Consumers should benefit from the reforms, the inquiry said

The review called for an independent body to handle complaints, and said a new regulator should be set up to oversee the Law Society and Bar Council.

These two bodies could keep their own regulatory functions if they could prove competence to the new regulator.

The inquiry also said non-law firms should be able to own legal practices.

'Reduced costs'

The inquiry, headed by former deputy governor of the Bank of England, Sir David Clementi, recommended the establishment of a new regulator, the Legal Services Board.

This would oversee a new Office for Legal Complaints, which the inquiry said would cost around �23m a year to run - roughly �6m less than the current cost.

Sir David said: "I believe there is a strong case for independent handling of complaints against lawyers.

"The current regulatory system is focused on those who provide legal services - the new framework will put the interests of consumers at its centre."

But he warned that reform would be resisted by "lawyers who are comfortable with the system as it is".

'Consumer-friendly'

Sir David said the reforms would attract new investment, which in turn would bring down prices and make legal services more consumer-friendly.

He acknowledged concerns that allowing commercial companies to own legal practices might lead to criminal organisations trying to set up law firms, but said this could be avoided by strict "fit to own" tests.

The review into regulation of the legal profession was ordered by the Lord Chancellor, Lord Falconer, who described the current set-up as "outdated, inflexible, over-complex and insufficiently accountable or transparent".

Under the review's proposals, so-called "ambulance-chasing" claims firms - who have been accused of making huge profits through hidden costs - would not be brought under the new regulator.

Sir David said it was for ministers to decide how to regulate such companies.

Speaking at a press conference in central London, Lord Falconer said the government would publish a White Paper on the proposals "as soon as possible next year".

But Chairman of the Bar Council, Stephen Irwin QC, was critical of the recommendations.

He warned of the risks of allowing non-lawyers to own legal practices, and said private capital could jeopardise the independence of law firms.