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Wider choice and better protection: A consultation paper on the regulation of legal services in Scotland

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Chapter 7: Law Society of Scotland

7 This section looks at what changes might be made to the governance of the Law Society of Scotland (the Society), including to accommodate ABS which deliver legal services.

Removal of current restrictions

7.1 At present the Society's Practice Rules prevent:

  • solicitors from sharing fees or profits with non-solicitors; 33
  • shareholding in a legal firm by anyone who is not a director and ownership by non-lawyers; and
  • the formation of multi-disciplinary practices. 34

7.2 In order for solicitors to participate in ABS, the Society will be required to remove these restrictions. It has indicated its preparedness for doing so in its policy paper.

7.3 The Society is also currently considering wider governance issues. The Government wishes to support this by ensuring that the primary legislation which establishes the Society is compatible with its role as a modern regulator of legal services which aspires also to regulate new forms of business structure.

Current structure of the Law Society of Scotland

7.4 Part I of the Solicitors (Scotland) Act 1980 provides for the organisation of the Society and the establishment and functions of its Council (governing body). Section 1 provides that, in addition to the exercise of various statutory functions, the objects of the Society "shall include the promotion of (a) the interests of the solicitor's profession in Scotland and (b) the interests of the public in relation to that profession".

7.5 The membership of the Society consists of every solicitor holding a current practising certificate. 35 Schedule 1 of the 1980 Act requires the Council to provide a constitution, conduct elections, hold meetings and appoint office bearers and committees. The Form of Council is set out in the Society's Constitution, 36 which has been in place since 1988.

7.6 The Council exists:

  • to carry out the business of the Society in name of the Council;
  • to apply the governing statutes and professional rules of the solicitors' profession in Scotland;
  • to promote the interests of the solicitors' profession and the interests of the public in relation to the profession;
  • to determine the policies of the Society; and
  • to lead the profession.

7.7 The Council exercises its authority itself, through a variety of Committees and through the Executive Officers of the Society. 44 members of the Council are elected by the members of the profession and up to 9 members can be co-opted by the Council. All of these members are currently solicitors. The Council's 44 elected members must come from different geographical constituencies.

7.8 The Council is required to meet no fewer than 10 times each year and in practice meets every month except July. Meetings are chaired by the president whom failing the vice-president, and a quorum of 9 members is required.

7.9 Standing Orders are made by the Council in terms of article 25 of the Constitution of the Society. They include rules about:

  • the conduct of business at general meetings of the Society;
  • the meetings of the Council;
  • the appointment of Council committees; and
  • the conduct of committee business.

Governance review

7.10 The Society is undertaking a governance review. The review will make recommendations on the over-arching constituency/representational model for the Society; the under-pinning committee structure; and the internal management connection between Council, Office Bearers and the senior management team of the Society to ensure transparency, clear lines of responsibility and authority and provide an efficient and flexible environment for regulation, policy and management decision-making.

7.11 This is a long-term review which will be implemented on a phased basis. Council has already approved the establishment of a Finance Committee, and a working party to examine how committee convenors are appointed. Papers are also currently being prepared on how an oversight committee (management board) may streamline policy work in the future. Larger, more constitutionally challenging changes, which will require the preparation of detailed proposals alongside legal advice and consultation with both the profession and stakeholders, are being developed in parallel to the incremental changes that can be made internally.

7.12 The Society aspires to become a regulatory body of ABS.. The Government recognises that the Society requires a modern statutory framework which ensures that it can operate efficiently and effectively, and that its regulation is credible and independent in the eyes of the public, and those subject to regulation.

Governance arrangements

7.13 It is unusual in modern governance for a governing council of over 50 members to exercise the range of functions exercised by the Law Society Council, and to meet as regularly as it does. A more common arrangement would be for such a body to set the broad policy direction, and for operational functions to be exercised by a smaller executive body, supported by designated committees. Changes were made as recently as 2003 37 to allow delegation by the Council, but we believe that further changes may be required.

Non-lawyer involvement

7.14 The absence of non-lawyer representation on the Council is a noticeable feature of the current decision making function of the Society. In response to the consultation 38 which informed the Legal Profession and Legal Aid (Scotland) Act 2007, the Society put forward proposals which would have allowed non-solicitors to be co-opted onto the Council, but these changes were not taken forward by Parliament.

7.15 Consumer bodies have also called for greater non-lawyer participation in the Council's governance, to reflect the fact that the Society is not simply a membership organisation, but a statutory body which has the public interest as a core concern. Consumer Focus Scotland ( CFS) 39 has proposed that (as is the case with bodies such as the Scottish Legal Complaints Commission) a significant majority of the members of the governing body should be non-lawyers. CFS advocate that there should be up to 75% independent representation, including the chair, within self-regulating schemes.

7.16 The Government is not currently persuaded that the extent of non-lawyer participation in the governance of the Society requested by CFS is justified, but accepts that a significant degree of credible non-lawyer involvement would provide reassurance that the Society is able effectively to balance public and professional interests.

Separation of regulatory and representative role

7.17 The Office of Fair Trading ( OFT), amongst others, has expressed concerns about the regulatory and representative roles of the Society. Its view is that, in the interests of consumer protection, there should be a clear separation of the regulatory function from the responsibilities for representing and promoting the interests of the profession. It is argued that, for a profession that places emphasis on the avoidance of conflicts of interest (of even the appearance of such), undertaking both roles creates such a conflict.

