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The body responsible for regulating the legal sector in England and Wales has “lost its way”, falling short in its oversight of front-line watchdogs according to an independent review.
The report into the Legal Services Board, published on Monday, comes after a number of high-profile law firm collapses in recent years have seen tens of millions of pounds of client money go missing.
The LSB is responsible for overseeing watchdogs including the Solicitors Regulation Authority and the Bar Standards Board, which together regulate more than 90 per cent of legal professionals.
Among the report’s 10 recommendations is a change to the LSB’s strategy to direct the majority of its resources to consumer protection, better taking into account the impact that technology and AI will have in the coming years.
The agency should also separate its enforcement function from its policy and sector engagement work to improve its relationships with the regulators it oversees, the report — commissioned by the Ministry of Justice — said.
“This review finds that the LSB has lost its way in recent years. It has lacked strategic clarity and has struggled to have the impact intended by parliament,” said Richard Lloyd, the author of the report and a former board member of the UK Financial Conduct Authority.
He added: “As a result, the interests of consumers have not been as well protected by the system as they might have been.”
Lloyd also recommended that the government should carry out its own review of legal services regulation by 2029 to decide which activities should sit within the purview of regulators, the report said.
The LSB was set up in 2009 to oversee the various watchdogs after the Legal Services Act 2007 was introduced to try to modernise England’s legal sector.
The act allowed law firms to take outside investment for the first time so that lawyers could go into business with other service providers such as accountants as so-called “alternative business structures” [ABSs]. The aim was to increase competition and improve access to justice.
However, despite a predicted wave of listings and ABSs, take-up has been lower than expected.
The LSB has become more prominent in recent years after a number of scandals including the collapses of Axiom Ince, as well as Sheffield firms SSB Group and PM Law, which together involved the alleged misuse of at least £100mn in client money.
The UK Serious Fraud Office is prosecuting a number of individuals in relation to Axiom Ince, with a trial scheduled for 2027. The SRA disqualified some former staff of SSB from working in law firms.
The LSB also took enforcement action against the SRA over its failings in relation to Axiom Ince and SSB, but the scandals have raised questions about the LSB’s role in preventing such failures.
Monisha Shah, who became LSB chair in April, told the FT last month that while amending legislation is not the regulator’s job, updating the Legal Services Act is worth “serious consideration” because of how technology is changing the sector.
“The landscape has changed dramatically and actually if you look at the landscape you’re not just talking alternative business structures . . . you’re also talking [about] the extraordinary difference that AI and tech is making,” said Shah. “Those are opportunities [and] those are threats as well.”
In a statement following the publication of the review on Monday, Shah said the LSB accepted “our responsibility in the failure of the system to protect the interests of consumers” and that the report “gives us a clear, independent basis for a major reset”.
The LSB’s budget last year was £5.7mn.
