Act 1973 which have now been repealed5. They apply to legal

professional services as to other sectors of the economy. In addition to these

general powers, advisory powers specific to certain important rules relating to

the provision of legal services are contained in the Courts and Legal Services

Act 1990 (CLSA). With regard to enforcement powers, the principal domestic

competition statute is the Competition Act 1998 (CA98). Since May 1, the

date at which the relevant provisions of the Modernisation Regulation6 came

5The OFT's report Competition in professions was conducted using the general powers of

review contained in Section 2 of the Fair Trading Act 1973.

6EC Council Regulation 1/2003.

Office of Fair Trading 5

into force, the OFT also has the power to enforce the competition provisions

of the European Community Treaty, Articles 81 and 82 EC. Specific advisory

and enforcement provisions are set out in more detail below.

COMPETITION ADVICE RESPONSIBILITIES

2.3 As noted in the consultation document, rights of audience and rights to

conduct litigation are regulated in that they are reserved to those who are

considered appropriately qualified. Under the Courts and Legal Services Act

19907, the Secretary of State for Constitutional Affairs (the Secretary of

State) has powers to designate bodies who wish to grant to their members

rights of audience and rights to conduct litigation, or to revoke such

designation. Rule changes by professional bodies are also subject to the

approval of the Secretary of State where proposed changes relate to either of

these two areas. The Secretary of State also has a power to call in any such

rule where he believes it to be unduly restrictive.

2.4 In relation to each of these powers the OFT has an advisory role with respect

to the potential competition effect of the proposed designation, revocation,

rule change by professional body or by Secretary of State. In each case, CLSA

Schedule 4 provides that the OFT must consider whether the grant, revocation

or rule change would have or be likely to have, any significant effect on

competition. The OFT's advice is provided to the Secretary of State and

published. The relevant provisions of the CLSA are summarised at Annex 1. It

must be stressed that the OFT's advisory role in this connection relates only to

rule changes, and not to existing rules.

2.5 In our view, the OFT's advisory powers under the CLSA have nevertheless

proved a useful way for ensuring that where changes are made to this very

significant area of legal service provision the potential competition implications

of such changes are fully considered prior to introduction of the change. The

OFT typically provides approximately 4 to 6 such pieces of advice in any one

year. An example of such an advice is that which was given in March 2003

regarding the competition implications of amendments to Bar Rules governing

qualification while practising in employment. The content of this advice is

summarised at paragraphs 3.18 to 3.22 below. We consider the availability of

a mechanism for competition scrutiny to be of particular importance where

rules that may restrict competition fall outside of the scope of the OFT's

competition enforcement powers.

7 See Schedule 4 to the CLSA Parts I-IV (as amended by Schedule 5 to the Access to Justice

Act 1999).

6 Response on review of regulatory

structure of legal services

June 2004

COMPETITION LAW PROHIBITIONS

2.6 The main competition enforcement provisions applied by the OFT are those

under the CA98. The CA98 contains two prohibitions. The Chapter I

prohibition applies to agreements between undertakings, decisions by

associations of undertakings or concerted practices which may affect trade

within the UK or any part of it and which have as their object or effect the

prevention, restriction or distortion of competition within the UK. The Chapter

II prohibition applies to conduct on the part of one or more undertakings that

amounts to the abuse of a dominant position in a market and which may affect

trade within the UK or any part of it. These two prohibitions are modelled on

European Community competition law and are applied consistently with it8.

The OFT has powers to investigate and to take enforcement action against

infringements of the prohibitions.

2.7 Since May 1 2004, the date at which the relevant provisions of the

Modernisation Regulation9 came into force, the OFT is also responsible for

applying and enforcing the competition provisions of the European Community

Treaty, Articles 81 and 82 EC. These provisions, which mirror those of the

CA98 described above, apply where the agreement or conduct under

investigation may have an effect on trade between member states.

EC CASE LAW

2.8 In principle, both Articles 81 and 82 EC, and since the repeal of CA98

Schedule 410, the provisions of the CA98, apply equally in the context of

professional services as they do in other sectors of the economy. Both sets of

provisions are interpreted and applied in the light of Community and national

case law. Developments before Community courts suggest that, in practice, it

is not always clear that rules that govern the provision of professional

services, and which may restrict competition, will always fall within the scope

of these provisions. Examples of factors that may be relevant to assessing the

scope of the provisions in the context of rules emanating from legal

professional bodies governing the provision of legal services include the

following:

8 See CA98 Section 60.

9EC Regulation 1/2003.

10See paragraph 1.5 above.

Office of Fair Trading 7

the nature and extent of oversight of the decision-making process by

government or regulators11;

the composition of the decision-making body and the extent of its

independence12;

whether there are public interest considerations which must be taken into

account in the decision making process13.

2.9 These factors are not intended to be exhaustive14. They are presented simply

to highlight that the choice of regulatory model may significantly affect the

subsequent scope for applying competition prohibitions in the context of rules

governing the provision of legal services. Regulatory design should make clear

that competition rules do apply. Where the model chosen is such as to make

doubtful the application of the competition prohibitions, then it will be

important to put in place an alternative mechanism for ensuring effective

competition scrutiny.

2.10 In the remainder of our response we consider the relative strengths of two of

the models set out in the consultation, Models A and B+. We consider the

implications of these models both for competition scrutiny and for competition

itself. We do not explicitly comment on the third model set out in the

consultation document, Model B. This is because we consider that in

proposing the separation of representation and regulation functions of legal

professional bodies, Model B+ has clear advantages over Model B. Whatever

the merits of self-regulation, they risk being seriously undermined by either the

reality or the appearance of the regulator's judgement being swayed by its

wish to represent the interests of its members when these may differ from the

interests of users of legal services.

Model A: A Legal Services Authority

2.11 Model A envisages setting up a Legal Services Authority (LSA) in which all

regulatory power in relation to legal services would be vested by statute. The

legal professional bodies would lose all their regulatory functions and would

continue as representative bodies.

11See for example, Case C-35/59 Arduino.

12See for example, Case C-35/59 Arduino, and Case C-185/9 Reiff

13See for example, Case C-35/59 Arduino, and Case C-309/99 Wouters

14For a more detailed account of the scope for enforcement action against professional bodies

under Articles 81 and 82 EC, see paragraphs 65-89 of the European Commission's Report on

Competition in Professional Services, published on 9 February 2004; Com(2004) 83 final

8 Response on review of regulatory

structure of legal services

June 2004

IMPLICATIONS FOR COMPETITION SCRUTINY

2.12 The implications of Model A for the application of the competition prohibitions

seem fairly clear. The removal of the professional bodies from any regulatory

function suggests that there would be no scope for such action by the OFT in

relation to anti-competitive rules. This is because if the LSA takes over the

regulatory functions of the professional bodies, the Chapter I prohibition of the

CA98 would no longer apply to the rules of those bodies. In this case there

would be a need for a vigorous advisory regime.

