Clause 62: The Board as an approved regulator

Clause 63: The Board's designation under section 62(1)(a)

Clause 64: Modification of the Board's functions under section 62(1)(b)

Clause 65: Cancellation of the Board's designation under section 62(1)(c)

Clause 66: The Board's power to recommend orders made under section 62

166.     This group of clauses make provision for the Board to be able to act as an approved regulator in relation to any one or more of the reserved legal activities. Clause 62 provides that the Lord Chancellor may, by order:

• designate the Board as an approved regulator in relation to one or more reserved legal activities;

• modify the functions of the Board, with a view to enabling the Board to discharge its functions as an approved regulator effectively and efficiently; and

• cancel the Board's designation as an approved regulator in relation to one or more reserved legal activity.

167.     Such an order may also modify other legislation as appears necessary or expedient to the Lord Chancellor (see subsection (5)). If the Board is designated by such an order, it must take the necessary action to ensure an appropriate financial and organisational separation between its functions as approved regulator and its other activities.

168.     The Lord Chancellor's power to make such an order is exercisable only if the Board has made a recommendation for such an order; and it may not be used so as make an order which differs materially from that recommended (subsection 2)). Clause 66 makes provision about the Board's recommendations for orders under clause 62. The Lord Chancellor is not bound to accept a recommendation, but must provide the Board with a notice stating reasons for refusal and must publish that notice (subsection (3)).

169.     Clause 63 provides that the Board may be designated as an approved regulator only in instances where an approved regulator's designation has been cancelled, or where the activity in question is a new reserved legal activity. By virtue of subsection (3), the Board may be designated as an approved regulator in advance of either of these eventualities. The order designating the Board must also ensure that the Board acting as approved regulator is separate from the Board acting in its "general" capacity so that the Board as approved regulator may only make or modify its regulatory arrangements with the approval of the Board in its general capacity.

170.     Clause 64 specifies some of the powers that may be conferred on the Board by an order made under clause 62 subsection (1)(b) modifying the Board's functions in order to enable it to fulfil its role as an approved regulator more effectively.

171.     Clause 65 makes provision regarding the cancellation of the Board's designation as an approved regulator. In such cases, clauses 46 and 47 (which provide for "transfer arrangements") will apply in relation to the Board and persons authorised by it as they apply to an approved regulator whose designation is cancelled under clause 45, and to persons authorised by that regulator.

172.     Clause 66 sets out the procedure that the Board must follow before making a recommendation for an order under clause 62.

Clause 68: Regulatory conflict and the Board as approved regulator

173.     This clause sets out how regulatory conflict will be resolved in instances where the Board acts as an approved regulator. It provides for requests to be made to the Board (in its capacity as an approved regulator) for it to reconsider the provision made by its regulatory arrangements, so as to prevent a conflict with another approved regulator. Such a request may be made by an approved regulator (on its own initiative) or following a request by an affected person (as defined by subsection (11)). Such a request may also be made by a person authorised by the Board (in its capacity as an approved regulator) to carry on a reserved legal activity or a manager or employee of such a person. Such a person may also apply to the Board in its capacity as an oversight regulator, requesting that it exercise its powers under clause 32 to direct the approved regulator to take the appropriate action in respect of regulatory arrangements to resolve a regulatory conflict.

     Clause 69: Modification of the functions of approved regulators etc

     Clause 70: Procedural requirements relating to recommendations under section 69

174.     Clause 69 confers the power on the Lord Chancellor to make an order modifying or making other provision in relation to the functions of an approved regulator or other body other than the Board). Such an order may only be made following a recommendation by the Board, and such orders may only be made to achieve the purposes specified in subsection (3), namely:

• to enable a body to become an approved regulator or licensing authority in relation to one or more reserved legal activities;

• to enable a body to regulate different categories of legal persons;

• to enable a body to carry out its role as an approved regulator/licensing authority more effectively or efficiently;

• to enable a body to become a qualifying regulator for immigration services; or

• (where the body is already a qualifying regulator) to enable it to authorise persons to provide any additional advice or services which amount to immigration advice or services.

