Regulators under scrutiny following CMA legal market study

Author: Lizzie Meager | Published: 21 Dec 2016
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A study into competition in the UK legal market by the Competition and Markets Authority (CMA) has concluded that it’s now up to its regulators to implement changes.

The CMA has demanded better transparency about the type, quality and cost of services provided, claiming that competition for individual consumers and small businesses ‘is not working well’. But in a divergence from many of its other competition studies, the remedies it proposes are aimed more at the regulators than the firms themselves.

Shearman & Sterling competition partner James Webber said the study shows that just because there are a lot of players in a market, that doesn’t make it automatically competitive.

“But that does mean the remedies can’t be aimed at breaking up the bigger firms. It has to be more about helping consumers make informed choices, and often that means better and more usable information,” he said.

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The CMA has conducted several investigations of entire markets

“Really what they’re trying to do is prod the legal services regulators, who are not focused on competition, into action. It’s a very useful role for the CMA to play.”

But Clifford Chance partner Nelson Jung thinks the competition regulator’s role should end here. “In a sense I can’t help but think its resources would be better spent on its core activities: antitrust enforcement and merger control,” he said. “The report says nothing I disagree with, but it’s helpful for the CMA to now pass the baton.”

Unlike other competition regulators, the CMA has the ability to conduct broad market investigations at what is called phase 1, with the option to extend the study to phase 2 if deep-rooted problems are identified. Law firms have this time avoided phase 2, which the UK’s retail banking and energy markets have just been through.

KEY TAKEAWAYS

  • The CMA’s year-long study into the UK legal market has finally come to an end, concluding that competition is not working well for most consumers;
  • Its remedies are levied almost exclusively at the regulators – a different approach to its past market investigations;
  • This has led some to question the usefulness of the CMA’s finite resources being spent here as opposed to on its core activities: antitrust enforcement and merger control;
  • But no one disagrees with the findings – for anyone who has tried to hire a lawyer in their personal life, they will probably resonate.

But the regulator’s resources are finite, and broad market reviews use a substantial amount of those. And as a hard Brexit looks increasingly likely, its remit could be majorly expanded as the European Commission would no longer make merger control decisions on behalf of it.

“In a post-Brexit world where the CMA could have a significant amount more on its plate I’m not sure if these market investigations will be able to continue,” added Jung.

It notes in the report that higher regulatory costs since the 2007 Legal Services Act may be passing on higher costs to consumers – which may be why remedies are aimed at the regulators, not the firms themselves.

The CMA sets out a package of reforms starting with a formal requirement to display price, service, redress and regulatory status. It also wants independent feedback platforms and price comparison resources to be improved, to make them more akin to those available for insurance and utilities.

At the moment just 17% of law firms in the UK publish price information online, and only 22% of customers compare the services on offer before choosing a lawyer.


"What they're trying to do is prod the legal services regulators, who are not focused on competition, into action"


Competition tends to be more distorted in sectors required at vulnerable points in life, including funeral services and some areas of healthcare – and of course legal services.

But more than £11 billion ($13.7 billion) is spent per year in the areas covered by the study: commercial, employment and family law, conveyancing, wills and probate.

“This is all quite intuitive. If anyone has ever tried to hire a lawyer in their private life the findings will probably resonate,” said Webber. “As a consumer it’s hard to negotiate a price for something when you have no easy feel of its market value, and at a point in your life when your first thought probably isn’t to haggle.”

There around nine entities that oversee lawyers, including the Bar Council, the Solicitors’ Regulation Authority and the Legal Services Board. The CMA thinks the multiplicity of what it calls frontline regulators may result in the unnecessary duplication of fixed costs, regulatory inconsistencies and a race to the bottom.

The Centre for Policy Studies (CPS), which had earlier this year drawn attention to the lack of transparency in the sector, called the CMA’s proposed remedies ‘a victory for fairness and competition’.

But importantly the CPS’ critique in February was levied primarily at corporate City law firms, which were exempt from the CMA’s market review. It notes that ‘innovation may be more prevalent in larger law firms serving corporate clients’.

Speaking at an IFLR event in early November CMA enforcement head Michael Grenfell set out the regulators’ priorities for the coming year. It intends to review competition in digital marketplaces, online resales and pharmaceuticals, and to continue increasing its caseload as it has done in 2016.

See also

Exclusive: CMA reveals enforcement priorities
CMA caseload nearly doubles since November
Competition Law Forum 2016: key takeaways

 


 

 

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