The Legal Services Act 2007 (LSA) introduced a fundamental reform of legal services in England and Wales. Its provisions are being introduced in stages. There are a number of measures being introduced, or currently under consultation, as a result of the LSA which impact directly or indirectly on areas such as estate planning, will writing, trusts and the relationship of financial advisers with other professions (especially solicitors).

Key provisions of the LSA

The following are the LSA's key provisions:   

• The creation of the Legal Services Board (LSB) to supervise regulation of all legal services by the respective regulators, i.e. The Bar Council and Law Society.
• The creation of the Office for Legal Complaints (OLC) - a new ombudsman for all complaints about legal services.
• The creation of Alternative Business Structures (ABSs) allowing lawyers to form partnerships with non-lawyers and accept outside investment or operate under external ownership.

ABSs and the regulation of legal services

ABSs were initially branded as "Tesco law" as Tesco was the first supermarket chain to move into this market. Since then, of course, the market has been expanding in leaps and bounds, with the major entrants including the Co-op and, more recently, Saga and Direct Line.

The intention is that the legal services to be offered by these new providers will include legal advice on will writing, probate and estate administration, powers of attorney, conveyancing, employment and personal injury claims. Some of these services have hitherto been reserved to certain professionals but there is little coherence across the UK.

Probate is already a reserved activity in all of the UK, but will-writing is reserved only in Scotland, not in England and Wales. Estate administration is not reserved anywhere in the UK. There has been much discussion about which services, if any, should be reserved. All the professional societies operating in the field have collected much evidence that 'cowboy outfits' are operating in both will writing and estate administration. The Legal Services Consumer Panel conducted research into poor practice, especially in will writing. It concluded that incompetence and dishonesty is widespread in the field - though by no means restricted to the unregulated sector. A significant number of law firms provided unsatisfactory services too.

The LSB has proposed that both will-writing and estate administration 'and all ancillary legal activities' be reserved to qualified professionals, where a fee is charged. But these activities should not be reserved to the legal profession alone. Different types of provider will continue to be allowed to operate, though all will be regulated. While some bodies (e.g. those representing solicitors) have welcomed the proposals, or even asked for even more stringent regulation, others (Accountants) have opposed the idea of "reservation" of estate administration.

Last September the LSB launched the second stage of its consultation on reserving will writing, probate and estate administration to qualified professionals in England and Wales.
The consultation document set out three basic proposals:

• Will-writing, probate and estate administration activities should be reserved to qualified professionals working under the scrutiny of regulators, principally to protect consumers;
• The regulation must be proportionate, risk-based and flexible, so that many different types of provider can continue to operate;
• Existing regulators, including the Solicitors Regulation Authority, will have to re-apply to keep their current roles and to extend them to newly reserved activities if they wish.

The consultation is now closed and the LSB will be making its recommendations to the government to introduce the necessary legislative provisions. Despite the lengthy consultation process, there are still some areas of disagreement.

The Law Society particularly objects to the fact that different types of service provider will be regulated by different authorities. It suspects this will create a two-tier system in which solicitors are more tightly controlled than non-lawyer will writers. The Society claims it is concerned that this would confuse consumers and lower professional standards, although it is also concerned that solicitors would be at a commercial disadvantage in a two-tier system. It wants the protections currently provided by firms of solicitors to be extended to apply, by law, to all providers of reserved estate activities.

Trust business and Powers of Attorney

The setting-up and administration of trusts, and applications for a power of attorney (PoA) are not currently reserved services although the Law Society is arguing that they should be. It says there is 'significant anecdotal evidence' from solicitors that some unregulated providers, who prepare probate applications for the executors of an estate, then persuade the client to give them a PoA thus giving control of the estate to the provider. So far, though, the LSB has rejected the reservation of trust and PoA work.

There is a further worry that reservation of estate activities will lead to a culture of referrals, as has happened in other legal services areas such as personal injury claims. The trend is for unregulated providers to market the services to new clients, do the preliminary unreserved work themselves, and then sell on the clients to regulated providers for a referral fee. The new legislation will probably not prohibit referral fees, but the Law Society wants them to at least be limited, and with full transparency for the client.

Complaints about legal services - especially about professional trustees

One of the key measures introduced by the LSA was the creation of the Office for Legal Complaints (OLC) which set up a new ombudsman for all complaints about legal services. This could include complaints about the “conduct” of trustees.

