Submission to House of Lords Industry & Regulators Committee

12 May

In January we made a submission the House of Lords Industry & Regulators Committee, exploring how legal regulation inhibits growth. Our submission is reproduced below. The Committee has now published its report here.

Passmore & Oliver Partners is a specialist global consultancy focused on legal services strategy and regulation. We advise law firms, investors, innovators and regulators on market insights, governance and strategy and regulatory reform. Our evidence is informed by practical regulatoryexperience in England & Wales and internationally: Passmore & Oliver Partners was founded by two individuals who were key figures in the reform of regulation, including the introduction of Alternative Business Structures; and have experience of designing and introducing regulatory frameworks in multiple sectors and markets.

Our response focuses exclusively on the regulation of lawyers, mainly in England & Wales, but we comment on Scotland and Northern Ireland to provide a full UK perspective; we also draw on international comparisons to offer alternatives to the Committee as it considers this important issue.

Introduction

Legal regulation risks failing consumers not because of weak protections but because it acts to suppress competition, innovation and growth - and in turn, access to affordable services.

The biggest single issue in the legal market and risk to consumers is the inability of most individuals and small business to access affordable legal services. That is not a theoretical risk – it is an issue faced by ordinary people and small businesses every day. That directly impedes economic activity by individuals and growth from small business. And in turn it means the legal market does not grow as it should.

Too often regulators treat consumer protection and economic growth as opposing goals, despite clear evidence that competitive markets deliver better consumer outcomes. And view firms’ commercial interests and novel ideas that underpin innovation with suspicion and in terms of risk, rather than as necessary for the growth of the legal market and the economic interests of the clients they support.

Reforms are required to ensure that both the regulatory framework and how it is operated do not present barriers to innovation and growth.

Consumer Protection and Economic Growth: a false dichotomy

Growth and consumer benefit are complementary

Legal regulators frequently treat economic growth and consumer protection as opposing interests and objectives. In functioning service markets, competitive dynamics are a primary driver of consumer welfare: more choice, better quality, lower prices, and improved access. Growth is not an industry indulgence; it is a mechanism by which more consumers—poor and rich, small business and large corporates—obtain the services they need.

Access to justice and the need for innovation

Outside a narrow set of services (notably conveyancing and personal injury – which increasingly rely on developments in technology, new models of delivery and/or external funding to provide services that are accessible to individual consumers), traditional legal services are unaffordable for most individuals and many small businesses. This is increasingly a middle-income problem as well as a low-income one. Legal services are seen as a distress purchase to be avoided at all costs, rather than an advisory and support service that enables individuals to play a full role in civic and economic life, or small business to grow.

Innovation in technology can widen access through low-cost services. The emergence of large language models and related AI presents an opportunity to fundamentally reshape the delivery of legal services and widen access. This requires a level of capital investment that is usually unavailable to traditional partnership models that distribute their balance sheet to zero each year end. The availability of ABS has started to address this in E&W but the failure to deliver ABS in Scotland and Northern Ireland means that consumers in those markets miss out.

Regulators need to better understand commercial models of investors and how risk can be managed in such situations, in order to support new ideas to widen market participation and access to justice for individuals and small business.

Recently, the SRA’s innovation sandbox has been paused with the regulator citing other priorities. The 2025/26 business plan says: "[We] have paused development of a safe testing environment for innovation and technology while we focus first on exploring demand and potential benefits …we will be assessing the demand and potential benefits of providing further support to the market, including what role a safe testing environment or similar initiative could have…And we would then carry forward any relevant work to enhance our support into the next strategic period.”

This is too slow and reactive. Whilst other priorities, such as strengthening its preventative capabilities are important, the work to support market innovation is critical, given the speed of technological developments and their importance in ensuring a competitive UK legal economy - driving key reforms (for example those highlighted in the Government’s recent Home buying and selling proposals aimed at unlocking the property market) and enabling business models that are financially sustainable and affordable to a greater diversity of clients.

Removing barriers to innovation

In parallel regulators need to focus on removing rules and processes that hamper growth.

There are certain requirements that present no benefit: for example, the need for a physical practice address in the jurisdiction to be authorised by the SRA. This does not add anything in terms of protections to the registered office and client account requirements and provides an additional potential barrier to international growth and digital startups.

In Scotland there have been repeated delays to the introduction of the ABS regime that is sitting on the statute books. ABS have been operating safely in E&W for 14 years and were called for in parallel in Scotland. The legislation has been in place for over a decade, but reform remains years away following the recent announcement from the Law Society of Scotland which cited a lack of appetite among law firms. That is patently untrue as many law firms have pointed out, and as demonstrated by the evidence of cross border deals being structured to navigate the Scottish system. This adds cost and complexity to deals and inhibits investment in Scotland.

