With this it will be convenient to discuss the following amendments:
No. 257, in clause 72, page 41, line 10, leave out subsection (1) and insert—
‘(1) For the purposes of this Act, a body is a “licensable body” if—
(a) at least one manager of the body is an individual who is a non-authorised person who provides services directly or indirectly to clients; or
(b) more than 25 per cent. of the managers of the bodyare individuals who are not authorised persons regardless of whether they provide services directly or indirectly to clients; or
(c) at least one person who has an interest in shares in the body is a non-authorised person and is not a manager of that body.’.
No. 268, in clause 71, page 41, line 8, at end insert—
‘, provided that a body is not a “licensable body” if the only managers who are non-authorised persons are individuals who do not directly provide any services to consumers.’.
No. 259, in clause 72, page 41, line 13, at end insert—
‘(1A) A body is not a licensable body if it is regulated under section 9(A) of the Administration of Justice Act 1985.’.
No. 260, in schedule 16, page 264, line 35, leave out paragraphs (a) and (b) and insert—
‘at least three-quarters of the partners are authorised persons or are registered foreign lawyers, and any other partners do not directly provide services to clients.’.
No. 261, in schedule 16, page 264, line 43, leave out paragraphs (a) and (b) and insert—
‘at least three-quarters of the members of the body are authorised persons or are registered foreign lawyers, and any other members do not directly provide services to clients.’.
No. 262, in schedule 16, page 265, line 6, leave out paragraphs (a) and (b) and insert—
‘at least three-quarters of the persons within subsection (5) are authorised persons or are registered foreign lawyers, and any other members do not directly provide services to clients.’.
New clause 14—Registration of non-authorised managers—
‘(1) Any body “B” which carries on an activity underSection 13 of this Act, which is not a “licensable body” as defined in Section [71(1)] but which has at least one manager who is not an authorised person, must register any non-authorised manager with an approved regulator.
(2) It is an offence for B to carry on an activity underSection 13 of this Act if B does not comply with the conditions of this section.
(3) For the purposes of this section an approved regulator may refuse to register any non-authorised manager (M) of B if its is not satisfied that:
(a) M does not provide services to clients, directly or indirectly, or
(b) M will act in a manner consistent with the “professional principles” set out in Section 1(3).
(4) No manager of B may be a person who has been disqualified from acting under Section 99.
(5) B will cease to be entitled to carry on an activity under Section 13 of this Act if B knowingly carries on reserved activities whilst a person, disqualified under Section 99, continues to be a manager of B.’.
Certain amendments in this group have been proposed by the Institute of Chartered Accountants in England and Wales and, because we are dealing with business organisations, I want to declare that I am a member of the corporate finance faculty of the ICAEW as a qualified corporate financier, although I am neither an accountant nor a member of the full institute. The amendments cover legal disciplinary partnerships and legal practice plus, and tie in closely with part 5, which deals with alternative business structures. I should say at the outset that amendment No. 256 should refer to “individuals who are authorised persons” rather than “authorised persons” and I apologise for any resulting confusion.
The amendments have been tabled on a probing basis, not least because many of them cover the same point in a slightly different way, although the principle is the same. Amendment No. 256 is required as a consequence of new clause 14, which was suggested to us by the ICAEW. The new clause enables
“practices to have 25 per cent. or less on a head count of managers who are not lawyers and who are not providing services to clients (so called Legal Practice Plus.)”
It would become operational on enactment alongside other forms of legal disciplinary partnerships, which are partnerships between different types of lawyers.
I have received a lot of feedback on the issue from the commercial law and accounting practitioners, and I am aware of a huge gap in expectations that needs to be filled. We need to address the issue of non-executive directors and other employees such as accountants, economists and tax advisers and those who deal with administration and back-up in servicing clients. For those people, the current system is unrealistic. They may come from merchant banks in the City, where they are among some of the highest earners, yet they are effectively second-class citizens in law practices because they cannot take part in the ownership of the firm.
