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Alternative business structures

22 July 2013

1. Introduction

1.1 Who should read this practice note?

This practice note should be read by all those who are interested in the opportunities offered by and the rules governing alternative business structures (ABS).

1.2 What's the issue?

The Legal Services Act 2007 allowS non-lawyers to own and invest in law firms.

This practice note provides details on ABSs and how to apply to become one.

2. What is an ABS?

An ABS is a firm where a non-lawyer:

  • is a manager of the firm, or
  • has an ownership-type interest in the firm

A firm may also be an ABS where another body:

  • is a manager of the firm, or
  • has an ownership-type interest in the firm

and at least 10 per cent of that body is controlled by non-lawyers.

A non-lawyer is a person who is not authorised under the Legal Services Act 2007 to carry out reserved legal activities.

 

3. Potential benefits and risks of becoming an ABS

3.1 Potential benefits

The benefits of becoming an ABS include:

1. equity can be raised from a broader base of potential partners, members or directors for example from:

  • other professionals
  • non-solicitor employees

2. Non-solicitor employees may be rewarded by partner, member or director status, with a direct stake in the firm, thus enabling a practice to both:

  • retain high-performing non-solicitor employees
  • attract outside legal talent

3. The ability to diversify the range of legal services provided by the practice either through:

  • becoming a 'one stop shop', or
  • consolidating a specialism in a particular area of the market.

4. Equity can be raised from outside the legal sector without the need for non-lawyer involvement at the management level. This has the potential to allow firms to attract new investment from different markets.

5. You may provide a wider range of services to clients through an ABS than you can through an ordinary law firm.

3.2 Potential risks

You should be aware of how the ABS structure may affect your firm. You should consider the following questions in your assessment:

  1. What impact will non-lawyer managers or owners have on the culture of the firm?
  2. How will the changes affect the firm's business plan and what benefits are they likely to achieve?
  3. How far will non-lawyers understand the culture and obligations of solicitors?
  4. Will becoming an ABS change the firm's perceived risk profile? The SRA does not believe that ABS are inherently more risky but changes to your firm may still alter the perceived risk. This may alter the way a firm is regulated by the SRA under its new system of risk based regulation and the ability of, and terms on which, a firm can obtain professional indemnity insurance.
  5. Do you want to provide services through an office overseas? Many foreign jurisdictions may not accept ABS.

3.2.1 Staff

Elevating suitable, existing, non-solicitor employees to partner, member or director status should be a fairly straight-forward process if there is consensus about this within the firm. Merging practices or bringing in a range of non-solicitor managers from diverse backgrounds carries an elevated degree of risk that will require a greater level of planning and risk assessment.

3.2.2 Outside investment

If you plan to accept outside investment then there will be more complex considerations particularly regarding how the firm will ensure compliance with principles and the new code of conduct. You should think about:

  1. the purpose of the investment
  2. the level of control that the owner will have over your business
  3. whether the owner could sell on their interest or withdraw their investment and the potential consequences to the firm of such an occurrence
  4. if the owner's control could interfere with the firm's ability to act in the best interests of clients and, if so, how this risk can be mitigated

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4. Services an ABS may provide

Under the proposed rules, ABS are not limited in the services that they can offer to the public. However, you will need to consider whether offering certain services may conflict with the duties owed to a solicitor's client. For instance, duties of different professionals within an ABS may conflict. One example of this is auditors, who are often under a duty to disclose information while lawyers are, on the whole, required to keep information provided by clients confidential.

You may not be able to accept instructions from some clients where aims of different parts of an ABS may conflict with a client's best interests. For instance, an ABS with an insurance arm would probably be unable to offer legal services to a client whose claim was against an organisation or individual insured by that ABS. This is because, it would be in the interest of part of the ABS (the insurance arm) for the client to lose the case and this creates a conflict which would normally preclude the ABS from acting for the client.

It will be important that an ABS that plans to offer additional services considers the potential conflicts that may arise and how they can be mitigated. There may be some cases where the risks cannot be mitigated and therefore a particular service might not be capable of being offered.

In general, the SRA do not plan to regulate non-legal services carried out within a multidisciplinary practice (MDP). However, it should be noted that the Code applies to individuals working within the MDP as well as the MDP itself and individuals carrying out non-legal activities may still be subject to the Code. However, if such services are not regulated and are not covered by the ABS 's indemnity insurance or the compensation fund, this must be made clear to the client.

5. How does a practice become an ABS?

5.1 Fundamental requirements

To be eligible to be an ABS, a body must:

1. At all times have at least one manager who must be an individual and who is:

  • a solicitor with a current practising certificate
  • a registered European lawyer (REL), or
  • a lawyer of England and Wales and who is authorised by an approved regulator other than the SRA, or
  • registered with the Bar Standards Board under regulation 17 of the European Communities (Lawyer's Practice) Regulations 2000 (SI 2000/1119)

2. meet the requirements for an ABS set out in section 2 of this practice note

3. have a practising address in England or Wales

5.2 Existing practices

Existing practices that wish to become ABS will need to apply to the SRA under the new authorisation rules.

