Clause 72

Legal Services Bill [Lords] – in a Public Bill Committee at 8:30 pm on 19th June 2007.

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“Licensable body”

Photo of Bridget Prentice Bridget Prentice Parliamentary Under-Secretary, Ministry of Justice

I beg to move amendment No. 111, in clause 72, page 41, line 10, leave out subsections (1) and (2) and insert—

‘(1) A body (“B”) is a licensable body if a non-authorised person—

(a) is a manager of B, or

(b) has an interest in B.

(2) A body (“B”) is also a licensable body if—

(a) another body (“A”) is a manager of B, or has an interest in B, and

(b) non-authorised persons are entitled to exercise, or control the exercise of, at least 10% of the voting rights in A.

(2A) For the purposes of this Act, a person has an interest in a body if—

(a) the person holds shares in the body, or

(b) the person is entitled to exercise, or control the exercise of, voting rights in the body.

(2B) A body may be licensable by virtue of both subsection (1) and subsection (2).

(2C) For the purposes of this Act, a non-authorised person has an indirect interest in a licensable body if the body is licensable by virtue of subsection (2) and the non-authorised person is entitled to exercise, or control the exercise of, voting rights in A.’.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

With this it will be convenient to discuss the following Government amendments: Nos. 112, 134 to 137, 139 to 143, 113, 144 to 183, 114, 118 to 125, 185 to 190, 192 to 201, 203, 204 and 191.

Photo of Bridget Prentice Bridget Prentice Parliamentary Under-Secretary, Ministry of Justice

I agree with you absolutely,Sir Nicholas. I shall be happy to stay here all night if necessary. Only a few of us remember the times when we sat through the night in Committee. Those were the days, and good fun was had by all.

This is a fearsome list of amendments, but they are relatively straightforward. They refine the ownership provisions in part 5 and schedules 16 and 17 to provide more clarity on how firms and companies with complex ownership structures will fit into the ABS or recognised body regimes, as well as on whether non-lawyer owners and managers will be subject to the fitness-to-own tests. They also contain a number of related and consequential changes to other provisions. They do not depart from existing policy on non-lawyer ownership, but they do provide essential refinements to ensure clarity in complex corporate structures.

The group contains amendments to the non-lawyer ownership and related provisions in part 5; to the ownership provisions in schedule 13, which contains the fitness-to-own test, and to the ownership and related regulatory provisions for recognised bodies in schedules 16 and 17 to ensure that there is no overlap with part 5.

The principal change to which the other amendments relate is the revised clause 72 proposed by amendment No. 111. The clause provides that a body will be a licensable body if it has any managers who are non-authorised persons, but it will now contain a refined ownership test that clarifies how the test will apply to complex corporate structures. Proposed subsections (1)(b) and (2A) provide that a body will be licensable if any non-authorised person holds shares in it or is entitled to control voting rights in it. As before, the concept of shares is wide enough to cover notonly companies but limited liability partnerships, partnerships and other unincorporated bodies. Proposed subsection (2) provides that a body shall be licensable if one of its managers, shareholders or persons with voting rights is itself a body and one or more non-authorised persons hold 10 per cent. or more of the shares or voting rights in that second-tier body.

The new formulation provides greater clarity and consumer protection than the existing clause 72 in relation to the many and varied types of structure that may be used to deliver legal services. In particular, it will ensure that loopholes do not arise because of complex structures, for example in bodies with multiple corporate tiers. A number of related and consequential amendments, including those to schedules 11 and 12, are necessary to reflect that change. That includes provisions that refer to or impose obligations on non-lawyer owners, such as the low-risk body provisions in clauses 106 and 108, and to the provisions in clause 90 setting out the duties of non-authorised persons. In addition, the definition of a “non-authorised person” in clause 111 is amended to ensure that the treatment of foreign lawyers and international  legal services firms, particularly those with complex corporate structures, is consistent with the amendments to clause 72.

There are a number of related amendments to schedule 13, which deals specifically with the regulation of non-lawyer owners. Many of them reflect our changes to the concept of interest in a body and the distinction between voting rights and the wider concept of voting power, which is defined in paragraph 5 of the schedule.

The third main area of change is amendments to the terms of the ownership test for recognised bodies regulated by the Law Society and the Council for Licensed Conveyancers, as well as related regulatory provisions. The amendments to the definitions of terms such as “licensable body” and “shares” reflect the changes to clause 72. They maintain our policy that the categories of licensable bodies in part 5 and bodies that may be recognised by the Law Society and the CLC are mutually exclusive.