Today, law firms realise the benefits of bringing skilled outsiders into their organisations. There was an interesting account earlier this month in an edition of the Law SocietyGazette. A non-lawyer, William Arthur, former director of professional practices at Barclays bank, was recruited as a non-executive director by a Kent firm, Cripps Harries Hall. His brief was comprehensive and demanding—to use his 30 years of top-end commercial experience to steer his firm through the challenges facing the legal profession today. Mr. Arthur observed:
“Law firms are getting bigger and bigger and are not small businesses anymore. The market place is changing rapidly and they need to apply the best business principles to everything they do. Many firms are acknowledging that while they have exceptional professional skills, they don’t always have the full suite of business skills and experience to bring them to the front of the field”.
Law firms have employed non-lawyers in senior roles, such as directors of IT or human resources, for many years. The appointment of non-executive directors is a relatively new phenomenon, but one that should be encouraged. We should assist that process, and ensure that people in senior positions within law firms are not stigmatised or penalised merely because they are not qualified lawyers. As I have shown, they are often people of great experience with good skill sets, and are an asset to law firms. The question is how those good intentions are to be translated into the Bill. I accept that it is not a straightforward issue.
Amendment No. 268, which deals with the licensing of alternative business structures, was suggested by the City of London Law Society. The amendment would ensure that a law firm, or a limited liability partnership, would not become an alternative business structure solely because it wished to appoint as managers non-lawyer professionals. It is already clear that that is no longer a rare phenomenon, but an increasing occurrence. The amendment would apply if those appointees provided only internal services to their firms and did not directly provide services to clients of the firm.
Amendment No. 257, which was suggested by the Institute of Chartered Accountants, would have a similar effect to that of amendment No. 268, from which it is clear that accountants and lawyers are moving in the same direction.
On Report in the other place, Lord Hunt returned to concerns expressed in Committee and tabled a similar amendment designed to enable legal disciplinary practices to exist without having to be licensed if three quarters of the partners were lawyers and there was no external ownership. He envisaged that the Law Society would need a power to establish a register of permitted non-lawyer partner-managers of firms and to set requirements for eligibility to register.
Baroness Ashton resisted the amendment, saying that the Government wished, as far as possible, to create a level playing field between regulators, offering all the potential to become licensing authorities. She would not want to give one regulator a potential competitive advantage, first, by virtue of reaching part of the alternative business structure market before other regulators and, secondly, by avoiding the additional statutory requirements that would otherwise apply to such practices. She went on to say that if a body had non-lawyers in positions of control it would be a licensable body. The framework is already provided for low-risk bodies but the Government have set the maximum limit for non-lawyer ownership at 10 per cent., and anything above that would need full scrutiny. The amendment was withdrawn.
Looking at the matter now, I have to say that Baroness Ashton’s position was somewhat regressive, and failed to understand how legal firms work now, let alone how we should enable them to adapt and continue to compete and excel in a competitive national and international marketplace. That is the view of most people, including the Law Society and the Conservative party.
Yesterday, I received a joint statement on the Bill from the Institute of Chartered Accountants, the Chartered Institute of Patent Attorneys, the Institute of Trade Mark Attorneys and the Royal Institution of Chartered Surveyors. I will not quote it all, but in particular it states:
“There should be immediate introduction of Clementi’s definition of Legal Disciplinary Practices with minority non-client facing, non-lawyer managers, helping enhance the service to consumers. This would enable earlier, effective regulatory oversight of arrangements already in place in all but name.”
The fact that non-legally qualified people who play a significant part in the running of a legal practice cannot be a partner without invoking the licensing provisions is a problem.
With respect to that point and that made by Lord Hunt of Wirral in the other place, I find myself agreeing with Baroness Ashton. The measures in new clause 14 and amendment No. 256 would be bureaucratic; they would set up a new system—the so-called register. It would lack transparency, which would drive a coach and horses through one of the aims of the Bill—to bring in new competition and promote consumer understanding of the legal services and entities with which they deal.
I disagree. I would say that the proposed measures would recognise and put into the regulatory structure a system that, in effect, already exists. That is important.