2.13 The consultation document draws parallels between the proposed powers of

the LSA and those currently exercised by the Financial Services Authority in

the context of financial services. In this context, powers of competition

scrutiny are given to the OFT under a special regime established by the

Financial Services and Markets Act 2000 (FSMA). The OFT's role involves

scrutiny of both the FSA's regulatory provisions and practices and of the

regulatory provisions of investment exchanges or clearing houses who apply to

the FSA for recognition or which have previously been recognised. The OFT's

powers and obligations in this context are set out in more detail at Annex 2. In

brief, the OFT has an obligation to keep such rules, practices and regulatory

provisions under review and to report to the Competition Commission where

we consider that they have a significantly adverse effect on competition. The

OFT has a discretion to issue and to publish such a report if we conclude that

there is no such adverse effect.

2.14 Our experience of applying these provisions suggests that they provide an

effective, if resource intensive, mechanism for competition scrutiny of the

relevant rules, regulations and practices, in circumstances where the

competition prohibitions do not apply. If Model A is adopted, the FSMA

provisions may therefore be a useful guide to achieving competition scrutiny in

the context of the regulation of legal services. Of particular importance is the

duty to report to the Competition Commission, noted above. Such a duty on

the OFT provides a strong incentive to the Regulator to ensure that rules,

practices and regulatory provisions do not have a significantly adverse effect

on competition. This might, of course be achieved in other ways; what is

important is a method to sanction or veto rules which significantly harm

competition or the development of competition. It will also be important to

ensure that the regulator's rule-making functions are exercised in accordance

with a clear and appropriately prioritised competition objective. This might

usefully include an assessment of the potential competition effects of the

Office of Fair Trading 9

individual rule viewed in the context of the other rules and in the economic

context in which it will operate.

IMPLICATIONS FOR COMPETITION

2.15 There may be a number of positive benefits for competition and therefore for

users of legal services that follow from the adoption of Model A. Independent

regulation is one potential advantage. The OFT's work in this area has led us

to consider that there is a significant risk that attaches to self-regulation by the

professions, which is that the resulting rules will reflect the interest of the

providers rather than the users of legal services. Similarly, OECD's report on

competition in professions, published in October 2002, underlines both the

desirability of making available a range of service at a range of prices and the

likelihood that if regulation rests with professional bodies, the level of

regulation will be such that some consumers will pay more that they need to

for services. Independence from government (subject perhaps to the possibility

of some minimal continuing government involvement15) also seems desirable.

A further potential competition advantage of Model A is that competition may

be encouraged by a framework that facilitates regulation by activity or service

rather than by profession. This might achieve greater clarity and transparency

and help to open up markets traditionally the preserve of members of one

professional body to members of others. Having a single regulator might also,

as pointed out at Chapter 3 below, facilitate the establishment of Multi-

Disciplinary Practices (MDP) both because of the potentially greater clarity and

simplicity in rules and also by providing a single partner for negotiations with

other professions involved (accountants, surveyors etc).

2.16 There are also, however, a number of potential threats to competition inherent

in Model A. Model A would necessarily suppress alternative approaches to the

regulation of legal services. Competition between regulators can be an

important way of identifying cheaper forms and encouraging innovation. If

Model A is adopted, a challenge for the new regulator will be to find

alternative mechanisms to ensure that innovation continues and that where

possible, buyers of legal services remain free to choose between a more

expensive service with a high level of regulatory protection and a cheaper

service that nonetheless meets a minimum standard in terms of consumer

protection. A further potential disadvantage is that in distancing the profession

from regulation, there may be a loss in regulatory expertise; professionals may

be best placed to identify risks to independence and probity even if they are

15See for example the restricted Government role under the FSMA set out at paragraph 28 of

the consultation document.

10 Response on review of regulatory

structure of legal services

June 2004

not best placed to balance these risks against, for example, the interests of

consumers when making rules that address the risks. Mechanisms for

consulting the profession about rules would clearly be essential to the success

of Model A.

Model B+: A Legal Services Board

IMPLICATIONS FOR COMPETITION SCRUTINY

2.17 Model B+ presents a more complex picture with regard to the potential for

future competition scrutiny than does Model A. Under B+, the continuing role

of the professional bodies in rule-making raises that possibility that some

scope for applying the competition prohibitions against bodies that make anticompetitive

rules might remain. Factors outlined at paragraph 2.8 above may

be critical to determining the continuing scope for such action under this

model. In particular, the extent of the oversight exercised by the Legal

Services Board will be an important factor as will the extent of the lay

involvement in the decision making by the regulatory arm of the professional

body.

2.18 To the extent that rules fall outside the scope of the competition prohibitions,

a special regime will need to be in place to ensure that rules made comply with

competition scrutiny. One aspect of this would be to ensure that a clear and

appropriately prioritised competition objective be set out for both the Board

and the professional body when discharging any rule-making/approval function.

This might usefully include an assessment of the potential competition effects

of the individual rule viewed in the context of the other rules and in the

economic context in which it will operate. A second aspect to this could be to

ensure that the Board had an obligation to seek competition advice from the

OFT when approving professional rules or when considering applications from

professional bodies to be recognised for the purposes of qualifying and

supervising members to provide services. This would be similar to the current

arrangements under the CLSA described above. In addition, the OFT might be

given responsibilities similar to those that currently exist in relation to financial

services to keep rules and practices under review and to report to the

Competition Commission where we found a significant adverse effect on

competition. The addition of this ongoing power of scrutiny (additional to

provision of advice at the point where rules are approved or when bodies seek

designation), would strengthen the OFT's capacity to provide effective

competition scrutiny of legal professional rules.

Office of Fair Trading 11

IMPLICATIONS FOR COMPETITION

2.19 Model B+ appears to us to have a number of potential advantages over Model

A. Where Model A necessarily suppresses competition between regulators,

Model B+ would allow the potential for such competition. It could also ensure

that the Board was in a position to both encourage such competition, but also

to step in if it appeared that such competition was weakening regulation to the

point where this was endangering consumer protection. A further advantage of

Model B+ would be the continued access to the expertise of the professionals

in rule-making, while at the same time providing oversight to ensure that the

self-regulatory element was operating in the interests of users of services

rather than suppliers. The continued participation of the professions might also

have cost advantages.

2.20 Model B+ does not appear well suited to deliver a transition from regulation

by profession to regulation by service although elements of this might be

achieved through the establishment by the Board of a system of guidelines for

rule-making in certain areas, or by the Board co-ordinating rule-making across

the professional bodies where it considered harmonised rules desirable. A

capacity to choose areas in which to promote harmonised rules might also be

important to the capacity of the Board to function as an effective single

representative for the legal profession in negotiation with other professions in

the context of MDPs.

