Legal Support Strategy
for small businesses – key asks
The results of the fourth wave of the Legal Services Board’s (LSB) Small Business Legal Needs Survey, published in April 2022, make clear that small businesses continue to face challenges in accessing legal services and aren’t empowered to obtain legal services meeting their needs. The ability to deal with legal problems is key to running a business effectively, and the access to justice gap faced by small businesses has wider consequences for our economy and society, from stifling innovation and job creation to undermining the UK’s objective to be a global centre for dispute resolution.
A legal support strategy for small businesses equivalent to that developed by the Ministry of Justice for citizens was identified in the LSB’s ten-year sector-wide strategy as a key priority to lowering unmet legal need.
In addition to our research, we recently brought a group of senior stakeholders together, including the Small Business Commissioner (SBC) and the Federation of Small Businesses (FSB) to share insights on how we could make the best use of the findings and determine the key areas of focus that a legal support strategy should address.
Informed by the results of our survey and input from senior stakeholders, and in alignment with government priorities for small businesses, we have identified five key areas which a legal support strategy should seek to address. A collaborative approach which goes beyond regulators and has cross-governmental coordination will be important to successfully address each area. We see the Department for Business, Energy, and Industrial Strategy and the Ministry of Justice as the principal government departments taking the lead in developing a strategy, drawing in other government departments and agencies where relevant.
1. Early information and advice provision
2. Fostering innovation in the delivery of legal services and access to information
3. Making the market work better for small businesses
4. Access to better dispute resolution mechanisms
5. Capacity building through networking with larger businesses to resolve legal issues.
APRIL 2022
1. Early information and advice provision
Obtaining information and advice on legal issues early on helps small businesses address problems before they become complex and costly. In its Legal Support Action Plan focused on citizens, the Ministry of Justice recognised that early resolution brings wider benefits: to society (through wider societal costs from unresolved legal problems – e.g. negative mental and physical health outcomes) and government (through preventable demand for services).
While professional legal services are needed for more serious issues, our survey results show that around half of small businesses seek to resolve legal issues entirely on their own. However, our findings also show that many small businesses lack the necessary legal capability to deal with a problem themselves. For example, 20% of small businesses have low legal confidence and only 12% recognise the issues they encounter as being legal in nature. When small businesses handle legal issues alone, they consider the outcomes to be less fair.
While government and membership bodies already provide important support roles, the information small businesses need is spread thinly across a fragmented advice landscape. We see value in exploring a legal support and information service for small businesses on a national scale, akin to Citizens Advice for individuals.
One option is to expand the Small Business Commissioner’s role, building on its core remit to empower small businesses.
Beyond this central focal point, a more strategic approach to early legal support is needed. This should start by understanding the best forms of support and how small businesses can access these, mapping available services and signposting to specialist sources of support. Similar to its Legal Support Action plan for citizens, the Ministry of Justice can help to deliver a support strategy which equips small businesses with resources to help them understand legal issues early on.
What we’d like to see a legal support strategy address:
Equipping small businesses with information, resources and advice so that they can recognise legal issues at an early stage and get help.
The role of regulation
Most of the legal services regulators contribute to public legal education on a cross-sector basis via the Legal Choices platform, which provides independent, factual information about legal issues and legal advisers. While mainly targeting individuals, the website also includes practical advice and tips to help small businesses sort out their legal issues.
Around half either sought to resolve their legal issues entirely
on their own or took no action at all.
2. Fostering innovation in the delivery
of legal services and access to information
The LSB’s historical survey data shows that overall levels of innovation in the market have remained static, supporting a view that legal services have not undergone the transformative change experienced in other markets used by small businesses such as accountancy. However, there are some signs that the disruptive effects of the pandemic, growth of lawtech and a more competitive market are creating a more fertile climate for innovation. For example, the 2021 report on innovation and technology in legal services by Oxford University on behalf of the Solicitors Regulation Authority found that there has been a step change in the adoption of legal technology and innovation in part as a consequence of the Covid-19 pandemic.
The LSB’s joint research with LawtechUK on SMEs’ (small and medium enterprises) impressions and experiences of lawtech revealed that SMEs are looking for solutions that offer value for money, aren’t time consuming, and provide reassurance. The findings also revealed that small businesses see a role for lawtech solutions, particularly for their most common legal needs, such as finding a legal service provider in the marketplace and preparing legal documents.
Both government and regulators have important roles in fostering a climate of innovation. In its Legal Support Action Plan focused on citizens, the Ministry of Justice committed to make funding available for initiatives developed by the market to deliver services in new ways. Further, the plan has a focus on unlocking access to data and connecting people with the right organisations across government and the public sector. More broadly, the department has made a significant investment in promoting the lawtech agenda.
Navigating regulation
The Confederation of British Industry has argued that a fragmented approach to regulation across
government, can be more acutely challenging for smaller businesses who do not have the expertise, resilience, or resource to navigate a complex system. It points out that new regulations emerge frequently, for example on data protection, digital tax, trade, content liability – each delivered by different government departments and regulators who have varied approaches.