We feel that it is wrong to lump non-legally qualified people with other entities by putting them on the slow-track ABS timetable. The hon. Member for Wirral, West mentioned that confusing issue. In some ways, the proposed measures would make matters more straightforward, because they would put such entities in the same position as lawyers who join together, which is recognised in the Bill. They would differentiate low and high-risk entities, as it were, which should then be considered in relation to the slower-track provisions in part 5. The proposals would remove the cumbersomeness that attaches to this part of the Bill and unnecessary red tape.
The key protection issue is that people’s access to justice is not attacked, and that ABSs are not able to cherry-pick services to the detriment of the overall position of consumer legal services. We should debate that when we come to part 5. At the moment, we are concerned about lawyers not losing out, compared with other professions, with regard to their ability to run their practices better for the benefit of consumers.
There is a fundamental issue, which has suddenly been given more prominence in relation to ABSs and LDPs. The issue is whether legal disciplinary partnerships that do not have external ownership will be enabled to operate sooner than 2011, which is the likely date if they are allowed to operate only under the ABS regime. The Government’s planning indicates that it is unlikely that the LSB will be fully functioning before 2010. Other regulators, including the Council for Licensed Conveyancers, may already regulate LDPs that include non-lawyers. The Law Society strongly supports permitting solicitor-led LDPs to operate under its mainstream regulatory regime before that time. Some minor enhancements may be needed to the Law Society’s regime to ensure that the SRA will have the necessary powers to regulate non-lawyer partners, but there should be no great difficulty. Indeed, the provisions of schedule 16 may already be sufficient.
The Law Society has pressed the Government for additions to its regulatory powers for some years. The council decided some years ago that in principle solicitors should be able to provide services to the public through any regulated entity, subject to ensuring the necessary consumer protection. The board worked up the issues further and concluded that it would be sensible to create what the Law Society subsequently called “Legal practice plus”, under which non-lawyers would be enabled to become partners in a solicitors firm, as long as it did not provide services normally forbidden to solicitors firms, such as audit services, nor would they be able to have external ownership.
That proposal foundered on the Law Society’s inability to regulate non-solicitor partners. It had hoped to do so on a contractual basis, but leading counsel advised that that was impermissible. Accordingly, the society asked the Government for additional regulatory powers to enable it to establish a register of permitted non-solicitor partners and to exercise all of the regulatory powers that apply to solicitors. The Department for Constitutional Affairs was sympathetic to that, but no suitable legislative opportunity arose until the Bill.
When the Bill was introduced, many people were therefore disappointed to discover that the Government intended that the only LDPs that could be regulated outside the ABS regime were those consisting solely of partnerships between different types of lawyers. That seemed to many, including the Law Society and the ICA, to provide an unnecessary barrier to establishing what Sir David Clementi called LDPs and the Law Society called Legal Practice Plus.
It would seem that the Government’s cautious attitude arose in part from the belief that a more liberal approach would encounter substantial difficulties in the House of Lords. The Conservatives thought that that concern was misplaced. We knew that the other place would be concerned about external ownership of law firms, and we and our noble Friends were and are concerned with ABS implications for access to justice, to which we shall come in part 5, but we did not think that the House of Lords would have such major concerns about the proposition that a minority of non-lawyers should be partners in a firm in order more effectively to provide a range of services to clients. Lord Kingsland and Lord Hunt both spoke in support of amendments to that effect, but the Government—surprisingly, given their pro-consumer stance—resisted them.
It is important to emphasise that such firms providing reserved legal services will continue to need regulation by a legal regulator. Indeed, the Council for Licensed Conveyancers can already regulate firms with non-lawyer partners, as can some smaller bodies such as the Institute of Trademark Attorneys and the Chartered Institute of Patent Agents. But significant public and consumer benefit would arise from the Law Society having such powers so that the SRA could regulate them.
The amendments suggested by the Law Society for Commons Committee, which we tabled as amendments Nos. 259 and 262, were weaker than it would have liked. They would enable the Law Society to regulate partnerships and other incorporated bodies under its ordinary regulatory regime and corporate bodies under its existing regulatory regime—that is, not as ABSs, and thus much sooner—where they have a minority of non-lawyer partners. Amendment No. 259 would exclude such bodies from the ABS regime. It is needed because of the Government’s approach whereby anything that could be an ABS must be.
