Legal Services Sector: Consumer Protection and Empowerment, Study notes of Law

Download Legal Services Sector: Consumer Protection and Empowerment and more Study notes Law in PDF only on Docsity! 1 Competition and Markets Authority's Interim Report on the Legal Services Market Study The Law Society response August 2016 2 PREFACE The Law Society (‘the Society’) is the professional body for solicitors in England and Wales, representing over 170,000 registered legal practitioners. The Society represents the profession to parliament, government and regulatory bodies and has a public interest in the reform of the law. The Society welcomes the opportunity to respond to the Competition and Markets Authority's Interim Report. The Society has consulted its committees in preparing this response. FOR FURTHER INFORMATION Officer's Name Officer's Title : Sophia Adams-Bhatti : Director of Legal & Regulatory Policy 5 different types of regulated and unregulated legal services providers”1 and “furthermore, consumers may not appreciate that some providers are unregulated.”2 We do not believe that consumers should be put in a position of having to undertake detailed due diligence before purchasing services in order to understand their right to protection from poor standard of advice. Much of the CMA’s work is focused on the individual consumer however, amongst the breadth of markets in legal services, a large proportion is providing support for businesses. Business customers account for 63% of total UK sales of legal services3. While the CMA is focusing mainly on the legal service market for individuals, the impact of any measures across the whole market, and in turn the economy as a whole, must not be ignored. 2. Promoting competition within the legal services sector supported by proportionate regulation Regulation, applied as either an ex post or ex ante tool is in itself not bad, or inefficient. It must, however be proportionate to risks and tailored for the needs of the market — something which both the CMA and Government are cognizant of4. On issues such as transparency of pricing and looking for ways to encourage greater use of business models such as fixed fees (and where regulation is not the primary driver or an effective tool) it is the market which is best placed to develop solutions and drive behaviour change in suppliers and indeed consumers. Regulation is not agile enough to keep pace with a fast changing market and therefore allow for the necessary innovation and change required for successful market development, although it should be responsive enough to reflect market developments. Regulation should focus on seeking to prevent those issues which pose the greatest risk and for which there is evidence of significant or potential harm. 3. Improving access to justice The Law Society believes that all consumers should have access to justice, regardless of social background or wealth. There are clearly unmet legal needs in certain sections of the population; this is a consequence of the Government removing funding for a significant number of legal services and low levels of legal literacy (eg a consumer understanding exactly when they have an issue which is legal). Whilst legal literacy must be improved across all consumer groups, it is still questionable whether certain sections of consumers would be able to obtain legal advice at any cost point. The evidence relating to other categories of unmet legal need is not sufficiently robust as to provide definitive evidence to justify changing the regulatory framework. Some consumers do not have the means to pay the cost of legal services no matter how cheaply offered; for these consumers, there is no realistic prospect of addressing their legal needs without some restoration of publicly funded legal services. The legal services markets have faced disruptive change in the last 10 years in many areas, including cuts to legal aid and also successive rises in court and tribunal fees; both are undeniably harmful to the consumer. There are parts of England and Wales which are legal aid advice deserts, where there is no 1 ‘Legal Services Market Study— Interim Report’, July 2016, the Competition and Markets Authority 2 ‘Legal Services Market Study— Interim Report’, July 2016, the Competition and Markets Authority 3 Ibid p17 4 ‘Regulation and Growth’, May 2012, Better Regulation Delivery Office 6 provision at all or only one provider for large geographical areas (see Annex A). It is in the public interest that the decline in provision of publicly funded services is reversed; campaigning for access to justice for consumers is a key priority for the Law Society. However, these areas of unmet legal need, which are the most significant, are not going to be addressed by reference to regulatory changes. 4. Upholding the rule of law and maintaining a stable legal regime, in the interests of the wider public good and the economy as a whole Stability and certainty of the legal system is vital to the healthy and continuous functioning of the legal services markets and further, the UK economy. The total value of legal services to the economy is £25.7 billion5. Any chilling effect as a result of disruptive reforms of the legal services markets will have a negative impact on the UK economy given that for every 1% growth in the UK legal services sector, 8,000 new jobs are created and £379 million is added to the economy6. The role of legal services sector in the economy is not limited to its own success, but rather it plays a central role as a key lever in the UK’s overall economic success. The effect of a disruption to the market is measurable. Our research indicates that a 1% decrease in the legal sector’s value would lead to a loss of £307 million in the sector’s gross value added and the loss of over 5,500 jobs across the economy in the first year. Regulatory changes that cause even a small market disruption therefore have the potential to create a significant impact on employment and on economic output7. In addition to the direct impact the legal services market has on the economy, the sector has a wider social value which is more difficult to measure – in basic terms, the benefits and public good derived through supporting the rule of law. The effect of a stable, independent legal regime is to encourage investment, market exchange and innovation which drives the UK economy. It is also one of the factors in making England and Wales the jurisdiction of choice for many internationally. Any instability, unwarranted change or excessive amendment to regulatory frameworks will also have a considerable impact on the perception of the UK as a choice of jurisdiction. As such, the threshold for triggering any change within the sector should be high, based on clear and strong evidence of significant harm or inefficiencies, alongside a clear understanding of the gains to be achieved. It is also worthy of note that the current regime is less than 10 years old, in some parts only 5 years, and that the regime was developed in its current state as a result of a lengthy, in depth, expert review of the entire regulated legal services sector8. We agree that innovation should not be stifled and we do not accept that the regulatory framework impedes this unnecessarily. We do not believe that regulatory changes will facilitate the innovation and transparency in the market that are currently identified aims. 5. Independence of the legal profession, provides confidence in the justice system of England & Wales, both domestically and abroad Independence in the legal services market is a multifaceted concept – from undue interference from the profession, the importance of consumers' ability to receive independent advice and importantly independence from the state. We believe that independence of the legal profession 5 ‘Economic value of the legal services sector’, March 2016, The Law Society 6 ‘Economic value of the legal services sector’, March 2016, The Law Society 7 Ibid p14 - 15 8 ‘Review of the regulatory framework for legal services in England and Wales- Final report’, December 2004, David Clementi 7 from the state is fundamentally linked to both a healthy and competitive economic landscape. Research undertaken9 by the International Bar Association broadly categorises regulatory frameworks, globally, as one of five distinct models: 1. Largely court regulated professions; 2. Exclusively bar regulated professions; 3. Predominantly or exclusively government regulated