175.     Furthermore, the Board may only make a recommendation that such an order be made with the consent of the approved regulator to which the recommendation relates. Clause 70 sets out the procedural requirements relating to the making of such recommendations.

PART 5: ALTERNATIVE BUSINESS STRUCTURES

176.     This Part of the Bill makes provision for new alternative business structures as a vehicle for providing legal and other advice and services. Lawyers and non-lawyers will be able to form legal partnerships and companies as vehicles for the provision of reserved legal services. Where non-lawyers are managers of, or have an interest in, such a body, the body will have to become a licensed body, licensed and regulated by a licensing authority, in accordance with the provisions of Part 5. Existing regulators of legal services will be able to apply to the Board to become licensing authorities. If there are no other appropriate licensing authorities, the Board itself can act as a licensing authority.

177.     Consumers will be able to complain about matters relating to the services provided by ABS firms: first through in-house complaints arrangements, and if necessary, to the new OLC.

Background

178.     Historically, there have been a number of statutory restrictions on the type of business structures through which legal services may be provided. Some existing regulators have also prohibited lawyers from entering into partnership with non-lawyers. Certain regulators have also placed restrictions on the ways in which non-lawyers can participate in the management of firms. In other cases, regulators do not have the powers they need to regulate a more diverse range of business structures.

179.     In March 2001, the OFT identified a number of rules of the legal profession that were potentially unduly restrictive, and that might have negative implications for consumers. ¹² The OFT recommended that rules governing the legal professions should be fully subject to competition law and that unjustified restrictions on competition should be removed.

¹² OFT, 2001

180.     Following the 2004 Clementi Review, ¹³ in 2005 the Government published a White Paper, The Future of Legal Services: Putting Consumers First. ¹⁴ It proposed ABS, which would allow different types of lawyers and non-lawyers to work together in an ABS firm or company, and/or the possibility of non-lawyer ownership and investment. It identified potential benefits for both consumers and legal services providers.

¹³ Clementi, 2004

¹⁴ Department for Constitutional Affairs, 2005

"Potential benefits for consumers:

• more choice: consumers will have greater flexibility in deciding from where to obtain legal and some non-legal services;

• reduced prices: consumers should be able to purchase some legal services more cheaply. This should arise where ABS firms realise savings through economies of scale and reduce transaction costs where different types of legal professionals are part of the same firm;

• better access to justice: ABS firms might find it easier to provide services in rural areas or to less mobile consumers;

• improved consumer service: consumers may benefit from a better service where ABS firms are able to access external finance and specialist non-legal expertise;

• greater convenience: ABS firms can provide one-stop-shopping for related services, for example car insurance and legal services for accident claims; and

• increased consumer confidence: higher consumer protection levels and an increase in the quality of legal services could flow from ABS firms which have a good reputation in providing non-legal services. These firms will have a strong incentive to keep that reputation when providing legal services.

• "Potential benefits for legal service providers:

• increased access to finance: at present, providers can face constraints on the amount of equity, mainly debt equity, they can raise. Allowing alternative business structures will facilitate expansion by firms (including into international markets) and investment in large-scale capital projects that increase efficiency;

• better spread of risk: a firm could spread its risk more effectively among shareholders. This will lower the required rate of return on any investment, facilitate investment and could deliver lower prices;

• increased flexibility: non-legal firms such as insurance companies, banks and estate agents will have the freedom to realise synergies with legal firms by forming ABS firms and offering integrated legal and associated services;

• easier to hire and retain high-quality non-legal staff: ABS firms will be able to reward non-legal staff in the same way as lawyers; and

• more choice for new legal professionals: ABS firms could contribute to greater diversity by offering those who are currently under-represented more opportunities to enter and remain within the profession."

