Scottish Government

Chapter 1 Introduction

1. Legal services are essential to society as they facilitate access to justice and enable individuals and corporations to arrange their affairs in accordance with law. Effective access to justice requires that legal advice should not only be of high quality but also be readily available, not just to the wealthy or those who can obtain legal aid. A competitive legal services market is crucial to ensure that services are provided at a reasonable cost and in a user-friendly way.

1.1 At the economic level the legal services market in Scotland has a significant impact on the Scottish economy as a whole. In 2004 expenditure on legal services in Scotland was almost £1bn ³. Competition and efficiency in the supply of legal services has the potential therefore to benefit the Scottish economy as a whole.

1.2 Scottish Ministers are committed to modernising the justice system in Scotland and to taking forward reforms which will benefit the users of legal services. They believe strongly that legal services in Scotland should be regulated in the interest of consumers and that the consumer interest requires the legal services market in Scotland to be competitive. Scottish Ministers commissioned this research into regulation and competition in the Scottish legal services market as a first step towards achieving those goals and as an evidence base on which to develop policy. Scottish Ministers wish to be satisfied that the legal services market in Scotland is free of anti-competitive restrictions which might disadvantage the users of legal services; and to be in a position to identify any such restrictions which cannot be justified in the interests of consumer protection or the public interest.

Background

1.3 Recent developments in Brussels, England and Wales and the Scottish Parliament have been relevant to this exercise

(a) European Commission

1.4 The European Commission has reviewed competition in the legal profession as part of a wider exercise looking at the liberal professions. To prepare the ground, research was carried out for the Commission by the Vienna Institute for Advanced Studies ⁴. The research looked at professional regulation in all member states. The research findings suggested that there were unnecessary regulatory barriers to the provision of professional services in some member states; and that those barriers were not in the interests of users of those services and the European economy generally. In the time available to its researchers, the Institute's study of the UK was limited to England and Wales and did not cover Scotland.

1.5 The Commission consulted widely on the research, and held a conference to discuss its findings in October 2003. The Commission's Competition Directorate published a report on Competition in Professional Services in February 2004 ⁵. The report targeted restrictions in 5 areas : (i) price fixing; (ii) recommended prices; (iii) advertising; (iv) entry requirements and reserved rights; and (v) regulations governing business structure and multi-disciplinary practices. The report invited member states and professional bodies to review professional rules and to identify any that might hinder effective competition. In the light of the report the Law Society of Scotland conducted its own proportionality review of its rules.

1.6 In a parallel exercise, the Commission's Market Directorate consulted in 2004 on a draft Directive designed to facilitate the free movement of services in the internal market, including professional services. The Commission is preparing a new draft of the Directive in the light of the consultative response. The Commission wants to remove unnecessary barriers and ensure that the Internal Market works as well for services as it does for goods. The United Kingdom strongly supports the Commission's initiative.

(b) England and Wales

1.7 A report was issued by the Office of Fair Trading in 2001 which challenged restrictions on competition in certain professions in England and Wales ⁶ including the legal profession. A review process was taken forward by the former Lord Chancellor's Department involving extensive consultation. Some initial reforms were implemented and a research exercise was carried out, the report of which led up to the announcement by the Lord Chancellor in summer 2003 of an independent and far reaching review of the regulation of the legal services market in England and Wales.

1.8 The aim of the review led by Sir David Clementi, was to consider the regulatory framework in England and Wales and recommend a framework which would best promote competition, innovation and the public and consumer interest. Sir David issued his report in December 2004 ⁷. His main recommendations were :

