Closed Consultation

Introduction

• 1.

  The third consultation on Moving towards a Fairer Fee Policy: transitional arrangements (no. 22) was part of a wider engagement strategy designed to seek the views of the profession, its representative bodies and other stakeholders on how the costs of regulation should be shared and what the best approach to establishing a fairer fee charging structure should be. It followed from the earlier consultations (no. 19 and 21), in which the SRA and the Law Society consulted on the broad principles that should apply to a new fee structure for 2010 (no. 19); and in which the SRA explained the rationale behind the proposed regulatory fees and Compensation Fund contributions as well as providing and consulting upon the various options for the renewal process, and outlining considerations relating to "special cases" such as new firms, mergers and splits (no. 21).

• 2.

  The third consultation paper consulted on whether there is a need for a transitional fee moderation process and, if such a process was perceived as necessary, then what the eligibility criteria would be fair both to those firms who may need to seek moderation and to all other firms who will, as a result, have to bear a slightly bigger share of the cost. In addition, the paper also included a revised proposal as to how the SRA intends to charge new firms.

• 3.

  The consultation was launched on 05 March 2010 and closed on 16 April 2010 . It was open for comments for six weeks. It posed 11 questions on the various proposals regarding the transitional arrangements.

• 4.

  This report presents analysis of the feedback received and provides the key points made by respondents. We received 12 responses to the questionnaire together with 2 general responses by email and post. Two Transitional Arrangement workshops were also conducted with 13 representatives from a spectrum of local law societies, private practices and sole practitioners. All of the responses have been taken into account and fully considered.

• 5.

  We would like to thank everyone who took the time to respond to this consultation. Comments and responses received have been extremely helpful and provided some very useful feedback on the proposed fee structure.

• 6.

  The responses were submitted by, or on behalf of, local law societies and representative bodies as well as individual solicitors from different sectors and law firms of varying sizes. In our analysis we have not given a particular weighting to the responses. It is difficult to weight a response from a representative body against a response from an individual, or an individual firm, but a reference, for example, to a view receiving "broad support" is not the result of a pure quantitative analysis counting each single response as having equal weight with all others.

  The list of respondents to the consultation (including workshops) is as follows:

  • Association of Council Secretaries & Solicitors (ACSeS)
  • Association of Women Solicitors (AWS)
  • Cambridgeshire Law Society (CLS)
  • Solicitors Sole Practitioners Group (SSPG)
  • The Law Society of England and Wales (TLS)
  • The Leicestershire Law Society (LLS)
  • 3x private practice firms (including a sole practitioner)
  • 5x private and employed solicitors
  • 13x attendees at the two Transitional Arrangement Workshops, representing local law societies, private practices and sole practitioners (anonymous)
• 7.

  In brief, we found broad agreement on:

  • a criteria-based fee moderation process to be introduced this year as a means of elevating some of the hardship caused by using historic turnover data in determining firm fees and facilitating a smooth transition to the new funding arrangement for certain firms
  • the three criteria of the criteria-based fee moderation process, as presented in the consultation paper, an application window for fee moderation between 1 July and 31 August, along with offering an exemption/special provision for firms with 50 per cent of their turnover derived from legal aid work, were perceived by respondents as reasonable proposals

  The main concerns raised by respondents were:

  • whether there is a need to add any further criterion (such as for example profit) to the suggested list of criteria for the proposed transitional fee moderation process
  • no clear agreement among respondents as to whether the proposed fee determination approach ('half way approach' between the most recent and the provided to the SRA in 2009 turnover figure) is the most appropriate and indeed fair one
  • whether the proposed charge to re-coup the operational costs of processing an application is reasonable
  • no clear agreement among respondents on the proposed additional regulatory firm fee of £1,000 per brand new firm charged to cover the additional cost of regulation

Responses to the questions

Transitional Arrangements

• 8.

  A majority of respondents agreed that there should be a criteria-based transitional fee moderation process in place as, in the words of one employed solicitor, "this seems more equitable than hitting smaller firms with a sudden cost increase in difficult economic times ".

  However, the ACSeS strongly expressed the view that if the proposed process of fee moderation is adopted then the burden should not be borne by the whole profession, but rather be applied to firms only:

  [W]e wish to make it clear in the strongest terms that we totally oppose any cost of these proposals falling on individuals. Any cost of moderated fees for firms or discounted fees for new firms must be part of the 60% split applicable to firms.

