Chapter 5: The regulatory approach
5 This chapter presents possible options for an effective regulatory framework and considers how regulatory regimes can be reconciled in a way which values different professional codes whilst safeguarding common principles.
Issues to be addressed
5.1 The Government agrees with the conclusion of the Society's policy paper that the key is appropriate regulation of the entity - that is, the alternative business structure ( ABS) providing a legal service. This is a model already used in industries such as financial regulation and so is familiar to many legal practices, but is a shift from the traditional model of professional regulation which predominantly regulates at the level of the individual practitioner.
5.2 However, those practising in an ABS who are themselves members of a regulated profession will continue to be regulated by their own professional bodies. In effect these individuals will be regulated on two levels. It is possible, but not inevitable, that the entity regulator and the professional regulator will be the same body.
5.3 Three core issues need to be resolved.
- Defining the ABS - particularly if the legal service is part of a larger business.
- Dealing with potential conflict between the professional codes of individuals participating in the entity and the rules of the entity regulator.
- Deciding who should regulate the entity.
5.4 These are complex issues and we do not propose that the Bill itself should seek to resolve every potential conflict between different professionals who might participate in an ABS. The Bill will set out a framework but, for some forms of multi-disciplinary practice, there will need to be agreement between the individual professional regulators to ensure that those professionals could conform to the requirements of the appropriate entity regulator. As is planned in England and Wales, simpler forms of ABS (such as legal firms with a minority of non-lawyer partners) may be likely to develop more quickly.
Defining the entity
5.5 As outlined in chapter 3, we intend that regulation should apply to any business where a legal professional is involved in the provision of legal services to third parties. That business may be a partnership, an incorporated practice or a limited company. In most cases, we expect that the boundaries of that business will be clear and the whole business will be liable to regulation by the entity regulator.
5.6 Difficulties may arise where legal services are a small aspect of a larger business, for instance, when a large organisation decides to offer legal services as a strand of its overall business. If that business does not want its entire operation to be subject to legal services regulation, it will be necessary for it to demonstrate to the regulator the following.
- The boundaries of the legal services business which is subject to regulation.
- How they will maintain a separation between provision of legal services by the ABS and the activities of the wider unregulated business.
- How they will ensure that clients and those dealing with the ABS are aware of the distinction between the part of the ABS that provides legal services and the wider business.
5.7 We considered whether the legislation should prescribe that, in such cases, the ABS would require to have a separate legal identity as a partnership or company. On balance, we have concluded that it is not necessary to prescribe in the Bill the particular form of relationship between the larger body and its ABS, provided the regulator can be satisfied on the above points.
Dealing with regulatory conflict
5.8 Regulatory conflict will not be an issue for those legal firms in Scotland which remain within the traditional business model, whether as partnerships or as sole practitioners.
5.9 However, there is potential for regulatory conflict in an ABS where the entity and all the professionals within it do not belong to the same regulatory body. Examples of ABS where there might be regulatory conflict include the following.
- A law firm that delivers legal services which is co-owned by solicitors and non-lawyer managers, where the latter are subject to different professional regulatory codes.
- A business that delivers a range of services including legal services and which includes solicitors and other regulated professionals. These may include accountants, architects, surveyors, or funeral directors, or a combination of such professionals.
5.10 Our approach is that the ABS entity regulator should have primacy. Its rules will apply to the activities of all legal professionals and others practising in the firm, in relation to all matters pertaining to the provision of legal services (defined broadly, as we propose at 3.9 above). It should regulate proactively - satisfying itself that the business is operating proper systems of management, oversight and quality control. Linked to that approach will be a requirement for every ABS to have either an identified "Head of Legal Services" who would have personal responsibility for ensuring compliance with entity regulation or, alternatively, a Practice Committee whose members would jointly be responsible for such matters. (Your views on this are invited at the end of chapter 6.)
5.11 The responsibility for professional discipline will remain with the professional regulators. It will be for those regulators to review their rules to consider how far any breach of standards set by an entity regulator should be a matter for professional discipline. Other than the Society and the Faculty of Advocates, which are dealt with specifically in our proposals (see chapters 7 and 8), it will ultimately be for individual professional bodies to determine whether it is appropriate for their members to participate in any particular form of ABS and retain their professional status. Where professionals provide services under reserved regulation such as insolvency, consumer credit, and immigration advice, they will be subject to the existing licensing conditions with the appropriate body.