5.3 New firms

New firms will need to apply for approval to become licensed as an ABS under the new authorisation rules.

5.4 Approval of a body under the Authorisation Rules

5.4.1 Application

A firm wishing to become an ABS will need to:

The application must set out which reserved activities the applicant wishes to be licensed to carry out.

If any of the information provided changes, the SRA should be informed. It should be noted that failure to do so or providing inaccurate or misleading information can lead to an application being refused or a licence being withdrawn.

5.4.2 Decision to grant a licence

The SRA will only grant a licence where it is satisfied, among other things, that:

  • the firm is an ABS
  • the firm will comply with the requirements relating to professional indemnity insurance and the compensation fund
  • compliance officers have been appointed (see further information on compliance officers in section 5.5.1.3)
  • all authorised role holders are approved, and
  • that one of the lawyer managers is qualified to supervise

The SRA may refuse a licence application if:

  • it is not satisfied that the managers and owners are suitable as a group to operate the ABS
  • it is not satisfied that the management and governance arrangements are adequate
  • it is not satisfied that the ABS will comply with the SRA 's requirements, including any conditions imposed on a licence
  • the applicant has provided inaccurate or misleading information, or failed to inform the SRA of a change to the information provided, or
  • it believes it is against the public interest or inconsistent with the regulatory objectives set out in the Legal Services Act 2007  

It is the responsibility of the applicant to show that they meet the SRA's requirements.

5.4.3 Granting a licence

All licences will be granted subject to the general conditions set out in the authorisation rules. These relate to various aspects of the running of an ABS and include:

  • compliance with the SRA's requirements
  • payment of fees
  • the role of compliance officers, and
  • provision of information to the SRA

Licences may also be granted subject to further conditions which may:

  • limit the activities of the ABS, or a particular manager, or employee, in order to protect clients or the public interest
  • prevent the ABS from entering into particular business agreements or adopting particular business practices in order to protect clients or the public interest
  • facilitate the SRA's monitoring of a business, in order to help the SRA ensure regulatory compliance, or
  • make the ABS take specific actions to ensure that they provide legal services in a suitable manner.

The SRA will normally be required to make any licensing decision within six months of application though it can extend this period to nine months. If it refuses an application it must set out its reasons for refusal.

5.4.4 Appealing against decisions

The SRA can decide to:

  • grant a licence
  • grant a licence subject to conditions
  • refuse an application

The licences have no specific end date so they do not have to be renewed.

The applicant can appeal against the SRA's decision to refuse an application and to grant a licence subject to conditions. In the first instance, the appeal must be to the SRA within 28 days of the decision. A further appeal can be made to the appellate body. This body has yet to be appointed.

5.4.5 Effects of refusal

The SRA may, if it considers it in the public interest to do so, publish and notify any persons of a decision including a decision to refuse a licence application. These persons include but are not limited to:

  • an authorised person of which the body or individual concerned is a past, current or prospective manager, employee or interest holder
  • other approved regulators
  • other professional regulators
  • the Legal Ombudsman

It is not clear how the SRA intends to use this power. However, a publication policy is under development.

5.5 Approval of authorised role holders under the Authorisation Rules

Under the Authorisation Rules, those undertaking certain roles within an ABS will require approval from the SRA. Approval will need to be sought in the first instance as part of the application to become an ABS. As the ABS grows and changes it is likely role holders will change and new approvals will need to be sought.

5.5.1 Authorised role holders

Authorised role holders are managers, owners and compliance officers.

5.5.1.1 Managers

Managers are defined as:

  • partners of a general partnership
  • members of a limited liability partnership
  • directors of a company, or
  • in relation to any other body, a member of its governing body

A manager can be an individual or a corporate body.

5.5.1.2 Owners

The term 'owner' is not specifically defined in the Legal Services Act 2007, the act makes references to restricted interests, therefore 'owner' has been defined by the SRA . It considers an owner to be any person who holds a material interest in a body or a partner where the body in question is a partnership. A 'material interest' is defined in the Legal Services Act 2007. In essence it is an interest of ten per cent in a corporate body or an interest that allows a significant influence over a corporate body. Those with a lesser stake will not be considered 'owners' by the SRA and will not need to be authorised. An owner can be an individual or a corporate body.