• 9.

  Even though a majority of respondents agreed with the criteria proposed for the fee moderation process in general as they "seem equitable in principle " [Employed Solicitor], some of them expressed certain concerns with regard to the thresholds and levels at which these should apply, for example:

  […] you need a fairer banding, I think [turnover from most recent closed annual accounts (i) should be below] £50,000 [Sole Practitioner]

  […] we believe [turnover from most recent closed annual accounts should be] increased to £600,000 [LLS]

  The total fees payable should increase by, say, 25-30 per cent from the 2009 figures [(ii)]; The decrease in turnover from 2009 should be, say 20-25 per cent [(iii)] [SSPG]

  Also TLS suggested that the SRA should have the flexibility to adapt the criteria if an unexpectedly high number of firms qualify for a reduction, and therefore:

  We suggest that the SRA includes a statement in any rules allowing them to revise the criteria if an unexpectedly high amount of firms qualify for a reduction. The scheme should not cost significantly more than the estimate provided in the consultation.

• 10.

  Respondents broadly agreed with the proposal of having an exemption/special provision for firms with 50 per cent of their turnover derived from legal aid work as both reasonable and equitable; and as one employed solicitor at a legal aid firm stated it is a welcomed approach as it is necessary to "realize the requirements of legal aid firms and to appreciate that not all firms deal with high paying corporate work".

  TLS took the opposite view and stated that: "[t] here should not be special provisions for any type of firm, including legal aid firms" , on the grounds that the possibility of assessing 'exceptional hardship' by the SRA should provide the appropriate level of flexibility.

• 11.

  There was an equal balance between those respondents who felt that there was no need for any further criterion to be added to the proposed, with one law firm stating that: " [c]riterion 15(iii) is in itself a sufficient indicator of detriment"; and those who felt that profit should be yet another indicator taken into account when determining firm's eligibility for a moderation of their fees.

• 12.

  There was also no consensus amongst respondents on the proposed fee-determination approach, with some agreeing to the suggested 'half way approach' between the most recent turnover figure and the one provided to the SRA in 2009, and one law firm strongly opposing the approach as unreasonable, unfair and undermining the very purpose of the proposed moderation process:

  If firms meet the 15(iii) criterion the fee should be based on their actual turnover not an artificially inflated figure. The reference to a "move towards paying the appropriate fee under the new systems" is puzzling. Surely the fee based on actual turnover for the last financial period prior to renewal is "the appropriate fee" and should not be increased in this arbitrary manner?

Impact across the profession

• 13.

  Respondents mainly agreed that the suggested application window between 1 July and 31 August was acceptable and reasonable, but SSPG made a further point:

  Provided that suitable arrangements could be made to provide estimated annual turnover figures for practices whose annual accounting year ends during this period and who thus may not be able to complete preparation of annual accounts during this period, this seems to be reasonable if the fees themselves have to be paid by 1 November

• 14.

  The majority of respondents felt, however, that it was not reasonable to charge firms/individuals a fee to determine whether they are eligible to apply for moderation. One solicitor further stated that:

  I am not sure how the extra costs will arise, however, if it is right to charge then the entire costs should be borne by those who apply and not subsidised in any way.

  The Leicestershire Law Society agreed that a fee should be payable for the service, but proposed an alternative way for collection:

  • i)

    If an application for fee moderation results in a successful outcome and reduced fee then no charge should be raised by the SRA

  • ii)

    If an application for fee moderation results in an unsuccessful outcome and there are no changes to the fee, then a charge should be raised by the SRA for an appropriate amount, for example £300

• 15.

  None of the respondents suggested any other circumstances where allowances should be considered.

• 16.

  Views were divided among respondents on the proposed additional fixed-fee of £1000 for new firms/ sole practitioners in their first years of practice, with the major concern being that whatever the fee is it "should be reasonable and not arbitrary" [Private Practice Solicitor], and that "this particular fee must reflect the costs involved. The profession should not be subsidising new entrants" [TLS].

  In majority of respondents felt that the proposed fee might be too high and could potentially discourage the setting up of new firms, especially sole practices, and therefore some suggested figures closer to £500. The SSPG expressed the view that:

  This figure would be a real discouragement to set up in sole practice, in partnership or otherwise. In the current economic climate, whilst there must be greater risks in setting up in practice in whatever form, the regulatory fees must not add to this .