The amendments will create greater certainty and identify the boundaries between regulatory regimes for ABS firms and other authorised bodies. They will also provide greater clarity in setting out how and when the different provisions in the Bill regulating owners will apply to specific individuals and firms. On that basis, I recommend them to the Committee.

Photo of Jonathan Djanogly Jonathan Djanogly Shadow Minister (Business, Innovation and Skills), Shadow Solicitor General, Shadow Minister (Justice), Shadow Solicitor General 8:45 pm, 19th June 2007

Clause 72 tells us what is a licensable body. The Government’s amendments to it are technical in nature and are intended to ensure that the controls on the fitness to own are fully effective, particularly in relation to what constitutes an interest in a body. That is acceptable to us.

Will the Minister confirm that in amendmentNo. 111, for the purposes of the proposed subsection (2A), the words

“holds shares in the body” will include the holding of a beneficial interest as well as a legal one? Where is that defined?

Photo of Simon Hughes Simon Hughes Shadow Attorney General, Party Chair, Liberal Democrats

There seems to be a move in the right direction, but I have two general questions and one specific one.

First, what prompted the tabling of the amendments at this stage? Was it debates in the Lords, particular representations, or an awareness that there was a technical defect in the drafting in respect of interest? I can see that an attempt is being made to be more precise.

Secondly, what was the justification or reason for the decision that a 10 per cent. rule should effectively determine whether there is a relevant interest? Is that based on what is accepted as common precedent, either in European Union countries or elsewhere?

Thirdly, amendment No. 191, which stands alone even though it is in the group, appears to broaden the remit of the Bill by expanding the definition of the phrase “relevant legal services” so that where it reads

“where authorised persons, other than solicitors or registered European lawyers, are managers of,” the words “or employees of” are added. What is the logic and the reasoning behind that expansion? It is welcome—I am not being critical, as it seems to me to  be a logical move in right direction, but I wondered what triggered the change at this stage. There is clearly a difference between considering a firm because the managers do certain jobs and considering all the employees down to whatever level.

Photo of Bridget Prentice Bridget Prentice Parliamentary Under-Secretary, Ministry of Justice

On the question about beneficial interest, no, that is not included unless voting rights are attached. Amendment No. 191 was reflected in some of the things that I said earlier in the day, but it is intended to ensure that employees who are authorised persons are in the same position as managers who are authorised persons so that there is a consistency across the piece. Horribly, I have forgotten the hon. Gentleman’s other question.

Photo of Simon Hughes Simon Hughes Shadow Attorney General, Party Chair, Liberal Democrats

Why was a limit of 10 per cent. set? Is it because that is what is done generally across Europe? What was the main reason for spotting that we needed to insert this raft of redefinitions relating to interests and checks at this stage?

Photo of Bridget Prentice Bridget Prentice Parliamentary Under-Secretary, Ministry of Justice

The main reason was that we had further discussions with the Law Society, the DTI and counsel. As a result of those discussions, we felt that it was important to make the amendments.

Photo of Jonathan Djanogly Jonathan Djanogly Shadow Minister (Business, Innovation and Skills), Shadow Solicitor General, Shadow Minister (Justice), Shadow Solicitor General

To return to the question of beneficial holding, is the Minister saying that if an owner does not appear on the share register as a beneficial owner and has not had voting rights transferred to themas part of the beneficial ownership, anyone could effectively own an ABS?

Photo of Bridget Prentice Bridget Prentice Parliamentary Under-Secretary, Ministry of Justice

I am not saying that anyone could effectively own an ABS, because a raft of other issues are included in the fitness-to-own test. However, the hon. Gentleman is ahead of me on the issue of a beneficial owner who is not on the list, so to speak. I shall have to consider that in more detail and get back to him, in order to ensure that I can reassure him on that.

The 10 per cent. figure was decided on because that was what the Financial Services and Markets Act 2000 used. We used it to be consistent.

Finally, it is important that recognised bodies are not restricted to legal services that only the partners of the firm provide but can cover the services provided by the employees, who carry out much of the firm’s services to clients. That is why employees and managers all had to be defined in a similar fashion.

I hope that that covers the issues raised by the hon. Gentlemen. When I look at Hansard, if I see that there are points that I have not covered I will write to the Committee.

Question put and agreed to.

Amendment made: No. 112, page 41, line 26, at end insert

‘, and references to the holding of shares, or to a shareholding, are to be construed accordingly.’.—[Bridget Prentice.]