2.21 The regulation of Legal Disciplinary Practices (LDP) needs particular attention

under model B+. Where, say, barristers and solicitors worked together in the

same LDP, problems could arise if they have different professional rules. For

example, solicitors are permitted to handle clients' money and have to abide

by certain rules when doing so, whereas barristers may not at present handle

clients' money. It is unlikely that an LDP could be run efficiently with this kind

of difference between its members. One solution would be for the Board to

harmonise the relevant professional rules, as envisaged in the previous

paragraph. Another solution might be for one professional body to act as the

lead regulator of LDPs and to regulate the members of other professions to the

extent that their conduct related to their role as members of LDPs. The OFT

does not have firm views about which of these solutions would be preferable,

or indeed whether there are other feasible ones, but it is clear that whatever

solution is adopted it must not restrict the ability of members of different legal

professions to join together in LDPs or the ability of LDPs to compete with

each other and with lawyers organised in other types of business structure.

12 Response on review of regulatory

structure of legal services

June 2004

3 ALTERNATIVE BUSINESS STRUCTURE

3.1 In Chapter F, the consultation document sets out and discusses a range of

possible business structures. Making available new business structures to

lawyers implies lifting current restrictions that have been identified as

restricting competition. In this chapter we consider the implications of each of

the models proposed for a range of restrictions that currently deny choice to

both suppliers and consumers of legal services.

How current restrictions on business structure are addressed by the proposed

alternative structures

RESTRICTIONS ON BUSINESS STRUCTURE

3.2 Among the most significant restrictions on the provision of legal services

identified in the OFT's reports and that remain to be addressed are restrictions

on choice of business structure in professional rules. Restrictions identified

included:

rules that prohibit partnerships between barristers and between barristers

and other professionals (both lawyers and non lawyers);

rules that prohibit solicitors from entering partnerships with members of

other professions (both lawyers and non-lawyers); and

rules that prevent solicitors in employment to non-solicitors from providing

services to third parties.

Questions raised and structures proposed in Chapter F of the current

consultation on Alternative Business Structures bear directly on each of these

restrictions. In relation to the restrictions on partnership in Bar rules (first

bullet), the Bar has sought to justify the current total ban. The Law Society

now favours lifting both the restrictions on solicitors entering partnerships with

members of other professions (second bullet) and the restriction that prevents

employed solicitors from providing services to third parties (third bullet).

THE BAR'S JUSTIFICATION FOR RESTRICTIONS ON PARTNERSHIP

3.3 As the Bar's justification for a ban on partnerships is relevant to the debate

over alternative business structures, we summarise below why we think that

the objection to partnerships is misconceived.

Office of Fair Trading 13

3.4 In February 2002 in response to the OFT's Competition in professions report,

the Bar Council issued a report (the Bar response)16. In the Bar response, the

Bar makes clear that it does not intend to relax restrictions on partnership

either between barristers or between barristers and members of other

professions. In both cases, and broadly for the same reasons, it considers the

restrictions to be justified. The Bar's arguments are set out in Section 3 of its

report. In essence, there are three arguments by which the Bar seeks to justify

a total ban on partnership:

it promotes competition and choice by maximising the number of competing

undertakings;

it serves to minimise costs in the provision of barristers' services; and

it enables the Bar to maintain the 'cab-rank' principle.

THE OFT CONTINUES TO CONSIDER THAT THE RESTRICTIONS GO BEYOND

WHAT IS NECESSARY

3.5 In its progress statement in April 2002, the OFT set out the reasons why,

notwithstanding the Bar's arguments, we do not consider that the restrictions

are justified. These are as follows:

3.6 The first argument relies upon an assumption that permitting partnership will

lead to an inadequate choice of barristers that would be detrimental to

competition and the public interest. We question this as a general proposition.

While it may be true that in some areas of barristers' practice, the number of

practitioners is relatively small, not all areas of practice are concentrated. In

any event, competition rules exist to prevent concentration, where this may

damage competition. The total ban fails to discriminate between partnerships

that may increase competition and choice and those that may not. On the

other hand, prohibiting partnerships restricts choice: the barrister's choice to

adapt his business structure in the way that best meets his needs and those of

his client is restricted. This choice should be open to the barrister as a

barrister, and without the need to requalify and to market oneself as a

solicitor- a solution proposed in the Bar's report. Similarly, the client's choice

to seek the benefits of an integrated service is restricted where partnerships

with non-barrister professionals are prohibited. In any event, in the context of

partnerships between barristers and other professionals, partnership may

expand the availability of barristers.

16 See response of the Bar Council to the OFT's report Competition in professions at

www.barcouncil.org.uk

14 Response on review of regulatory

structure of legal services

June 2004

3.7 The Bar's second argument relies on the observation that solicitors' overheads

in partnership are significantly higher than those of barristers in sole practice.

As the Bar response points out elsewhere however, many of the activities of

solicitors and barristers remain, for the time being, significantly different. It

would therefore be premature to draw the conclusion that the difference in

business structure is responsible for the difference in overheads. Lifting the

prohibition on partnership would allow barristers the freedom to choose

alternative structures and the efficiency benefits that these might bring.

3.8 Thirdly, the Bar argues that prohibiting partnerships enables the Bar to

maintain the cab-rank principle. While it may be the case that barristers in

partnership might not be subject to the cab-rank principle, the principle would

continue to apply to barristers in independent practice and might apply also at

the level of the partnership.

3.9 In summary, the OFT does not consider that the case has been made out for

the retention of either of the prohibitions on partnership imposed by Bar rules.

IMPLICATIONS OF PROPOSED ALTERNATIVE STRUCTURES FOR

RESTRICTIONS IDENTIFIED

3.10 The matrix at Chapter F, p 66, of the consultation document (the matrix) sets

out 4 models of possible alternative business structures. It is important to

consider how far each of these models is likely to address the restrictions

discussed above and to reduce, therefore, the cost to users of legal services

that result from these restrictions on freedom and choice.

OPTIONS FOR ALTERNATIVE STRUCTURES

3.11 The matrix sets out 4 possible options for alternative structures. The options

distinguish between practice that offers only legal services (Legal Disciplinary

Practice or LDP) and practice where legal services are supplied alongside other

services such as for example, accountancy or surveying (Multi-Disciplinary

Practice or MDP). The other distinction that is central to the options is that

between practice where those who manage the practice own it and practice

which is not exclusively owned by managers. The options presented may be

listed and labelled as follows:

Option one is an LDP that brings together lawyers from different

professional bodies (barristers, solicitors, conveyancers, legal executives,

trade mark attorneys, patent agents, notaries) to work together on an equal

Office of Fair Trading 15

footing to provide legal services to third parties; Non-legal professionals

might help in the management of such practices, but they would not be

able to provide services to third parties. The practice would be owned by

those who managed it.

