Draft Referral Fees (Regulators and Regulated Persons) Regulations 2014
Draft Legal Services Act 2007 (The Institute of Chartered Accountants in England and Wales) (Modification Of Functions) Order 2014
Draft Legal Services Act 2007 (Chartered Institute of Legal Executives) (Modification of Functions) Order 2014
The Committee consisted of the following Members:
† Bruce, Fiona (Congleton) (Con)
† Carmichael, Neil (Stroud) (Con)
Cunningham, Mr Jim (Coventry South) (Lab)
Evans, Mr Nigel (Ribble Valley) (Con)
† Hemming, John (Birmingham, Yardley) (LD)
† Lefroy, Jeremy (Stafford) (Con)
McDonnell, John (Hayes and Harlington) (Lab)
† Metcalfe, Stephen (South Basildon and East Thurrock) (Con)
† Morris, Anne Marie (Newton Abbot) (Con)
† Murphy, Paul (Torfaen) (Lab)
† Ruane, Chris (Vale of Clwyd) (Lab)
Shannon, Jim (Strangford) (DUP)
† Slaughter, Mr Andy (Hammersmith) (Lab)
† Thornton, Mike (Eastleigh) (LD)
† Turner, Karl (Kingston upon Hull East) (Lab)
† Vara, Mr Shailesh (Parliamentary Under-Secretary of State for Justice)
† Wallace, Mr Ben (Wyre and Preston North) (Con)
Sarah Thatcher, Adam Mellows-Facer, Committee Clerks
† attended the Committee
Third Delegated Legislation Committee
Tuesday 18 November 2014
[Sir Edward Leigh in the Chair]
Draft Referral Fees (Regulators and Regulated Persons) Regulations 2014
8.55 am
The Parliamentary Under-Secretary of State for Justice (Mr Shailesh Vara): I beg to move,
That the Committee has considered the Draft Referral Fees (Regulators and Regulated Persons) Regulations 2014.
The Chair: With this it will be convenient to consider the Draft Legal Services Act 2007 (The Institute of Chartered Accountants in England and Wales) (Modification of Functions) Order 2014 and the Draft Legal Services Act 2007 (Chartered Institute of Legal Executives) (Modification of Functions) Order 2014.
Mr Vara: It is a pleasure to serve under your chairmanship, Sir Edward.
The order relating to the Institute of Chartered Accountants in England and Wales is made under section 69 of the Legal Services Act 2007 and it modifies the functions of the institute. The draft order essentially does two things. First, it enables the institute to make regulations or rules providing for appeals to the first-tier tribunal against its decisions as an approved regulator and licensing authority. Secondly, it modifies the provisions of schedule 14 to the 2007 Act so that they apply to the institute in its capacity as an approved regulator.
Schedule 14 gives licensing authorities certain powers of intervention over bodies that they regulate, exercisable in specific circumstances set out in the schedule, in order to protect clients or trust beneficiaries. Extending the powers through the order will mean that the institute will have the same intervention powers as an approved regulator has as a licensing authority, should it need to take such action. The order follows the two orders designating the institute as an approved regulator and licensing authority for probate activities, which were made in July and August.
When the Legal Services Board made its recommendation to the Lord Chancellor that the institute be designated an approved regulator and licensing authority, it considered that its regulatory arrangements were appropriate and also that its existing appeals arrangements were suitable as an interim approach. However, the LSB indicated that the institute wished to use the general regulatory chamber of the first-tier tribunal as the single appellate body for all regulatory decisions relating to probate. To achieve that, orders under sections 80 and 69 of the Legal Services Act 2007 would be needed, to amend the regulatory arrangements and appeal routes.
The recent designation of the institute as an approved regulator and licensing authority for probate activities is an important step. Its entry to the sector will help to contribute to the growth of the legal services market
and bring further innovations, leading to benefits to consumers of legal services. The order will ensure that the institute’s decisions as an approved regulator and a licensing authority can be appealed to the first-tier tribunal, which will help to ensure consistency of regulation. It will also provide the institute with the same intervention powers as an approved regulator that it already has as a licensing authority, similarly ensuring consistency of regulation.The first order relating to the Chartered Institute of Legal Executives is also made under section 69 of the 2007 Act, and it modifies the functions of CILEx. It will enable CILEx to operate more effectively, by modifying its powers to make regulatory arrangements.
