CMA review of the legal services market study

Summary

On 17 December 2020, the Competition and Markets Authority (CMA) published its findings of a three-month review of the extent to which its recommendations in the 2016 Legal Services Market Study have been taken forward and the impact of these changes.

The review is divided into two parts that assess the impact of the market study recommendations on:

• increasing the transparency of price, service and quality information to enable consumers of legal services to make informed choices
• reform of the regulatory framework

Improving consumer outcomes by increasing transparency

The market study found that there was not enough information available on price, quality and service to help consumers make informed decisions.

This limited transparency made it more difficult for consumers to compare providers, thereby weakening competition.

Information shortcomings, including limited consumer understanding of the sector and the lack of transparency offered by providers, also led to some consumers believing they could not afford legal advice and resorting to doing nothing or attempting to resolve their issue themselves.

The market study made several recommendations to the regulatory bodies to improve transparency, including:

• rule changes requiring legal services providers to publish information on price
• promote the provision of information on quality by legal services providers and issue guidance for providers on engaging with online reviews
• make available relevant information on legal services firms and professionals to consumers
• review and develop the content of the Legal Choices website to enable consumers to navigate the sector more easily

The market study anticipated that these measures, taken together, would deliver a necessary step change in transparency. However, the CMA recognised that the measures would take time to have visible impacts.

Since the market study, all of the regulatory bodies have taken steps to introduce minimum requirements for price and service transparency, mostly by adopting regulatory requirements, resulting in a substantial increase in the availability of such information.

This information is a necessary starting point for allowing consumers to make the sort of informed choices that drive competition.

Such improvements in transparency have only recently come into effect, with new rules being implemented by the regulatory bodies from late 2018 onwards.

For this reason, there has been a limited impact on the intensity of competition between providers and on sector outcomes, but the review predicts greater impact over time.

In order to maximise the impact of such regulatory changes, the review goes on to recommend that the Legal Services Board (LSB) and other regulatory bodies continue to build on the reforms so far by focusing on the points below.

The aim of these recommendations is to provide a high-level framework to be overseen and developed further by the LSB and implemented by the regulatory bodies. More detail is provided in chapter 4 of the CMA’s report.

Compliance

While the regulatory bodies have all taken steps to introduce greater price and service transparency, levels of compliance with some of the rules and guidance appear to be fairly low.

It’s important that regulatory bodies take action to ensure high levels of compliance.

Clarity

Regulators should aim to improve the clarity and comparability of information through better promotion of best practice, developing their approaches to monitoring and compliance and through refining the rules and guidance now in place.

Increased information on quality

Price information alone, without information on service quality, may not be sufficient to drive effective competition.

The regulatory bodies have made limited progress on developing information on the quality of legal services providers in response to the market study recommendations.

The LSB is now considering a range of options on quality indicators, following roundtable discussions with the regulatory bodies, the Legal Services Consumer Panel (LSCP), the CMA and the Legal Ombudsman (LeO).

Further measures enabling consumers to engage with the price and quality information online

Improvements need to be made to better facilitate the role of digital comparison tools (DCTs) in the sector, including to address:

• the lack of standardised pricing information
• limited information on quality indicators
• limited engagement with online reviews by both providers and consumers

In addition, while a number of regulatory bodies have introduced digital registers identifying regulated entities and professionals, these only cover basic regulatory information.

As yet, there is no single source for this information covering all regulated legal services as envisaged by the market study.

Consumer research

To support the implementation of measures based on the CMA’s recommendations, the review notes the value in regulators conducting consumer research and testing to determine what solutions are the most appropriate, and to adapt their interventions over time based on ongoing testing and trialling.

Different legal services

Given the differences between different practice areas, the scope for greater transparency to drive competition varies across those legal services.

Some legal services, such as conveyancing, are relatively commoditised and hence particularly amenable to comparison by consumers across price and quality dimensions.

For other legal services, providing clear and transparent information may be more difficult.

However, the review puts forward that there is still greater scope to tailor the transparency recommendations to account for these differences across different legal services, and that regulators should work to enhance transparency further on legal services where there is scope for increased transparency to have the greatest impact on competition and sector outcomes.

Regulation

The market study found concerns with legal services regulation, stemming from the way that the regulatory framework is structured around professional titles and reserved activities, rather than according to the risk profile of the activities being undertaken.

The market study found that this has the potential to restrict competition unnecessarily or lead to unnecessary costs for some legal services.

For others it may leave a regulatory gap, where consumers are unaware of the risks and lack of protection they face when using unauthorised providers.

The market study also identified that the complex regulatory structure of multiple regulatory bodies overseen by the LSB may lead to practical difficulties in coordinating regulatory changes.

It also highlighted residual concerns about the independence of regulation from the representation of the legal professions.

The review noted that so far, there has been little progress with the regulatory reforms recommended by the market study. The government has acknowledged the case for reform, but a review of the Legal Services Act 2007 has not taken place.

The recommendations to review the extension of redress or to systematically gather new evidence on the unauthorised sector have only progressed to a limited extent.

Consequently, the issues identified in the market study largely remain.

Furthermore, a case for reform is strengthened by evidence that the unauthorised sector is continuing to grow through developments in lawtech.

The increasing significance of the unauthorised sector exacerbates the issues arising from a regulatory framework that is aligned with professional titles rather than activities. The need to address this will become more urgent over time.

The review notes that the preferred long-term approach would be for the Ministry of Justice to carry out a wholesale review to reform the Legal Services Act.

In the meantime, the CMA recommends shorter-term steps, which are consistent with a long-term strategy, focusing on three actions:

• address the regulatory gap for unauthorised providers by establishing a mandatory public register of unauthorised providers for certain legal services and mandating that these providers offer redress options for consumers
• the LSB carry out a review of the reserved activities to better align them to risk
• the LSB evaluate the impact of the revised internal governance rules (IGRs) before deciding on whether further measures are required and, if so, what they might be