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Public Bill Committee Debates

Draft Legal Services Act 2007 (Functions of a Designated Regulator) Order 2008

The Committee consisted of the following Members:

Chairman: Sir John Butterfill
Bellingham, Mr. Henry (North-West Norfolk) (Con)
Brake, Tom (Carshalton and Wallington) (LD)
Caborn, Mr. Richard (Sheffield, Central) (Lab)
Dunne, Mr. Philip (Ludlow) (Con)
Harris, Mr. Tom (Glasgow, South) (Lab)
Hesford, Stephen (Wirral, West) (Lab)
Heyes, David (Ashton-under-Lyne) (Lab)
Hollobone, Mr. Philip (Kettering) (Con)
Howarth, David (Cambridge) (LD)
Jenkin, Mr. Bernard (North Essex) (Con)
Lucas, Ian (Wrexham) (Lab)
Munn, Meg (Sheffield, Heeley) (Lab/Co-op)
Prentice, Bridget (Parliamentary Under-Secretary of State for Justice)
Stringer, Graham (Manchester, Blackley) (Lab)
Turner, Mr. Andrew (Isle of Wight) (Con)
Wright, David (Telford) (Lab)
Gosia McBride, Committee Clerk
† attended the Committee

First Delegated Legislation Committee

Monday 10 November 2008

[Sir John Butterfill in the Chair]