Question proposed, That the clause, as amended, stand part of the Bill.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

With this it will be convenient to discuss new clause 16—Patent and trade mark agents—

‘A body—

(a) existing at the date this Act comes into force and entitled to use the description “Registered Trade Mark Agents” or “Registered Patent Agents”; and

(b) which through the operation of section 72(1)(b) of this Act would otherwise be a licensable body, shall not be a licensable body unless it ceases to be entitled to use the said descriptions.’

Photo of Jonathan Djanogly Jonathan Djanogly Shadow Minister (Business, Innovation and Skills), Shadow Solicitor General, Shadow Minister (Justice), Shadow Solicitor General

New clause 16 has been tabled on a probing basis by my hon. Friends and me, with information provided by the Chartered Institute of Patent Agents and the Institute of Trade Mark Attorneys. I should make it clear that both institutes agree with proposals in the Bill to remove restrictions from the type of business structures that can provide legal services. Their experience has demonstrated that external ownership in existing mixed-practice firms has neither been problematic nor posed a threat to consumers in relation to conflicts of interest or anything else. The new clause mirrors one that was tabled by Lord Kingsland in the other place when he pointed out that

“It arises specifically out of the unusual position in which the patent and trade mark agents find themselves in comparison with other approved regulators. Patent and trade mark attorneys have never been restricted as to their ownership. As I understand it, a number of firms—at least one major firm and several smaller ones—have external owners, and have done so for a long time. I should emphasise that this situation is perfectly legal.”

That is true. The two institutes informed me that the ownership of patent and trade mark agents has never been restricted. A number of firms have external owners and have done so perfectly legally without any known consumer or conflict risk.

Patent and trade mark attorneys are directors of one firm that is listed on the alternative investment market, Murgitroyd & Company. There are attorneys of both types in either single or multidisciplinary practices, including partnerships, limited liability partnerships and limited companies. In other words, in private practice several bodies already fall within the definition of an alternative business structure. That fact was not recognised during the debate on 23 January, whenthe other place discussed a gradual approach to introducing ABSs or the possibility of piloting them. Therefore, as Lord Kingsland said, we believe that

“there has never been any suggestion of a risk to a consumer, nor indeed any risk of conflict of interest. To us it seems inequitable to regulate a business practice that has so far been perfectly legal and where no risks have been identified.” —[Official Report, House of Lords, 6 February 2007; Vol. 689, c. 621.]

In addition, many providers—patent attorneys, trade mark attorneys, solicitors, barristers and probably legal executives and licensed conveyancers—are employed in-house. Their employing companies—each usually a subsidiary within a group of companies—might also fall within the definition of an ABS if the in-house practitioner in question continues to provide services to a member of the public, which might be the case if a subsidiary company is hived off but continues to use the patent or trade mark services of its old parent company. In that scenario, the parent company would need to be licensed under the proposed scheme. That type of working practice is well known to the  Chartered Institute of Patent Agents, as are circumstances in which the subsidiary is not only owned by the employing company. That demonstrates another form of regulation to be borne by some UK industries.

The proposal in the Bill will require mixed practices with external ownership to seek authorisation as ABSs and to undertake a fitness-to-own test within a transitional period. That would cause considerable cost and disruption, not only to existing firms, who would be forced to restructure, but to the two institutesthat would be obliged to be the licensing authorityfor ABSs. For that reason we have tabled the new clause, which proposes an exemption from licensing requirements.

Despite an assertion from the Lord Chancellor in his speech to the Law Society on 13 October 2006 that ABS proposals are not intended to put pressure on lawyers to change their working arrangements, the institutes are concerned about the effect that the requirement to be licensed will have on their members. They do not feel that the perceived risk that ABSs pose to consumers relates to the type of business service that intellectual property mixed practices provide. They have argued for an exemption of existing practices for any corporate structure, but have also discussed with the Bill team a compromise under which subsequent voluntary structural changes might trigger ABS status. That would put the institutes’ member firms in the same position as new entrants to the ABS market and give them a similar degree of choice.

Sitting suspended for a Division in the House.

On resuming—

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

Order. The hon. Member for Huntingdon was on his feet, giving the Committee the benefit of his advice and knowledge. I ask him to continue.

Photo of Jonathan Djanogly Jonathan Djanogly Shadow Minister (Business, Innovation and Skills), Shadow Solicitor General, Shadow Minister (Justice), Shadow Solicitor General

It is my great pleasure to do so, Sir Nicholas, even at this late hour.