The speed of operational processes and decision making also has a real impact on investor and law firm activity as it slows down the pace of investment – that cannot take place until a deal is approved by the SRA. Much of the approval process is bureaucratic and repetitive for those involved in growth via consolidation. New firm approvals are required, in addition to fit and proper checks, where an existing business takes on non-lawyer ownership for the first time, or moves from an LLP to a Limited company. Repeat approvals of known regulated individuals can take many months. This is at least in part driven by legislation – for example, the non-lawyer ownership approval requirements in Schedule 13 of the Legal Services Act 2007, applied by the SRA to all law firm owners, go far beyond those with real influence and control over the management of the law firm. First steps towards a more targeted process were taken in changes introduced in 2019. These could be extended significantly, with the benefit of further experience of the operation of the rules.

The practices of regulators would be more efficient and effective if they strengthened their ability to gather and analyse their data and intelligence, and focussed on early detection of emerging risks, data-led supervision, and faster, tougher, proportionate enforcement where real harm occurs – with clear evaluation of outcomes. Regulators are currently impeded in doing so by immature datasets and limited investment in AI/technology solutions.

Targeted protection

Regulatory approaches often aim implicitly to ensure consumers never lose out. This aspiration is unattainable, and it can be counterproductive. All markets involve trade-offs and informed choice. The consequences of over-precautionary regulation - which raises costs, deters entry and innovation, and reduces access - are given too little consideration and are too easily disregarded.

While the statutory regulatory objectives provide a framework for balancing consumer protection with key objectives such as competition, the strength of the market, alongside access to justice, there are no set priorities, targets or indicators to help drive the balancing act in policy or operational decision-making. This risks too little weight being given to those regulatory objectives, given the normative culture of regulators, which is often risk averse and uncommercial.

There are also political aspects to this culture. At times the media and politicians drive regulators to be risk averse and hindsight driven. While there are lessons to learn from every event where consumers or the public lose out, not all are regulatory failures. And an unforgiving public discourse leads to defensive and over-cautious regulatory rules, processes and practice. Politicians have an opportunity to lead that debate and support regulators in not trying to design a zero-failure regime.

Consumer protection should be targeted toward genuine vulnerability and high-impact risks, rather than being designed around universal risk elimination. Where protection is needed, it should be proportionate, evidence-led, and designed to preserve consumer access and choice.

By way of example, reform of the SRA’s professional indemnity obligations would lower the costs of providing legal services in areas where the benefit would be high on individuals and small businesses, and risks of harm minimal. The current arrangements provide as a mandatory minimum, gold plated blanket cover across all firms and sectors in the market; and across reserved and unreserved services where the latter is provided by a regulated firm. The sole differentiation is the requirement, without justification, for higher cover per claim for ABS (3 million rather than 2million). Designed prior to the creation of the Legal Ombudsman’s redress scheme, there is no equivalent in any other professional market in the UK or globally.

Regulatory architecture: the reserved activities

Currently six activities are reserved to regulated lawyers and law firms. These are an accident of history (see Mayson, Legal Services Institute: ‘The regulation of legal services: Reserved legal activities – history and rationale’[1].) and are evidence that protectionism – rather than risk - has driven the design of the current regulatory framework.

There is nothing immutable about the current list of activities reserved to lawyers. Other countries have very different systems. For example, Sweden does not reserve any part of the market to regulated lawyers but does regulate the Advokat title – only members of the Swedish Bar may use that title - and so consumers can choose when to use a regulated lawyer and when to use other services. At the other extreme most US States operate within an ‘unauthorised practice of law’ regime, where it is an offence for anyone other than a regulated lawyer to practice law in any way;which itself grew out of protectionist efforts. (See for example Nora Freeman Engstrom & James Stone, Yale Law Journal: ‘Auto clubs and the lost origins of the access to justice crisis’).[2] New Zealand operates a similar system to the UK but only reserves litigation and advocacy to regulated lawyers.

Most significantly there is no evidence that increasing the scope of regulation of lawyers improves consumer outcomes in terms of higher quality, lower complaints or better pricing. Research in England & Wales makes this stark – see IFF for LSB: ‘Understanding the consumer experience of will writing services’.[3] This research showed conclusively that unregulated will writers provide as high quality a legal service as regulated lawyers when writing wills but tend to innovate more and offer predictable and competitive pricing.

Regulatory architecture: the Legal Services Board

The Legal Services Board was created (by the LSA 2007) to oversee the transition to modern independent regulation and a more open market. Over 15 years later, the legal regulators operate (mainly) independently from professional bodies, and have greater, broader and deeper expertise in regulation across their Boards and Executives. Meanwhile the LSB adds an additional layer of oversight that dilutes accountability, entrenches risk-averse behaviour and slows reform.

One such example is the power the LSB exercises over regulators rule making. Each regulator is required to consult in line with best practice and public law. That is overseen at each regulator by a Board, chaired by a non-lawyer, with a non-lawyer majority of Board members and within a statutory framework. Yet, after that, the rule changes must go through a similar process with the LSB. Whilst all it aims to provide is a backstop – to ensure that the rules do not adversely impact the regulatory objectives – however the process involves a detailed and resource intensive application process and adds delay into the ability of regulators to make changes to address their needs. It is lobbied hard by vested interests – and the risk of refusal makes regulators even more cautious. The delay simply slows the pace of change. This is a model left over from when professional bodies wrote the rules of their profession: now that regulators are effectively independent it should be simply abolished.