Specifically, the section 69 order will enable CILEx to make compensation arrangements as defined in the 2007 Act and allow it to make rules authorising it to establish and maintain a compensation fund, requiring CILEx-authorised entities to contribute to it. The compensation fund will protect clients of CILEx-authorised entities who suffer loss in the event of dishonesty or a failure to account.
Moreover, as with the section 69 order modifying the functions of the Institute of Chartered Accountants in England and Wales, the CILEx order modifies the provisions of schedule 14 to the 2007 Act so that the intervention powers are available to CILEx in its capacity as an approved regulator. For example, these powers would enable CILEx to seek an order from the High Court to intervene on an entity, to enter its premises and to seize documents or property. This power will both protect consumers and provide the public with continued assurance that there are mechanisms in place to protect and safeguard their interests.
Taken together, the increased safeguards put in place by this order will enable CILEx to authorise and regulate entities for the first time. This will enable individuals whom CILEx has assessed as sufficiently competent to carry on one of the reserved legal activities for which it is designated to set up independent businesses for that reserved legal activity.
The section 69 order follows a recent designation order, designating CILEx as an approved regulator for the reserved legal activities of reserved instrument activities and probate activities. That order brought to five the total number of reserved legal activities which CILEx is able to regulate as an approved regulator under the 2007 Act.
On 1 April 2013, a ban was introduced on the payment and receipt of referral fees in personal injury cases by regulated persons. The ban was implemented through provisions in the Legal Aid, Sentencing and Punishment of Offenders Act 2012, which defines regulated persons as solicitors, barristers, claims management companies and insurers. This ban was a response to the concern highlighted in Lord Justice Jackson’s “Review of Civil Litigation Costs” that referral fees in personal injury cases contribute to the high costs and volume of personal injury litigation.
As CILEx-regulated practitioners did not fall within the definition of regulated persons at that time, they were not included in those provisions. However, if made, the CILEx section 69 order that we are debating today will bring CILEx-regulated practitioners who are authorised to conduct litigation within the scope of the referral fee
ban. Without formally extending the ban to them, they will otherwise be able to pay and receive referral fees. This would compromise consumer protection and would give such practitioners an unfair commercial advantage over other practitioners in the field.The order therefore adds CILEx to the list of regulators for the purposes of the ban and specifies the group of practitioners to whom it will be applied. In so doing, it fulfils one of the major objectives of statutory regulation, namely, to protect and promote the public and consumer interest. It will also create a level playing field in relation to other regulated legal service providers.
The orders enable these bodies to strengthen their regulatory powers leading to greater consistency and greater protections for consumers.
9.3 am
Mr Andy Slaughter (Hammersmith) (Lab): It is a pleasure to be here under your chairmanship this morning. The Labour party will not oppose the orders. The two main orders are consequent on the Legal Services Act 2007 and build on several other orders that we debated earlier this year in opening up to branches of the legal profession—and to those outside the legal profession—issues to do with the regulation and conduct of matters that we have dealt with previously. The issues concern probate and conveyancing in relation to legal executives.
We have also dealt with increasing the powers of the Institute of Chartered Accountants in England and Wales. We approve of these measures, which come out of a piece of Labour legislation. As I said previously, perhaps the only criticism is that the process of making these changes seems to have been very long and laborious. The changes are necessary, because they increase choice and competition within the legal services market. At the same time, as part of the rationale of the orders, the changes protect the public by ensuring that there are sufficient safeguards in train. The point made in the helpful briefing from CILEx is that the orders also allow greater diversity within the legal profession. It is not just the quantity but also the quality of practitioners which is now being opened up. For all those reasons, these orders are not controversial.
I will deal briefly with the Referral Fees (Regulators and Regulated Persons) Regulations 2014—which is quite a mouthful. We have supported throughout the banning of referral fees. The only reason why it has not hitherto been necessary for these matters to apply to chartered legal executives is that they had to work under the supervision of a solicitor, which we all now regard as arcane and bureaucratic. Chartered legal executives will be able to run and manage their own businesses and therefore it is appropriate that they are subject to the ban on referral fees.
