How to redress the balance where the solicitor is dishonest

One of the principal arguments against ABSs is the claim that they would attract criminal and other elements to infiltrate law firms. A report earlier this month linked the alleged theft of more than 9 million of clients' funds from a firm in England with so-called deregulation of the marketplace. Putting aside the fact that the firm in question was a traditional solicitors' firm rather than any new form of ABS, this misses the point that effective regulation provides the most important safeguard against such fraud.

The Society's regulatory system involves a rigorous inspection of all firms, plus there is also the protection of the Scottish Solicitors' Guarantee Fund. The fund, a statutory consumer protection that has been described as one of the "jewels in the crown" of our system, was set up to protect those who have lost money because of the dishonesty of a solicitor or a member of the solicitor's staff should that solicitor not be able to redress the loss of the client. It is a fund of last resort and, indeed, most cases of loss as a result of theft result either in a claim on the firm's insurance policy or the firm repaying the loss to the client directly.

If, however, all of the partners were party to the theft (and insurance therefore becomes unavailable) and after their personal estates are fully utilised, any balance of the loss, less contributory negligence, will be referred to the fund. Claims for compensation are thoroughly investigated and a decision made on any grants payable, though even then awards are discretionary.

The fund is of particular benefit to smaller firms, both in terms of their funding model and to help protect their position in the marketplace, particularly if involved in buying and selling property.

The proposals currently contained in the Legal Services Bill would allow new business structures called licensed legal services providers (LPs) access to the fund. Some concerns have been expressed about these proposals and we have argued strongly there should be greater protections if LPs, which are not regulated by the Society, are permitted to contribute to and access the fund. For instance, we believe that all regulators should have the same rigorous inspection regime as the Society.Also, the Society should have the power to monitor the operation of corresponding accounts rules by other approved regulators where necessary.

As well as these proposed changes to the Bill, the Society promoted a number of other amendments, including a 1.25 million cap on individual claims to the Guarantee Fund. As we approach stage 3, the draft legislation now requires a rigorous regulatory regime for LPs and a similarly robust process for vetting approved regulators. The types of other regulated professionals involved in a firm providing legal services - and the code of conduct and ethics within which they operate - will be identified through the application process to become an LP. Likewise, external capital providers will require to be known and approved by the regulator - otherwise the LP will not be licensed. The Bill also sets out regulatory objectives that all approved regulators will have to meet. For our part, if the Society is accepted as an ABS regulator, we will apply the same regulatory rigour to any other legal services provider as we do with existing law firms.

During the ongoing reform process, the Society will continue to work to ensure that risks are managed, best practice enhanced and changes well managed in the interests of solicitors and their clients.

• Alistair Morris is Convenor of the Law Society of Scotland's Guarantee Fund Committee