professions; 4. Legal professions predominantly regulated by independent or delegated authorities; or, 5. Legal professions predominantly regulated on a mixed or shared basis by representatives of different organisations. In many European jurisdictions, the regulation of legal services is wholly independent from the state. Examples of countries where the role of government is more prominent include Saudi Arabia, Qatar, Oman, UAE, Tajikistan, Kyrgyzstan, Taiwan, People’s Republic of China and Vietnam. The Society believes that a core component of the attractiveness of the English and Welsh jurisdiction internationally is the certainty of protection from state interference, or even the perceptions of this. At a practical level it is vital in the interests of both consumers and the wider economy, that consumers must be able to obtain advice from an independent provider who puts their interest first and acts free from undue influence or conflicts of interest. The provider of legal services should also be independent of the state, and should be able to act free from any risk that the regulatory framework is fettered by the state. The Clementi Review of legal services addressed the issue of independence, rightly highlighting how crucial the independence of regulation is – both from the profession and the state10. The review and subsequent legislation delivered a solution which addressed two issues - structural separation of regulation from the profession, and also a protected status for the regulator and the profession which prevents them being fettered by the state. The ability of any regulator to command the trust and confidence of both industry and consumers is crucial to its success. Unlike other sectors such as financial services, the legal profession is often faced with being in direct opposition to those representing another party in a dispute or with conflicting commercial interests or the state. Most obviously the latter arises in relation to criminal law but it is much wider, as individuals may face numerous legal issues in which the state has an opposing interest (eg the state's assertion of rights over property and taxation; access to benefits; immigration; employment where the state is the employer; and access to education). The perception that the regulator or the profession may be influenced by the state poses a risk to the reputation of the UK's rule of law, and the confidence that industry, in the UK or abroad, have in it. Given the level of exports from the legal sector (£3.5bn11) and the widespread use of English law in international contracts, the reputation of the English and Welsh legal system internationally is of considerable importance to the economy. Access to legal advice from advisers who are demonstrably and clearly free of any direct or indirect relationship with the state (and are regulated under a regime free from state influence) is critical. The global success of the English legal services sector has been underpinned by the 9 See http://www.ibanet.org/IBA_Regulation_Directory_Home.aspx 10 Review of the regulatory framework for legal services in England and Wales- Final report’, December 2004, David Clementi 11 Economic value of the legal services sector’, March 2016, The Law Society p18 2 innovation to take place as markets are best placed to respond quickly to the specific needs of consumers, both constant and changing. This is especially the case when there is a high number of different consumer segments (such as in the legal services markets- see Part Three, Section Three of this response: 'Are there examples of good practice in price and service transparency that could be shared more widely?'). There are inherent dangers in prescribing the specific ways in which the presentation of pricing and quality information should be presented and shared, particularly if prescribed through regulation which seldom keeps pace with innovation in a changing market. Most significantly, and especially, as the CMA are studying only a limited number of markets within the legal services sector, this gives rise to a range of unintended consequences as discussed in Section 1.3: 'Potential difficulties with pricing and quality transparency'. 1.2 Transparency on pricing and quality after engagement We agree that once consumers have commissioned the services of a solicitor, the ongoing transparency of pricing and the quality of service is important in ensuring that consumers are aware of what they are paying for. Although it is a potential area of improvement, there is limited evidence of this being a significant problem for consumers. The Legal Ombudsman's own report shows that complaints about costs were limited versus other types of complaints2. Within the current framework, there are existing regulatory requirements regarding the type of information on costs that solicitors must provide to consumers, both at the start of an engagement and throughout a retainer. This initial information is often provided in the client care letter3. There are issues regarding length and accessibly of such letters; the SRA requirements are comprehensive and require firms to be explicit in the client care letter on a range of issues designed to ensure that the client fully understands the contract being entered into. This content is also supplemented by additional requirements i.e. the Provision of Services Regulations 2009, the Consumer Contracts Regulations 2013 and data protection requirements. The need to comply with regulatory obligations makes reducing the actual breadth of content of the letter difficult. Within our existing support mechanisms, we provide information on the need to provide clarity in a client care letter. We are building on this work to help firms explore ways in which to provide this information in a more accessible manner and will be publishing guidance on this in the near future. We are also looking at how this type of information might best be provided to consumers and hope to publish work on this by the end of the year. 1.3 Potential difficulties with pricing and quality transparency The CMA’s interim report specifically asks for thoughts on why pricing and transparency may be a difficult area in legal services.4 We believe that there are a number of contributory factors which have limited broader comparison online tools to date. It should, however, be borne in mind that despite these challenges, the sector is nonetheless developing greater transparency on pricing. We are aware of propositions coming to market which are specifically focused on creating online price comparison tools . We are also aware of comparison tools in other jurisdictions such as www.avvo.com in the US legal services market. 2 Legal Ombudsman, ‘What were complaints about?’, 2016 http://www.legalombudsman.org.uk/wp-content/uploads/2014/09/What- were-the-complaints-about-2014.csv. Accessed on 25/07/2016 3 See Annexe B 4 CMA Interim Report, Page 92, Questions on improving price and service transparency 3 The difficulties faced by firms in providing fixed fees relate, in the main, to the challenge of pricing a service that at the outset may be unclear – for example evaluating the degree of complexity. In areas of the law where the service can be ‘commoditised’ these difficulties occur far less frequently and can therefore be absorbed in the financial margins of a firm. However, there are some more complex areas of the law where this does not readily apply. This can give rise to risks such as:  Weighted fixed fees which build in a 'contingency' in case the matter being advised upon becomes more complicated than it appeared at the outset. This poses two further detrimental impacts − firstly, that some consumers are at risk of paying more than they might otherwise have done so, and secondly, potentially higher costs which deter people from seeking legal assistance.  Firms not being able to quickly ascertain the right price to fully cover costs and, as such, finding the market uneconomical to operate in. Although risk of failure is not a sign of an ineffective market, in some geographical areas the exit of local firms may have a serious detrimental effect on consumers’ ability to access legal services. There are already areas of the country with ‘legal aid deserts’5. There is potential that some geographical areas could result in no or very few firms being able to provide services under regulatory pricing arrangements.  