(LDP 1)

Option two is similar to Option one except that, this option would allow for

a practice owned not exclusively by its managers but also by third parties

such as a bank, automobile association or a supermarket.

(LDP2)

Option three allows the development of practices that would bring together

lawyers and other professionals such as accountants and surveyors. It could

therefore offer a one stop shop to clients who require the services of more

that one professional. Those who managed the firm would also own it.

(MDP1)

Option four is similar to Option three except that this option would allow for

a practice owned not exclusively by its managers but also by third parties

such as a bank, automobile association or a supermarket.

(MDP2)

IMPLICATIONS OF ALTERNATIVE STRUCTURES FOR CURRENT

RESTRICTIONS

3.12 LDP1, if introduced, would address current restrictions on partnerships

between barristers. It would also allow both barristers and solicitors to enter

partnership with lawyers who were members of professional bodies other than

their own. In lifting these restrictions on business structure, LDP1 would also

allow clients to buy litigation and advocacy services from one and the same

firm and may go some way therefore to address the related restriction in Bar

Rules on barristers in independent practice conducting litigation (for a fuller

discussion of this restriction see paragraphs 3.14 and 3.15 below).

Introduction of LDP1 would not however address the current restrictions that

prevent solicitors in employment to non-solicitors from providing services to

third parties, nor would it lift the restrictions on partnerships between either

solicitors and barristers and non lawyer professionals.

LDP2, if introduced, would bring all the advantages of addressing the

restrictions that LDP1 addresses but would in addition involve lifting the

restriction that prevents solicitors in employment to non-solicitors from

16 Response on review of regulatory

structure of legal services

June 2004

providing services to third parties. Partnerships involving provision of legal and

other services would remain prohibited, however, so further change would be

necessary if clients were to benefit from the availability of one stop shops.

MDP1, if introduced, would bring all the advantages of LDP1 but would in

addition involve lifting restrictions in Law Society and Bar Rules that prevent

solicitors and barristers from offering one stop shop services alongside nonlawyer

professionals. Capitalisation and other potential benefits from third

party ownership would remain restricted.

MDP2, if introduced, would address all restrictions on business structure

identified in the OFT's reports.

CONCLUSIONS

3.13 It follows from what is said above that MDP 2 is the only model the

introduction of which would ensure that all of the restrictions on business

structure identified in the OFT's work were addressed. We therefore strongly

favour this model and consider that it is the model which is likely to maximise

benefits to users of legal services in England and Wales. We recognise

however, that there are a number of issues that are specific to the MDP

models and that would need to be resolved, in some cases in partnership with

other professions; the time-frame for introduction of MDP2 might therefore be

longer that that for LDP2. We consider LDP2 to have significant advantages

over LDP1 in competition terms. Resolution of issues specific to MDP2 should

not be allowed to cause delay to an early introduction of LDP2. But LDP2

should be seen as a step towards MDP2 rather than an alternative to it.

Creating a framework in which lawyers who are members of different

regulatory bodies can offer services in partnership is likely to be a significant

step toward establishing a framework where lawyers can practice with other

professionals. Similarly, reform of the overall regulatory model and the

establishment of a single body, whether authority or board with oversight

functions (see Chapter 2 above), with regulatory responsibility for legal

services is also likely to facilitate the subsequent introduction of model MDP2.

In the interests of early progress, we would therefore support the early

introduction of model LDP2 as an interim step towards MDP2. In 'Issues

specific to MDPs' (from paragraph 3.24 below) we look at issues specific to

MDPs and consider how they may be addressed.

Office of Fair Trading 17

Implications of new business structures for other restrictions

THE PROHIBITION ON LITIGATION BY BARRISTERS AT THE INDEPENDENT

BAR

3.14 Questions in Chapter F related to alternative business structures have

implications also for other restrictions in professional rules, even where these

may not appear to be primarily about business structure. Some such

restrictions were identified in the OFT's 2001 report; others emerged in

subsequent work by the OFT in this area. One significant example is the

prohibition in rules of the Bar on the conduct of litigation by barristers in

independent practice. This was highlighted in the OFT’s Competition in

professions report in 2001 and further commented on in the progress

statement in 2002. In our report, we stated that we considered that this

prohibition prevents potential efficiencies and limits the number of lawyers

available to conduct litigation. We underline that the OFT does not seek to

oblige any individual barrister to conduct litigation. Our concern is that

barristers should be free to choose. At present, the Bar dictates that in no

circumstances can any member of the independent Bar conduct litigation. We

consider it a significant restriction on the freedom of choice of both barristers

and their clients. Whatever the future form of this rule, however, its

significance is likely to be affected by the availability of new business

structures.

3.15 We welcome the fact that each of the models that are set out in the

consultation document would allow a barrister to offer services as a barrister

within a practice that could offer clients the full range of legal services

including litigation and advocacy. Where, following the introduction of

alternative structures, it was clear that such integrated services were available

to clients who wanted them, and that barristers who wished to practice in this

way could do so unimpeded and without change to title or practising rights,

this would clearly be a relevant consideration in assessing whether a

continuing prohibition on litigation, affecting those barristers who chose to

remain sole practitioners, constituted a significant restriction on competition. If

a substantial number of mixed solicitor/barrister LDPs were formed, the

restriction on competition entailed by a prohibition on litigation by sole

practitioner barristers would be less likely to be appreciable.

18 Response on review of regulatory

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June 2004

ENTRY RESTRICTIONS AND PRACTITIONER MOBILITY

3.16 It will be critical to the success of any new business structures to ensure that

the entry and qualification requirements do not unnecessarily hinder the

development of new structures. Similarly, the capacity of practitioners to

move from one business form of practice to another without unnecessary

restriction will be important to the success of new business structures.

3.17 We have been concerned for some time that the requirements which the Bar

places upon those who seek to qualify other than at the independent Bar go

beyond what is necessary and are disproportionate in their effect on entry to

requirements set for qualification at the independent Bar. If rules that currently

govern qualification at the employed Bar were to be applied also in the context

of new legal and multi-disciplinary partnerships, and it would appear that

failing amendment they would, then there is a real danger that such rules

would significantly impede the establishment and development of new

business structures at least as far as barrister participation is concerned.

3.18 A particular rule which we are concerned may significantly impede potential

competition from barristers choosing to practice in new business structures is

Rule 203 of the Bar's Code of Conduct. In advice to the Lord Chancellor

provided under the Courts and Legal Services Act 1990 (CLSA), we have

previously set out our concern about the anti-competitive effects of Rule 203

in the context of practice as an employed barrister17. Rule 203 requires that a

barrister who has less than three years' standing must practice from a

chambers or office which is also the principal place of practice of a practitioner

who is suitably qualified to provide guidance (Rule 203 (1)(b). A person is

considered suitably qualified if they have been qualified to practise and have

practised for six of the previous eight years, two of which must be the years

that immediately precede the period of supervision (Rule 203(3)).

