Market FinancialsCost of regulation
Our review found no analysis of the costs imposed by regulation by type of activity. However there are elements of cost analysis contained in certain sources.
As part of the development of the Legal Services Act the Ministry of Justice undertook a full regulatory impact assessment in 2006 , which was updated in 2007. This looked at specific elements of the Act and provided an analysis of likely costs. For example this reported that the implementation costs for the establishment of the new complaints framework would be £26.7 million in 2007-08 prices1.
A survey by the Law Society2 found that:
Over three-quarters of firms (78%) thought that the regulatory system places too great a burden on law firms.
- The costs of compliance were excessive for 37% of firms and reasonable for 26%
- Costs exceeded 10% of gross total costs for over one-quarter of firms (29%)
- Compliance obligations had resulted in increasing paperwork for 74% of firms, had caused 4% to plan to close down and 27% to turn clients away purely because of associated administration.
However this does not contain a detailed analysis of costs of regulation.
Clearly regulations around holding client money incur costs (accountants fee for example), and the practicing certificate fee is in part a cost imposed by regulation.
Most not-for-profit legal practices will be subject to other forms of regulation such as OISC, FSA, Charities Commission etc3.
Legal aid providers are subject to additional regulations as part of the Legal Services Commissions’ contracting process. This has been criticised as adding to costs with one commentator stating “When tendering for work, between 5-10% of the cost of the service is spent on the tendering process itself”.4
Voluntary accreditation schemes– designed to assure or enhance the quality of advice provided – are often seen as an additional cost. For example some felt the accreditation costs to be on the children panel was too high5, survey respondents were wary of the cost of obtaining quality assurance for advocacy accreditation6, and another report suggests that the cost of quality mark accreditation may make it not worth bothering with for some firms.7
There is a concern that the costs of regulation will lead to some legal service providers moving into activities and using business models that don’t require regulation, termed regulatory escape.8 For example will writing is not a reserved activity, but solicitors aren’t allowed to run it as such as a separate activity – they must comply with regulations that their competitors do not.9
However internationally the level of regulation in the UK appears to be comparatively low. A study comparing regulation of professions across the EU, puts the level of regulation of the legal profession within the UK as fifth lowest, behind Finland, Sweden, Denmark and the Netherlands.10
In terms of the costs of regulation going forward there is a view that: “The LSA will give rise to competition between regulators with practitioners assessing the relative merits burdens and cost of each regulator and decide which regulatory home is most suitable for their practice”.11
The changes brought about by the Act will drive changes in regulatory focus: “The higher the debt/equity ratio in a firm then the more attractive risky strategies are to the company, hence large LDPs or MDPs are far more likely to be at risk of slipping from the ‘straight and narrow’ if there is too much debt in the company. Therefore, the focus of regulation on large highly concentrated LDPs and MDPs should not be on management but on the financial structure. This may affect the form of the development of firms. For example, four large firms merging may not be a cause for concern but one company borrowing heavily or raising hybrid finance to buy out three others may be.12“