5.12 The Scottish Legal Complaints Commission ( SLCC) will be responsible for dealing with complaints against a regulated ABS for the legal services it provides, in the same manner as it does for solicitors and advocates at present. The SLCC will act as a gateway and will deal with issues of inadequate professional service. Issues of misconduct will be referred to the appropriate professional regulators.
5.13 A specific area of potential conflict is the position of legal professional privilege. We agree with the Society that this would need to be protected under an ABS system. Legal professional privilege protects communications between a solicitor and their client in relation to legal advice and communications, and documents made in preparation for court proceedings.
5.14 This issue has been dealt with in the LSA 2007 for England and Wales. Under those provisions, clients of licensed bodies will have the same legal professional privilege rights that they would have had if they had instructed a traditional law firm. The LSA 2007 ensures that as long as communications with a licensed body are carried out through a lawyer or under the supervision and direction of a lawyer, the ordinary rules of legal professional privilege will apply.
5.15 We are minded to adopt a similar approach but would welcome views in response to the question below.
Determining who should regulate the ABS
5.16 We propose that the Scottish Government, with the agreement of the Lord President of the Court of Session, should authorise regulatory bodies to act as regulators of ABS. In doing so, they will require to be satisfied that the regulators meet criteria to be set out in the Bill, including that the regulator:
- is adequately resourced and organised to undertake this responsibility;
- has developed an appropriate regulatory scheme to comply with the regulatory objectives and ensure public protection; and
- is sufficiently independent of bodies being regulated to ensure public confidence and avoid conflicts of interest.
5.17 These criteria are likely to require a clear separation between the regulatory role and any other functions performed by the body (such as promotion of a particular profession) and a substantial degree of lay involvement in the regulatory function.
5.18 We intend to allow flexibility in the Bill so that the authorisation could be for any form of ABS or a particular indentified model.
5.19 In future, it would be possible for the Government, on cause shown, and with the agreement of the Lord President, to revoke or amend the authorisation (if, for example, there was evidence that regulation was not operating effectively). We anticipate that the period of the authorisation would normally be open-ended, but it would be possible for Ministers to require that a licence be renewed after a specified period.
5.20 This is different from the approach adopted by the UK Government in the LSA 2007 which has established a "super-regulator", the Legal Services Board, to licence individual regulators of legal services. As discussed at 2.14-2.15 above, we believe that creating an additional public body to undertake this role is disproportionate and unnecessary in the Scottish context.
5.21 However, we are interested in your view on whether it would be desirable to have some form of advisory panel which could offer advice to Ministers on applications for authorisation and keep the regulatory framework under review. This panel, or perhaps the existing Joint Standing Committee on Legal Education, might also advise on regulatory issues to do with admission and training for providers of legal services in ABS.
5.22 The Society has indicated in its policy statement that it would see itself as the natural regulator of ABS. The Government believes that this may very well prove to be the case, but that it would be inappropriate to grant exclusive powers to the Society without a process of ensuring that it has established the appropriate regulatory framework.
5.23 In summary, the Government makes the following proposals.
- Any ABS would be regulated by a single regulator, authorised to regulate that form of business by Scottish Ministers with the agreement of the Lord President.
- Professionals within that ABS would also continue to be regulated by their own professional bodies.
- ABS would be subject to the SLCC with respect to complaints.
- It would be for each professional body to consider the implications of how participating in an ABS would affect the individual's professional duties.
- Entities and professionals would continue to be subject to any subject-specific regulation (such as financial services and immigration advice).
15 Do you agree that ABS should be regulated at the entity level, with individual professionals regulated by their own professional bodies, as set out in paragraphs 5.1 and 5.2?
16 Do you agree with our proposals for defining the ABS in paragraph 5.6?
17 Do you agree with our proposals for dealing with regulatory conflict in paragraphs 5.10 to 5.12?
18 Do you have any views on how the legal professional privilege should be protected in an ABS with reference to paragraphs 5.13 to 5.15?
19 Do you have any views in the setting up of some form of advisory panel to advise Ministers on applications as described in paragraph 5.21?
20 Do you agree that Ministers, with the agreement of the Lord President, should authorise ABS regulators as proposed in paragraph 5.16?
21 Do you agree that the Bill should set out the criteria for authorisation of ABS regulators, and that these criteria should relate to organisational capacity, independence, and an appropriate regulatory scheme (as proposed in paragraph 5.16)?