Clause 71: Carrying on activities by licensed bodies

181.     This clause introduces Part 5. Subsection (2) defines "licensed body" as a body holding a licence under Part 5.

Clause 72: "Licensable body"

182.     This clause defines licensable bodies. They are bodies that have at least one manager who is not an authorised person (as defined in clause 111) or at least one person who has an interest in shares in the body who is not an authorised person. Clause 208 defines a manager as: a member, in relation to a body corporate whose affairs are managed by its members; a director, in relation to a body corporate if its affairs are not managed by its members; a partner, if the body is a partnership; and a member of its governing body, if it is an unincorporated body other than a partnership.

183.     By subsection (2) an interest in shares is determined in accordance with section 820 of the Companies Act 2006 which provides that a reference to an interest in shares includes an interest of any kind whatsoever. Any restrictions on the shares are disregarded.

184.     Subsection (3) defines "shares". It provides that shares, in relation to a body with share capital, means allotted shares as defined in the Companies Act. In relation to a body that has capital, but no share capital, shares are rights to share in that capital. Shares in relation to a body without capital are either: interests conferring the right to share in profits or contribute to losses; or interests that give rise to obligations to contribute to debts or expenses on the winding up of the body.

Clause 73: Licensing authorities and relevant licensing authorities

185.     This clause provides that a licensing authority is either the Board or an approved regulator who is designated as a licensing authority under Part 1 of Schedule 10. Under subsection (2), the Board is a licensing authority in relation to all reserved legal activities, but an approved regulator is only a licensing authority in relation to those reserved legal activities for which it has been designated under Schedule 10. By subsection (3) the Board may delegate its functions as licensing authority and must ensure that it appropriately separates its functions as licensing authority from its other functions.

Clause 74: Designation of approved regulator as licensing authority

186.     Part 1 of Schedule 10, introduced by this clause, sets out the procedure to be followed when an approved regulator seeks designation as a licensing authority. It is similar to the procedure for a designation of a body as an approved regulator.

187.     Paragraph 1 of the Schedule sets out certain requirements for applications for designation as a licensing authority. The intention of this provision is for fees to cover the reasonable costs associated with the application, etc., to which they relate (paragraph (1)(d).

188.     Paragraph 11 obliges the Board to make rules governing the way it determines applications. Sub-paragraphs (2) and (3) sets out conditions that must be met (and must be reflected in the rules) before the Board can grant an application.

189.     Paragraph 12 sets out the matters the Board must consider before deciding whether to grant the application in whole or (where it relates to more than one reserved legal activity) in respect of any of the activities in the application. The Board's decision notice must give reasons for any refusal and must be published.

190.     Paragraph 13 provides that the deadline for deciding applications is 12 months from the day of the application. That period can be extended any number of times up to a maximum of 16 months after consulting the OFT, the Consumer Panel and the Lord Chief Justice, and obtaining the Lord Chancellor's consent.

191.     Paragraph 14 sets out the process by which the Board must make a recommendation to the Lord Chancellor to make an order designating the applicant as a licensing authority.

192.     Paragraph 15 provides that when the Lord Chancellor receives a recommendation from the Board the Lord Chancellor may either make the recommended order or refuse to make it. If the applicant has also applied to be designated as an approved regulator, the Lord Chancellor must first make the appropriate order. If the Lord Chancellor makes a modified order or declines to make an order the reasons for that decision must be published. Paragraph 16 provides that the making of the order, has the effect that the proposed licensing rules are treated as approved by the Board (but remain subject to the power of the Board to make directions under clause 31).

     Clause 75: Automatic cancellation of designation as licensing authority

193.     This clause provides that if a licensing authority loses its status as an approved regulator, it automatically loses its status as a licensing authority.

