In the first of a series analysing the five key issues highlighted by the Clementi review, Neil Rose considers the so-called regulatory maze in legal services and what could replace it

In the time between the government highlighting the 'regulatory maze' that is the legal services market, and David Clementi naming it as one of the key issues his review intends to address, another name was added to the list of regulators.

The Legal Services Complaints Commissioner - announced by the Secretary of State for Constitutional Affairs, Lord Falconer, at September's Law Society annual conference - is, by the government's reckoning, the 23rd regulator of legal services (see below).

Mr Clementi, charged by the government with reviewing the regulation of legal services, last month placed 'institutional structures and the regulatory maze' at the top of the list of five 'key architectural issues' on which he intends to focus (see [2003] Gazette, 23 October, 3).

The status quo, he made it clear, is not a likely option and the early betting is on some form of external regulation.

Some of the 23 regulators are so-called primary regulators, such as the Law Society and the Bar Council, and those which oversee them, such as the Legal Services Ombudsman.

There are also 'super regulators', including the Lord Chancellor and the Master of the Rolls, while major purchasers of legal services such as the Legal Services Commission, local authorities and insurers are included as quasi-regulators.

And, as the Department for Constitutional Affairs (DCA) put it in the report in July that concluded there was a need for the Clementi review, 'to complicate matters further, some regulation is of the service, irrespective of who provides it, while other regulation is based on professional status'.

The report contended that the system currently suffers from 'regulatory proliferation, confusion and fragmentation'.

Four specific problems were identified:

- Anomalies - some services, such as legal advice, are regulated if provided by a solicitor or barrister, but not if provided by a non-lawyer;

- Gaps - some participants in the supply of legal services can be regulated but other important actors, for example immigration interpreters and claims managers, are not;

- Difficulties of interface - for example, solicitors providing non-incidental financial advice are regulated by both the Law Society and Financial Services Authority (FSA);

- Incoherence - quality assurance and complaints schemes, for example, are out of step, with different organisations applying different approaches to the same or analogous services.

But while this does not look good in theory, how much of a problem is it in practice? Law firms offering discrete financial services advice, for example, have simply addressed the problem of double regulation by hiving off their non-legal practices.

As part of its initial work on this issue, the DCA commissioned a scoping study for a regulatory review of legal services, conducted by three academics and a DCA official.

They spoke to a broad range of legal and non-legal representative bodies, as well as sample groups of practitioners, and found mixed views as to whether the regulatory maze matters.

For example, some respondents said the confusion made it difficult for the public to know to whom they should complain; others countered that the different regulatory bodies are quick to point complainants in the right direction.

There were few concerns that the overlap between regulators caused any significant problems.

Nonetheless, the report said there was some support for a single overarching regulatory body to head the system, although there were different views on what that body would look like - 'from a body that would devise rules and enforce these centrally to an organisation that would merely take further than at present the harmonisation of rules and their application by existing regulators'.

The authors found 'broad support' for switching from regulating the provider to regulating the service as a way of helping to tailor controls to the market and to open markets, and again an FSA-style regulatory body found favour to achieve this.

They said: 'This course of action was supported as a means of ensuring clarity and simplicity, and encouraging the equal treatment of individuals of different status who provide the same legal service.

'There were fears, however, about the costs and practicalities of such a change and whether it was really necessary.

Some respondents questioned whether it would be possible for an overarching body regulating legal services to draw clear boundaries with non-legal services.

'There was also concern that the legal services markets were so varied (for example, from publicly funded police station advice to large-scale private corporate work) that the overarching body would need to incorporate a huge range of expertise to be able to regulate efficiently.'

The researchers noted that the operation of different regulation covering the same services may provide opportunities for suppliers to choose the one most convenient for them, which could weaken regulation and endanger consumer protection.

But 'regulatory competition may identify cheaper forms and encourage innovation', they said, adding: 'This does not, however, provide a justification for regulatory institutions which are opaque, over-lapping or prevent "one-stop shopping".'

In summarising the options for reform, the scoping study categorised them as minimalist, modest and radical.

Under minimalist, it suggested encouraging co-ordination of rules and procedures between different regulators.

Modest reform could include harmonisation of the different regulators' rules and procedures, and the merger of small and medium-sized regulators.

