Working paper 05/135 - Abstract

The Clementi Report: Potential Risks of External Ownership and Regulatory Responses (PDF, file 131 KB) (PDF, 130kB)

Paul Grout

This report has been commissioned by the Department of Constitutional Affairs to consider the potential risks arising from the introduction of outside ownership and to suggest any regulatory proposals to deal with these. The conclusions are:
- Regulation should focus on the underlying incentive structure not the business form. The current proposals do not this.
- ‘Small’ LDPs and MDPs: The limitations on management composition and fit and proper tests are the appropriate focus of regulation. Those currently proposed in the Clementi Report appear appropriate.
- ‘Large’ LDPs and MDPs: (i) Management restrictions such as those currently proposed in the Clementi Report may not be appropriate. They do not resolve potential regulatory problems since the incentive benefits and problems are common to lawyer and non-lawyer managers and owners. Indeed, they may provide a false sense of security. However, some alternative forms of management regulation may be helpful and fit and proper tests are necessary. (ii) Financial oversight and ‘regulation’ rather than management controls will be the most important mechanism of ‘regulatory control’ for large LDPs and MDPs, particularly where equity is highly concentrated. This will be a new departure for regulation of the legal profession. (iii) Management incentive schemes will need oversight and it may be deemed appropriate to bar particularly high-powered schemes.
- It is important to consider easing the constraints on the market. For example, extending the deadline on the 'Accreditation and Exemption routes' beyond 31 October 2005 to increase the number of solicitor advocates.

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