• A Legal Services Board should be established as a new legal regulator in England and Wales to provide consistent oversight of the front-line bodies such as the Law Society and the Bar Council.
• The statutory objectives of the Legal Services Board should include promotion of the public and consumer interest.
• Regulatory powers should be vested in the Legal Services Board, with powers to devolve regulatory functions to front-line professional bodies, subject to their competence and governance arrangements.
• Front line bodies should be required to make governance arrangements to separate their regulatory and representative functions.
• An Office for Legal Complaints should be established as a single independent body to handle consumer complaints in respect of frontline bodies, subject to oversight by the Legal Services Board. Issues about conduct would be handed down to front-line bodies.
• Legal Disciplinary Practices ( LDPs) should be able to operate as law practices, bringing together lawyers from different professional bodies (eg solicitors and barristers) and non-lawyers, permitting non-lawyers to be involved in their management and ownership and allowing flotation on the Stock Exchange.
• The safeguards to be applied by the Legal Services Board in respect of non-lawyer owners should include a 'fit to own' test. Such practices should encourage new capital and new ideas in promoting cost-effective consumer friendly legal services.

1.9 In a White Paper published on 17 October 2005 "The Future of Legal Services : Putting Consumers First", the UK government confirmed its intention to create a Legal Services Board to provide consistent oversight of the legal services sector in England and Wales, to set up a new Office for Legal Complaints independent of the legal profession to handle consumer complaints about legal services, to facilitate moves towards alternative business structures through a flexible and robust licensing system and to permit external investment in law firms.

(c) Scottish Parliament : Justice 1 Committee

1.10 In the first session of the Scottish Parliament the Justice 1 Committee held an inquiry into regulation of the legal profession. The Committee focused on the way in which the profession handled complaints, which it perceived to be the main source of public concern. The Committee also looked at the general arrangements by which the legal profession regulated itself. The Committee concluded that the best option for Scotland was to retain self-regulation, but it recommended that the present system should be reformed to make it more acceptable to consumers and more representative of the public interest. The Committee made a series of recommendations aimed at building public confidence and increasing the degree of independent oversight of complaints handling by the profession.

Scottish Executive consultation paper on complaint handling arrangements

1.11 A process of reform is underway, which takes account of the Committee's recommendations. The professional bodies have already implemented a number of reforms in response to the Committee's recommendations. The Executive for its part issued a consultation paper on 11 May 2005, entitled "Reforming Complaints Handling, Building Consumer Confidence" ⁸. The consultation paper invited views on a range of complaints handling issues, which included

• structural issues of whether complaints handling arrangements should be retained broadly as they are (subject to an increase in the powers of the Scottish Legal Services Ombudsman), or
• whether the level of oversight of the professional bodies might be raised by the introduction of a "single gateway" for complaints based on the Ombudsman's office (with either a monitoring function or a substantive complaints handling function); or
• whether an independent complaints handling body should be introduced which would be managed by a board with a lay Chair and lay majority.

1.12 Scottish Ministers considered the outcome of that consultation and announced on 22 December 2005 their decision to introduce legislation in the current session of the Scottish Parliament to establish a new independent body to handle such complaints. The new body would act as a gateway to receive those complaints about lawyers which could not be resolved at source; and would take over the handling of complaints about inadequate professional service from the legal professional bodies, the Scottish Legal Services Ombudsman and the Scottish Solicitors Discipline Tribunal. Effective complaints handling arrangements are essential to a competitive legal services market, but are not covered by this report in view of the reform process which is already in progress.

The legal profession in Scotland

1.13 Though the legal profession in Scotland is divided into two main branches of solicitors and advocates, there is a common core to the education and training of all Scots lawyers. The traditional role of the Scots solicitor has been as a general adviser to clients, buying and selling property on their behalf, preparing wills and winding up estates ⁹, conducting litigation and providing advice on specific areas of the law. Solicitors are able to appear in the sheriff and district courts and tribunals and inquiries on an extensive range of matters. Since 1993 solicitor advocates, who are solicitors with specialist training, may also appear in the Supreme Courts. Advocates, who are specialists in the art of advocacy or pleading and in advising clients on every aspect of litigation, have extensive rights of audience in all Scottish courts. Chapter 2 presents a fuller picture of the sources of legal services.

