Our second Board Meeting of 2022 took place on Tuesday 1 March. We dedicated the first half to considering some of the significant challenges facing the sector and issues we plan to address in the coming year. This strategy session allowed us to step back, think about some projects at an early stage, and reflect on the progress of the sector-wide mission to ensure legal services work better for people who need them.
The war in Ukraine
It was impossible to hold any kind of discussion without reflecting on the terrible plight of the Ukrainian people. The threats to global peace and security cast a shadow over everything we do.
We asked the Executive to begin discussions with the regulators on how best to ensure that the regulatory objective of “an independent, strong, diverse and effective legal profession” is not undermined by either the perception or reality of profiting from assistance to sanctioned individuals or businesses. While we would go to any lengths to uphold the principle that everyone is entitled to legal representation, the sanctions regime in the UK is very clear: if you are going to receive legal fees from a sanctioned entity you need a licence in advance from the Office of Financial Sanctions Implementation, and any fees must be within “reasonable” limits.
It is of critical importance that the legal sector – already under often unwarranted attack on other fronts – can say with absolute certainty that it is playing its part in full.
Promoting positive culture and leadership in the public interest
Moving into the main part of the meeting, we discussed how we could best support regulators in their efforts to make sure regulation works effectively on behalf of the public. Based on evidence from performance assessments, thematic reviews and other sources, the Board agreed on the importance of regulators having the right culture and leadership to deliver effective independent regulation in the public interest. In that vein, we discussed the importance of the regulators complying with the spirit of the internal governance rules, which set out the requirements for the approved regulators to ensure the separation of regulatory and representative functions, as well as the letter.
Independent regulation gives consumers, providers, and society confidence that legal services work in the public interest and support the rule of law. It also provides the legal services providers with the certainty they need to grow and innovate.
We reminded ourselves of the need to focus on consumers and people who need legal services when regulators make evidence-based decisions and consider the impact of regulation on them. In turn, noting that we are a small organisation with finite resources, we agreed that the Legal Services Board must continue to use our regulatory levers in a targeted way to drive progress and increase the pace of change.
Protecting consumers through effective insurance and compensation arrangements
Looking ahead to work that we plan to do later this year, we discussed the financial protection arrangements that are in place to protect consumers of legal services – professional indemnity insurance (PII) and compensation funds. This was in the context of the hardening of the PII market, sharp rises in premiums, and insurers’ refusal to renew cover for regulators’ compensation schemes.
We are concerned about the impact of these changes on the costs of legal services and on innovation in the sector. Both of these could impinge access to justice.
Addressing these challenges will require joint working and collaboration, and we discussed the emerging trends in this area, research that we have already commissioned and early thinking on how we will approach our planned PII review in 2022/23.
We consulted on our plans to make further progress on these matters in our Business Plan for 2022/23. The Board will consider the responses to that consultation at our meeting on 22 March 2022.
Data and evidence: Tracking progress on the challenges
Every six months, the Board reviews a range of indicators designed to help us track the sector’s progress against the challenges set out in the Reshaping Legal Services Strategy. Although we are only one year into delivering our ten-year vision, the data gives us an indication of whether the issues we identified continued to be the right ones.
New data in the digest indicated that overall, the legal services sector in England and Wales continued to be broadly healthy. While monthly legal services turnover dropped 3.5% from October to November 2021, this is still 6.5% higher compared to November 2020.
The percentage of law firms who rated themselves as quite or very confident looking forward dropped from 91% in 2019 to 78% in 2020. However, business confidence has more than recovered by 15% to 93% in 2021.
Insolvencies of registered companies in legal services in England and Wales totalled 52 in 2020, and until November reached 42 in 2021. Insolvencies increased from five in October to 13 in November, but overall these numbers are very similar to the number of insolvencies in accounting firms.
The Board welcomed the positive health of the sector but agreed that it was important that consumers, people who need legal services, and society more broadly benefit.
The Board noted that the proportion of litigants in person increased by nearly two percentage points between Q2 and Q3 2021, to 57%. The data digest also shows that 29% of adults own legal expenses insurance – a 12% increase compared to 2017. This was welcome, and we agreed that we would like it to increase further. Legal expenses insurance has the potential to increase access to justice and help reduce unmet legal need. However, as our report on this in November 2022 concluded, consumers need better information to support them to exercise choice and purchase good quality legal expenses insurance suitable for their needs.
The Board was pleased to see that a study by Oxford University commissioned by the SRA found the past year has seen a “step change” in the adoption of legal technology and innovation, in part due to Covid-19. 55% of firms surveyed had improved or increased their use of existing technology, while 48% made changes in ways to deliver services, and 35% introduced new technology.
Technology offers potential solutions by making services more convenient, easier to use and often cheaper. That’s why we have set an open stance for regulation and technology in the legal sector.
As part of our work monitoring the progress and impact of the strategy, we are developing an online platform for regulators and other stakeholders to demonstrate how the sector collectively is progressing against the nine challenges identified. The microsite will host cross-sector evidence and research aligned to the regulatory objectives and show where we are having an impact and where we need to do more for consumers and the profession. The platform is due to launch in Spring.
Reviewing our regulatory performance framework
The main item on our Board meeting agenda was discussing draft proposals for a revised regulatory performance framework. This work is central to our duty to promote the regulatory objectives, have regard to the better regulation principles and our ambition to reshape legal services to better meet society’s needs and provide consumers with fairer outcomes, stronger confidence and better services.
The current framework was introduced in 2018 with an expectation that it would be reviewed every three years to ensure it remained fit for purpose. Our experience of the framework, feedback from regulators and research into other approaches indicated that we should develop a revised outcome-focused framework that places sufficient emphasis on effective leadership, capability and capacity of regulators. The framework should also encourage regulators to take ownership of the regulatory objectives and hold them to account for putting these at the centre of what they do. It should be sufficiently flexible to account for developments in the market and the policy environment.
The Board agreed the need to ensure the new framework is more explicitly linked to the Regulatory Objectives and that it supports progress being made on the challenges set out in the Reshaping Legal Services strategy. We also welcomed the plan to move the rating system away from the current ‘red/amber/green/ (RAG) system to one based on the level of assurance that has been provided in relation to the outcomes.
Following the conversation we had at the start of the meeting about culture, leadership and effective decision-making, the Board agreed that the new framework must put the responsibility for regulatory performance firmly with the Boards of the regulators. The new system must also make sense and be accessible to consumers and other stakeholders, as well as the regulators themselves, to ensure everyone can understand how well a regulator is performing.
The Board planned to have a further discussion on the proposed framework before consulting publicly.