The Department for Business, Energy and Industrial Strategy (BEIS) and the Better Regulation Executive (BRE) are already making headway in this area by developing an Open Regulation Platform – a Digital Regulation Navigator tool which seeks to make it easier for SMEs to understand the regulatory environment. This will help to achieve greater transparency and accessibility of regulations for small businesses.
The role of regulation
The LSB’s sector-wide strategy, Reshaping legal services, sets two linked challenges to address in this area:
fostering innovation that designs services around consumer needs; and supporting responsible use of technology that commands public trust.
The LSB’s research indicates that legal businesses consider regulation to be less of a barrier to innovation and there is a more competitive environment than before. Even so, the strategy identifies a need to keep regulation under review so that it does not unnecessarily impede innovation and to proactively take measures that foster a climate of innovation.
The Lawtech Sandbox pilot administered by Tech Nation enables innovators to engage in a coordinated way with regulators in a single forum: the Regulatory Response Unit (RRU). The RRU is made up of 11 regulators and supports lawtech providers to navigate regulatory and governance issues by providing tailored guidance and assurance. It also enables regulators to collectively consider market issues and their own learning.
What we’d like to see a legal support strategy address:
The development of easy to understand, standardised tools that help small businesses to address their common legal needs.
Better alignment between traditional legal services and technology to provide small businesses accessible legal solutions which offer value for money.
Transparency and accessibility of regulations and regulators’
decision-making to help small businesses navigate a complex regulatory system.
Digital capability
A linked issue is that many small businesses face challenges with digital capability. In the Small Business Legal Needs Survey, 71% of businesses did not utilise the internet to run specific legal tasks. The government already recognises the role tech can play in boosting business growth, and has recently launched Help To Grow: Digital, a scheme to help SMEs adopt technologies to save time and cost. The scheme includes guidance and tools to identify appropriate digital technologies for businesses, a software comparison tool and a financial discount on approved software.
0 10 20 30 40 50 60 70 80
In the Small Business Legal Needs Survey, businesses were asked whether they utilise the internet to run specific legal tasks
No - 71%
Yes - 29%
3. Making the market work better for small businesses
There is a long-standing issue in legal services that too many consumers, including small businesses, do not engage effectively with the market. A lack of understanding of the sector and poor access to clear and comparable information about providers means that a significant proportion of consumers cannot easily access legal services suited to their needs.
In the Small Business Legal Needs Survey, 54% of small businesses surveyed did not shop around at all, with 8% stating that they wanted to but did not know how. Reasons for not shopping around include the time required and relevant information being hard to find. While an improved picture since the last wave of the research in 2017, there is still much scope for improvement with less shopping around by small businesses than individual consumers.
Promoting competition is one of the regulatory objectives in the Legal Services Act and this is an area where there is significant activity by legal services regulators.
Legal services are widely seen as unaffordable by small businesses. In the Small Business Legal Needs Survey, just 10% of respondents viewed lawyers as cost-effective and almost 1 in 5 small businesses who paid for legal services used personal savings to meet these costs. At a time when many small businesses are paying back Government-backed Covid-19 loans, and with rising inflation, financial challenges encountered because of unexpected legal costs can bring significant setbacks to already struggling businesses.
The role of regulation
The Competition and Market Authority’s (CMA) study on the legal services market in 2016 found that
competition in legal services for individual consumers and small businesses was not working well. Since then, legal services regulators have introduced new requirements on legal businesses to improve transparency on pricing, quality, regulation and redress.
Following a CMA progress review in 2020, the LSB has used its statutory powers to issue a statement of policy on empowering consumers. This sets expectations of legal regulators to support consumers to engage effectively with the legal services market. As well as making further progress on transparency by legal businesses, regulators are expected to facilitate the use of tools that could provide useful and comparable information to consumers, such as digital comparison tools, review websites or a centralised database of regulatory information.
10 %
of respondents viewed
lawyers as cost-effective,
when asked In the Small
Business Legal Needs Survey
There is anecdotal evidence that the legal expenses insurance market for small businesses is expanding, yet our survey data shows only 4% of businesses used insurance to fund their legal costs. This may suggest that small businesses are not using the insurance policies they own. The rationale for legal expenses insurance for small businesses is the same as it is for individuals: meeting the cost of legal advice which they otherwise couldn’t afford.
Small businesses need to have confidence that the insurance products they purchase will cover the types of legal issues they may encounter. Therefore, a positive development is that Defaqto has started to rate legal expenses insurance aimed at businesses for the first time.
Membership of professional bodies and legal services subscriptions can provide alternative financing for legal costs but remain limited for complex and unexpected legal issues. For example, the FSB’s legal hub provides support to members on compliance matters and access to templates for common legal issues encountered by businesses. As for extra ad hoc support, a solicitor can be instructed at additional cost. Legal subscription services provide advisory support but do not guarantee unexpected or emergency cover for complex legal issues.