The single overarching FSA-style body is one possible radical reform, it said, as are: 'multi-sector regulators' (such as co-regulation or regulating cross-professionally, for example solicitors and accountants); regulating services not providers; and that hoariest of hoary old legal chestnuts - fusing the professions.

With so much focus already on the possibility for a legal FSA, has the original FSA been a success? Solicitor Walter Merricks was director of professional and legal policy at the Law Society until leaving in 1996 to become first the insurance ombudsman and then the Financial Services Ombudsman.

He says one major success of the structure of financial services regulation is that there are clear 'separate entry doors' for people who have complaints and want financial redress (his service) and people with conduct-related complaints (the FSA).

'It is an extremely good and sensible model,' he contends, while recognising that it could not simply be transposed without alteration on to the legal profession.

Mr Merricks dismisses the argument that the legal services market is too broad to have potentially just a single regulator and complaints service.

'We cover a pretty wide field,' he says, 'probably wider than legal services.' Between them, the FSA and ombudsman oversee work ranging from multi-million pound investment business to complaints about pet insurance.

The Law Society has yet to decide its detailed line in response to the Clementi review, although special meetings of the main board and council are planned for before Christmas in the hope of influencing the consultation document Mr Clementi has promised for the first quarter of 2004.

President Peter Williamson says that while Mr Clementi is bound to look at the theory of regulatory structure, he hopes the review will take a pragmatic approach in deciding whether the current system damages the consumer interest or restricts competition.

Andrew Lockley, head of public law at national firm Irwin Mitchell and a one-time senior Law Society official, says consumers do not appear to have much of a problem deciding to whom they should complain.

The exception to this is professional negligence claims, he says, as the public can be confused about the difference between negligence, inadequate professional services and misconduct.

Bar Council chairman Matthias Kelly QC maintains that people complaining about barristers do not have a problem, although he concedes that there may be a lack of clarity across the entire profession.

However, it is the problem of gaps that Mr Lockley identifies as the most persuasive argument for an overarching regulator.

This would have the much-needed result of bringing claims management companies, will writers and employment consultants into the regulatory net, he says.

Others take up this point.

Law Society chief executive Paraskeva agrees that 'it would be in the public interest to introduce regulation in some areas, such as claims managers', while Mr Kelly sat on the government-commissioned Blackwell committee, which in 2000 recommended some form of regulation for claims assessors and employment advisers.

Nothing has happened since.

However, Ms Paraskeva says that although there may be a large number of bodies involved in regulation, gaps and anomalies may emerge at the boundaries even with a single regulator.

The profession largely opposes a single external regulator.

In his speech to the Law Society's annual conference, Mr Williamson told solicitors: 'I am absolutely confident that the Law Society will be able to demonstrate the value of having profession-led regulation, so that the profession takes responsibility for setting the standards and for regulating legal services provided by solicitors.'

Mr Kelly has also spoken in favour of self-regulation, saying the bar does not want to be regulated by a government appointee, particularly as the legal porofession is often in conflict with government.

If self-regulation stays, the question then is what checks and balances are needed to ensure the public interest is taken into account.

For example, does the system by which the Master of the Rolls and Lord Chancellor approve changes to professional rules deal with this satisfactorily?

Speaking from the point of view of practitioners, Mr Lockley says: 'Our profession's interest is in retaining the Law Society as the regulator.'

He argues that whatever solicitors' view of Chancery Lane, at least they have an element of control over their own regulation through the council.

If an external regulator were introduced, this would be lost.

'Those members of the profession who moan about how hopeless the Office for the Supervision of Solicitors is forget that any government-run body or non-governmental organisation would be less easy for the profession to have its say in,' he maintains.

With Mr Clementi promising to be 'pro-competition', the European Commission demanding that professional rules comply with competition principles, and the World Trade Organisation also taking an interest, Mr Williamson acknowledges the need for the current rules to be tested in this way.

This means that any restrictions imposed by professional rules have to be abolished unless they can be objectively justified as being in the public interest.

Restrictions that pass this test must then be set at the minimum level required to meet legitimate public policy goals.

Ms Paraskeva says a system based on regulating services rather than providers is a possibility, but adds: 'It may be more practical and less disruptive to reform the existing arrangements.

