Legal Services Bill [Lords]

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Clause 105

Trade union exemptions
Amendment proposed: No. 115, in clause 105, page 57, line 5, leave out ‘a’ and insert ‘an independent’.—[Bridget Prentice.]
Question put, That the amendment be made:—
The Committee divided: Ayes 8, Noes 3.
Division No. 22 ]
Flello, Mr. Robert
Foster, Mr. Michael (Worcester)
Goodman, Helen
Hesford, Stephen
Kidney, Mr. David
McCarthy, Kerry
Mann, John
Prentice, Bridget
Bellingham, Mr. Henry
Burrowes, Mr. David
Neill, Robert
Question accordingly agreed to.
Amendment made: No. 116, in clause 105, page 57, line 7, leave out second ‘a’ and insert ‘an independent’.—[Bridget Prentice.]
Clause 105, as amended, ordered to stand part of the Bill.

Clause 106

Power to modify application of licensing rules etc to special bodies
Amendments made: No. 117, in clause 106, page 57, line 10, leave out ‘a’ and insert ‘an independent’.
No. 118, in clause 106, page 57, line 36, leave out ‘in shares’ and insert ‘or an indirect interest’.—[Bridget Prentice.]
Clause 106, as amended, ordered to stand part of the Bill.
Clause 107 ordered to stand part of the Bill.

Clause 108

“Low risk body”
Mr. David Kidney (Stafford) (Lab): I beg to move amendment No. 271, in clause 108, page 59, line 4, leave out subsection (2) and insert—
‘(2) The management condition is that—
(a) the number of managers of the body who are non-authorised persons is less than 10% of the total number of managers; or
(b) the managers who are non-authorised persons who provide services directly or indirectly to clients within their own professional training, are members of one or more recognised professional bodies.’.
The Chairman: With this it will be convenient to discuss the following amendments: No. 272, in clause 108, page 59, line 6, leave out subsection (3) and insert—
‘(3) The ownership condition for B satisfying the management condition set out in subsection (2) is that—
(a) the proportion of shares in B in which non-authorised non managers have an interest is less than 10%, and
(b) the proportion of the voting power in B which non-authorised non managers are entitled to exercise, or control the exercise of, is less than 10%, and
(c) if B has a parent undertaking (“P”)—
(i) the proportion of shares in P in which non-authorised non-managers have an interest is less than 10%, and
(ii) the proportion of the voting power in P which non-authorised non-managers are entitled to exercise, or control the exercise of, is less than 10%.
No. 273, in clause 108, page 59, line 16, at end insert—
‘(3A) The ownership condition for B satisfying the management condition set out in paragraph 2(b) is that shares and voting power in B are only held by authorised persons or members of recognised professional bodies.’.
No. 274, in clause 108, page 59, line 19, at end insert—
‘“recognised professional body” means a body (other than an approved regulator), incorporated by Royal Charter, which makes provision for—
(a) testing the competence of those seeking admission to membership of the body as a condition for such admission; and
(b) imposing and maintaining professional and ethical standards for its members, as well as imposing sanctions for non-compliance with those standards.’.
No. 275, in clause 108, page 59, line 23, at end add—
‘(5) For the purposes of subsection (4)—
“member” means a member or member firm as defined by the appropriate rules of such a body.’.
New clause 15—Low risk and professional bodies
‘(1) A licensing authority may apply to the Board to determine the status of a recognised professional body if it is in any doubt as to whether that professional body meets the criteria set down in this Act.
(2) A licensing authority may apply to the Board to determine whether a body “B”, which is “low risk” under section 108(2)(b) should not be treated as low risk if it considers the services to be offered by B are inconsistent with the “professional principles” set out in section 1(3).’.
Mr. Kidney: Sir Nicholas, it is fortunate for Committee members that you have returned safely from the Falkland Islands and that consequently we are able to benefit from your firm and fair guidance as Chairman of our proceedings. I remind hon. Members of my registered interest as a non-practising solicitor. I am indebted to the Institute of Chartered Accounts in England and Wales, which from now on I shall refer to as the institute, for its assistance in drafting the amendments in the group and the new clause.
The clause defines a low-risk body. Under clause 106, which we approved a moment ago, the licensing authorities may in relation to low-risk bodies disapply some of their rules and disapply schedule 13, in whole or in part. That clause therefore recognises that the full panoply of regulation is unnecessary for some alternative business structures. Taken together, the amendments in the group would define as low-risk those multi-professional practices that consist of already highly regulated and trained professionals. The new clause would incorporate a get-out clause for the licensing authorities in some circumstances. Further, one of the amendments in the group would tighten the “10 per cent.” category of low-risk bodies in the clause, such that it would apply only to internal owners and with the full oversight of the regulator.
