Clause 37
Legal Services Bill [Lords]
5:30 pm
Simon Hughes (Party President, Cross-Portfolio and Non-Portfolio Responsibilities; North Southwark and Bermondsey, Liberal Democrat)
I beg to move amendment No. 225, in clause 37, page 18, line 30, at end insert—
‘( ) The Board may not determine that it is appropriate to impose a penalty unless it is satisfied that the matter cannot be adequately addressed by the Board exercising the powers available to it under sections 31 to 36.’.
The amendment is supported by the hon. Member for North-West Norfolk and some of his hon. friends. I will read the proposal that was put to me and others by the Law Society which explains why the amendment is both sensible and justified. In the clauses so far, we have looked at various ways in which there can intervention. We have considered censure in clauses 35 and 36, directions that can be given by the board in clauses 32, 33 and 34. We considered the setting of performance targets in clause 31. Before that, we examined the rules that require the separation of regulatory and representative functions.
We are now discussing a clause on financial penalties. The amendment is designed to restrict the powers of the board by prohibiting it from imposing a financial penalty unless it is satisfied that it cannot adequately address the matter by exercising its other powers. It would put penalties on a gradated scale and would force the board to consider other types of intervention, such as direction or censure, before imposing a financial penalty. That position would be consistent with that of other regulatory regimes that have been established by Parliament in recent years. The amendment would ensure that the Legal Services Board could not impose fines unreasonably. It would also ensure that any action that is taken does not hit the wrong target.
It is commonplace for direct regulators of services, particularly those provided commercially, to havethe power to fine those who fail to comply with requirements. That is unarguable. The recent McCrory report emphasised the importance of the availability to regulators of a wide range of sanctions, including the power to fine, to ensure that the sanction for the breach of regulatory requirements is sufficient to removeany financial incentive to fail to comply with responsibilities. It is sensible to have a financial penalty to deal with wrongful activity for financial gain. That is entirely logical. The Law Society is seeking powers to fine solicitors for regulatory breaches in appropriate circumstances so that, as a regulator, it has an effective range of available sanctions, rather than having to refer all such cases to the Solicitors Disciplinary Tribunal. That is entirely sensible, too.
I have been told—I have thought about it and I cannot dispute it—that it is unusual for there to be a power to fine a body that carries out regulatory, non-commercial activities. I have been given the examples of the Council for Healthcare Regulatory Excellence, which has no power to fine any professional medical bodies, and the Financial Reporting Council, which has no power to fine the accountancy bodies.
Given that the Legal Services Board has extensive powers to make directions, which are by definition enforceable, it is far from clear that a power to fine approved regulators is necessary. The Joint Committee picked that up in its report during pre-legislative scrutiny and the Government said that they would reconsider the issue, but they have not come back with an answer to the concerns expressed in the Joint Committee or elsewhere. In the Lords, the issue was debated in part. Baroness Ashton, the Minister, sought to justify the power to fine with reference to the position of other regulators, including the Financial Services Authority and Ofgem. Both of those directly regulate service providers, however; there is no intervening tier, so they do not supervise other regulators. The Legal Services Board is, by definition, the umbrella. Other regulators, of which the Law Society is one, have been approved to set up in anticipation of the legislation. It is not a parallel situation. We are talking about a three-tier structure; the other organisations that have such a power to fine are part of a two-tier structure.
I have been told that the only example that supports the Minister’s case is the power of the Legal Services Complaints Commissioner, which was created under an addition to the Access to Justice Act 1999. It was intended to cover a specific problem with the Law Society’s handling of consumer complaints. I remember the debate on the subject, and there was thought to be a need to give the commissioner more teeth in that context. It is unusual for a supervisory regulator to have the power fine another regulator, so that power needs to be confined to circumstances in which no other sanction is appropriate. The first argument against the provision is therefore that it is not based on precedent and it appears wrong in principle.
The second argument is that, with legal services regulation, day-to-day responsibility for regulatory action will, by definition, rest with the regulatory arm of the relevant professional body. The representative side will not be able to control the way in which the regulatory arm operates; indeed, it would be a serious breach of the principle of independence if it sought to do so. One of our great debates was about ensuring that we separate regulation and representation absolutely and rightfully.
Any fine would not impact on the regulatory arm unless it were charged against the regulation side’s own budget, which would defeat the whole purpose of having a fine, because that would mean fining the fund that is there to put things right and to deal with problems. Any such fine would effectively be borne by the professional body, and thus its members and the representative arm. Members of the regulatory arm would not even be subject to any sanction from an electorate for having incurred the fine, as they are all appointed under Nolan principles rather than elected, so they could not be ousted. It would not be the equivalent of a vote of no confidence that would result in them leaving their office.
There is a risk that lawyers who are regulated by the approved regulator will bear the whole burden of any such fine without being able to exercise any effective influence over the people whose failings led to the imposition of the fine. That seems wrong to me, as a matter of principle. I believe that the Joint Committee also thought it wrong, but the answers given in the Lords did not address the issue. That is my second reason for asking the Minister to be sympathetic.
In the debates in the other place, the Government tabled an amendment to ensure that approved regulators cannot be fined for the failings of their regulatory arm unless a direction has already been made under clause 31. That provides some welcome protection for approved regulators. By placing appropriate requirements on their regulatory arms, they will be able to ensure that they can intervene where necessary to ensure that directions are complied with, but there is still a significant risk of fines being used inappropriately, because the current drafting does not prevent that. It does not seem to guarantee that other options have to be considered before that power is used.
My last point is that there is frequent media pressure on professional bodies across the board, not just legal bodies, and on regulators to flex their muscles and exercise their powers to intervene. That is rightful and understandable in certain cases; you and many others, Sir Nicholas, have been keen, in our talks on rail services in this place, that the regulator should be able to intervene when railway companies do not do their jobs properly and services are not what constituents of yours, mine and our colleagues would wish. It is absolutely right that there should be calls for that to happen, but that alone is not a good justification for it to be the common practice if other remedies are appropriate and available.
Good regulatory practice requires regulators to use the least draconian sanction that will meet the regulatory need. It would be quite wrong to fine an approved regulator simply because circumstances have arisen in which there is, in theory at least, a power to do so. The power to fine should properly be exercised only when the Legal Services Board is satisfied, under the provisions in the Bill, that no lesser sanction, such as direction or censure, will suffice. I believe that the Government have accepted that principle as far as the board’s power to intervene in the functions of approved regulators is concerned. I think that that was said to be generally the case by Ministers elsewhere, and I suggest that the same principles should apply to fines as it does elsewhere. On that basis, I hope that the Minister will accept our arguments, or at least take them away to consider, and will be sympathetic.