There is a need for greater consistency between regulators where a range of providers offer the same service under different rules.'

That could be where an overarching body - but not an FSA-style regulator - could come in.

It would not necessarily harmonise the rules, but it could require the regulators to justify the differences.

The issue of differing levels of regulation is already felt in the conveyancing sector, where there has been a continuing, if small, trend of solicitors giving up their practising certificates and becoming licensed conveyancers because of the greater regulatory flexibility offered by the Council for Licensed Conveyancers.

There is no suggestion that the regulation of licensed conveyancers is too weak, but at least the issue could be tested in the public interest by such an overarching body.

Mr Lockley says the concern with the 'regulatory competition' advanced by the scoping study is that it would 'end up with people choosing the regulator with the lightest touch'.

The possibility of cross-professional regulation is not one that has been floated before, but could be relevant in a world of multi-disciplinary partnerships.

At first glance, the logistics appear fearsome.

Fusion has been mooted for about as long as solicitors and barristers have walked the earth.

Reviews in 1971 and 1996 called for common training, while the extension of full audience rights to solicitors in 1998 was meant to have sounded the death knell for the bar.

In 1999, then Law Society President Robert Sayer called for fusion within five years.

As with every other call to bring the two main branches of the profession closer, nothing has happened.

However, the Office of Fair Trading (OFT) could be a more active catalyst.

In its 2001 report on competition in the professions, from which the Clementi review has ultimately sprung, it called for an end to the bans on direct access and on conducting litigation.

The bar has introduced measured expansion of its BarDirect scheme, but this still accounts for just a small proportion of instructions.

The OFT was not convinced by the bar's arguments for withholding the right to conduct litigation, and said in 2002 that it intended to pursue this issue.

As yet, however, there have been no public moves.

Mr Williamson says fusion 'is not one of the things we'll be pressing for', although he notes that the development of advocates may change as the professions evolve.

'There is a question as to whether advocates will join the bar straight after law school or later in their careers,' he says.

Unsurprisingly, Mr Kelly has no interest in fusion.

'[The separation] survives because there's a functional need for it and it will continue to survive,' he asserts, adding that in an era when competition is so important, it is hard to see how reducing competition is in anyone's interest.

The Clementi review is to be welcomed, Mr Lockley asserts, if for no other reason than it offers an opportunity to consider practical problems in regulation, although Mr Clementi has indicated that he intends to concentrate on structural issues and leave it to whatever regulator/s that emerge as a result to consider the detail.

For example, Mr Lockley has acted for several solicitors in legal challenges to the Society's power to intervene in practices, which he maintains is excessive.

He also highlights problems caused by regulatory overlap between the Society and Legal Services Commission, such as the unpopular contract compliance audits.

Mr Lockley says: 'If the Clementi review isn't to go into the wide blue yonder, it has to look at the pinch points currently concerning the profession or it won't have any credibility.'

But with Mr Clementi telling reporters at a briefing last month that 'I don't think it's a popularity contest' when asked if he was concerned about taking lawyers with him, keeping the profession happy may not worry him much.

The 23 regulators

Super regulatorsLord ChancellorMaster of the RollsFinancial Services Authority (also a service regulator)Office of Fair Trading (also a service regulator)Attorney GeneralJudiciaryRules CommitteeRegistrar for the Patents OfficeLegal Services OmbudsmanLegal Services ComplaintsCommissioner

Professional bodiesLaw Society (incl.

Office for theSupervision of Solicitors)Solicitors Disciplinary TribunalGeneral Council of the Bar(including Inns of Court)Institute of Legal ExecutivesInstitute of Trade MarkAttorneysChartered Institute of PatentAgentsService regulatorsCouncil for LicensedConveyancersImmigration ServicesCommissionerCourt of Faculties

PurchasersLegal Services CommissionCrown Prosecution ServiceLocal authoritiesInsurers

Source: DCA

The five 'key architectural issues' on which David Clementi will focus are:

- Institutional structures and the regulatory maze;- The level of self-regulation and professionalism within the legal services industry;- The handling of complaints against lawyers;- Unregulated providers and regulatory gaps;- New business structures, including employed lawyers and multi-disciplinary partnerships.