Firms restricting their offering only to those types of services which are easily amenable to fixed fees. The impact of this would be felt most significantly by consumers who have complex cases and may struggle to find advice on an issue or would have a more limited choice of providers. Alternative Business Structure ('ABS') models have, to date, focused on the 'commoditised' end of the market. As such, a reduction in provision for complex cases would not be mitigated by new entrants from untraditional models.  Fixed fees resulting in a detrimental effect as some firms could see certain cases as 'too risky' − meaning that these consumers would have less choice of providers. Firms also fear that the risk of complex cases would drive up the average price.  Difficulty in predicting the cost of certain legal services in sectors of the legal services market where consumer needs are particularly complex. This is particularly the case where litigation is involved and the consumer's "legal journey" can be a long one. Early settlement of a claim (avoiding court) can significantly reduce fees, as court and tribunal fees are an additional cost to the consumer.  An unintended negative impact on the section of the legal services sector that provides business to business ('B2B') support. Certain aspects of advice provided in a B2B setting are highly bespoke; given that the CMA's study has only looked at certain markets, the variable levels of complexity must be considered when looking at recommendations that impact the whole range of markets within the legal services sector. Legal services support growth of the economy so the chilling effect of any adverse impact on B2B should be considered carefully. This is not to say that we do not support the use of fixed fees. Indeed, fixed fees are on the increase6 and we encourage their use in areas of the legal services sector where the issues are less complex and services are more easily commoditised. However, it is not for regulation to determine how and where fixed fees are most appropriate. Rather, we should encourage the market to develop better models for analysing cases and related costs and identify the solutions 5 See Annexe A and The Law Society, July 2016, www.lawsociety.org.uk/news/stories/lack-of-housing-legal-aid-services-is-leading- to-nationwide-advice-deserts 6 Legal Services Consumer Panel (2016) Tracker Survey 2016 http://www.legalservicesconsumerpanel.org.uk/publications/research_and_reports/documents/Howconsumersarechoosing.pdf p2 4 best suited to the industry and consumer needs. A tool built around a set of comprehensive algorithms – which help to predict likely time and complexity of a case and, in turn, price points would be useful. Accuracy of pricing is the core issue, firstly to ensure that consumers are not misled and secondly, for firms to ensure financial viability. Historically, the 'directory' style models that have existed have been inefficient in helping consumers to diagnose their legal needs and find an appropriate legal services provider. Some directory websites did not have the needs of the consumer as their key priority and did not assist in helping the consumer identify what services they need; many of these directories no longer operate as they went no further in empowering consumers to make an informed decision7. The Law Society understands the role of tools to help consumers, beyond the 'directory model', provided that they support both the consumer and the market and contain features encouraging consumer literacy of that market. However, we are mindful that consumers, who view them as a completely safe and neutral space, are still vulnerable to anti-competitive behaviours whilst using tools such as these; the CMA has seen recent examples in both the motor insurance industry8 and the energy industry9, which are being investigated for anti-competitive behaviours. However, as more sophisticated models emerge across different sectors there are transferable lessons which can be learnt and applied which can assist in developing better solutions – such as the types of reviews that consumers prefer (star ratings, numerical ratings, written reviews) or the search tool framework needed to cope with the intricacies of a complex and wide ranging market. Some of the same difficulties may also arise in relation to increasing transparency around quality. Cases vary widely from extremely complex to relatively straightforward; this could prove difficult to factor into a simple comparison tool and we discuss this further in 'What are the barriers to comparison and search?' in Part Three of our response. 1.4 Informed consumers The CMA remedies touch on the need to raise consumer awareness with regards to both the consumer's ability to identify when they have a legal problem and the types of services available in the legal services markets (both regulated and unregulated). This should be explored further. In financial services, financial literacy (examples being Barclays Money Skills10 and Learn Money Week11) is now regarded as a key component in preventing detriment to consumers. Financial literacy is an example where there has been a demonstrable impact on consumer behaviour; changes to behaviour have included better management of money, the ability to avoid or manage debt, increased likelihood of planning and saving for retirement and the increased demand of higher quality of services12. 'Legal literacy' is equally important and greater public education around identifying legal problems and legal services could play a significant role in addressing the problem of 7 Examples include www.lawyerlocator.co.uk (provided by Lexis Nexis) and www.findlaw.co.uk (provided by Thomson Reuters) 8 Private motor insurance market investigation, July 2014, https://www.gov.uk/cma-cases/private-motor-insurance-market- investigation 9 CMA investigation into a suspected breach of competition law by some price comparison websites that offer energy tariff comparisons, June 2016 https://www.gov.uk/cma-cases/energy-price-comparison-websites-suspected-anti-competitive-agreements 10 Barclays Money Skills has created a set of financial education resources for young people, http://www.barclaysmoneyskills.com/ 11 Learn Money Week is a global event which aims to help young people manage their finances and raise awareness of the need for financial literacy in schools, http://mybnk.org/learnmoneyweek 12 'Advances in consumer education: European initiatives', Goldsmith, E. B. and Piscopo, S, International Journal of Consumer Studies, 38: 52–61, 2014 7 2.2 The importance of equal standards of care and equality of access to redress Although we do not, in principle, have an objection to the presence of unregulated legal services providers in the markets, the continued differentiation of the level of protection afforded to consumers simply reallocates the ‘burden’ of regulation to consumers in the form of risk. The CMA itself has noted that consumers are often unaware as to the status of their provider.21 As in any transaction, it is crucial that the consumer should be aware that there is a difference in the choices they face – in this case, knowingly choosing between an advice route which affords full protection and an alternative route which does not. Whilst we support the idea that providers should make these sorts of issues clearer, there is a significant risk that unregulated providers – those that pose the most potential harm to consumers as they are without the full range of mechanisms of redress – would continue to be opaque in this regard and consumers would continue to be misled and at risk. We also believe that it is premature to say that there is no significant harm to consumers from unregulated firms; this Market Study only examined a limited part of the legal services sector, and as such it is difficult to assume the evidence in these markets is also reflective of practice in other areas. As the CMA has noted in its report22, the size of market share is still limited. In addition to this, new entrants in this field have tended to focus on more easily commoditised areas of the law - as such the results can at best be taken to be indicative, and cannot be extrapolated to other more complex areas of law. Will writing, which has been serviced fairly widely by unregulated providers for a number of years, is a service with a very long tail and the true picture of quality of service is still unknown. Anecdotally, our members report that they are addressing problems arising out of unregulated will writers' provision of