I take slight issue with the Government’s suggestion that the purpose of the ban is to reduce personal injury litigation. I thought the purpose was to reduce unnecessary personal injury litigation. There are other measures pursued by the Government in the LASPO Act which clearly are aimed at simply depressing the number of claims, with or without merit. I would like to see the ban on referral fees being targeted specifically at meritless or unnecessary claims. That is an important distinction to make, but it does not go to the heart of the issue, with which we have no difficulty.
The other two orders come from the 2007 Act. This is—both through the ABS model and the modifications of the regulatory regime—an attempt to ensure that there is broader access from both the profession’s and the public’s side. There are two points I would make on these orders which raise issues for the Minister to deal with. First, there has been a consultation process on both these orders. I understand that that is a statutory requirement. Nevertheless, I was surprised that no representations were received on either consultation paper. I am used to the Government either not bothering to consult on statutory instruments or consulting and finding that the vast bulk of the legal profession is opposed, and then going ahead, lawfully, notwithstanding that outcome. However, I do not think I have come across a case where there have been two consultations with no responses whatever. Can the Minister shed any light on how the consultation was carried out? Was it done in such an opaque way that nobody bothered to respond, not even anybody saying, “Well done, carry on”? Was it sent out to only one person? Was it sent out in Greek? I do not know. There must be some explanation.
The other—perhaps slightly more serious—point is that there are impact assessments. Again, we often do not get impact assessments on contentious issues. Here, we have the benefit of the impact assessments. As far as I can see, their only purpose is to look at the cost implications. It would be polite to say that the impact assessments are “finger in the air” exercises. Essentially, the Government say that they do not expect any significant resultant costs to fall on professional bodies because they do not expect, for example, appeal mechanisms to be used. Could the Minister enlighten us further? What is the basis for saying that there will be no further demands in relation to tribunal and that there will be a very limited number of appeals in each case—10, or fewer in the case of the ICAEW? It seems to be saying something for the sake of it, rather than being based on any evidence.
In relation to the modification of the ICAEW’s functions, clearly going to the first-tier tribunal is a better course, first, because it is seen as a more independent route and, secondly, because it is part of that long drawn out process of moving towards a single body for these matters. We have no problem there, and clearly we have no problem with the idea of a better intervention regime in the interests of anti-fraud measures.
Equally, in relation to the modification of the functions of CILEx, it is clearly necessary to have a compensation fund. Again, I do not see why the figure of £1 million has been chosen rather than some higher or lower figure, but perhaps the Minister does not know either. If he does, I am sure that he will enlighten us. Clearly, there needs to be insurance to cover that, and there needs to be a power of intervention.
Taken together, all the orders are sensible. There will be incremental advances. I am particularly pleased with the way that CILEx engages with Members of all parties, both to reassure us that we are taking the right course of action and to brief us so that we understand the practical implications, both for their members and for the general public. I therefore have no hesitation in saying that we support these orders.
Fiona Bruce (Congleton) (Con) rose—
The Chair: A member of the public wants to be consulted.
9.11 am
Fiona Bruce: Thank you, Chair. Just a few notes, if I may. I declare my interest as in the Register of Members’ Financial Interests, as the senior partner of a community law firm. I support these provisions, and from the perspective of a community law firm, the regulations that were initially applied regarding solicitors appear to be worded well in several ways. Of course, we are seeing that reducing the additional and not insignificant sums that claimants had to pay to claims farmers—£200 or more, taken from or added to the compensation—is discouraging unmeritorious claims for compensation. I believe that that in turn has the potential to reduce insurance premiums for us all. Insurers do not now have what is almost a set sum for a claim, below which they consider it not worth litigating and so they say “Let’s settle”. That is happening less.
I believe that this promotes a healthier legal market for consumers across the country. Law firms—particularly smaller law firms in local communities where people live—which provide direct access to justice find that people with genuine personal injury claims are more likely simply to walk through their door and ask for legal advice, because they have not initially come into contact with a claims farmer. When claims farmers operated, they often had a relationship with large law firms that were at a distance from the consumer. The claimant often never met their legal adviser, and felt that they were simply being shunted through a process. There is now a greater opportunity for clearly genuine claimants to contact their local solicitor or lawyer. That in turn ensures that local lawyers continue to specialise in this field, which promotes access to justice for individuals.