A more effective means of oversight of the work of the frontline legal regulators, would be direct accountability to Parliament via an annual report and hearing before business and regulation committees in the two Houses. This is consistent with the approach taken in other sectors.

Interim reform: reduction in reserved activities to only conduct of litigation and advocacy in higher courts

Learning from the range of legal markets and regulatory frameworks around the world, we encourage the Committee to consider recommending reducing the number of legal activities to just the conduct of litigation and exercising rights of audience in higher courts.

Without evidence from risk assessment to support continued reservation, most of the other activities (probate activities, conveyancing (by virtue of being a reserved instrument activity), administration of oaths) should be removed from the list. They are an arbitrary list of activities and the landscape has changed in the centuries since reservation, bringing in a wider framework of consumer protection. For example, conveyancing reservation has at least in part been superseded by the Land Registry, compulsory registration of land, its system of quality control and its shift to a digital model. The financial elements of home purchase could be regulated through financial services regulators. Oaths have been replaced by Statements of Truth and many administrative services (such as passport and driving licence applications, or tax and benefits processes) operate well without oaths.

Notarial services are different because of their role in cross border economic activity, but the Committee should recommend a review of how notarial services are regulated and if a more modern and growth orientated system could be designed instead of the current reservation.

Longer-term reform: a single legal services regulator

In the long term, consolidation into a single legal services regulator is the obvious and necessary next step. While institutionally challenging, itwould align accountability, reduce duplication, lower regulatory cost, and remove structural barriers to growth and innovation.

There is no doubt that this is harder to deliver. The current regulatory system post Legal Services Act took from the Office of Fair Trading’s 2001 ‘Competition in the professions’ report[4], through the Clementi Review[5], the Governments proposals[6] and consultations and to a Joint Committee[7] review of the draft Legal Services Bill[8], before the Act was passed in 2007 and implemented in 2010. It was 10 years from the first analysis of barriers to growth through to the first non-lawyer owned law firms.

But that does not mean we should not start now. Professor Mayson has already undertaken much of the analysis needed for this work[9]. Other jurisdictions beyond England & Wales have reached similar conclusions (see Roberton Review[10] in Scotland and Paterson Review[11] in New Zealand for example).

The Committee should therefore consider recommending that an independent review proposes a new draft legislative framework for the regulation of legal services in the UK. It could draw on prior reports, be narrowly focused on promoting economic welfare and draw heavily on the academic paper setting out the rationale for regulating legal services produced for the LSB by Profs Decker and Yarrow.[12]

Conclusion

Legal services regulation has delivered important reforms, but it is now constrained by outdated assumptions, and precautionary rule-makingand processes. In our view, consideration should be given in the short/medium term to:

Replacing the LSB’s oversight role with direct parliamentary accountability for frontline regulators, to sharpen oversight, improve performance, and better align regulation with public interest goals surrounding access and growth.
A statutory duty to promote growth, competition and innovation for frontline regulators, with clear reporting and metrics.
A time-limited, externally chaired ‘red tape challenge’ requiring regulators to justify rules and processes against evidence of consumer benefit and evaluate their impact on growth and access.
The Law Society of Scotland fast-tracking plans to implement ABS

In the longer term, consideration should be given to reducing the number of reserved activities to those which are needed to address risk to consumers and the public, and to commissioning a review into the consolidation of legal services regulation.

We would welcome the opportunity to provide further evidence or oral testimony.

16 January 2026

[1]https://stephenmayson.com/wp-content/uploads/2013/08/mayson-marley-2010-reserved-legal-activities-history-and-rationale.pdf

[2]https://yalelawjournal.org/feature/auto-clubs-and-the-lost-origins-of-the-access-to-justice-crisis

[3]https://www.legalservicesboard.org.uk/what_we_do/Research/publications/pdf/lsb_will_writing_report_final.pdf

[4]https://webarchive.nationalarchives.gov.uk/ukgwa/20060213210144/http://www.oft.gov.uk/NR/rdonlyres/B08439C8-C5F6-4946-8AFF-71C050D34F46/0/oft328.pdf

[5]https://www.legal-services-review.org.uk/content/report/foreword

[6]https://assets.publishing.service.gov.uk/media/5a7c000740f0b63f7572ab8b/6679.pdf

[7]https://publications.parliament.uk/pa/jt/jtlegal.htm

[8]https://www.gov.uk/government/publications/draft-legal-services-bill-explanatory-notes-and-regulatory-impact-assessment

[9]https://www.ucl.ac.uk/laws/publications/2018/sep/independent-review-legal-services-regulation

[10]https://www.gov.scot/binaries/content/documents/govscot/publications/factsheet/2018/11/review-of-legal-services-independent-report/documents/legal-services-regulation-report-of-independent-review/legal-services-regulation-report-of-independent-review/govscot%3Adocument/Review%2Bof%2Blegal%2Bservices%2Bregulation-independent%2Breport.pdf