The amendments would enable non-lawyers to become partners only so long as they are not client-facing. That would meet the main concern of City firms that wish to be able to make senior support professionals partners, but it would not enable a high street firm, for example, to go into partnership with an accountant and to provide tax advice primarily through that accountant.
The Law Society suggested a more limited approach because it had got nowhere with broader amendments in the House of Lords and wanted to see whether it could make at least some progress, albeit more limited than it would have liked. It would much prefer non-lawyers to be allowed as partners even if they provide services directly to clients, and that view reflects the Conservative party’s position. The Law Society would be happy if there were a simple majority of lawyers, but the ICA would go even further. We can discuss its point of view later in part 5, when we come to multidisciplinary practice.
I shall comment on the other amendments grouped with those suggested by the Law Society. We simply want to enable the SRA to regulate LDPs that are not externally owned as soon as possible after Royal Assent rather than in three or four years, and to ensure that the full range of public and consumer protections are available in respect of all practices providing reserved legal services.
The ICA-inspired amendments Nos. 256 to 258 and new clause 14 are supplementary to amendments Nos. 259 to 262. They have the benefit of generalising the provision rather than making it applicable only to the Law Society. We still need amendments Nos. 260 to 262 as well, because without them the Law Society would have no power to regulate such a body.
Commenting on ICA new clause 14, the Law Society said that it would also be concerned if it thought that the only bases on which non-lawyer managers could be refused registration were those set out in paragraphs 3 and 4. It would expect the SRA or any other regulator to wish to ensure that any non-lawyer managers were fit and proper persons, and particularly that they did not have any convictions for dishonesty. In the case of non-lawyers from some other professions, such as accountancy, that could be done fairly readily, since the other professional body has requirements similar to those of the SRA. The non-law regulator would need only to certify that the member concerned was of good standing. That would not necessarily apply to all possible non-lawyer partners, however; it is important that legal regulators would be able to impose the appropriate requirements.
It might also be appropriate for the legal regulators to require any non-lawyer partners or managers to demonstrate understanding of the rules concerning the way in which legal services must be provided—what would be described as the conduct of business rules in other contexts. The Law Society would be anxious to ensure that new clause 14 did not inadvertently limit a proof-regulated entitlement and duty, to ensure that people holding senior positions in law firms were personally suitable to do so.
This is a complex matter, but I hope that, through my explanation of the amendments, the Minister can see where we are coming from, as we do not feel that the Bill addresses the issue correctly. I hope that the Minister will take a positive approach.
We generally support the principle of the amendments. Most legal firms of any size have one or two senior managers to do the accounts and manage the staff, infrastructure, computers and so on. Under the amendments, those managers would be regulated by the Law Society, so that they could be made a partner and have a cut of the profits, which would be entirely reasonable. That would not undermine the interests of the consumer, and it would achieve the sort of balance that exists in many other organisations. From that point of view, the Government should accept the general principle of the amendments, if not their detailed nuances, given that they are probing amendments.
The amendments are designed to take certain practices outside the scope of the ABS regime in part 5 of the Bill. They are familiar, because they are similar to those that were debated in another place. To the hon. Members for Birmingham, Yardley and for Huntingdon, I must say that I sympathise with some of the objectives of the amendments, but I think that they would create some difficulties.
Amendments Nos. 259 to 262 would exclude from part 5 any practice regulated by the Law Society in which at least three quarters of the owners and managers are authorised persons. I am a wee bit disappointed that the Law Society is still unconvinced by the arguments that were made in the other place, because our objections remain the same.
There are problems with an amendment that seeks to depart, in various respects, from the stated objective with regard to ABS. It would allow firms with significant non-lawyer management and ownership to operate without the oversight of the board or any of the guaranteed safeguards provided by part 5. It would allow firms to be partially managed and owned by non-lawyers, with no provision for a head of legal practice or a head of finance and administration, or for fitness-to-own tests, disqualification lists or enforcement powers over non-lawyers. That would not be in line with Sir David Clementi’s recommendations; nor would it be in the consumer interest. It would give no guarantee of consumer protection, and it would not provide for a mechanism to ensure that professional principles prevail.