services. Furthermore, we believe there is a potential under-reporting risk in this field given the limited avenues to pursue a complaint or concern, so it is difficult to assess the impact. It has been argued by some commentators that the general consumer protection regime is sufficient to ensure that consumers using unregulated entities are sufficiently protected. Although the Consumer Rights Act 2015 made it easier for the consumer to understand their rights, there is considerable evidence to suggest that the current framework of general consumer protection law and methods of redress regulating business-to-consumer transactions contains a number of weaknesses. The Law Society produced a report in 201323 which highlighted specific problems in general consumer protection law and outlined a number of policy recommendations with regards to the consumer protection and redress framework. One of the key weaknesses identified by the report was a lack of methods of redress under general consumer protection law. The consequences of this failure of consumer protection law were: significant numbers of consumers not getting the redress they deserve; reduced confidence in consumer markets resulting in consumers purchasing less and making more risk- averse decisions; an uneven playing field for those business that are trying to compete fairly (with good business being undermined); and, most worryingly, a chilling effect on the competitiveness of the markets. The report identified that public enforcement authorities are unlikely to be able to tackle all infringements and remedy all detriment that consumers experience, resulting in a continuing enforcement gap. The Law Society recommended that consumers should be empowered to bring their own actions through a range of different mechanisms, and should be encouraged to use both consumer Alternative Dispute Resolution ('ADR') mechanisms and the courts system, in order to achieve redress. Access to these 21 CMA Interim Report, Para 5.8, Page 59 22 CMA Interim Report, Para 1.30, Page 12 23 '21st Century Consumer Markets- A new framework for consumer protection', The Law Society, 2013 8 choices is fundamental to ensuring effective access to justice. These concerns regarding redress mechanisms for consumers still remain. ADR We are aware that the current ADR arrangements are difficult to understand for consumers. The implementation of the EU Directive on Consumer ADR24 ('the Directive') does mean that consumer ADR (that follows minimum standards) is now available in all sectors, whether unregulated or regulated, if they wish to use it. However, the outcome of this consumer protection mechanism is not necessarily binding on those who offer it and statutory complaints schemes, such as the Legal Ombudsman ('LeO'), have more extensive powers. We are aware that many solicitors have not signed up to an approved ADR provider which would try to resolve the complaint before it is escalated to LeO. We surmise that this is because many firms:  have processes in place which are able to successfully resolve the issues themselves;  believe that the service provided by LeO is adequate; and,  believe that adding a further stage to the complaints process would be unnecessary and expensive. 3. Changes to regulation and the regulatory framework 3.1 Reducing the burden of regulation As set out in Part One of our response, we agree that regulation should be proportionate. We have previously submitted to the SRA25 a list of regulations which we believe are unnecessarily burdensome on the legal services markets and could be considered for removal or dilution without compromising consumer protection. However, we urge caution and careful consideration as to how and where the regulatory requirements are relaxed. In an attempt to level the playing field with regards to regulatory ‘burdens’ we believe it is vital to ensure that there is not a ‘drive to the bottom’. Regulation is in place which provides consumers with crucial protection and access to redress should things go wrong; this is important in the legal services markets, where consumers are making decisions with significant, long-term impact and can be engaging in high value transactions. Although it is positive that regulators such as the SRA are considering how to deliver de-regulation, if the SRA and Government are committed to delivering a significant shift in the regulatory burden this requires a more in depth analysis of the ‘regulatory definition’. It is our view, in line with the Clementi Review, that regulation should be tightly defined, focusing on the core elements, with professional standards being owned and delivered by the profession. Crucially, any changes should be carefully examined and the balance between the reduced burden on firms and the increased risk for consumers thoroughly studied and consulted upon. PII is another vital component of consumer protection, enabling consumers to gain effective and reliable redress post-engagement if things go wrong. The cost of PII places financial burdens on firms in the regulated parts of the legal services markets. Reducing or removing the requirements to have PII in place would no doubt reduce the regulatory costs to firms. However, the resulting decrease in protection and increase of risk for consumers is not in the public or consumer interest. Nor do firms or solicitors want to take this risk. While the LSB’s research found that PII was perceived to be one of the highest cost areas of regulation, PII was also the highest ranked area of regulation to keep. Furthermore, removing PII protection would create a 24 'Directive 2013/11/EU of the European Parliament and of the Council on alternative dispute resolution for consumer disputes' http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:165:0063:0079:EN:PDF 25 See http://www.lawsociety.org.uk/policy-campaigns/articles/cutting-regulatory-red-tape/ 9 two-tier market of consumer protection, dependent on who provides the legal service and what PII cover they may or may not choose to have in place. As the CMA itself reports, this is an opaque area for consumers already, and further asymmetry would only serve to increase confusion about the differences between regulated and unregulated legal services providers. Although we consider compulsory PII to be an essential element in allowing the markets to appropriately protect consumers, front-line regulators should be encouraged to develop PII arrangements that reflect regulatory risk and allow insurance providers to develop cost effective PII products, in order to reduce any unnecessary regulatory burden and associated costs. In the solicitors’ PII market, we believe that current SRA-mandated minimum terms and conditions of insurance are appropriate and necessary to protect both firms and consumers. It is encouraging to note that average PII premium costs appear to have fallen from the 2014-15 to 2015-16 indemnity year, for all sizes of firm26. 3.2 Sandboxing Changes to regulatory arrangements and their full effects are complex and difficult to model at the policy development level. However, there are mechanisms by which changes can be safely ‘tested’. Lessons can be drawn from the Financial Conduct Authority's ‘sandbox’ which has demonstrated the value of taking a methodical approach to relaxation of regulatory requirements.27 We welcome the SRA’s innovation zone, as a mechanism for feedback around those regulations which legal services providers deem a barrier to innovation and a forum for the sharing of ideas and information around new business models. The Law Society believes that a full ‘sandbox’ programme, as a 'safe zone' in which innovation can be tested and monitored, would be an appropriate approach to test the changes currently being proposed. Building such approaches into the remedies proposed by the CMA would be a robust way to encourage changes to be explored, whilst also ensuring that there was a method through which impact, cost and outcomes could be measured and assessed before full scale adoption. 