  On the other hand, some others felt rather strongly that new firms should not be given any special treatment, with one solicitor stating: "I don't see the difference between them and others ", whilst the view was expressed on behalf of a firm that: " I do not think a brand new firm should be significantly advantaged in this respect compared to one which is, say, 1-3 years old ".

• 17.

  Respondents also urged that due consideration be given to the impact that the proposed transitional fee moderation process might have on particular sectors of the profession, especially small firms and sole practitioners who have a higher proportion of solicitors from BME backgrounds, and often serve disadvantaged clients.

  AWS made a general comment that the proposed flat fee for individuals with no reduction for part time working was potentially discriminatory.

  The Leicestershire Law Society proposed "that following the introduction of the criteria-based fee moderation process a review should be held after the first 12 months of implementation. [...] This would help identify how the fee structure was working across the profession and any firms or types of firms which may have been particularly adversely affected by the change".

Conclusions

• 18.

  This consultation discussed the options available for the transitional arrangements, the eligibility criteria that would need to be satisfied and the impact these provisions would have on the profession.

• 19.

  The comments and feedback provided in response to this consultation are of great value as they will inform the development of the new fee structure in general and the transitional fee moderation process in particular.

Appendix 1 (Response from the Law Society)

The Law Society's response to the SRA consultation on "Moving toward a fairer fee policy: Transitional arrangements".

Question 1:
Which approach do you prefer and why?

We agree with Option 2: criteria-based fee moderation process. When responding to the SRA's previous consultations on fairer fee issues the Law Society pointed out that a minority of firms may face a considerable increase in the first year of charging. This is fair if it consistently reflects a firms level of activity but if their recent turnover is significantly lower, then a fee based on historic turnover could present some of these firms with a disproportionate charge. This could place them in considerable financial difficulty. Transition arrangements should be in place which will minimise this potential occurrence.

Question 2:
Do you agree with the criteria proposed for the criteria-based fee moderation process in paragraph 15?

Yes. The criteria are clear, transparent and costed. The Society notes that when the SRA assessed the proposed criteria against data collected in 2009 that under 5% of the profession will be eligible for a moderation of their fee. This would result in an overall fee burden to the rest of the profession of below £160,000.

The transition scheme should be operated in a way that doesn't put the majority of the profession at risk of being charged unfair costs. On past figure the criteria suggested achieves this aim. But it is important to remember that the past cannot guarantee what will happen in the future. The SRA should have the flexibility to adapt the criteria if an unexpectedly high number of firms qualify for a reduction. We suggest that the SRA includes a statement in any rules allowing them to revise the criteria if an unexpectedly high amount of firms qualify for a reduction. The scheme should not cost significantly more than the estimate provided in the consultation.

Question 3:
What is your view with regard to having an exemption/special provision for firms with 50% of their turnover derived from legal aid work?

There should not be special provisions for any type of firm, including legal aid firms. The SRA have included the possibility of assessing "exceptional hardship". This will give them the appropriate level of flexibility.

Question 4:
Are there any other objectively measurable criteria that should be included, for example, to demonstrate financial hardship?

No. The criteria is straightforward and appropriate

Question 5:
What is your view with regard to the proposed fee determination approach?

The Law Society accepts the proposed fee determination approach.

Question 6:
Please comment on the impact of the proposal to run an application window between 1 July and 31 August.

We understand that as a regulator it is important for the SRA to have an application window. If any firm misses the application window due to circumstances out of their control then the SRA should consider the request.

Question 7:
What is your view on the proposed processing fee of £150?

We support the fee.

Question 8:
Are there any other circumstances where allowances should be considered, whether in addition to the currently proposed criteria or as an alternative?

No.

Question 9:
What is your view on settling a pro-rated regulatory firm fee for brand new firms/sole practitioners in their first year of practice of £1000?

In previous consultation responses we have stated that this particular fee must reflect the costs involved. The profession should not be subsidising new entrants.

Question 10:
Please indicate any impact of the proposals that you perceive on special interest groups that should be fed into the equality impact assessment.

It is likely that the transition arrangements will be most applicable to small firms. Traditionally these types of firms contain a higher proportion of solicitors from BME backgrounds. The SRA needs to ensure that the transition arrangements are appropriately communicated to those who are most likely to qualify.

Question 11:
Are there any further comments that you would like to make?

We have no further comments.