Some changes could be made to the Law Society’s rules to create further safeguards, but they would have to be pretty complex and extensive—along the lines of schedules 11 and 13, for example—to ensure fully effective regulation of non-lawyer managers and owners. I am not sure that such changes could be achieved through secondary legislation or that it would be appropriate proceed in that way.
A key principle of part 5 is that the regulatory bodies must demonstrate to the board that they are competent to enforce a complex, potentially interventionist, regime. If they cannot do so, they will not be designated as licensing authorities, and clearly, that must apply to the Law Society as it would apply to any other regulatory body.
That brings me to another key principle that has been constant throughout our development of policy on ABS, which is that there should be new opportunities based on increasing competition and creating a level playing field between regulators. The amendment would do the opposite. It would allow the Law Society to regulate certain types of ABS firms in advance of other regulators, without having to demonstrate to the board that it is fit to do so.
I turn now to amendment No. 268, which was again proposed on behalf of the Law Society. I suppose that it offers a less extreme alternative to amendmentsNos. 259 to 262. This amendment also seeks to exclude bodies with non-lawyer management from the ABS licensing regime, but this time on the condition that those managers do not provide services to clients. Therefore, the practice would also not be bound by any of the safeguards in part 5, and it could develop in advance of part 5 being implemented. Once again, I am not convinced that that is an appropriate way forward at this stage.
I shall now consider amendments Nos. 256 and 257, as well as new clause 14, which were inspired by the Institute of Chartered Accountants. Again, the ICA has proposed a more detailed amendment, also with the provision for 25 per cent. of non-lawyer managers. In this case, certain additional requirements would apply to such practices, by virtue of new clause 14.
Both the Law Society and the ICA cite Sir David Clementi’s report, arguing that the Government are not being sufficiently proactive in facilitating all the different forms of legal disciplinary practices identified by Sir David. We are, of course, facilitating those types of practice, but I am not persuaded that we should seek to do so outside the boundaries, safeguards and protections that part 5 will give.
I am aware that one incentive for proposing to facilitate the different forms of LDPs is to avoid delaying the possibility of practices with non-lawyer managers until part 5 is fully implemented. I have a lot of sympathy with that view. I want to allow providers and consumers to take full advantage, sooner rather than later, of the benefits that might be delivered by those types of practice—indeed, by all types of ABS firms.
I also understand that the ICA has applied to become an authorised body for probate services under schedule 9 to the Courts and Legal Services Act 1990. Obviously, I cannot comment on that application, as it is currently being considered. However, I can say that, although I agree that that development may happen some time after Royal Assent, if it were to happen, that would be one means by which the ICA and its members could become part of a more integrated practice ahead of the formal commencement of part 5.
Apart from that, however, in general terms, the management of law firms by non-lawyers is a territory that is, in many respects, unfamiliar and complex. Therefore, I am very keen to ensure that the implementation and the safeguards are right. I believe that the presence of the board is absolutely vital to ensuring that that happens, as are the regulatory objectives; even more important is the need for effective regulatory powers over non-lawyers.
Of course I recognise that the amendments proposed by the ICA make a concerted effort to give effect to some of the safeguards that Sir David’s report concluded should apply to LDPs, particularly in seeking to ensure that those managers who are non-lawyers are fit and proper persons. Even so, I must say to the hon. Member for Huntingdon that there is a risk that these amendments would leave us without some of the vital elements that part 5 will provide, which Sir David identified as being essential for the effective regulation of firms with non-lawyer managers.
It is not clear in the amendments where the boundaries of the new clause would be or how it would be monitored or enforced. It leaves scope for some pretty big discrepancies in terms of the way different approved regulators might apply it. I do not think that the restriction of the proposed exemptions to bodies in which non-lawyers do not provide services to clients is practical or effective. It still leaves some scope for uncertainty, regulatory gaps and potentially even the emergence of multidisciplinary practices by the back door.