3.3 Increasing oversight and regulation of the unregulated providers As the CMA highlights28, there is an asymmetry between the regulated and unregulated providers which we believe should be addressed. We are pleased to see the CMA supporting the view that in some cases this may require an increase in oversight to ensure that consumers are sufficiently protected in higher risk areas29. Although there are the four pillars of consumer protection for consumers who use regulated legal service providers, consumers can choose to use unregulated providers. Unregulated legal services providers do not offer the same levels of consumer protection, giving rise to high levels of risk for consumers should something go wrong and a lack of an equal playing field for regulated providers. The Law Society disagrees with the conclusion of the CMA that this differentiation is not significant. We recognise that the role of these providers in the legal services markets is still emerging, the number of consumers exposed is relatively low and there is a lack of insight about consumer experiences and we understand that this may not currently meet a 'significant detriment' threshold at this point in time. However, we believe that there is significant potential for this to be a longer-term issue and the CMA should seek to find further evidence of the effect of unregulated legal service providers on consumers. A lack of evidence does not mean that there is no issue for consumer, nor that in the future there will be no issue, and the CMA should look to proactively address this before it becomes a large scale problem. 26 Law Society annual PII survey 2015-16 http://www.lawsociety.org.uk/support-services/risk-compliance/pii/surveys/ 27 Project Innovate and Innovation Hub https://www.the-fca.org.uk/firms/project-innovate-innovation-hub 28 CMA Interim Report, Para. 3.22, Page 31 29 CMA Interim Report, Para. 7.60, Page 100 12 important for the remedies proposed to look for ways in which the market can bring about the solutions sought – thereby supporting the desire for deregulation, balanced with consumer protection. Wholesale change to the regulatory regime has high costs for both the sector and for the economy as a whole. This report has not provided a theory of harm supported by evidence of actual material harm to consumers, the legal services sector or the economy. In the absence of evidence, we do not believe that a case has been made for revisiting the design of the regime so soon after the last root and branch review undertaken by the Clementi Review. 1 The Law Society's response to the Competition and Markets Authority's Interim Report on the Legal Services Market Study Part 3- response to questions Questions on improving price and service transparency 1. What are the barriers to providers sharing price and service information with consumers and do these vary by legal service? The most significant barrier to improving transparency around price and services is that, intrinsically, the markets are discrete and, whilst they share many similarities, there are key differences with each, and within each. This is evidenced in the many different types of price structure available and the variation in level of information immediately available to consumers (such as on a website) on those structures. The legal services market is based on providers, such as solicitors, selling their time and expertise. The cost of an expert's time is likely to be greater where their expertise is more specialised and niche, and thus scarce. Recent research demonstrates that 48% of consumers now pay for legal services via a fixed fee1 and fixed fees are much more prevalent in areas where work can be commoditised. For example, in conveyancing, 68% of consumers had work carried out under a fixed fee arrangement. There is a similar trend in other practice areas, with fixed fee arrangements in wills (60%), powers of attorney (64%) and immigration matters (64%).2 In other areas of the legal services markets, they are less prevalent. This is due to the following reasons: 1. the work is complex and it is difficult to predict the likely level of work required or how far work might progress. For example, disputes with neighbours and family law3; and 2. there are other means of funding. For example, advice on debt and benefits is often provided free of charge which means fixed fees are of limited use. In the case of 1, the difficultly in predicting the costs and thus providing fixed prices relates back to the very nature of the work used within the legal services market. The cost relates to the amount of time that a case may take, which can be difficult to predict4, and also the amount of time and input a client wants from the solicitor which may vary from client to client. This can make providing fixed costs difficult and also limit flexibility for the client in relation to additional input from their solicitor. 1 Legal Services Consumer Panel, 2016, Legal Services Consumer Tracker 2016 Insight report, p.35 (http://www.legalservicesconsumerpanel.org.uk/publications/research_and_reports/documents/LegalServiceBoardReportbyYouGovV4.pdf) 2 Legal Services Consumer Panel, 2015, Full data tables from the 2015 Tracker Survey - a sample of recent users of legal services (http://www.legalservicesconsumerpanel.org.uk/publications/research_and_reports/documents/Tracker_Users_15_000.xlsx) 3 Ibid 4 Cases can vary in length and depth depending on the issues, the other parties involved and the consumers own appetite for how to approach the case. 2 There are obvious difficulties in predicting the cost of certain legal services, particularly where certain types of litigation are involved5. Early settlement of a claim, as occurs in many cases managed by a solicitor, as opposed to going to court, can have a significant impact on the level of fees a client might pay, (as court and tribunal fees are an additional cost to the consumer), and also the costs to the wider public, as it prevents the case coming to court. A solicitor is likely to provide estimates of the approximate cost of each potential stage of the process because an overall fixed fee under these circumstances would be extremely difficult to calculate before receiving the full facts. Fixed fee arrangements are not necessarily beneficial to consumers. In some cases they could, for example, result in a consumer paying more than necessary if a case was to settle early. There is evidence to show that only a very small percentage of consumers were dissatisfied with the costs information provided to them (7%)6. The difference between levels of consumer dissatisfaction relating to costs information is relatively small when comparing those areas of legal services where the majority of work is carried out under a fixed fee arrangement and where it is not. For example, dissatisfaction in relation to costs in conveyancing is 4%, whilst dissatisfaction relating to costs in family law (where only 35% of work is carried out under a fixed fee) was 9%. This is a good indication that clients are clear about the cost of their legal services at the start of an engagement with a legal services provider7, no matter what structure is used to share information on costs with the consumer upfront. Within the CMA report, the argument is made that fixed fees are not used as widely as they might be because they place the risk on the firm. It is important to understand that fixed fees may not present good value to the consumer as they do not usually represent the lowest cost for which a firm could undertake a case if no unexpected issues arise. Instead, firms may use a higher price as a contingency to reflect that some cases may cost considerably more than the minimum price. This may result in some clients paying more for their case than they could have done: predictability is traded off against cost-minimisation, which is a perfectly rational choice for some consumers to make. However, it does mean that fixed fees do in fact transfer some risk to the consumer. 2. Is there a minimum level of information that providers should either (i) publish or (ii) or provide to consumers either in advance or on engagement? Should this be mandatory? The Law Society agrees that there could be improvement in the levels of information made available for consumers. Providers in the regulated legal services markets are already required to provide cost information on engagement, a current requirement which provides consumer 5 It should be noted for certain types of litigation fixed costs are in place e.g. personal injury cases for claims up to the value of £25,000. 