Scottish legal services market

1.14 The purpose of the research has been to provide an evidence base wherever possible which would permit policy to be formulated to meet Scottish circumstances and to inform a Scottish response to the European Commission's initiative. The research into the legal services market in Scotland has been steered by a widely representative working group to ensure that the research carried out has been as balanced and well-focussed as possible. The research focussed on the legal services market and did not seek to cover the whole of the justice system in Scotland. On issues where evidence was not available or could not readily be commissioned in the time available, the report identifies the position of the key stakeholders, including consumer interests, and provides relevant economic analysis.

Purpose and aims of research

1.15 The wider policy objectives underlying the research were :

• to respect and further the interests of justice;
• to improve consumer protection and promote better access to justice;
• to strengthen the competitive market to benefit the users of legal services in Scotland;
• to develop a more competitive market sector which could compete better in international markets to the benefit of the Scottish economy; and
• to respect the duty of the lawyer to the Court.

1.16 The agreed research aims were to :

• identify, describe and analyse the different legal services markets operating in Scotland.
• identify restrictions, whether deriving from statute, professional rules or custom and practice, which may have the effect of preventing, limiting or distorting competition in the different Scottish markets.
• identify access to justice, public interest and consumer protection factors that may justify such restrictions and to evaluate whether the restrictions are proportionate to their purpose.
• examine the evidence on alternative systems and structures across comparable jurisdictions including alternative business structures and the availability of rights of audience and rights to conduct litigation.

Specific issues

1.17 The Group's priority was to examine whether regulation of the Scottish legal services market was free of anti-competitive restrictions and that those restrictions which did exist were proportionate to the need to protect the public interest. The Group also agreed however that where practicable a number of specific issues might be looked at, including :

• Entry into legal education and professional training.
• Supply of legal practitioners, number of potential entrants and career choices.
• Benefits and drawbacks of different business structures and the extension of rights of audience and rights to conduct litigation.
• Fee competition.
• The role of auditors of court in relation to taxation of fees/accounts.
• Communication and quality of information flow between legal practitioners and the various users of legal services, including advertising.
• Roles of lawyers and non-lawyers in providing legal services and advice on legal matters in different markets.
• Implications of forthcoming EU competition law and policy.
• Implications of Scottish policy developments such as legal aid reform, community legal services and the Public Defence Solicitors' Office.

1.18 The remit of the Research Working Group was set early in 2004. Though the findings of the Clementi review were published in December 2004, the report nonetheless provides evidence or analysis relevant to consideration of the implications of a number of Sir David Clementi's recommendations to the Scottish legal services market. The research informs and contributes to the debate and policy development process required to identify the Scottish implications of Clementi's recommendations. It does not present agreed conclusions, nor was it expected to do so given the widely representative composition of the Group. The report identifies evidence wherever possible and records differing views on key issues. It also points to areas where further research would be helpful and draws attention to reforms already achieved.

1.19 The Working Group decided that the Scottish legal services market should be examined as a number of sub-markets and selected as sub-markets to be researched : wills/trusts/executries/estates, employment law, personal injury, financial services/tax advice, immigration, criminal law, residential conveyancing, commercial conveyancing, commercial law, family law, welfare/debt/ housing and consumer law (see chapter 3).

1.20 The work of the Group resulted in different outcomes :

• where the Group's research enabled it to reach agreed conclusions and make specific recommendations to Scottish Ministers;
• where the Group's discussion of the issues did not identify consensus, but provided an assessment of the arguments and identified the nature of the decisions which would be needed by Ministers; and
• where the Group's work provided an evidence base for future policy consideration.

Research Working Group membership

1.21 The Research Working Group met on 10 occasions between March 2004 and November 2005. Chaired by the Scottish Executive Justice Department, it included representatives of consumer interests and the legal professional bodies, and senior academic researchers working in the fields of law, economics and consumer rights. The membership of the Working Group is at annex A.