I believe that there is a growing willingness across the political parties, and certainly in the professions, that part 5 should facilitate alternative business structures but ensure that the right protections are in place to deal with risk to consumers. That is certainly the thrust of the Clementi report, and I know that a lot of people in business and the professions are keen for the Government to do what they say by accepting the Hampton principles of risk-based regulation. Although there will be opportunities for significant benefit for consumers and the economy, we need to ensure that in cases where there is a low risk the process can be enabled as easily as possible. The flexibility of a low-risk category is appropriate, but clause 108 defines low-risk bodies as those with up to 10 per cent. non-lawyer ownership and up to 10 per cent. non-lawyer management, irrespective of the training, professional standards and ethics of those owners and managers and whether they are external or internal owners. Licensing authorities can vary licensing conditions for those low-risk bodies.
The vast majority of likely combinations of well-regulated professionals and lawyers could conceivably be regarded as offering positive benefits for consumers but low risk to consumers. For example, there would need to be 10 lawyer partners to allow one equal partner to come on board for a body to be defined as low risk. That deprives smaller high street or rural practices of the opportunity to come together as low-risk bodies, and inhibits the benefit to consumers of such alternative business structures. Such multi-professional practices have the potential to support access to justice on the high street and in rural areas.
As my hon. Friend the Member for West Bromwich, West said this morning, it is wrong to think that allowing alternative business structures will impact only negatively on access to justice. By offering extra commercial opportunities to small legal practices, and a reduction of back-office and marketing costs, they might aid the survival of such firms in an increasingly competitive market. When different professions combine across different towns, access to justice could be increased.
The current approach of part 5 plunges that combination of small professional practices into the panoply of licensing conditions for alternative business structures of a much higher risk. In effect, it favours those alternative business structures developed by larger law firms and puts extra restrictions and costs on smaller law firms and firms of other professionals that would like to be ABS. Allowing multi-professional practices also offers sizeable benefits to business and consumers. Small enterprises have to go separately to both lawyers and accountants for general business advice. One-stop shops would increase competition, reduce costs and reduce the time taken to develop understanding of a business and its needs. The benefits for our enterprise economy could be significant, and allowing their lawyers and surveyors to come together could cut time and complexity for home buyers.
What is proposed is a recognition that for the vast majority of professionals, coming together with lawyers when they are both owners and managers of the practice will be low-risk. That will help to ensure opportunities for all sizes of legal practice while enhancing fair competition. The classification of recognised professionals uses a definition used in recent Home Office legislation on money laundering reporting obligations, but makes it tougher by referring to the chartered status of each institute. Furthermore, the additional safeguards that have been proposed would enable the authorised licensing body to challenge the presumption of low-risk and appropriate cases.
Approved regulators in the board can act in cases where it might be argued that certain professional organisations have regulatory systems that are unacceptable or where certain combinations of services require greater regulatory oversight. I want to pause for a moment to talk about that point. I have seen a lot of support for the institute’s position, most recently from the Federation of Small Businesses. It wrote to the Minister this week—I do not know whether she has seen this yet—to say that it supports the position. It said:
“Lawyers and accountants are the most common sources of small business advice and they can play a vital role in assisting entrepreneurs.
It went on:
“This is why the enablement of multi-professional practices, and greater competition and innovation in the professions, has so much potential for UK enterprise and the wider public interest.”
2.15 pm
I note, too, that the institute’s position is supported by a number of other chartered institutes—the Chartered Institute of Patent Agents, the Institute of Trademark Attorneys and the Royal Institution of Chartered Surveyors. If I have one hesitation about the matter, it is that in much of what I have said about access to justice provided through such alternative business structures, I have referred to quite small businesses. However, there is nothing in the amendments to stop an extremely large law practice—or a large practice of chartered accountants, for that matter—from forming and claiming that it is a low-risk body.
That is why new clause 15 is important. It could be said that although the same principle still applies—they should all be highly regulated, well-motivated and honest professionals doing their jobs within their competencies—the very fact that large groups of people doing many different kinds of work come together adds a layer of complexity that would not be present in a much smaller firm. That is why the new clause would allow the licensing authority to say in some circumstances that they will not accept designation as a low-risk body or disapply any of the rules.
Amendment No. 271 is a means of introducing an alternative class of low-risk body related to professionals coming together who are all subject to supervision through a chartered institute. Of the grouped amendments, No. 272 introduces the tie that I mentioned between ownership and management, No. 273 is effectively a consequential amendment concerning professionals as owners, Nos. 274 and 275 are the definitions and, as I have explained, new clause 15 provides a get-out clause for the licensed authorities if it is seen that a particular combination ought not to be regarded as a low-risk body.