6 Legal Services Consumer Panel (2015) Full data tables from the 2015 Tracker Survey - a sample of recent users of legal services (http://www.legalservicesconsumerpanel.org.uk/publications/research_and_reports/documents/Tracker_Users_15_000.xlsx) 7 Legal Services Consumer Panel (2015) Full data tables from the 2015 Tracker Survey - a sample of recent users of legal services (http://www.legalservicesconsumerpanel.org.uk/publications/research_and_reports/documents/Tracker_Users_15_000.xlsx) 5 as examples, the Conveyancing Quality Scheme and the Wills and Inheritance Quality Scheme.14 The accreditation schemes promote high standards in legal service provision and ensure that clients are able to easily identify legal practitioners and firms with proven competency in specific areas of law. Consumers are able to find out what each accreditation scheme means on the Law Society website15 and can identify which legal services providers hold the Law Society's mark of excellence through the Find a Solicitor search tool (further detail on the Find a Solicitor search tool is in Questions on addressing barriers to comparison and search below). With consumer protection and empowerment a key priority, the Law Society is committed to further developing the accreditation schemes and we would welcome the opportunity to discuss the offerings that we are currently developing. Data on complaints collected by the Legal Ombudsman ('LeO') and front line regulators may act as a proxy for quality of legal services but they do not provide a full picture. The Legal Ombudsman's data in particular tends to reflect the quality of service rather than the quality of work; for example, service issues may include whether there were delays or where the lawyer failed to follow instructions. The LeO publishes basic information on all decisions on its website including firm names, anonymous case studies and very occasionally, where the LeO deems it to be in the public interest, detailed information about a firm.. Claims on providers’ PII in relation to negligent work could also give some indication as to quality of legal services, assuming that claims data can be acquired and analysed in a form enabling extraction of trends. However, the nature of many legal services e.g. conveyancing and will writing, means that mistakes often do not become apparent until some time after the work has been completed; this lag in the system makes the data difficult to rely upon. Questions on addressing barriers to comparison and search 1. What are the barriers to comparison and search? Data indicates that only a small percentage of those consumers shopping around for legal service providers found it difficult to do so (15%).16 However, we recognise that as the legal services markets are made up of a large number of players and consumer issues do vary in scope complexity and urgency; it is essential to make it possible for any consumer to make an easy search and comparison by searching for the details of firms and obtaining services and cost information. An important factor in this sector is the range of services in each market and the complexity of the services provided. In some areas, the easy commoditisation of the services makes pricing easier to determine and therefore provide up front and in a clearly understood way. There are however areas of the law where advice and progress is less easily predictable in advance - and in some cases wholly unique to the case in hand. In these situations, the issue to be dealt with 14 A full list of Law Society accreditation schemes is available here: http://www.lawsociety.org.uk/support-services/accreditation 15 http://www.lawsociety.org.uk/for-the-public/using-a-solicitor/accredited-specialists/ 16 Legal Services Consumer Panel (2016) Legal Services Consumer Tracker 2016 Insight report, p.35 (http://www.legalservicesconsumerpanel.org.uk/publications/research_and_reports/documents/LegalServiceBoardReportbyYouGovV4.pdf) 6 is how these complex variables can be managed in such a way that any price proposals offered are meaningful and not misleading. In relation to comparisons of quality, legal services are subject to many variables - the outcome of any given case may be the combination of the service by the provider, the court system's efficiency, the involvement of any third parties etc. In addition, given such low levels of consumer legal literacy17 customers may not know if the service they had was 'good' or 'bad' until some time after the transaction or ever. These issues are not complete barriers to some form of quality comparisons or indicators, but any remedies should be mindful of these factors. It should be noted, however, that the CMA’s survey evidence already indicates that 72% of customers felt able to judge quality before choosing a provider - as such there appears not to be a great degree of discontent amongst consumers on this issue. As the CMA's report indicates18, there is a generic difficulty across all sectors in the goods and services market in the relatively low uptake of quality comparison tools. To the extent tools are or could be useful, they need to be trusted. 2. Are those barriers consistent across legal services? The challenges identified are relevant to most markets within legal services - although to differing degrees. As mentioned above, where the services are more predictable or capable of commoditization, the fewer the barriers. The greater the degree of complexity the less scope there is for comparison tools to work easily. 3. What additional information could be made available by regulators and trade bodies? Consideration needs to be given to what additional information would be relevant and valuable to each audience (e.g. consumers, lending panels, SMEs). Providing context and how this information is displayed is key to helping consumers understand the information and to help them gain real value from it. Providing more information is not always the best approach; information overload can cause confusion rather than the levels of transparency hoped for. The key to consumer empowerment and protection is to have the right information provided. Confidentiality and legal professional privilege are also constraints that would have to be addressed. 4. What measures would allow consumers to be better able to compare non-price attributes of legal services providers (such as quality or consumer protections)? Most individuals (over 70%19) would use online reviews to find a solicitor or law firm if they did not have a personal recommendation, and these reviews are very likely to be influential in the choice made by consumers. Reviews are likely to reflect both the quality of service and to an 17 Law for life (2015) Legal Needs, Legal Capability and the Role of Public Legal Education http://www.lawforlife.org.uk/wp- content/uploads/Legal-needs-Legal-capability-and-the-role-of-Public-Legal-Education.pdf 18 CMA interim report on Legal service market para 4.29 19 The Law Society, online reviews research, May 2015 7 extent the value for money provided. As well as the ratings scores themselves, information on what kinds of services are provided and the date of the review would be considered important20. While some might be sceptical about the reason for the lack of reviews, other responses by consumers suggested a neutral reaction and a preparedness to accept a legitimate explanation such as the newness of the firm. When looking at scores/ratings to help measure the service received, consumers prefer to reference non-price indicators to help them compare providers. Figure 1 shows the rank order of ratings/reviews that consumers would like to refer to in deciding to choose a law firm. Understanding needs and quality of service share the top position, followed by keeping them informed and explaining the process and options clearly. As discussed earlier in this response, the Law Society has developed a full range of accreditation schemes. This is an ideal mark of quality for consumers to be able to differentiate between legal services providers’ levels of quality. The Law Society's Find a Solicitor service allows for consumers to search for a legal service provider by area of practice and location. The results show the consumer the number of and type of accreditations held, if any, by the legal services provider. The Find a Solicitor service also allows consumers to filter the results by showing only legal service providers who have achieved the relevant accredited status in the practice area they are searching in. Again, the Law Society is open to sharing further details with the CMA of the current and continuing development of our Find a Solicitor service. Legal literacy has a major role to play in helping consumers compare legal services providers. As the CMA have pointed out, many consumers automatically assume that they have guaranteed consumer protections and methods of redress whichever legal services provider they use, which is not true. Legal literacy around the different types of providers and protections for consumers is a key step in helping consumers to compare legal service providers. 