What we’d like to see a legal support strategy address:
Helping small businesses engage with the market and shop around for a provider.
Exploring the potential for legal expenses insurance to play a bigger role in financing legal expenses.
The scope for alternative financing options for legal services for small businesses.
0 20 40 60 80 100
In the Small Business Legal Needs Survey, businesses were asked whether they used insurance to fund their legal costs
No - 96%
Yes - 4%
4. Access to better dispute resolution mechanisms
Access to dispute resolution mechanisms which focus on early intervention and alternatives to court would help small businesses avoid court proceedings which can be very costly, complex and time consuming.
Recognising this, the Ministry of Justice put out a call for evidence on dispute resolution in England and Wales in August 2021 to support the development of more effective dispute resolution mechanisms. In the consultation, it set out its ambition to mainstream non-adversarial methods of dispute resolution so that they can be embedded within the culture of the legal system and the consumers and businesses it serves.
The FSB’s Tied Up report assessed dispute resolution provision for small businesses and found that 70% of its members had experienced at least one commercial dispute between 2010-2015, and that the average value of a dispute was over £18,000. It also found that while there are dispute resolution mechanisms available to small businesses, access to them is limited, due to a lack of awareness of the scope of dispute resolution mechanisms, and an overburdened court system. The report identified that existing dispute resolution structures do not empower small businesses to pursue legal issues early, due to a lack of information, an imbalanced trading environment and an inaccessible dispute resolution system.
In June 2020, the FSB’s Late Again report found that out of 5,471 responses received from the small businesses surveyed, 62% experienced either an increase in late payments (44%) and/or had payments frozen completely (30%) as a result of the pandemic. In its January 2022 Small Business Index study of more than 1,200 business owners, the FSB found that close to one in three (30%) had seen late payment of invoices increase over the last three months. The Small Business Commissioner was set up by the government to help small businesses tackle late payments.
To address the issue of late payments, the Prompt Payment Code was issued by the government and requires companies that have signed up to it to pay 95% of invoices from small businesses within 30 days.
However, becoming a signatory remains voluntary and just over 3500 have signed
up out of an estimated 5.6 million businesses.
The financial challenges experienced because of commercial disputes have knock-on effects on the economy as investment, innovation and growth are impacted. Late payments have a negative impact on small business profits, innovation and hiring of new employees. The government’s Levelling Up agenda seeks to increase small businesses’ capacity for innovation, and address skills needs, however in order to maximise their capacity, there needs to be better dispute resolution mechanisms for small businesses.
Various options have been proposed to improve dispute resolution mechanisms for small businesses that should be considered further. For example, Lawtech UK plans to establish a tech-enabled online dispute resolution platform focussing on SMEs, and Christopher Hodges, Emeritus Professor of Justice Systems at Oxford University has proposed a dispute resolution system that combines best practice from local authorities, Better Business for All, the Ombudsman Services Pilot and the Small Business Commissioner1. In its Tied Up report, the FSB also recommended a three-tier dispute resolution system comprising information for small businesses on preventing disputes or early informal resolution processes if that isn’t possible, access to a diverse and trusted alternative dispute resolution (ADR) system, and an effective civil justice system providing cost-efficient and just outcomes. Under tier 1, the FSB recommended that the SBC take a central role in developing and making freely available guidance and support for small businesses to improve their awareness and understanding of commercial relationship management and dispute resolution strategies. To help achieve tier 2, the FSB recommended that the SBC provide guidance and undertake measures to help raise small business awareness about the availability and potential benefits of ADR.
What we’d like to see a legal support strategy address:
Creating a dispute resolution system which includes
early intervention options, alternative resolution mechanisms and a fairer, cheaper civil justice system
Improvement of the claims process for debt recovery.
5. Capacity building through networking with larger businesses to resolve legal issues
Our Small Business Legal Needs Survey identified that larger businesses (10-49) employees, had better confidence and legal capability than smaller ones (2-9 employees). Larger businesses were more likely to use professional help, to get better outcomes and to have higher legal capabilities compared to smaller firms. This ties in with a lack of legal confidence and capability.
The legal knowledge and capability that large businesses have can potentially benefit small businesses, particularly those which are new or just starting out. The government already recognises the value of peer mentoring in its Help To Grow: Management scheme, which helps 30,000 small and medium sized businesses maximise their growth potential and resilience through peer networking that enables sharing experiences with groups of other small business leaders. While this scheme will provide opportunities for sharing business knowledge, we’d like to see networking opportunities between small and medium sized businesses specifically for legal knowledge sharing, and we recognise that networking could help to deliver against all the other key asks. Small business membership organisations could work with large business membership organisations to facilitate networking opportunities between their members, for example the FSB could work with the Confederation of British Industry and the British Chambers of Commerce.
What we’d like to see a legal support strategy address:
The creation of networking opportunities between small
and medium sized businesses to enable legal knowledge sharing.
1. Christopher Hodges, Delivering Dispute Resolution: A Holistic Review of Models in England and Wales, 2019.
