ABS countdown | Iceberg Ahoy

Older readers may remember a famous Bill Tidy cartoon, set at a steamship company after the Titanic disaster. There are many people seeking news of the passengers but one man has a polar bear on a lead, with the caption reading “No, but is there any news of the iceberg?” The recent exchange between the Legal Services Board on the future of the separate business rule in the SRA Code of Conduct reminded me that it is easy for two people to look at exactly the same situation in completely different ways.

In its post-OFR form, the separate business rule is set out in chapter 12 of the code. It is rather less specific than it used to be but, in essence, it is designed to stop both traditional law firms and ABSs from separating out their non-reserved legal work into unregulated businesses. The SRA argues that, if this were to be allowed, it would be confusing to consumers and allow the possibility of unregulated legal work, which is not in the public interest. It has always been very sensitive on the point, especially since the Legal Services Act reared its head, viewing any relaxation of the prohibition as a sort of thin end of the unregulated wedge.

Commercial growth

The Legal Services Board (LSB) has a rather different perspective on the separate business rule and has just written to the SRA to say so. The LSB had previously suggested that the rule was not compatible with either the regulatory objectives enshrined in the Act or the better regulation principles. In response, the SRA had assured the LSB that it would conduct a review of the operation of the separate business rule. Chris Kenny, the board’s chief executive, has now asked the SRA to fulfil its promise. To some extent, this argument is caught up in the bigger issue as to which legal activities should be “reserved” under the Legal Services Act. Last month the LSB announced that will writing might join the list of such activities, if the Lord Chancellor agrees. The SRA, however, wants many more non-reserved legal activities to become reserved, which would ultimately be good for solicitors and, dare it be said, for the strength of the regulator itself.

The LSB looks at the separate business rule in a completely different way. It is often forgotten that the LSB is primarily an economic regulator, not a legal one, and that its main role is to promote competition and grow the size of the legal sector. The board thinks that it would be disproportionate for all legal activities to be regulated. It also does not understand why businesses which have successfully delivered legal advice outside of legal regulation, without any detriment to consumers, should be forced to bring those services within the sphere of SRA control and become reserved activities. The LSB sees the separate business rule as an inhibiting factor to its goal of freeing-up the legal services marketplace, simply adding unnecessary cost to the sector. The board has expressed its frustration on several occasions in the past that the Act and ABS have not yet delivered the range of innovation in the provision of legal services which it had expected. It sees the rule as clutter, and as sort of legal regulation self-preservation device for the SRA.

Protect consumers

It seemed that the SRA was likely to go ahead with a review of the rule, somewhat unwillingly and slowly. That view has now proved incorrect as the SRA has unequivocally rejected the LSB’s demand for the review. The SRA’s chief executive, Antony Townsend, has indicated the carrying out a review of the separate business rule is not in its work programme for 2013 and that there are no resources available to carry it out. In other words “Sorry but we have changed our mind. We are not going to do it.” The SRA takes the view that the review would be a waste of its resources and that it is more important to protect consumers, via the existing rule, from “attempts to evade regulatory protections”.

So, the two most important legal regulators are at loggerheads on a significant regulatory issue. The LSB has hitherto operated with a light touch towards its approved regulators, not seeking arguments and only making strong public statements on rare occasions. This may be the issue that changes its modus operandi regarding the SRA since there appears to be very little middle ground in the respective positions of the two bodies. A potential iceberg perhaps?