20 The Law Society, online reviews research, May 2015 Figure 1 10 3. How should a central hub be promoted?  Should frontline regulators, representative bodies and self-regulatory bodies be asked to promote an information hub? Should legal service providers be obliged to link to an information hub? All front-line regulators, professional bodies and the LeO could promote a central hub through websites and via advice to legal service providers Many different information hubs are already in existence. Those that struggle to develop their own content (smaller organisations) may welcome the ability to be able to signpost to a central hub; however, third party commercial providers will have more of an interest to direct traffic to their own site to generate more leads for subscribers of that particular site. In the interests of the key principle of proportionate regulation, legal services providers should not be subject to additional regulation in this area which will add to the pre-existing administrative burden and cost on regulated firms. The administrative burden of complying with regulatory requirements is already problematic for small firms and sole practitioners and the time taken cumulatively to undertake these prescriptive, regulated tasks could ultimately be reflected in increased prices for consumers. The regulated market should not be more heavily regulated in this regard than the unregulated market. Practically, it is also hard to envisage how a requirement on unregulated providers to link to an information hub would be binding without legislation. This may not be feasible given the Government's commitment to cutting red tape and regulation for businesses. The CMA should carefully consider these implications before suggesting any further regulatory requirements. 4. Should Legal Choices include information on unregulated and self-regulated legal service providers? In order for equal protection to be extended to all consumers it would be necessary to include information on unregulated legal services providers in order to completely inform and empower the consumer. However, as stated before, it is difficult to envisage how this would be funded. It would be unacceptable and unfair for the regulated profession to subsidise the provision of information about the unregulated legal services providers. 5. What material should be prepared to aid comparing and selecting a provider?  Should materials be made available through channels other than a central information hub (such as Citizens Advice)? The Law Society believes that Citizens’ Advice is a more suitable organisation as a hub for materials which aid the comparison and selection of a legal services provider given that it already has a firmly established neutral and trusted role in the consumer advice landscape; it could take an active part in improving consumer legal literacy, vital to consumer protection and 11 empowerment. Information could be provided on the types of service that consumers may expect to see packaged in a commoditised fashion (for example, will writing or conveyancing) and other services which are usually priced on a case by case basis. It would also be helpful to provide consumers with information on the best way to engage and interact with legal services providers. Materials could include the questions they should ask, the information they should try and provide etc. Although much of this information is already available through organisations such as Citizens' Advice and the LeO, consumers must be aware of its existence in order for it to make a difference when comparing and selecting providers. Questions on improving client care communication and increasing access to redress 1. How can client care communication be improved to better protect consumers’ interests and are there examples of client care communication that provide succinct and relevant information? As previously referred to earlier in this response, requirements already exist to ensure that consumers receive clear information on costs when they use a regulated legal services provider. The number of complaints referred to the LeO relating to legal service providers has declined over the last few years as the client care requirements have become embedded in the service provided to consumers. The CMA has stated that "there is evidence that the client care letter, given by the provider to the client after the legal service provider has been retained, is not effective." The amount of information that solicitors need to provide at the start of a retainer means clients care letters are often long and complex and difficult for consumers to navigate. In addition the requirements for what should be included in the client care letter change on a regular basis. This makes it incredibly difficult for regulated legal service providers, (particularly small firms or sole practitioners), to keep informed of and abreast of any changes. (for instance, the recent implementation of the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 in 2014 which require solicitors to provide certain information dependent on where a contract is agreed). Stability and consistency in the information that solicitors are required to provide would benefit both consumers and practitioners. We envisage that our work on developing a practice note in this area will help support and enable providers to navigate this better and thereby make it easier for consumers. 2. What would be the consumer protection benefits and impact on competition of restricting the use of the title lawyer? Anyone can call themselves a lawyer or offer legal services as a lawyer (irrespective of whether they have any legal training or qualifications). This is confusing for consumers and in some cases misleading. The Legal Services Consumer Panel considered that ‘lawyers’ are more trusted than any other profession except for teachers and doctors23. Consumers felt their rights 23 Legal Services Consumer Panel (2016) Legal Services Consumer Tracker 2016 Insight report (http://www.legalservicesconsumerpanel.org.uk/publications/research_and_reports/documents/LegalServiceBoardReportbyYouGovV4.pdf) 12 would be best protected in their dealings with lawyers and consumers appear to think it is reasonable to place their trust in those holding a regulated title. The principle of equal protection of all consumers must be supported by a professional title which is overseen by a professional body. Professional titles are an important hallmark of quality and provide reassurance and guarantees to consumers. Professional titles such as ‘solicitor’ or ‘barrister’ are hallmarks of quality, easily understood by consumers. Even when the services provided by solicitors are not providing reserved activities, the professional principles still apply and key principles such as solicitors’ integrity and confidentiality are engaged. This underpins the quality of service received by consumers. As noted in Part 2 of our response, the SRA are consulting on changes to the regulatory system which may change the position described above and create a two tier system, where solicitors working in regulated firms will continue to offer a full range of consumer protections but those working in unregulated firms will not. We believe this is likely to be opaque to consumers, cause further confusion and require consumers to carry out significant due diligence. 