Mr. Burrowes: It is a pleasure to follow the hon. Member for Stafford, who served with me on the Joint Committee and was a vocal member. I have been awaiting his voice expectantly, and it has been worth the wait. I support the amendments. I shall try to allay concerns—I can think of one particular hon. Member who may have some—that there might be just some love-in going on among lawyers, accountants and members of established professional bodies. That is certainly not what is going on. In many ways, this is a love-in with consumers.
We must not forget that small businesses are also consumers of legal and professional services. The hon. Member for Stafford referred to the support of the Federation of Small Businesses, whose 2006 report “Lifting the Barriers to Growth in UK Small Businesses” stated that accountants are the main source of business advice, being consulted at a rate of 54 per cent., followed by solicitors at a rate of 28 per cent. One-stop advice shops could reduce costs to business consumers and increase competition and innovation. The voice of a consumer body is also worth referring to. The National Consumer Federation believes that one-stop shops promise greater convenience and more choice for consumers. It is good that an alliance of consumers, businesses and professionals alike should endorse the amendments.
The high benefits and low risk of multi-professional practices are of prime importance. When well-regulated professions come together in alternative business structures, such businesses will be subject to regulatory regimes. In many cases, all employees will be subject to two regimes—the Bill deals with those regulatory conflicts—but if different skills and backgrounds are brought together, even if professionals remain within the sphere of their expertise, the quality of service is likely to increase.
The Government have set the risk bar at 10 per cent. ownership, but that pays no attention to the individuals’ background or what they will be doing in the practice. Well regulated, multi-professional practices clearly fall below the low risk bar that the Government have set in the Bill, yet they will not be able to take advantage of that low-risk definition.
In essence, the amendments establish that low risk stems from the nature and type of ownership, not necessarily from a percentage interest. I support this balanced group of amendments because the approach has a degree of caution, which the hon. Member for Bassetlaw might welcome. It is right to be cautious; although someone might believe themselves to be professional, they might not yet have reached that stage, so proper regulatory systems need to be in place. There needs to be a check on a combination of services and systems that might threaten the principles of the legal profession. New clause 15 would deal with that by allowing the rebuttal of the presumption of low risk. The board would be at the centre of that decision and it would be allowed to set standards of appropriate professionalism and encourage the professions to take the new opportunities.
The amendments would address my concerns about the impact of this part of the Bill on small businesses. For example, a small legal practice of two persons that comes together with a non-legal professional will be classified as having a higher risk than a practice of 100 partners that takes on 10 non-legal professionals. Given that the non-lawyers would remain in their own area of professional expertise, how would the risk be established consistently? I wonder whether the 10 per cent. rule is appropriate in such a situation, and whether the Government appreciate what its impact will be on the ability of small businesses—and larger ones, to which the hon. Member for Stafford referred—to enter the market and provide a good service to consumers.
The amendments would benefit consumers as well as businesses of various sizes. They would improve our competitive standing, not least in the City. The difficulties of international regimes and conflicts of interest will, in the main, deter the mergers of larger firms. Those offering services such as forensic investigation and due diligence could benefit especially from specialist, multi-disciplinary practices. If people dealing with business turnaround and insolvency were brought together with those offering legal and other professional advice, it could only help business survival. The one-stop services extolled by the National Consumer Federation, which we wish to support and encourage, would help to reduce costs. That would result in more money for business survival, which would be of assistance to employees.
One might rebut the arguments behind the amendments by asking whether we are not just creating the spectre of Enron. However, we should take comfort from, rather than be concerned about, the interaction between regulatory regimes. The Financial Reporting Council is a good example because it has regulations to prevent the combination of audit and legal services, which has a material impact on the independence of audit. Indeed, such auditing is taking place in only 10 companies of the larger ilk. The FRC no doubt has the concerns of the public in its sights. However, we should not deny opportunities to the vast majority of businesses.
The Institute of Chartered Accountants, which was referred to, has a membership of 12,000 registered accountancy firms. If one does not take the word of the bodies that have been mentioned, one might take note of the approach of Sir David Clementi, whom Members on both sides of the House have sought to pray in aid. We might do so particularly with regard to his intention to ensure that alternative business structures are allowed to develop in a controlled manner.
The Joint Committee recommended a step-by-step approach. The amendments would create the right structure and utilise the expertise of the licensing authorities and the board to set detailed conditions. They would ensure that barriers to ABS were proportionate to risk, which is one of the Bill’s intentions, and would allow low-risk ABS to be set up more easily. That would provide a better risk-based approach than part 5 of the Bill that would be of benefit to the consumer and would help to mitigate concerns about threats to access to justice. Regulatory scrutiny would be focused on ABS that posed high risk and greater potential for conflicts in respect of access to justice.