3.19 There are two aspects of Rule 203(1)(b) that give rise to concern. Both

currently relate to the effects of the rule in the context of practice at the

employed Bar, but the effects are likely to be similar in the context of future

practice in MDP/LDPs. The first is the requirement that a barrister's place of

practice must, for the duration of the qualifying period, be the same as that of

a person who is qualified to supervise. The second relates to the operation by

the Bar Council of a discretionary power of waiver in relation to this

requirement.

17 See the OFT advice of March 2003. Since April 2001, advice given under Schedule 4 to the

CLSA is published. The advice is available on the OFT website www.oft.gov.uk

Office of Fair Trading 19

3.20 The requirement in Rule 203(1)(b) that a barrister's principal place of practice

must, for a period of three years be the same as that of a suitably qualified

supervisor governs both independent practice and employed practice and

would also unless amended come to govern practice within future LDPs or

MDPs. Its effects in the context of employed practice or LDP/MDPs are,

however, very different from its effects in the context of independent practice.

In independent practice, the requirement will almost inevitably be met by

practice in chambers, and irrespective of whether there is, in reality, regular

contact for the purposes of supervision between the qualified person and the

person supervised. By contrast, in employment, the rule acts to severely

restrict the freedom of a newly qualified barrister to accept an employment

contract and to restrict also the freedom of potential employers to employ

newly qualified barristers. This will only be possible where the would-be

employer already employs a relatively senior lawyer who meets the exacting

terms of Rule 203(3). In our view, the restriction inherent in this rule might be

considerably relaxed, and the level of supervision maintained or even

improved, if the rule were expressed in terms of regular contact with a

supervisor rather than in terms of a principal place of practice. This would

allow a barrister in employment or practising within an LDP or MDP to be

supervised by a suitably qualified person (such as a former pupil master),

whether that person shared his place of employment, was employed elsewhere

or was at the independent Bar. This would greatly enhance the opportunities

for barristers in employment and in newly formed alternative business

structures.

3.21 The Bar Council has a general discretion to waive the requirements of Rule

203(1)(b) on application. Applications are considered by the Transitional

Arrangements Sub-Committee. Our concern here is that the operation of a

waiver system in this context creates a very high degree of uncertainty for

barristers who wish to practice at the employed Bar and to acquire standing to

meet the three year rule. Given that the numbers of barristers qualifying

greatly exceeds the number of openings at the independent Bar, it is likely that

this uncertainty affects the majority of the recently-qualified Bar. Taking into

consideration the discretionary nature of the waiver system, the absence of

clear published criteria, and that barristers seeking an exemption are unlikely to

be in a position to make an application for waiver until they have taken up a

post in a new LDP, MDP or other employment, the hurdles that face those

who wish to practice outside the independent Bar are considerable.

20 Response on review of regulatory

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June 2004

3.22 In summary, the current rules and the way they are applied operate to prevent

a barrister from knowing in advance whether a period of practice in

employment (or in an LDP or MDP) will qualify him/her to the same degree as a

period at the independent Bar. The criteria for meeting Rule 203(1)(b) should

be clarified and simplified to allow a barrister who wishes to enter employment

to know in advance whether the period in employment will meet the

requirements. In order to widen the range of business structures that will meet

the requirements, we also recommend that the Bar Council consider amending

Rule 203(1)(b) to allow appropriate supervision to be undertaken by any

suitably qualified person who is willing to undertake it.

3.23 Rule 203 is one example of a rule that may impede the establishment and

development of MDP/LDPs. Similar concerns exist in relation to the

requirements for completion of pupillage (the 12-month period of practical

training which a barrister must undertake to qualify to practice). While we are

not aware of qualification requirements of other legal professional bodies that

may have similar effects, these would need to be considered to ensure that

requirements do not unnecessarily impede the freedom of lawyers to choose to

practice within new business structures where they consider that new

structures will allow them to better meet the needs of clients.

Issues specific to MDPs

INTRODUCTION

3.24 Chapter F sets out a number of issues that arise specifically in the context of

multi-disciplinary practices (MDPs). It has long been the position of the OFT

that it is desirable in principle to permit the formation of such partnerships18. In

the OFT’s report Competition in professions, in 2001, we noted that

restrictions on MDP may both inhibit new entry and prevent the exploitation of

possible economies of scale and scope. It was and remains our view that the

opportunities to provide combinations, in particular, of high-street professional

services under one roof should unlock potential cost efficiencies and enhance

customer choice and convenience at this level of the market. Potential benefits

might accrue also from combinations at other levels of the market19.

3.25 We recognised in the OFT’s Competition in professions report that particular

safeguards would be necessary in particular in relation to combinations

18 See the Entities Report , OFT,1986

19 See OFT 328 Competition in professions at paragraphs 29-32 available at www.oft.gov.uk

Office of Fair Trading 21

involving auditors20. We doubt however if the need for such safeguards in

relation to audit services can justify the current blanket prohibition on MDPs

outside of the field of auditing services; nor do we consider this to be a

necessary implication of recent European case law. Even in the field of audit,

the response of those with responsibility for regulating audit following the

Enron situation has not been blanket prohibition of the provision of non-audit

services by auditors but has been to consider the specific risks involved in the

provision of each combination of services and only to prohibit those

combinations of service where identified risks cannot be addressed by

appropriate safeguard.21

3.26 The issue of legal professional privilege is highlighted in the consultation

document as an inhibitor to the development of MDPs. In the OFT’s report

Competition in professions 22, and subsequent progress statement, we

highlighted the concern that where lawyers are in competition with nonlawyers,

legal professional privilege may distort competition in favour of the

lawyer. Government subsequently concluded that altering the scope of

privilege would not be in the public interest23. However, a recent judgment of

the Court of Appeal, which limits the scope of legal advice privilege to advice

or assistance given by a lawyer in relation to rights and obligations, may be

relevant in this context24. To the extent that the ruling restricts the scope of

legal advice privilege, it may also have the effect of reducing to some degree

the competition effect of legal professional privilege as well as its effect as an

inhibitor on MDP. Note that the Court of Appeal's judgment is currently under

appeal to the House of Lords.

3.27 The consultation draws a number of distinctions between MDP and LDP. It

clarifies that, unlike LDPs, the process of agreeing an appropriate framework

for the regulation of MDPs is one that will necessarily involve negotiation with

those with responsibility for the regulation of other non-lawyer professionals.

This was recognised also by the OECD in its 2002 report on competition in

professions in the UK25. This may argue for a different time scale for the

introduction of this business structure that takes account of the need for a

20 See Competition in professions Progress Statement at paragraph 3.38, available at

www.oft.gov.uk

21 See for example the recent consultation issued 24 November 2003 by the Auditing Practices

Board on Draft Ethical Standards at ES5.