If a body’s business is the provision of legal services to the public, it is difficult to see where the line would be drawn. I understand that the proposal would be intended to cover non-lawyers in finance and IT functions, but an IT partner might be responsible for using IT strategy to improve client service and business development. They might even oversee the provision of IT services to clients in conjunction with legal services. Unless we have a clear and fully developed statutory framework, it is difficult to see how the boundaries would be interpreted and enforced.
We might create a grey area of regulated practice that could lead to regulatory gaps in places where the part 5 safeguards ought rightly to apply. There is no provision for a head of legal practice or a head of finance and administration, which I believe are key to ensuring that the professional principles really do apply on a practical day-to-day basis.
Presumably, if the outside professionals were in a minority in the firm, they would be regulated as part of the firm.
No. Under part 5, once non-legal professionals are involved, there must be a head of legal practice and a head of finance and administration. I understand where the hon. Gentleman is going, but the proposal is sufficiently far away from that provision to make me doubt whether it would be satisfactory.
The Minister will not find a law firm that does not have a head of practice. She will hardly find one that does not have a head of finance. She seems to be detached from the reality of what is happening out there.
I like to think, given all our discussions with all the legal professionals as well as the consumer groups, that I have a pretty fair idea of what is going on out there in terms of the provision of legal services. The safeguards in part 5 are an essential part of the Bill. To move so far away from them would undermine that. I am therefore reluctant to accept the amendments.
I recognise that that there is an attempt to ensure that non-lawyer managers are fit and proper, but the only way to enforce that is to apply sanctions against the body itself. In my view, robust enforcement powers over the non-lawyer managers themselves are essential, particularly as such managers may be not only individuals, but companies.
What about the differentiation between an individual who is regulated under another regulator—for instance, an accountant going into the law firm—and a non-regulated individual?
That is the key point. Let me finish on part 5. In contrast to the proposed new clause, it creates statutory powers to fine and discipline non-lawyer managers and to refer them to the board for inclusion on a public disqualification register. Where managers are also owners, as in partnerships and limited liability partnerships, all the powers in schedule 13 will also apply. Schedule 13 is quite a detailed and complicated part of the Bill.
Part 5 will ensure that all those powers apply in a way that the proposed new clause would not. Part 5 is more facilitative than restrictive. ABS firms often have a complex structure, and strong powers will sometimes be required properly to regulate such practices. It is therefore appropriate that the approved regulators should be able to satisfy the board that they are competent to apply the requirements of part 5.
Although I have some sympathy with the institute’s position, I want the licensing framework to ensure that practices with non-lawyer managers or owners, and the bodies that regulate them, will be fully accountable and subject to effective safeguards. Sympathetic as I am to concerns about the desirability of encouraging ABS sooner rather than later, I want to ensure that we get it right. Even with the amendments, I see no obvious way to meet those concerns without creating other drawbacks that will be just as problematic, if not more so. None the less, I want to consider whether thereare alternative solutions. I therefore ask the hon. Gentleman to withdraw the amendment.
I find the Minister’s response rather disappointing and, in some ways, frustrating. She started by saying that she had some sympathy with the basic concept. She went on to say that it would require complex and extensive changes. She went through each of them, throwing in all the problems one could care to mention.
They are probing amendments. I am not saying that there are no problems with the clauses. The Minister then sighed rather dutifully and told us why none of it would work and why she was not totally convinced. Unlike the union provisions, these provisions have been in place for a long time. They were raised in the other place, there has been extensive consultation on them, and they were discussed by Clementi. No one is saying that they have a problem with the idea in principle. I might be wrong, but no Members have said today that they have a problem of principle with the concept.
Frankly, the Government have had plenty of time to develop a framework, and I find the Minister’s response rather weak. She now says that she wants to consider the matter again. I am pleased to hear her say at least that much, but here we are in Committee and we are no further forward. I hear what she says, and we will follow it up. I beg to ask leave to withdraw the amendment.