A thread that appears to run through many case studies of successful legal firms is how the business leaders made big bets at critical moments. Underpinning such strategic bets seems to be the capability to ask the right questions. The ability to ask the right questions is a likely reason why legal firms with broadly similar characteristics and facing similar challenges adopt different approaches. For example two firms facing the long term trend of reduction of publicly funded legal services may frame different questions to inform their strategic response.

Firm A’s strategic decision arises from the following question:

‘How can we continue to make sufficient profit from our publicly funded legal services?’

Whilst Firm B may determine their strategic response based on the following question:

‘How can we increase our profit margins by 50% in those legal services that are currently publicly funded?’

Whether the strategic response of Firm A would be more effective than Firm B’s is dependent on a number of variables including the quality of strategic execution but it is likely that both firms would take different actions primarily shaped by the questions framed during the strategic planning process.

So business leaders in legal firms are constantly faced with a laundry list of challenging (sometimes with competing demands) questions to consider in order to ensure the efficient and effective achievement of relevant strategic objectives. This is why it would be surprising if the question ‘Do we need to go regulator shopping?’ floats to the top of their agenda.

Although it appears surprising that ‘regulator shopping’ is a possible consideration for business leaders in the legal services market. Rest assured that this is not an illusion and the reality is that regulator shopping is permissible arising from the Legal Services Act 2007 even though in hindsight it now appears to be an unintended consequence. Despite the fact that the choice of legal services where regulatory shopping is applicable has been fairly limited, the increasing number of approved regulators authorised by the Legal Services Board (LSB) to regulate more legal services is broadening the choice for regulated entities.

Race to the bottom

It is fair to say that the concept of regulator shopping provokes mixed reactions including whether it is appropriate for the legal services market. Such views in part resonate with some of the insights from the analysis (by a range of commentators) of regulatory failures in the USA leading to the global financial crisis in 2008. The cocktail of regulator shopping mixed with an unrestrained appetite for ‘bad profits’ by some regulated entities resulted in a bitter experience for the public at large.

It is therefore understandable why there are valid concerns about a possible ‘race to the bottom’ with regard to regulator shopping. However, fortunately the LSB plays a key role to ensure that such a race does not take place. Furthermore, the LSB ensures that the lowest common denominator with regard to setting and enforcement of standards is set at a level to protect the best interests of consumers in the legal services market.

Key Drivers

Given the opportunity for legal firms to choose their regulator in certain circumstances, it seems appropriate that business leaders particularly in light of their obligation to their key stakeholders should at the very least properly evaluate the suitability of this opportunity for their respective firms even if it results in a conclusion that it is not appropriate. Some of the possible reasons why legal firms may consider choosing a different regulator are as follows:

  • Perception of over regulation by existing regulator;
  • Heavy-handed regulatory approach of existing regulator;
  • High cost of regulation particularly with regard to compliance costs;
  •  Insufficient and unreliable guidance from existing regulator.

Some of the likely objectives that legal firms may seek to achieve by choosing a different regulator are as follows:

  • To benefit from a less stringent regulatory approach by alternative regulators;
  • To receive tailored and timely guidance and support to achieve compliance underpinned by an alternative regulator’s deeper understanding of specific market segments;
  • To benefit from a more flexible regulatory approach by alternative regulators particularly to enable a more conducive environment for experimentation and innovation;
  • To reduce compliance costs;
  • To benefit from a more proportionate regulatory approach by alternative regulators;
  • To exercise greater influence on the regulatory approach of an alternative regulator.

Risks of switching

A decision to switch regulator would normally include an assessment of the strategic risks which would be relative to each firm’s circumstances. However, there are two risks which firms should ideally not overlook.

1.     Reputation Risk
The reputational risk of switching regulator should be carefully assessed particularly where the perceived reputation of the effectiveness of the regulator is a key driver for selection of legal firms by customers in certain market segments in legal services.
Firms that primarily provide services to well-informed buyers of legal services need to ensure that the decision to switch regulator is broadly acceptable to those customers and that they can demonstrate how the decision is in alignment with the continued promotion of their best interests.

2.    Growth Risk
The decision to switch regulator needs to ensure that it does not compromise the future growth ambitions of a firm. If a firm currently operates in niche market segments where the choice of regulator is applicable and intends to continue to do so in the long term, then the probability and impact of this risk is relatively very low. However, if a firm has ambitions to expand into new markets including more diverse and novel practice areas and to serve global customers, then the decision to switch may present a major risk to the firm.

Final Checkpoint

The decision to switch regulator is a massive decision and should not be taken lightly. Undoubtedly in some cases, it would be appropriate to proceed with the decision after all the necessary due diligence and cost/benefit analysis. However, one final consideration which such a firm needs to genuinely and honestly address is as follows:

‘Are we satisfied that the intention to choose a different regulator is because the requirements, approach and expectations of the existing regulator are unreasonable for the size, scope, profile and impact of our firm and that this is unlikely to change in the foreseeable future?’

This question aims to sense check the proposed decision to ensure a firm is not switching regulators for the wrong reasons.

The evaluation of regulator shopping may not result in a decision to switch regulators but it may lead to a better appreciation of the strengths of the existing regulator and/or a renewed commitment to optimise the relationship with that regulator.