22OFT 328 at paragraph 47

23 'Competition and Regulation in the Legal Services Market' DCA 2003

24 Three Rivers District Council & Ors v The Governor & Company of the Bank of England

[2004] EWCA civ 218

25 See OECD Report Regulatory Reform in Gas and electricity and the Professions in the UK, 23

October 2002.

22 Response on review of regulatory

structure of legal services

June 2004

process of inter-professional negotiation. It does not in our view argue for the

abandonment of the potential advantages that MDPs may bring. Indeed, we

see one of the advantages of the reform of the regulation of the legal

framework for legal services is that this is likely to result in a single entity

(Authority or Board) capable of representing all of the legal profession in such

negotiation. To this extent it may mark a significant step towards the

facilitation of the regulatory structure for MDP. We encourage the review team

to recommend that the OECD recommendation in its 2002 report on

competition in the UK be taken forward, and that government now facilitate a

process of discussion between professions towards a regulatory environment

for MDPs.

3.28 To conclude on the issue of alternative business structures, it seems

appropriate to recall the following point of general relevance to a consideration

of any new business structure. The question of how services are supplied is

generally best determined by unfettered competition between producers for

the custom of consumers. Regulators at whatever level should therefore avoid

prescribing how professional services should be supplied. It follows that

where, as currently, restrictions are placed on the freedom of patterns of

supply to evolve and improve, those restrictions should be removed unless

they can be justified. Removing current restrictions in professional rules and in

statute that prevent lawyers participating in LDPs and MDPs is likely to have a

positive effect on competition in the supply of legal services in England and

Wales.

Office of Fair Trading 23

4 CONSULTATION DOCUMENT QUESTIONS

In this chapter, we provide responses to the questions set out in the consultation

document where these are relevant to the work of the Office of Fair Trading. In the

main, this will involve reference back to the relevant paragraphs of Chapters 2 and 3.

Question A1

There are a number of important possible objectives for a regulatory system covering

the provision of legal services. What objectives do you believe should form the

cornerstone of a regulatory system for legal services?

The consultation document properly identifies the relevant objectives. We

welcome the recognition both in the objectives and the terms of reference to

the review of the importance of a competition objective. It is in the interests of

users of legal services that a regulatory regime prevent unjustified restrictions

and encourage competition.

Question A2

What aspects of professional ethics, or legal precepts, do you feel are essential to a

properly functioning legal services industry and in what way should they be reflected in

the regulatory system?

These aspects are properly identified in the consultation document. In our

negotiations with legal professions we have recognised that it may be

necessary to restrict the freedom of professionals, including aspects of

freedom to compete, in order to ensure that, for example, the independence of

lawyers is protected. However, lawyers are likely to best serve the interests of

their clients where such restrictions are maintained at the minimum level

necessary. With regard to confidentiality, see comments on privilege at

paragraph 3.26 above.

Question A3

Do you consider that risks to the regulatory objectives should be a central

consideration in determining how regulatory powers and resources should be used?

Yes. Provided that all appropriate objectives are recognised and that competing

objectives are appropriately balanced.

24 Response on review of regulatory

structure of legal services

June 2004

Question B1

What do you see as the broad advantages and disadvantages of Model A in

comparison with Model B? In particular, what do you see as the strengths and

weaknesses of (i) combination and (ii) separation of regulatory from representative

functions?

See Chapter 2 above.

Question B2

Which model best meets the criteria of the terms of reference?

See Chapter 2 above.

Question B3

If it were felt appropriate to separate regulatory and representative functions within

professional bodies as envisaged under Model B+, how might it best be achieved?

There would be distinct advantages in ensuring that the regulatory function

was carried out pursuant to clear public interest criteria provided by statute. It

would be preferable to ensure also that the composition of the Board with

oversight functions reflected the interests of users of legal services. Any

arrangement should ensure that the implications for competition scrutiny are

recognised (see Chapter 2 above at paragraphs 2.1 to 2.10, 2.17 and 2.18).

Question B4

What powers would you wish to see delegated from the Government to the Regulator?

Powers currently exercised by government under the CLSA should be

delegated whether Model A or B is adopted. The aim should be an independent

Regulator.

Question B5

What powers to instruct the Regulator would you wish to see Government retain?

The retention of minimal powers such as those retained in respect of financial

services appears unlikely to interfere with the key objective of ensuring that

the Regulator is independent.

Office of Fair Trading 25

Question B6

What international considerations should influence the design of appropriate regulatory

arrangement of legal services within England and Wales?

Enabling providers to continue to compete effectively in an international

market place is clearly a key objective. The consultation document points also

to the need for a new regime to be responsive to international obligations and

to be able to accommodate new market and regulatory developments. We

agree, but consider also that by pooling expertise in a single regulator, whether

Authority or Board, more dynamic participation by the new regulator within the

relevant international bodies should also be possible. Recent publications by

the European Commission (DGComp) and the Organisation for Economic

Cooperation and Development (OECD) have been important in informing

Chapters 2 and 3 of this response.

Question C1

Should service complaints (which are consumer centred) be operationally split from

professional conduct and disciplinary issues (which are centred on the practitioners and

their professional bodies)?

The OFT's experience in this area is drawn from our work on voluntary,

business to consumer, codes of practice. The Consumer Codes Approval

Scheme (CCAS) is our current approach to the promotion of self regulation

through codes of practice. Codes are assessed by the OFT for approval against

a set of challenging core criteria which cover organisation, preparation of the

code, code content, complaints handling, monitoring, enforcement and

publicity. Under the CCAS code members must have in place speedy,

responsive, accessible and user-friendly procedures for dealing with consumer

complaints. If a code member and complainant cannot reach agreement on

how to solve a complaint, the complainant must be allowed access to

conciliation services. The role of the conciliation service is to try to facilitate

an agreement between the code member and the complainant. This service

must be subject to reasonable time limits and could be provided by the code

sponsor (the administering body of a code eg a trade association). If a

complaint has still not been resolved following this stage, the complainant

must be allowed unrestricted access to an independent redress scheme. For

the OFT's purposes, an independent redress scheme must be completely

independent of the code sponsor. If a code sponsor uses a board or panel, the

entire membership of the board or panel must be independent of the code

sponsor and its subscribing members. If a code sponsor appoints an individual

26 Response on review of regulatory

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June 2004

as an arbitrator, that person must be independent of the sponsor and its

subscribing members. In order to ensure impartiality, any arbitrators,

adjudicators or ombudsmen adjudicating under the redress scheme cannot also

sit on the code sponsor's disciplinary panel. An independent redress scheme

should resolve complaints speedily, be free for the consumer if possible and

must be easily accessible to the consumer without the assistance of a legal

representative.

