The CMA Market Study: What might it look at?

Very shortly after the Government’s announcement of its review of regulatory barriers for ABS firms and independent regulators last year, the CMA has announced a market study into the legal services market.  Should lawyers worry about it?

This is a market study, so an early stage. It could lead to a clean bill of health, informal encouragement for the industry bodies to improve the quality of information etc, recommendations to Government to change policy or formal action. In the absence of significant evidence of a cartel, a formal referral seems unlikely.

The CMA will be looking at:
• whether customers can drive effective competition by making informed purchasing decisions
• whether customers are adequately protected from potential harm or can obtain satisfactory redress if legal services go wrong
• how regulation and the regulatory framework impact on competition for the supply of legal services.

Supporters of the Legal Services Act 2007 hoped that independent regulation would abolish rules restricting the market and that ABS firms would enable lots of innovative new businesses to flourish. As a result, empowered consumers could make informed choices between a range of suppliers, prices would fall and access to legal services improve.

Most of us would be hard pressed to find any access to justice benefits flowing from the reforms. So will the CMA’s study address this?

Consumers making informed purchases

Consumers rarely use lawyers. This doesn’t help them judge whether they’ve got the lawyer they need, are getting a decent service at the right price or a good outcome. And there is very little information to help them.

The LSB consumer panel’s tracker survey, cited by the CMA as a prompt for the review, suggests that few consumers shop around for their legal services and their methods for choosing lawyers don’t go much beyond “phone a friend”. Many aren’t aware of the difference between regulated and unregulated providers and probably assume that one provider is pretty much the same as the other. That doesn’t suggest that they’re exactly driving change.

Regulators and LeO can provide basic regulatory information but don’t run to the sort of qualitative information consumers need to make a rational judgement, let alone “drive effective competition”. So far, an effective Trip Advisor-type site hasn’t materialised (assuming this would help) – partly because of cost and partly because there’s absolutely no enthusiasm in the industry for the risk of bad reviews. And, lawyers, unlike, say, cars are profoundly unsexy: I don’t see a monthly glossy entitled What Lawyer? appearing any time soon.

So I suspect that the CMA may be pressing for the professions to do more to provide information. Whether this can be achieved in a way that consumers will trust or find useful is another question.

Consumer protection and redress

Most lawyers will be surprised at the CMA raising this. It points to that tracker research indicating that 10% of users felt that the services were poor value for money. Given that this is an inherently complex area where consumer satisfaction is influenced by the outcome, 10% dissatisfaction looks quite respectable to me.

LeO may have its problems, but nobody seems to be saying that it’s not providing suitable redress. There’s better protection in the event of solicitor dishonesty than if a bank collapses. It’s even arguable that these protections are a barrier to competition or, at least, a disproportionate burden on business (LeO costs around £19m and a similar amount goes into the Compensation Fund). How will the CMA grapple with this basic tension between competition and consumer protection?

If, however, the CMA were to look at the unregulated sector, that would raise some really interesting questions. It’s reported that it’s going to be studying will-writing in particular. So maybe that debate will be reopened. I would expect them to raise the question of whether LeO should have jurisdiction over the unregulated sector.

There could be an interesting debate between the “no more burdens” group and the consumer protectors over whether there should be greater regulation of the unregulated sector. This isn’t necessarily something for the profession to feel confident about. The last time the question of regulating will-writing was raised, solicitor will-writers didn’t come brilliantly out of the comparison.

Regulation and competition

The CMA refers to LSB research suggesting that only 13% of small business users thought that lawyers were a cost-effective way of resolving disputes while 50% said they regarded using lawyers as a last resort.

More worryingly, under 25% of businesses thought they could access affordable legal services if they needed them. Even where the respondents had actually used lawyers only just over 50% felt they could access affordable services.

The figures for consumers would probably be even higher. Aside from those areas where there’s a steady flow of reasonably commoditisable work, often where there’s a lot of someone else’s money involved (conveyancing, wills and probate, some employment and (subject to further fall-out) personal injury), significant legal action is out of the reach of most of us.