Draft Legal Services Act 2007 (Functions of a Designated Regulator) Order 2008

4.30 pm
The Parliamentary Under-Secretary of State for Justice (Bridget Prentice): I beg to move,
That the Committee has considered the draft Legal Services Act 2007 (Functions of a Designated Regulator) Order 2008.
It is a joy to serve under your chairmanship, Sir John. [Hon. Members: “Hear, hear.”] That is supported at least from our side of the Committee. I will do my best to explain the order as briefly as possible.
The order amends new section 9A of the Administration of Justice Act 1985, as inserted by schedule 16 to the Legal Services Act 2007, removing a restriction on the types of bodies that satisfy the definition of legal services bodies and therefore may qualify to be recognised by the Law Society as suitable to carry out certain legal services.
When commenced, new sections 9 and 9A of the 1985 Act will allow bodies that satisfy a management and control condition and relevant lawyer condition to become legal services bodies. The management and control condition is that at least 75 per cent. of the managers, shareholders or holders of voting rights in the body must be legally qualified. The term “legally qualified” is defined to include bodies as well as individuals, but 75 per cent. of the bodies’ owners and managers must also be legally qualified individuals.
Following discussions with the Solicitors Regulation Authority and the Law Society, it became clear that section 9 of the 1985 Act, as currently drafted, does not restrict recognised bodies in that way and that some of the law firms they regulate currently have multiple tiers of ownership. Were section 9A commenced as currently drafted, bodies with more than two levels of ownership would be in breach of section 9A ownership requirements and, as a result, would be forced to restructure in order to qualify as legal services bodies and thereby fall within the recognised regime. That restructuring would be of great expense to those firms and would inadvertently cause an unnecessary restriction that does not exist at present.
Firms are currently able to structure themselves in the most effective and efficient way for them, by allowing, for example, easier transfer of ownership in the event of a partner leaving or retiring. Section 9A, as currently drafted, would limit a firm’s ability to structure itself to meet its business needs, so the amendment of 9A will remove that restriction and allow firms to realise the benefits of outside investment while maintaining the flexibility of the old regime.
The order seeks to ensure that the bodies with multiple tiers can continue to operate in their current structures and be recognised as legally qualified for the purposes of section 9A. If they then meet the management and control condition and relevant lawyer condition, they will satisfy the “legal services bodies” definition and may be recognised by the SRA under section 9 as suitable to carry on certain legal services.
The order achieves that by removing the requirement set out in section 9A(5) for qualifying bodies to be owned by legally qualified individuals to satisfy the relevant lawyer condition; recognising partnerships that already exist; recognising bodies corporate that already exist; and giving the Law Society the power to make rules expanding the category of what it is to be legally qualified for the purposes of satisfying the management and control condition. Those bodies must satisfy all the conditions in section 9A in order to be legal services bodies.
It is vital that, in removing the two-tier limitation on corporate ownership, we do not allow full alternative business structures to emerge before the licensing regime set out in part 5 of the Act is implemented. The Law Society’s rules that may also permit recognition of other bodies as legally qualified are subject to consultation and a statutory approval process set out in paragraph 16 of schedule 22 to the 2007 Act, which includes approval by the Lord Chancellor. The SRA also published changes to its code of conduct on 17 October 2008 to take into account the proposed new provisions relating to legal services bodies. All bodies must still satisfy the management and control condition and the relevant lawyer condition to be legal services bodies, which may then be recognised by the Law Society as being suitable to provide legal services.
The Ministry of Justice published the draft order on 6 October, seeking views from legal regulators, the profession and consumer groups by 17 October. Schedule 22 also provides that advice must be invited from the Office of Fair Trading and the Lord Chief Justice. I am telling the Committee that because I know it is important to members and to those who were involved in the Legal Services Act 2007 that we involve and consult all those who may be interested. By the completion of the consultation period we had received nine responses, which all supported the order.
During the consultation we made small changes to highlight relevant amendments to the legislation—for example, to indicate that a copy of the relevant pre-commencement conduct rules will be available on the Solicitors Regulation Authority website, and to remove “qualified” from the definition of legal partnership to avoid confusion. Under paragraph 3(7) of schedule 22, if the order that Lord Chancellor intends to make differs from that which was published, he must publish the revised draft alongside a statement detailing the changes. That was done on the Ministry of Justice website on 24 October, and the Law Society and the SRA gave their consent under paragraph 2(4) of the schedule.
The order is necessary to realise the benefits of legal disciplinary practices as early as possible, by allowing recognised bodies to take on non-lawyer managers if they wish. Of course, to be legal services bodies they must still satisfy the management and control condition, and the relevant lawyer condition that places appropriate conditions on ownership. The order ensures that existing bodies are not forced to restructure simply to carry on their business. I am sure the Committee will agree that that position would have been unfair and anti-competitive.
4.37 pm
Mr. Henry Bellingham (North-West Norfolk) (Con): It is a pleasure to serve under your chairmanship again, Sir John. I thank the Minister for explaining the statutory instrument. The Minister and I spent many hours on the Legal Services Bill, which was in Committee for weeks—I think months—and on Report for a long time as well. I had forgotten how delightful it is to listen, perhaps at less length, to the Minister’s sonorous and charming tones while she is explaining complex matters. She pointed out that the Law Society supports the SI, which is the case, and that it is needed. She did not explain that it has come about because of a drafting error in the original Bill that became the 2007 Act.
There was always a danger that the Act was more of a skeleton Act upon which SIs would be hung, and that we would have to depend upon secondary legislation. The order is a consequence of not getting the initial legislation right. As the Minister explained, some of the technical wording in the Act inadvertently restricted potential opportunities by reducing the number of corporate tiers admissible for legal services bodies. That reduced the opportunities, particularly for some of our leading commercial firms.
The Opposition support the advent of legal disciplinary practices and the alternative business structures concept. At a time when we want the City of London to reap the maximum opportunities in a global economy, commercial firms need to have as few restrictions on them as possible—after all, London is a global legal centre. Many corporations and Governments around the world use London to arbitrate disputes. Many disputes in London are arbitrated in legal systems apart from our own, but our legal procedures control those arbitrations. For London to remain competitive, we have to look at the opportunities provided by the legal disciplinary practices and alternative business structures, so it is important for the Government to act quickly if any small technical obstacles spring up.
The Government have acted quickly. They have listened to what the Law Society said and have consulted on that. It is a pity that the Act was not right in the first place, but I grant the Minister that it is a complicated piece of legislation which was dealt with at great length in both Houses. The Government had a huge amount of resource in terms of civil service time and expertise advising them, but to be fair, they cannot be expected to get every last detail right.
We are back in Committee today to say to the Government that perhaps they should have got the legislation right in the first instance, but they have listened to representations received. I believe that the SI will enable commercial law firms to move forward in the way they want. At a time of increasing economic uncertainty, it is vital that our top legal firms are able to move forward in a global economy and the SI will help them to do that.
4.41 pm
Tom Brake (Carshalton and Wallington) (LD): It is a pleasure to serve under your Chairmanship, Sir John. I echo the point made by the hon. Member for North-West Norfolk. Clearly, we are here as a result of drafting error. That reminds us that when it comes to Bills, more often equals less—certainly less accuracy, on occasion.
Having taking advice from my hon. Friend the Member for Cambridge, who leads on these matters for the Liberal Democrats, there is no issue with the purpose of the statutory instrument. I am therefore happy to support it.
Hon. Members: Good speech!
4.42 pm
Bridget Prentice: Given the approbation of my hon. Friends for the shortness of the hon. Gentleman’s speech, I shall do my best to emulate him.
I am grateful to the hon. Members for North-West Norfolk and for Carshalton and Wallington for supporting the SI. As he pointed out, the hon. Member for North-West Norfolk served on the Legal Services Bill with me over many a long day. I am grateful for his recognition that we acted quickly once the mistake was recognised. I also welcome his support for LDPs.
The 2007 Act is extremely complex. We worked closely with all the legal agencies involved, which gave us the opportunity to respond quickly to concerns about some of the drafting. I hope that we will not have to return with further drafting amendments. On the basis of the support from all parts of the Committee, I commend the order.
Question put and agreed to.
Committee rose at seventeen minutes to Five o’clock.

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