Question C2

In connection with complaints, what are the advantages and disadvantages of (a)

having a uniform complaints organisation, independent of the bodies, similar to the

FOS, or (b) each body remaining responsible for its own complaints? Is the New South

Wales example a useful model?

No comment.

Question C3

If you believe that each body should remain responsible for its own complaints, what

form of regulatory oversight would you wish to see?

No comment.

Question C4

How do you think that disciplinary arrangements should relate to the underlying

practitioner bodies? Is there a case for one single uniform disciplinary body for all

lawyers?

Under the CCAS disciplinary procedures must be independent of code

sponsors and their members and also independent of the industry. This means

that the procedures must have no present or past association, either directly or

indirectly, with the code sponsor's sector. A code sponsor could use a board

or committee to deal with disciplinary procedures. If it does, then there must

be at least 50% independent representation, as well as an independent chair.

Question C5

What should be the mechanism for funding the handling of complaints?

No comment.

Office of Fair Trading 27

Question C6

What should be the mechanism for funding the handling of disciplinary processes?

No comment.

Question D1

Should the Regulator be a board or an individual?

We agree with the recommendation of the Better Regulation Task Force in its

Report, Independent Regulators, October 2003, that a Board is preferable to

an individual. We see no justification for departing from this in this instance.

Question D2

What sort of Board should the Regulator have and how should it be constituted? What

would be an appropriate split between practitioner involvement and lay content in the

Board? As regards the practitioner content, would you favour the inclusion of

individuals on their merits, or formal representatives from different parts of the

industry?

See Chapter 2 paragraph 2.16 above. Practitioners should not dominate the

Board but there should be sufficient of them to ensure its expertise. All

practitioner members should be appointed as individuals on their merits.

Question D3

Who should appoint the leadership of a Regulator? With whom should that person

consult? How should the appointments of the other directors of the Board be made?

The Secretary of State should make the final decision on appointments.

Question D4

What period should the appointments be for? In what circumstances and by whom

could directors be removed?

No comment.

28 Response on review of regulatory

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June 2004

Question D5

Having regards to the need for independence both from Government and providers of

legal services, what qualities and background would you wish the leadership of the

Regulator to possess? Is there anything you believe it would be important for the

leadership of the Regulator not to be?

The regulator should be impartial, fair and independent minded, and committed

to the principles of the regulatory framework (including the promotion of

competition). If he or she has these qualities, his or her background will not be

of great importance. However, in order to promote public confidence in the

new regulatory arrangements, it might be better if the first regulator were not

a practising lawyer.

Question D6

What mechanisms would you propose to ensure the accountability of the Regulator: (1)

to Parliament; (2) to Ministers; (3) to public interest groups? Is there anyone else to

whom a Regulator for legal services should be accountable and how?

No comment.

Question D7

What consultation arrangements would you wish to see the Regulator follow before

exercising its powers?

See Chapter 2 above, in particular paragraphs 2.3 to 2.5, 2.12 to 2.14, 2.17

and 2.18.

Question D8

To where should the right of appeal against decisions made by the Regulator lie? On

what matters should appeal be permitted?

No comment.

Question D9

This section refers to the funding issues arising from different models. What would be

your suggested mechanism for dealing with these issues?

No comment.

Office of Fair Trading 29

Question D10

What relationship should there be between the Law Officers, the Regulator and

professional bodies with advocacy rights?

The Law Officers should not have a special relationship with the Regulator or

with the professional bodies to whom decision making powers may be

delegated under Models B and B+.

Question E1

Should the Government have power to determine which legal services should be

included in, or removed from, the regulatory framework? What consultation with the

Regulator, with the providers of legal services, and with public interest groups, should

there be in reaching these decisions?

We agree that decisions as to the need for regulation of particular legal

services should be left to the Government. While consultation with the

regulator and providers seems appropriate, it will be particularly important to

get the views of users of services and interest groups that represent them.

Question E2

What are the main factors one should consider in determining whether a service

requires regulation?

The primary factor is market failure. In the context of professional services,

the chief source of such failure is inadequate or asymmetric information and

more particularly, asymmetric information about product quality. The buyer of

a legal service is frequently an occasional buyer who is not in a position to

assess the value of what is offered. Where customers are well informed, the

availability of providers regulated to different degrees or unregulated expands

customer choice. However, where information is inadequate, there is a risk

that services that do not incur the cost of regulation may drive out those that

do and that this will reduce consumer choice. One solution to this is to find

ways of improving information in order to improve the correlation between

price and quality. Only where it is not possible to do this should regulation be

contemplated. Such regulation should only go so far as is necessary to remove

from the market those services which it is clearly not in the interests of the

consumer to have available. This will improve the correlation between price

and quality and assist consumers in choosing services. Regulation should aim

to leave available a range of service quality at a range of prices.

30 Response on review of regulatory

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June 2004

Question E3

What characteristics of the regulatory framework would facilitate the inclusion of new

services within the regulatory net, or the exclusion of a service presently included?

A flexible framework that allows for the regulation (or the deregulation) of new

areas of service provision, without the need to create new bodies and

structures, appears desirable. Model A would appear best suited to this, but

expansion of the responsibilities of a Model A regulator may bring with it

disadvantages of increased complexity and bureaucracy.

Question F1

Is there potential demand, from users and providers, for Legal Disciplinary Practices

(LDPs)?

As current restrictions prevent those who would provide and buy such

services from doing so, the strength of demand cannot be accurately

assessed. In order to encourage innovation, restrictions on permitted business

structure should be no greater than is absolutely necessary. The removal of

current restrictions would allow demand to be tested and allow users of

service to decide which structure best corresponds to their needs.

Question F2

How do you see the advantages and disadvantages of LDPs?

See paragraph1.6 and Chapter 3 paragraphs 3.10 to 3.11.

Question F3

What restrictions, if any, would you wish to see imposed on LDPs in the area of

management? What restrictions, if any, would you wish to see imposed on LDPs in the

area of ownership (i.e. moving from the top left hand box of the matrix in paragraph 9

to the top right)?

See Part B paragraphs 3.11 to 3.15.

Question F4

Is there any reason why the regulatory system should distinguish between practices in

the commercial and the not-for-profit sector?

No

Office of Fair Trading 31

Question F5

What body would you expect to regulate LDPs? What, if any, additional safeguards do

you believe need to be put in place to protect the consumer?

The answer to the first question would depend on the choice of regulatory

model. The new LSA would clearly be the answer if Model A were chosen.

Under Model B a professional body might need to be appointed as the main

Regulator (see Chapter 2 paragraph 2.21). Where ownership and management

were split, it would be necessary to ensure that this did not interfere with the

independence of legal advice. Minimum fitness criteria for ownership seem

appropriate. These could be established by the Regulator.

Question F6

Is there potential demand from users and providers, for MDPs?

See answer to question F1 above.