The level of regulation required under licensing and authorisation proposals for ABSs is substantially greater than for other bodies. As the licensing authority for ABSs, the institutes would have to bear considerable costs to provide that level of regulation. That in turn would mean sizeable fees for ABSs, over and above current regulatory fees. The feedback that has been received from the institutes’ members in response to the proposals in the Bill suggests that the idea of setting up as an ABS may not be as attractive as envisaged to those in private practice, with the licensing system being seen as such an unwanted burden that some firms are considering restructuring to avoid the need for a licence.

In-house practitioners are worried about the ABS requirements being loaded upon them. It may be that so few private practices of patent and trade mark attorneys wish to becomes ABSs under the new system that it will be unsustainable for the institutes to apply to be licensing bodies. The proposals for ABSs could then have the opposite effect to that intended, acting as  a disincentive to practices wishing to continue to provide a mixed practice, rather than effectively removing restrictions, in order to allow more flexible business models in the legal services market.

Photo of Bridget Prentice Bridget Prentice Parliamentary Under-Secretary, Ministry of Justice

Since the Clementi review, we have demonstrated, I hope, our commitment to ensuring that the new opportunities for external control and investment are balanced by robust safeguards. It is important that ABS firms are protected by the very same statutory safeguards. It is clear throughout the Bill that significant non-lawyer owners must be approved by regulators as fit and proper persons. Providing exemptions to that would create a risk of inconsistency in both standards and the protection of the consumer.

In addition, competition in the legal services market could be distorted by giving some existing trade mark and patent practices a competitive advantage over new practices offering services in the same area. If we allowed those exemptions, as the hon. Gentleman has suggested, we would create even more complexitiesin the framework, albeit without very many real additional benefits for either firms or consumers.

There is sufficient flexibility in the Bill to allow for proportionate regulation, without creating specific exemptions for any category of legal services. I am absolutely confident that the current provisions in the Bill would allow existing trade mark and patent attorney practices, such as those that do not have external ownership, to continue without necessarily requiring an ABS licence. We have provided that firms with small numbers of non-lawyer managers may qualify for flexible regulation as low-risk bodies under clause 108. That means that they may qualify for licensing rules that are not subject to this part ofthe Bill.

I hope that the hon. Gentleman will withdraw the amendment. I understand why he has tabled it, but the Bill is sufficiently flexible to allow trade mark and patent practices to work successfully under the new arrangements.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

Order. The Minister was slightly inaccurate in asking the hon. Gentleman who leads for the Opposition to withdraw his amendment, because we are not discussing an amendment. We are debating clause stand part, with which we are discussing new clause 16, which will be voted upon formally, as and when we reach it.

Photo of Jonathan Djanogly Jonathan Djanogly Shadow Minister (Business, Innovation and Skills), Shadow Solicitor General, Shadow Minister (Justice), Shadow Solicitor General

Thank you, Sir Nicholas, I take your point.

Having heard the Minister, I wish to make three general points. The first point is that, as the Minister knows full well, there are different sizes of regulators. Bodies like the trade mark and patent institutes are much smaller than some of the other regulators, and they have specific issues, which have come up now and again during our debates on this Bill. The Minister has acknowledged those issues, but does not seem to have done much about them.

My second point is that those institutes are not closed professions. That means that people who practise in patents or trade marks do not have to be  regulated. The implications of getting the provisions of the Bill wrong will mean that more people who practise in patents and trade marks will not move towards regulation. The institutes may fold and the Government may therefore have an opposite effect to what they would want. The Minister just said that regulation should apply to everyone; I am afraid that it simply does not apply in the context of professions that are not closed professions.

Thirdly, if representatives of those institutes were here, they would stand up and say, “Minister, you have been warned”. I just hope that the approach that the Minister has taken is right. Serious concerns have been raised that what she has said is, in fact, not right. I suppose it will be a case of sucking it and seeing. None the less, we have our concerns.

Question put and agreed to.

Clause 72, as amended, ordered to stand part of the Bill.

Clauses 73 to 76 ordered to stand part of the Bill.

Schedule 10 agreed to.

Photo of Simon Hughes Simon Hughes Shadow Attorney General, Party Chair, Liberal Democrats

On a point of order, Sir Nicholas. Of the remaining clauses up to and including clause 82, the only one that I would be grateful for havinga moment to ask the Minister a question about is clause 80.

Clauses 77 to 79 ordered to stand part of the Bill.