3. What are the barriers to using the LeO and are there any benefits in amending its scope, jurisdiction or approach? An issue around the extension of access to LeO for third parties is that regulated legal service providers could increasingly find themselves in a situation of conflict where their duty to respect client confidentiality and their duty to comply with the LeO come head to head. Cases of conflict already arise although on a relatively small scale. For example, under the existing rules, beneficiaries of estates and trusts are able to complain to the LeO. This can be problematic for a legal services provider if, for example, the executor of a will refuses to waive client privilege. The solicitor is placed in a position where they have to negotiate the difficult ground between complying with information requests from the LeO whilst not taking action which would interfere with responsibilities to their client. These problems are likely to increase if there is any amendment to the LeO's jurisdiction, and would have to be addressed. Extension of the LeO’s jurisdiction could result in a disproportionate level of regulation and further burden on regulated legal services providers. A high proportion of the cases that are brought to the LeO are resolved in favour of the solicitor; however, the administrative burden of having a complaint referred to the LeO is highly significant even if the decision is made in favour of the solicitor. Any extension to the LeO's jurisdiction for solicitors should first involve a thorough financial and economic impact assessment forecasting the likely cost to the regulated legal services markets. Paragraph 7.54 of the CMA's interim report compares the LeO's jurisdiction with the Scottish Legal Complaints Commission (SLCC). The LeO will only accept complaints from micro- enterprises (small charities, trusts, small businesses) and the SLCC will accept complaints from businesses, regardless of size. However, it is not the case that redress is not available for larger companies; larger companies are more than likely to have the means to negotiate a settlement or in rare cases to be able to use the court system as a route to gaining access to justice. 15  The LeO's core jurisdiction is mandatory and binding but a voluntary scheme for unregulated legal service providers would not be. This could be misleading for consumers and a potential waste of the LeO's resources. Paragraph 5.67 of the CMA's interim report welcomes views as to "whether, in practice, it is a material issue that consumers who use unregulated providers benefit from fewer such consumer protection mechanisms." The Law Society believes that it is a both serious and material issue that consumers who use unregulated legal service providers benefit from fewer consumer protection mechanisms. For example, if a regulated legal services provider drafts a will incorrectly, it could have significantly negative repercussions for the intended beneficiaries. However, the beneficiaries of a poorly drafted will have access to the LeO who can order a legal services provider to pay compensation, claim against their PII providers and depending on the details of the case, use the Compensation Fund or 'run off cover'. If it is an unregulated legal services provider who has drafted this will incorrectly, the consumer benefits from none of these protections. This is just one example of how, if things go wrong, the use of an unregulated legal services provider can result in a lack of consumer redress. Questions on the regulatory framework 1. Are the high level criteria for assessing the regulatory framework that we have identified appropriate? We agree with the high level criteria set out in the CMA's interim report and we would support the criteria as a mechanism for assessing any potential regulatory change. However, as the CMA will be aware, sometimes the supply side outcomes are in conflict with the demand side outcomes when an attempt is made to apply the criteria to a real life example. For example, the SRA is currently consulting on proposals that would allow a solicitor to perform as a solicitor, providing services to someone who is not his/her employer, in an unregulated entity. On the supply side, it could be argued that this allows solicitors and unregulated firms to innovate. However, the proposal also needs to be balanced against the demand side. Under these proposals, the consumer will no longer be able to safely assume that, because they are dealing with a solicitor, the four pillars of protection are in place. We support the inclusion of criteria on the direct costs of regulation. The cost of regulation is borne solely by the profession and constitutes a major expense for firms. It is important that where new requirements are being considered, the impact on the legal services markets is thoroughly assessed. 2. Does the current regulatory framework prevent, restrict or distort competition? The four pillars of consumer protection, in the regulated legal service providers markets, are crucial in order for the public to have confidence in the legal profession. The existence of unregulated providers in the market who are able to operate without having to abide by the four pillars of protection creates a wide range of consumer and competition issues. The existence of 16 competing regulators can have a detrimental impact on the market if practitioners are able, in effect, to 'shop around' for a regulator. There may be benefits to this in theory if it encourages regulators to engage in manner that is more attractive to legal practitioners but the big danger is that it eventually contributes to a 'race to the bottom'. The cost of regulation would be cheaper but professional standards would be significantly eroded. Regulation in the legal sector requires these considerations to be balanced against one another. 3. Would the potential changes to the regulatory framework we have identified promote competition? We agree with the CMA that changes to the regulatory framework are unlikely to have the effect of encouraging competition in the legal services markets. Some of the potential changes suggested by the CMA and SRA will either weaken or eliminate the four pillars of consumer protection in areas of high consumer risk or create further and unjustified burden on regulated legal service providers. We have laid out our reasoning in Part 2 of this response. 4. Is a further review of the regulatory framework justified on the basis of competition concerns? No, a further review of the regulatory framework is not justified on the basis of competition concerns. The current regulatory framework has been brought in gradually since the Legal Services Act was passed in 2007: the LeO went live in October 2010, the applications for ABS licenses were accepted in 2011, and some regulators are still making applications to extend their remits to cover new services. The effects of the Legal Services Act have not played out fully yet and it would be premature to push towards a second Legal Services Act. We believe that issues around transparency can be better addressed by enhancing the services and information already provided by professional bodies. The legal profession is currently undergoing a great deal of change: the UK’s decision to withdraw from the EU is likely to have implications for the legal services markets and it is a key priority that that England and Wales remain the jurisdiction of choice for legal services. In addition to this, the SRA is proposing to significantly alter its Handbook containing the rules that solicitors must follow and allow solicitors to practise in new ways. The proposals could result in two tiers of solicitors - those working in a regulated entity and those who are not - with different rules and protections applying to consumers, depending on where the solicitor is working. The regulated sector would continue to operate with full consumer protection, including full PII, offering clear redress in the event of things going wrong. Advice from solicitors in unregulated entities may not be legally privileged – which means vital protections for consumers, that keep what passes between them and their solicitor confidential, would be under threat. Furthermore, the proposals will mean that a consumer instructing solicitor in an unregulated firm will not benefit from fully comprehensive PII, the compensation fund, or a clear redress pathway. We believe that these proposals are an example of where the balance between deregulation and consumers facing unacceptable risks needs to err on the side of the 17 consumer. We also fear that the consumer confusion created by this new two tier system will distort competition in the market. We believe it would be impossible to be able to measure the impacts of any changes given that so much is occurring elsewhere in the sector and it would not be appropriate at this time to create further instability in the market without conducting a full and in-depth review of the entire legal services sector. This holistic review would provide the evidence needed to base any proposals on changes to regulation in the legal services sector. The Law Society has been considering the future of regulation in the legal services sector and have looked at various models.