Is this because of regulation? The default position of the competition authorities has been that failure of markets to develop is down to professional rules inhibiting competition, rules made by those professions. How long can that position run?

Regulatory and representational functions have been separated. It’s very hard to argue that the Law Society exercises any influence over the SRA. The CMA might dislike the fact that BSB is taking a fairly conservative approach to ABS licensing, but that’s as likely to be a result of a realistic assessment of its organisational abilities as of any undue influence from the Bar Council.

A good many restrictive practices have been abolished in the last thirty years. Barristers can accept work direct from the public. Very few do: is this because the permitted business models aren’t apt for this or because most barristers would have become solicitors if they’d wanted to work directly with consumers? Solicitors can exercise higher rights but, except in crime, this doesn’t seem to have seriously dented the Bar’s hold on this market.

ABS firms are now permitted. But, my impression is that firms adopt new models to improve the running of their business, to compete better in existing markets or to make a quick buck for the owners. Few have targeted areas where access to justice is a real problem.

The SRA’s processes for authorising them have been criticised but if there had been a real business opportunity there, I suspect businesses would have lived with those. Indeed, might not traditional law firms have moved in there?

It feels rather like a horse being led to water but refusing to drink because it has a perfectly decent source back home.

Small business and consumer research

Looking more closely at the LSB’s research and at earlier research on consumer behaviour by Pascoe Pleasance and Nigel Balmer, you have the impression that businesses and consumers positively don’t want to use lawyers. Businesses try to resolve the problems themselves first, then talk to contacts and then their accountants or other professional advisers – and apparently 73%(!) of disputes were resolved satisfactorily. These look like pretty rational business decisions to me.

Consumers, faced with legal problems, again, usually find other ways of dealing with them – either because they’re not important enough or because they can be sorted out without lawyers.

Culture rather than regulation?

So lawyers are called in irregularly, don’t get a relationship with the client and are less able to do interesting things with prices.
So this looks like a problem which has become cultural and which goes beyond regulation: consumers don’t want to use lawyers unless they have to; lawyers have developed models which work for them and which compete against each other but don’t seem good at creating appealing models for consumers to use; and consumers don’t have the power to alter this. Outside investors can see money in helping firms compete in some existing markets but not, apparently, in developing new ones.

What might the CMA look at?

This isn’t to say that there aren’t things for the CMA market study to look at. The fact that there are large numbers of part-qualified barristers and solicitors out there at a time when using lawyers is out of the reach of most consumers and small businesses, must raise questions about whether something can be done about the supply side – particularly given that it’s the existing members of the profession who control whether an individual qualifies or not. There isn’t a cartel here but might it not inhibit innovation and competition if you can only qualify by being part of an existing business model?

Is it appropriate for there to be a single dominant qualification covering ever-expanding number of branches of law – particularly when the regulatory model doesn’t assess competence in the overwhelming majority of them? Would a single regulator, authorising activities rather than granting titles be a better answer and provide greater opportunities for innovation in the market?

That LSB research might prompt questions about the extent to which people who aren’t primarily trained as lawyers (accountants etc) in practice provide legal advice and about the relationship between regulated and unregulated legal services. Does the concept of reserved work have any relevance at all?

There are lots of other aspects: to do with maintaining professional standards and the reputation of the profession abroad. You might also ask whether, in fact, changing regulation will work when there are profound cultural and financial questions here: if there’s no money in providing legal advice on, say, housing repairs, there won’t be much commercial supply of that advice.

Effect on the profession

So will it affect the profession? Probably no more and no less than the reforms arising out of the previous enquiries, commissions and legislation. However, if I were a managing partner I might well muse about the finding in the LSB’s research that small businesses are more likely to go to an accountant for legal help than to a solicitor and more than 5 times more likely to have an accountant than as a solicitor as their main external adviser. A