The Legal Ombudsman is an independent, consumer-focused, ombudsman scheme set up to deal with complaints by consumers about legal services which here means services provided by lawyers, such as barristers, solicitors, legal executives, licensed conveyancers etc. The employees of firms providing such services are also covered.

As far as trustees are concerned, this will only be relevant where the trustees are professional trustees, such as solicitors. The Ombudsman will only deal with complaints about the “service” that the lawyer has provided. This would include the lawyer not doing what he has been instructed to do, unreasonable delays, providing inaccurate or incomplete information, failure to reply to phone calls, letters, failure to provide enough information about their charges etc. The Ombudsman does not deal with complaints about misconduct, for example where the lawyer breaks the rules of his own regulatory body, and in such cases complaints would still be made to the relevant regulatory body such as the Solicitors Regulation Authority.

The type of complaints that the Legal Ombudsman will consider is not exhaustive and in principle any complaint about the level of service could be referred to the Ombudsman. Where solicitors act as trustees, the level of service required from them would clearly include compliance with their statutory duties, especially with regard to investment of the trust funds. It is therefore possible that, where trustees fail to follow their statutory duties under the Trustee Act 2000, the Settlor and/or the Beneficiaries under a trust could well be able to make a complaint to the Legal Ombudsman. The only possible causes of action for Settlors or Beneficiaries who felt they were not receiving a sufficient level of service from the trustees prior to now would have been either to make complaints to the relevant regulatory body (if they could prove professional misconduct) or sue the trustees for breach of trust if they had suffered a loss as a result of any breach of trust. Under the new complaints procedure there is no need to prove misconduct or a loss resulting from a breach of trust.

The impact of the LSA on developing professional connections

Most successful IFAs, especially those advising trustees, have probably already forged professional connections with solicitors and accountants. In many cases such collaboration is based on 'two way referrals', i.e. with solicitors referring clients to the IFA for investment advice (the solicitors' code of conduct requires that they only make referrals to IFAs and not to other types of adviser) whilst IFAs would refer clients to a solicitor or accountant for core legal, tax and auditing services that the IFA cannot handle. Under the LSA, collaboration between IFAs and lawyers will be possible on a more formal footing. This is because the ABSs will enable lawyers to share management and control of the firm with non-lawyers in a new business entity.

Whilst the press and consumer bodies may be most concerned about services such as will writing and conveyancing, as far as IFAs are concerned the introduction of the new structures should allow for greater cooperation with solicitors acting as trustees.

The impact of the new rules on complaints about professional trustees

There are statutory requirements that trustees are subject to under the Trustee Act 2000 – most notably being the requirement to keep trustee investments under regular review under section 4(2) of the Trustee Act.

The requirement is to review investments "from time to time" which in practice means an annual review. All trustees are subject to the statutory duties under the Trustee Act 2000 but solicitors acting as trustees need to pay more attention to those duties, given the possibility of complaints to the Legal Ombudsman.

Given that trustees are also under a statutory duty to obtain and consider proper advice in connection with the trust investments under their control and that, under their code of conduct, currently the only person to whom a solicitor can refer in such circumstances is an IFA (although this is currently under review), there should only be one, positive, outcome for both parties in such a relationship.

The only time the requirement to obtain and consider proper advice on trust investments does not apply is if the trustees reasonably conclude that, in all the circumstances, it is unnecessary or inappropriate to do so. In practice, this will only be relevant if there is a very small fund and the cost of advice would outweigh the benefit of it, or if the trustees are suitably qualified. Given the level of investment knowledge required, as well as the regulatory requirements for fact finding and for justifying advice, it is extremely unlikely that any professional trustee would be prepared to take it upon himself to dispense with advice of an investment IFA. This will also include knowledge of the tax treatment of the relevant funds as well as the tax position of the individuals concerned - the Settlor, Trustees and Beneficiaries. It is essential to know all of this as well having knowledge about basic investment choice.

The forthcoming reduction in the trust income tax rates from next April should also be a trigger to trustee clients to review trust assets, suggesting a review of the trust investments in the light of those changes. Income tax rates payable by trustees are to reduce by 5%. Any change in taxation may impact on the overall trust returns - only a review of current investments will allow a decision to be made as to whether any reinvestment action should be taken. Doing nothing may lead to the trustees being liable for either a loss or a poor level of service.