Glass half full?

One of the difficulties of the Legal Services Act is that it only regulates a very small corner of the legal services market. Unreserved and paralegal services '“ which in today's world consumers increasingly turn to for their legal services '“ fall completely outside the regulatory net (although some are regulated through other mechanisms such as the Compensation Act 2006).

This market includes a wide range of legal services marketing, introducers, intermediaries, initial advice, and processing services in the legal sector market '“ such as claims management companies selling conditional fee services, fee-charging debt management and advice services, and insurers undertaking third party capture claims. It deals with a wide range of issues faced by ordinary consumers such as personal injury claims, financial compensation such as enforceability of consumer credit debt, unfair bank charges recovery or PPI claims.

It is perhaps in recognition of this regulatory gap that the Solicitors Regulatory Authority now proposes that in order to promote clarity for consumers, the scope of ABS regulation should extend to any non-reserved legal activities provided by an ABS. This effectively collapses the regulatory distinction between reserved and unreserved services, and takes a big move towards 'entity-based regulation' '“ something we are likely to hear a great deal more about in light of the recommendation of the recent Hunt review.

Addressing the risks

However, the move towards entity-based regulation raises some major challenges in how different regulatory regimes can knit together and address key risks to which consumers may be exposed; for example, hard selling tactics where new financial and legal products are developed and put onto the market, and the problems that can occur at the interface between financial and legal services and advice. Regulatory responsibility in these areas can sometimes be unclear. On the one hand, firms offering both legal and financial advice services from suitably qualified professionals can improve the all-round level of advice received by clients. However, financial advisers and legal professionals are under different regulatory expectations in terms of their duties to clients and the products and options they may present. While the solicitor in an ABS may be under a professional duty to act on the instructions of the client, the financial adviser is not under a duty to advise the client about all the products available on the market. In an ABS situation, this could result in some consumers being offered fewer product choices, and an ABS could incentivise the consumer with 'free financial advice' to effectively lock them in.

Entity-based regulation has big implications for the not-for-profit sector and for legal aid work. For social welfare law services '“ housing, debt and benefits advice '“ the Legal Services Commission (in an unrelated development) is now contracting integrated services as a 'bundle', including advice and litigation services. This will require many more advice agencies to employ solicitors in order to continue providing publicly funded community legal advice services. The practical consequence is that advice agencies, whether a CAB, Law Centre or other agency will be de facto ABS. It will be a big challenge for solicitors and their managers in such advice bodies to manage the regulatory requirements of ABS licensing, such as delineating required roles of head of legal practice and finance and introducing systems to ensure professional standards compliance under SRA codes, and to integrate these with the other levels of regulation imposed by charity governance, LSC contracting, OISC supervision of immigration advice, and OFT/FSA/Insolvency Service regulation of different aspects of money and debt advice.

Potential benefits

However, the new regime does open up opportunities both for services and clients; for example, the potential benefits to consumers in developing the facility to access legal and financial services from the same provider. In our experience, solicitors acting alone are not very effective at providing practical financial advice, and even less so when it comes to advice on entitlement to pensions and benefits, and so we would like to see solicitors working more closely with other advice specialists such as welfare benefit advisers. More broadly, the access to justice gap presents opportunities to both private and third sector organisations to offer legal services in different ways. There are clearly people who need legal advice or assistance who would benefit from this being available through different business practices or models, especially for those whose income is above the legal aid eligibility limit and who might benefit from being able to access legal advice within a financial services context.

There is also significant potential for looser partnerships and consortia between different money, legal and welfare advice services to cooperate on a project basis, and also in the delivery of pro bono. However, unless the market is appropriately regulated, it could become dominated by the practices of less ethical providers and market players who at worst construct and deliver business models which can prey on consumers' vulnerabilities and lack of knowledge. A salutary lesson needs to be learnt from experience of dealing with the excesses of the claims management market, and the current problems being experienced by mainstream financial services.

The jury is still out as to whether the Legal Services Act will have a positive effect on access to justice. Legal needs research from the Legal Services Research Centre consistently shows that around a third of the adult population has unresolved civil legal problems at any one time, but that a significant percentage of people with civil law problems get no advice at all. Moreover, as legal aid is restricted in scope and only available to those on very low incomes, it is important that advice and legal services providers outside the legal aid funded sector should be encouraged to innovate in order to reach a wider range of consumers at a lower cost.