Clause 76: Cancellation of designation as licensing authority by order

194.     This clause sets out how the designation of a licensing authority may be cancelled in whole or in part. Cancellation is by the Lord Chancellor on the recommendation of the Board. The Board must recommend cancellation where the licensing authority requests it and adheres to the requirements under subsection (3). The intention of this provision is for fees to cover the reasonable costs associated with the application, etc., to which they relate (subsection 3(b)). Under subsection (5) the Board may make a recommendation for cancellation where an act or omission of the licensing authority, or a series of such acts or omissions has had, or is likely to have, an adverse impact on the regulatory objectives, and in all the circumstances of the case it is appropriate to cancel the designation. By subsection (6) the Board may not exercise this power unless it is satisfied that the use of any of the powers set out in clauses 31 to 44 (performance targets, directions and public censure) would not adequately deal with the situation. Subsection (7) introduces Part 2 of Schedule 10, which makes provision about recommendations under subsection (5).

195.     The Lord Chancellor may decide not to make the order recommended by the Board, but must give reasons and publish them.

196.     Part 2 of Schedule 10 sets out the details of the procedure to be used when the Board is considering making a recommendation for cancellation under subsection (5). Paragraph 18 provides that the Board must give the licensing authority a warning notice, setting out its reasons for cancellation, which it must publish. The licensing authority may then make written representations (or oral representations, if authorised by the Board) within 28 days or a longer period specified by the Board. The Board must publish a report about those representations after having regard to the licensing authority's comments about the draft report.

197.     Paragraphs 19 to 24 set out the process whereby the Board must consult the OFT, the Consumer Panel, the Lord Chief Justice and such other persons that the Board considers reasonable to consult.

198.     Paragraph 25 requires the Board to provide to the licensing authority a copy of any advice from those persons, and to publish that advice together with any representations made by the licensing authority under paragraph 18. The licensing authority and any body licensed by that authority may then make written representations and, if authorised by the Board, oral representations. The Board may also allow others to make written or oral representations. The remainder of the paragraph sets out related procedures.

     Clause 77: Cancellation of designation: further provision

199.     This clause allows consequential provision to be made by the Lord Chancellor where the designation of a licensing authority is cancelled. Two types of order are possible. The first, under subsection (2), enables legislation etc. to be modified to take account of the cancellation. The second, under subsection (3), allows arrangements to be made transferring licensed bodies from the regulation of the original licensing authority to another that consents to act as their licensing authority. Such arrangements must include provision for placing the transferred bodies under the "new" licensing authority's rules (subsection (6)(a)) and may include provisions for transferring licensing fees to the new authority (subsection (6)(b)). Subsection (8) provides that the Lord Chancellor may only make an order under this section on the recommendation of the Board, and only one that is materially the same as the order drafted by the Board.

     Clause 78: The Board's power to recommend orders made under section 76

200.     This clause provides for the process that must be followed by the Board if it wishes to make a recommendation that the Lord Chancellor exercise the powers conferred under clause 76.

     Clause 79: Cancellation of designation: powers of entry etc

201.     Where an approved regulator has its designation cancelled, this clause provides for the Board to request assistance from the former licensing authority to enable regulation by the new licensing authority to continue. Subsections (3) to (10) make provision for the Board to obtain a warrant to enter and search the premises of the former licensing authority and to take possession of written or electronic records where necessary or desirable to enable regulation to continue. The Lord Chancellor must make regulations, either on the Board's recommendation or after consulting it, which specify further matters that the judge must take into account before issuing a warrant, which regulate the exercise of the warrant power and set out the circumstances in which records can be copied.

Clause 80: Functions of appellate bodies

Clause 81: Procedural requirements relating to recommendations under section 80

202.     Clause 80 allows the Lord Chancellor, on the Board's recommendation, to establish appellate bodies by order, or to modify the operation of the Solicitors Disciplinary Tribunal or the Discipline and Appeals Committee of the CLC, for the purposes of appeals under Part 5. The order may also make provision about fees and costs and may make modifications to any enactment. The order must be in a form that is not materially different from the draft attached to the recommendation by the Board under clause 81.