As we have heard, the Institute of Chartered Accountants supports the amendments. It should be commended for saying:
“A better risk based approach to facilitation of differing forms of ABS should be adopted. This should utilise existing systems of regulation to concentrate resources on the greatest risks to consumers.”
That would provide appropriate transitional arrangements for existing ABS that should
“ensure minimal disincentives to their continuation.”
The institute says:
“Through such an enhanced risk based approach, costs to the consumer and barriers to innovation can be minimised.”
It is for those reasons that I commend the amendments to the Committee.
Bridget Prentice: I absolutely agree with my hon. Friend the Member for Stafford and the hon. Member for Enfield, Southgate about following the Hampton principles in respect of the risk-based approach. We very much want to do that. The proposed bodies would not have a maximum percentage threshold for non-lawyer management or control. Instead, any number of non-lawyers could be managers and owners—if I understand amendment No. 273 correctly—provided that they were all members of recognised professional bodies.
New clause 15 would provide the board with the power to restrict the professional bodies that would be acceptable in that context for the purpose of determining whether certain professionals could qualify for low-risk status. I can tell that a great deal of thought has gone into the amendments and I commend my hon. Friend for the way in which they have been drafted. Various attempts have been made to add the necessary safeguards, but that may still provide for a wide range of practices to emerge without the requirement of full ABS regulation. I would be reluctant to allow that to happen because I do not believe that they would necessarily all be low risk.
For example, there is no requirement that the non-lawyer owners and managers must be the same or, indeed, that they must be individuals. As a result, a body could be at least partly owned—for example, up to 95 per cent.—by an audit firm and, under the amendments, still be classed as low risk. That is not a desirable outcome and nor is it the outcome that my hon. Friend would want.
More importantly, the amendment would class some forms of multidisciplinary practices as low risk. Even if the non-lawyer professionals were effectively regulated, things would need to be faced when combining different codes and rules, and different services. That is why part 5 is so important because it creates such safeguards to address exactly that situation. I recognise that multidisciplinary practices might bring many benefits, but they must be carefully regulated, as both Sir David Clementi and the Joint Committee recognised. I am therefore still reluctant to waive part 5 safeguards for bodies of that type.
My hon. Friend put his argument succinctly. A young friend who owns an outstandingly successful IT business wrote to me before Second Reading about the one-stop shop that is necessary when people are starting up a small business because of the variety of professionals they have to get in touch with, such as lawyers, conveyancers and bankers. The whole gamut of people who are needed can lead to quite an expense at the early stage of setting up a business. I understand the problem and have a lot of sympathy with small businesses, especially for that reason. I take on board what the Federation of Small Businesses says, and my friend Leigh Caldwell made clear the importance of the one-stop shop.
2.30 pm
My concern is whether it is appropriate to ditch the safeguards in part 5, so I say to my hon. Friend and the hon. Member for Enfield, Southgate, who has been supporting him, that although I shall resist the amendment, I have heard the concerns of hon. Members and small businesses about legal disciplinary practices and the need to ensure that we take a genuinely risk-based approach, as I have said in previous debates. I am exploring whether we can bring forward a viable alternative to cover that until part 5 is up and running. If that is possible, I shall do so on Report. On that basis, I ask my hon. Friend to withdraw the amendment.
Mr. Kidney: We have had a useful, albeit short, debate. My hon. Friend the Minister’s response was extremely constructive, and it was pleasing to hear her say that she would give further consideration to the matter and perhaps say something more positive on Report. Will she give us an assurance that she will continue the dialogue with the various chartered institutes and legal bodies that have an interest, such as the Law Society? Perhaps she will keep Members with an interest in the subject informed of how those negotiations are progressing.
Bridget Prentice: I am more than happy to give my hon. Friend that reassurance. I shall certainly keep him and other members of the Committee abreast of how successful we are in dealing with the matter. I hope that, in turn, he and others will encourage those professional bodies to work closely and positively with us to see whether there is a solution that would be satisfactory all round.
Mr. Kidney: That is very helpful. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendments made: No. 119, in clause 108, page 59, line 7, leave out ‘in which non-authorised persons have an interest’ and insert ‘held by non-authorised persons’.
No. 120, in clause 108, page 59, line 9, leave out ‘power’ and insert ‘rights’.
No. 121, in clause 108, page 59, line 12, leave out ‘in which non-authorised persons have an interest’ and insert ‘held by non-authorised persons’.
No. 122, in clause 108, page 59, line 14, leave out ‘power’ and insert ‘rights’.
No. 123, in clause 108, page 59, leave out lines 20 to 23.—[Bridget Prentice.]
Clause 108, as amended, or dered to stand part of the Bill.
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