Legal services market is failing us, say small businesses

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FSB: unregulated providers should be subject to Legal Ombudsman

This is a “considerable failure” of the legal services market to meet the needs of small businesses, a major lobbying group has told the Competition and Markets Authority (CMA).

The Federation of Small Business (FSB), which has 200,000 members, welcomed the CMA’s investigation into the market as “the first step along the road to a better commercial legal services sector fit-for-purpose for small businesses”.

In its response to the CMA’s call for evidence, the FSB said the barriers small businesses face in resolving legal problems were “numerous”, starting with difficulties in recognising whether the issue they faced was a one amenable to resolution through the law in the first place.

Even when they did, the FSB said the instinct of small businesses was to avoid using formal legal services and instead rely on informal advice, solve the problem themselves or use “existing trusted partners such as their accountants”.

Perceptions about the risks of taking a legal route “often turn small businesses away at this stage of the ‘consumer journey’”, it continued. These included “high and uncertain costs”, complexity and associated fear and time commitments, the risk of escalation, difficulty in identifying the right provider, and “the perceived lack of practicality and understanding of business by lawyers”.

And even when businesses still press ahead, they faced problems with “evaluating the quality and range of the legal services providers available and to identify and choose the very best options”.

The FSB said: “The sector is lacking in many of the elements of a mature market including the provision of clear, usable comparative data for consumers about value-for-money, specialisation etc.” Further, it could be difficult to identify the return on the purchase of a legal service.

The lobbying group said these demand-side barriers were “compounded by supply-side issues such as the lack of transparency about providers and products in the market and consequently high search and information costs”.

These included pricing. The FSB said it was “often not provided upfront”, and only after a consultation. “This approach prolongs the search process generating considerable sunk costs for a small business and increasing the search costs of looking around the market for alternatives.

“It is time-consuming for a business owner to have to go through numerous initial consultations just to compare prices.

“While there is evidence that fixed fees are becoming more common in part through the unbundling of services, the extent to which these have spread to commercial legal services is not clear.

“Small businesses need transparency in pricing and some sort of market standard or norm, which would enable small business owners to make better judgments about the cost of offerings and act as a basis on which to challenge egregious pricing policies…

“A second price issue is the relatively high cost of legal services compared to the value of the issue at stake.”

The FSB also backed arguments from the Legal Ombudsman (LeO), that it should be able to deal with complaints about unregulated firms.

The FSB said it was “not always clear” who was regulated and who was not, and the CMA “should consider the case” for giving micro-businesses access to LeO.

“It is better and more efficient if potential purchasers of legal services can avoid the poor-quality providers in the first place. This requires useable information on the quality of providers to be more readily available to potential buyers.

“Better decisions can be made by buyers if they have access to such information. For sellers the availability of such information mechanisms helps quality suppliers sustain their customer base and grow while weaker ones either have to improve or leave the sector.”

The FSB went on: “The solicitors’ profession has the most well-known and trusted brand. However, lack of effective competition and the practical difficulties of navigating the market have meant a lack of incentives for developing sophisticated complaint handling operations by many regulated legal services providers.”

LeO argued earlier this month in its latest draft strategy, that the government review of the Legal Services Act needed to give clients of unregulated providers access to its service so as to close off a “competitive advantage” enjoyed by those that are regulated.

Meanwhile, a report by Citizens Advice on the experience of litigants in person (LiPs) in the family courts has highlighted the problems people have understanding and trusting lawyers.

It said: “Unclear information about the services lawyers can provide makes it difficult for people to judge the quality of a professional or compare services. Without clear information, unrealistic expectations about what lawyers do causes people to feel frustrated with the service they ultimately receive. Consumer protections are not well enough known and people do not know how to complain. This means that one poor experience can put someone off the whole sector…

“They spend large sums of money on services they neither understand or trust. Distrust of lawyers is exacerbated by stories in the media about ‘fat-cat’ lawyers who overcharge and underdeliver. It is these frustrations with lawyers’ methods that can cause people to take matters into their own hands.” At the same time, the report found that many people subsequently realise the value of having a lawyer.

The report added that while unbundled services were not as good as full representation, “in many cases” it was better that no advice at all. “It also saves consumers money. Legal services are increasingly diversifying their offer by providing unbundled services. If this market is to continue to grow, consumers need to have information about how best to ‘pick and mix’ the legal advice and representation for which they pay.”

The report identified eight ways to improve the process of going to the family court alone, including the need for “more information to make the most of lawyers’ services”.