203.     Clause 81 sets out procedural requirements about recommendations by the Board for an order under clause 80.

     Clause 82: Licensing authority policy statement

204.     Clause 82 requires licensing authorities to issue and publish policy statements setting out how they will comply with the regulatory objectives when carrying out their functions under Part 5. These statements have to be approved by the Board, as do any amendments or replacement statements.

     Clause 83: Licensing rules

205.     This clause requires the Board, acting in its capacity as a licensing authority, to make suitable licensing rules (which mean suitable regulatory arrangements as defined in Schedule 12) within a period of 12 months from a decision of the Board under Schedule 12 that a licensable body is entitled to apply to it for a licence. Under Schedule 12, such a decision would be made because no other approved regulator has suitable regulatory arrangements in relation to the body in question, or in the case of certain non-commercial bodies (as listed in paragraph 1(6) of Schedule 12), no other approved regulator is prepared to offer appropriate terms. Those rules must be made or modified by the Board acting as licensing authority, with the approval of the Board acting in its capacity as oversight regulator rather than licensing authority or approved regulator. Subsection (3) provides that licensing rules made by an approved regulator only have effect while that regulator is also a licensing authority. Subsection (4) defines licensing rules. Subsection (5) details the provisions that must be contained in licensing rules, including conduct, discipline and practice rules; appropriate provision requiring the licensing authority to consider the likely impact on access to justice of a proposed application for a licence; the regulatory conflict provisions of clauses 52 and 54; and the complaint handling provisions of clauses 112 and 146. Subsection (6) introduces Schedule 11, which makes further provision as to licensing rules. Subsections (8) and (9) provide that the licensing rule requirements in subsection (5) and Schedule 11 are subject to sections 105 and 106, which make special provision in relation to trade unions and other special bodies.

206.     Schedule 11 describes licensing rules in detail. It has four Parts, dealing with licensing procedure, the structural requirements of licensed bodies, the practice requirements of those bodies, and their regulation. Decisions about individual licences are taken by licensing authorities without reference to the Board or the Lord Chancellor.

207.     Part 1 of this Schedule outlines licensing procedures.

208.     Clause 84 (described below) sets out the basic conditions for the way licensing authorities must deal with applications for licences. Part 1 of the Schedule makes detailed provision about licensing decisions. Under paragraphs 1 to 6 licensing rules must include provision about how an application for a licence, or for the modification of a licence, should be made, and they may include provision as to the period for which a licence is to remain in force and the renewal of licences.

209.     Paragraphs 7 and 8 make provision in similar terms to that described above in relation to applications under clause 106, which deals with the power to modify the application of licensing rules to the special bodies detailed in clause 104. In particular, licensing rules must make provision obliging a special body to notify the licensing authority where it becomes a different kind of special body or ceases to be a special body, within 30 days or a longer period provided for in the licensing rules.

210.     Part 2 of the Schedule outlines the three basic structural requirements that must be covered in the licensing rules. Paragraphs 9 and 10 require all licensed bodies to have at least one manager who is an authorised person, who can be either an individual or an entity (which is not a licensed body); prohibit a licensed body having a manager who is disqualified (provision about disqualification can be found in clause 98); permit licensing rules to be made about managers; and prohibit licensing rules from specifying that all the managers must be authorised persons.

211.     Paragraphs 11 and 12 require licensing rules to provide that licensed bodies must also have a designated Head of Legal Practice ("HoLP") who is approved by the licensing authority, is an authorised person and not disqualified. Under paragraph 11(4) a HoLP may be approved only if the person is fit and proper to undertake the duties set out in clause 91. Paragraph 12 requires provision in the rules about the procedures and criteria that the licensing authority will apply in determining whether a person is fit and proper, and in determining whether to withdraw its approval of the person as fit and proper. It also requires that licensing authorities make provision for review of these decisions. Paragraph 12 also allows the rules to suspend the requirement to have a HoLP for a specified period, so long as the licensed body complies with other requirements set out in the rules.

212.     Paragraphs 13 and 14 make similar provision in relation to the requirement to have a designated Head of Finance & Administration ("HoFA") approved by the licensing authority.