Anne Marie Morris (Newton Abbot) (Con): I support everything that my hon. Friend says. Clearly, this is an important moment for the legal profession, because it seems to me that legal executives are now coming of age. Does my hon. Friend think that there is anything that the Government—or, indeed, law firms—might sensibly do to try to explain to the public exactly what this instrument does? It is very much to their benefit, but if they do not understand it, will we get the footfall of people using this new process that the Government would like to see?
Fiona Bruce: My hon. Friend makes a good point, and this may well be something that the professional bodies of legal representatives should consider. However, the public are—I am sorry to use the pun—voting with their feet. Because they are now not being contacted by claimant companies, they are looking up where their local legal adviser is or seeking recommendations from friends or neighbours, and they are contacting local solicitors or local lawyers. This is a healthy way to promote access to justice, which we need to keep within our local communities.
9.15 am
Mr Vara: I thank the hon. Member for Hammersmith and my hon. Friend the Member for Congleton for their contributions and support. The hon. Member for Hammersmith spoke about there being no responses to the consultation. The consultation was not dissimilar to many others that have been held and it was a matter
for the public whether they wished to contribute. Similar consultations for other matters have received a response. In this case, I can only assume that the public were delighted with the proposals and had other things to do rather than clog up the system with their contributions, knowing that the hon. Gentleman would agree with the Government’s proposals, which is good news; it does not happen always but when it does, it is appreciated.The hon. Gentleman referred to the impact assessment, which estimates that there will be fewer than 10 additional appeals as a result of the measure. That reflects current experience. For example, the first-tier tribunal already deals with appeals from the Council of Licensed Conveyancers, and so far it has had no appeals. The compensation fund of £1 million is a matter for CILEx to arrange; that was a level that it set. However, I understand that, with time, it will get contributions and the sum will increase.
Chris Ruane (Vale of Clwyd) (Lab): I, too, congratulate the efforts of my hon. Friend the Member for Hammersmith and the hon. Member for Congleton. Giving ordinary people access to redress and justice on the high street is a good thing, but does the Minister think that sometimes unscrupulous lawyers take advantage of that?
In my constituency, a young lad of 18 was killed by a taxi driver just before Christmas on a street in Dyserth. Three years later, a solicitor said to that taxi driver, “Do you want me to pursue a claim against the parents of the dead boy because of the trauma that you went through?”, and the taxi driver did so, causing great upset to the parents at a very difficult time. Although access is important, we need to be wary of abuses by unprincipled solicitors.
Mr Vara: I express my sympathies to the family of the deceased in that case. I hope that Britain does not go down the route that America has taken, where everybody looks to every opportunity to sue, regardless of—I will put it bluntly—the morality of the case. Of course, we deal with the law, but I hope that the law will remain on track. When such cases happen, I hope that the public will see them for what they are and that other lawyers will look at them and not pursue that route. I am grateful to the hon. Gentleman for raising the point and I very much hope that British justice does not go down that route.
The two section 69 orders under the Legal Services Act will help ensure consistency of regulation—for example, in appeals against regulatory decisions; provide greater consumer protection in terms of intervention powers, and generally help the regulators to operate more effectively and efficiently. I trust that the Committee agrees that the extension of the referral fee ban to include CILEx should be welcomed as a sensible way forward. It closes a potential loophole in the legal services regulatory framework and will ensure a level playing field in terms of the regulation of referral fees across the profession. As has been said in the debate, the orders will feed into the widening of the legal services market, increasing competition. That, in turn, will help to drive standards up and costs down, ensuring that consumers get the best services at competitive prices.
Draft Legal Services Act 2007 (The Institute of Chartered Accountants in England and Wales) (Modification of Functions) Order 2014
That the Committee has considered the draft Legal Services Act 2007 (The Institute of Chartered Accountants in England and Wales) (Modification of Functions) Order 2014.—(Mr Vara.)
Draft Legal Services Act 2007 (Chartered Institute of Legal Executives) (Modification of Functions) Order 2014.
That the Committee has considered the draft Legal Services Act 2007 (Chartered Institute of Legal Executives) (Modification of Functions) Order 2014.—(Mr Vara.)