7.18 Undoubtedly, it is in the broader interests of the profession that it should maintain its public standing, so there is in that sense a commonality of interest between the profession and the public. Nonetheless, the combination of roles does make it harder to demonstrate that regulatory decisions are taken purely with the public interest in mind, regardless of any inconvenience or difficulty they may cause to the profession.

7.19 Should the Society be an ABS regulator, the combined roles would be harder to justify as the Society would be regulating people working in ABS who are not solicitors (indeed may be in competition with solicitors), while being required to promote the interests of solicitors.

7.20 In England and Wales, the regulatory and representative functions of the Law Society of England and Wales have been split with the establishment of the Solicitors Regulatory Authority ( SRA). This is part of the Law Society but operates at arm's length as an independent regulatory body, whose purpose is to protect the public by ensuring that solicitors meet high standards, and by acting when risks are identified.

7.21 Such a split is not straightforward. The SRA's resources are ultimately dependent on decisions by the Law Society, so it is not able to operate completely without reference to the Society. Also, it is difficult to distinguish between regulatory functions and those of a professional body. Education and training, for example, contains elements of both.

7.22 A more radical option is for the Society to focus only on one role - to choose either to be a professional regulator or to be a representative body. This is the way professions such as the medical profession operate. 40 However, if the Society were to give up its regulatory role, the establishment of a new independent regulator would require the creation of a new public body at considerable expense, and would involve the loss of the considerable regulatory experience of the Society.

7.23 It is the Government's view that the Law Society should remain as the regulator of individual solicitors, and we are sympathetic to their aspirations to regulate ABS. However we believe that this will require a move towards a clearer separation of the regulatory function. In respect of this aspect of the work of the Society, we also believe that the argument for majority non-lawyer representation on any regulatory committee has considerable merit.

Guarantee Fund and Master Policy

7.24 Currently, consumers enjoy a greater level of protection if the legal services they receive are delivered by a Scottish solicitor working within a traditional firm, as opposed to an unregulated legal services provider working outside the reserved areas. If alternative business structures are to become a reality in Scotland, it is important that the same level of consumer protection applies to alternative business structures as it does to traditional business models.

7.25 There are two different kinds of consumer protection particular to the solicitors' profession, namely the Guarantee Fund and the Master Policy.

Guarantee Fund41

7.26 The Law Society of Scotland administers the Scottish Solicitors Guarantee Fund which is a unique consumer protection. The fund, to which all solicitors who are partners in private practice and who handle clients' money contribute annually, can be used to reimburse any persons who have suffered monetary loss as a result of the dishonesty of a solicitor or their staff.

7.27 A justifiable claim must satisfy all of the following conditions.

  • The solicitor or their staff must have acted dishonestly in the course of their legal practice.
  • The claimant must have suffered monetary loss.
  • All other means of recovery must have been exhausted.

7.28 Most claims are against sole practitioners as those who work in a partnership are likely to be covered by the Master Policy for the dishonesty of one of their partners or a member of staff.

Possible limits to liability

7.29 When the Guarantee Fund was established, society was very different. It can be argued that to ensure that mandatory protections should be aligned with modern business practice and consistent with the treatment of other professionals

7.30 The Society is of the view that the current unlimited liability of the Guarantee Fund across the whole profession is inconsistent with encouraging greater enterprise and the attraction of third party capital to alternative business structures. However, it may be felt desirable that the owners of an individual business remain liable to fully compensate victims of dishonesty within that business so far as not covered by insurance.

7.31 It also believes that irrespective of the introduction of ABS, a cap on the value of individual claims should be introduced. The question of whether the overall liability of the Fund should also be limited is still being considered, although the Society is not aware of any equivalent commitment within any other legal jurisdiction nor, indeed, any other profession or sector.

Who should contribute?

7.32 One of the main questions to be determined is who within an ABS should be expected to contribute to the Guarantee Fund. Currently for incorporated legal practices, only the principals of the practice contribute to the Fund.

7.33 Another option would be to require a contribution from all legal services firms (irrespective of the business model) rather than principals, with an underlying formula to calculate how much each firm must pay, although there is a risk that calculating a contribution might be disproportionately bureaucratic.

Professional indemnity insurance - Master Policy42

7.34 All solicitors in private practice must have professional indemnity insurance. The Master Policy is the compulsory professional indemnity insurance arrangement which covers all Scottish solicitors working in private practice. The Society arranges the Master Policy for professional indemnity insurance through appointed brokers. Claims are handled by the Master Policy insurers. The insurance provides cover of up to £2 million for any one claim.

How would this fit in with ABS?

7.35 The Government considers that it should be a licensing condition for ABS to take out appropriate professional indemnity insurance. Such insurance would require to be at least equivalent to the Master Policy in order to ensure proper public protection as well as guaranteeing consistency between ABS and the traditional business model for a legal practice.

Questions

26 Should changes be made to the Society's governance arrangements, for example, in relation to the size of Council, frequency of meetings and decision making powers?

27 Do you agree that there should be significant non-lawyer membership on the Council of the Society?

28 Should the representation and regulatory roles of the Society be split as proposed by the Office of Fair Trading (see paragraph 7.17)?

29 Should the Guarantee Fund or an equivalent provision be required for ABS?

30 Should the liability under the Guarantee Fund be capped, either for individual claims, or the overall liability?

31 Are there any particular provisions which are required in relation to professional indemnity insurance for ABS, beyond what is set out at paragraph 7.35?