Question F7

How do you see the advantages and disadvantages of MDPs? Can the current

restrictions (by professional bodies) preventing the development of these practices still

be justified?

See Chapter 3 paragraphs 3.11 to 3.15 and 3.24 to 3.28.

Question F8

What restrictions, if any, would you wish to see imposed on MDPs in the area of

management? What restrictions, if any, would you wish to see imposed on MDPs in

the area of ownership (i.e. moving from the bottom left hand box of the matrix in

paragraph 9 to the bottom right)?

In order to avoid unnecessary delay it might be appropriate to begin provision

of MDPs where the firm is controlled by lawyers. Ultimately, decisions on who

manages should be a matter of negotiation between a body or bodies

representing the legal profession and those representing other professions. It

seems appropriate to ensure that ownership of MDPs might be subject to

prospective owners satisfying the regulator that they met a minimum ‘fitness

to own' criteria.

32 Response on review of regulatory

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June 2004

Question F9

What body would you expect to regulate MDPs? Would your answer be different if

lawyers were not in a majority? What, if any, additional safeguards do you believe

need to be put in place to protect the consumer, and to ensure respect for

independence and integrity in the exercise of professional judgment?

We do not consider that there should be any pre-judged restrictions at this

stage. It may be advantageous to begin with lawyer-regulated MDPs. As

negotiations with other professions progress these could aim to address issues

of how best to guarantee the independence of legal advice where the

lawyer/legal team was subject to management or owned by non-lawyers.

Question F10

What are the international implications for the legal professions in England and Wales if

legal services were allowed to be delivered through alternative business structures?

The development of MDPs is likely to flourish where clients perceive that this

structure best serves their needs. In an increasingly international market place,

a structure that is attractive to domestic clients is likely also to enhance the

international competitiveness of professionals regulated in England and Wales.

Office of Fair Trading 33

ANNEXES

A COMPETITION SCRUTINY OF LEGAL PROFESSIONAL RULES

BY THE OFT UNDER THE COURTS AND LEGAL SERVICES

ACT 1990 (CLSA)

A.1 Under Part I of Schedule 4 to the CLSA, if the Secretary of State is

considering an application from a professional or other body for designation as

a body authorised to grant to its members rights of audience or rights to

conduct litigation, and for approval of the qualifying regulations and rules of

conduct related to such rights, the Office of Fair Trading (OFT) must be sent a

copy of the application and must consider whether granting the application

would have, or be likely to have, any significant effect on competition. The

OFT shall give such advice as it thinks fit to the Secretary of State and shall

publish any advice given.

A.2 Under Part IV of Schedule 4, a similar obligation exists where the Secretary of

State is considering recommending revocation of a designation.

A.3 Under Part II of Schedule 4 to the CLSA, if the Secretary of State considers

that it would be appropriate to seek the advice of the OFT with respect to

approving alterations made by an authorised body of its qualification

regulations or rules of conduct or of its rights of audience or rights to conduct

litigation, the OFT is sent a copy of the application and must consider whether

granting the application would have, or be likely to have, any significant effect

on competition. The OFT shall give such advice as it thinks fit to the Secretary

of State and shall publish any advice given.

A.4 Under Part III of Schedule 4 to the CLSA, if the Secretary of State proposes to

alter any of the qualification regulations or rules of conduct of an authorised

body because they unduly restrict a right of audience or a right to conduct

litigation or the exercise of such a right, the OFT must be sent a copy of the

application and must consider whether making the proposed alterations would

have, or be likely to have, any significant effect on competition. The OFT shall

give such advice as it thinks fit to the Secretary of State and shall publish any

advice given.

34 Response on review of regulatory

structure of legal services

June 2004

B THE OFT'S ROLE IN COMPETITION SCRUTINY IN FINANCIAL

SERVICES

Part X, Chapter III, of the Financial Services and Markets Act 2000 ('FSMA'):

The FSA regulatory provisions and practices

B.1 Under Part X section 160 of the FSMA, the OFT must keep the FSA's

regulatory provisions and practices under review (section 160(1)), and report

to the Competition Commission if it considers that, individually or collectively,

they have a significantly adverse effect on competition (section 160(2)).

B.2 The OFT's report under section 160(2) must include details of the adverse

effect on competition and must also be sent to the Treasury and the FSA

(section 160(5)(a)), and must be published.

B.3 The OFT may also report if it concludes that the FSA regulatory provisions or

practices do not have a significantly adverse effect on competition (section

160(3)). In this case, the OFT must send a copy of such a report to the

Competition Commission, the Treasury and the FSA (section 160(6)(a)),

although is not obliged to publish it (section 160(6)(b)).

B.4 Section 161 gives the OFT the power to request information for the purpose

of investigating any matter with a view to its consideration under section 160.

B.5 Under section 162, the Competition Commission is required to investigate the

matter and make its own report (unless, as a result of a change of

circumstances, it considers that no useful purpose would be served by a

report) if the OFT has found a significantly adverse effect on competition.

Section 162 also allows the OFT to require the Competition Commission to

investigate if the OFT has not found any significantly adverse effect on

competition and has reported to that effect.

B.6 The Chapter I and Chapter II prohibitions of the Competition Act 1998 do not

apply to agreements, practices and conduct of authorised persons and others

subject to the FSA regulatory provisions, to the extent that such agreements,

practices and conduct are encouraged by the latter (section 164).

Office of Fair Trading 35

Part XVIII, Chapter II, of the FSMA: Competition scrutiny of applicant and

recognised investment exchanges and clearing houses

B.7 Under section 303 of the FSMA, the OFT must issue a report (and send it to

the Competition Commission, the FSA and the Treasury) on whether the

regulatory provisions of investment exchanges or clearing houses that have

applied for recognition have a significantly adverse effect on competition.

B.8 Section 304 places an obligation on the OFT to keep under review the

regulatory provisions and practices of recognised investment exchanges and

clearing houses and to report (and provide copies of any such report to the

Competition Commission, the Treasury and the FSA – section 304(5)(a)) if it

considers that, individually or collectively, they have a significantly adverse

effect on competition. The OFT must also publish its report (section

304(5)(b)).

B.9 Under section 304, if the OFT thinks that one or more of the regulatory

provisions and practices of recognised bodies, individually or collectively, do

not have a significantly adverse effect on competition, it may make a report to

that effect. Should it decide to do so, it must send a copy of it to the

Treasury, the Competition Commission and the FSA (section 304(6)(a)) and

may publish it (section 304(6)(b)).

B.10 Section 305 gives the OFT the power to require information for the above

purposes.

B.11 Pursuant to section 306, the Competition Commission must investigate the

matter which is the subject of the OFT's report if it has found a significantly

adverse effect on competition. Section 306(3) also allows the OFT to ask the

Competition Commission to consider a report, even if the OFT has not found

any significantly adverse effect on competition.

 

 

 

 

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