5.5.1.3 Compliance officers

A compliance officer is either a compliance officer for legal practice (COLP) or a compliance officer for finance and administration (COFA). Compliance officers will need to be individuals who are employees or managers of the ABS. A COLP must also be a lawyer of England or Wales, or a REL, or a person who is registered with the Bar Standard Board under Regulation 17 of the European Communities (Lawyer's Practice) Regulations 2000. Both a COLP and a COFA will need to be in a position of sufficient seniority and responsibility to fulfil their role.

The roles of COLPs and COFAs are set out in the authorisation rules. COLPs will need to take all reasonable steps to ensure the ABS complies with the SRA's regulatory arrangements (except those relating to accounts rules) and any statutory obligations of the body. They will also need to report any failure to comply to the SRA.

The COFA will need to take all reasonable steps to ensure that the body complies with the SRA Accounts Rules and report to the SRA any failure to comply.

The SRA has clarified that the ultimate responsibility for compliance still remains with the governing body of a firm. However, it will expect compliance officers to ensure firms put in place systems and controls for compliance and to oversee those controls.

Compliance officers will need to have sight of the firm's application to become an ABS and will need to confirm to the SRA that the information provided in the application is accurate

5.5.1.4 Approval process for authorised role holders

The SRA must normally approve all authorised role holders. However, a practising solicitor with no conditions on their practising certificate or authorised body is deemed to be approved for the roles of owner or manager (but not for the roles of COLP or COFA) provided the appropriate notification requirements put in place by the SRA are met.

When approving persons for an authorised role, the SRA will consider:

  • the criteria set out in the SRA suitability test, and
  • any other relevant information

5.5.2 The suitability test

All managers, owners and compliance officers will need to meet the suitability requirements that a solicitor would need to meet on entry to the profession. In assessing a person's suitability the SRA will consider:

  • any criminal offences
  • any behaviour not compatible with that expected of a prospective solicitor eg behaviour which is dishonest or violent in nature
  • regulatory history
  • financial behaviour

There are also additional requirements for authorised role holders. In these cases, when assessing a person's suitability the SRA will also consider:

  • corporate or professional history
  • a person's affiliates

The SRA will normally refuse an application where it has evidence that reflects on the honesty and integrity of a person who an authorised role holder is affiliated with and who the SRA believe would influence how the role holder would carry out their role.

5.5.3 Application process

The ABS or potential ABS will need to apply on behalf of the candidate who wishes to fulfil an authorised role. The obligation falls on the applicant to satisfy the SRA that the candidate is suitable to fulfil the role. The candidate will need to declare that all the information provided is accurate.

The applicant must cooperate with the SRA with regard to supplying information, answering queries and securing the cooperation of the candidate for the role.

5.5.4 Retention of information

The Authorisation Rules require that practices retain information and documentation pertaining to the application for the approval of an authorised role holder for not less than six years after the person ceases to carry out the authorised role.

5.5.5 Appealing against decisions

The SRA will notify both the applicant and candidate of their decision. The SRA can decide to:

  • grant approval
  • grant approval subject to conditions
  • refuse approval

If the SRA intends to refuse to approve an owner or grant conditional approval then they are normally obliged to warn the applicant and the candidate, to allow them the opportunity to make representations within a prescribed period. If the application is made once a body has been granted authorisation, this warning may be dispensed with. Any person can also appeal against the decision to the SRA. The appeal will normally need to be made within 28 days of the notification of the SRA's decision and reasons. Any person may make a further appeal against the decision to the appellate body.

The applicant or the candidate can also appeal against the SRA's decision to refuse to approve a manager or compliance officer or to grant conditional approval. In the first instance, the appeal must be to the SRA within 28 days of the decision. A further appeal can be made to the appellate body.

5.5.6 Effect of refusal

It should be noted that where the SRA refuses approval for a solicitor to fulfil an authorised role then regulation 3 of the Practising Regulations will be triggered and the solicitor will need to submit their next application for a practising certificate early (ie at least six weeks before the replacement or renewal date).

The SRA may also, if it considers it in the public interest to do so, publish and notify any persons of a decision, including a decision to refuse to approve a potential authorised role holder. These persons include but are not limited to:

  • an authorised individual or body of which the person concerned is a past, current or prospective manager, employee or interest holder
  • other approved regulators
  • other professional regulators
  • the Legal Ombudsman

It is not clear to what extent the SRA plans to use this power. However, a publication policy is under development.

6. Becoming recognised as an ABS

The SRA website will provide full information on the application process.

7. Costs and renewal

For details of current fees for see the SRA website.

8. Further considerations

8.1 Disciplinary powers

The SRA will have new enforcement powers against ABS. These include the power to impose significant fines and to disqualify Heads of Legal Practice (HOLPs), Heads of Finance Administration (HOFAs), managers and employees of ABS. The appeal provisions will also differ from those applicable to non-ABS.

8.2 International operations

Practices with offices in overseas jurisdictions should consider the potential impact that ABS status may have on non-UK operations.

Some jurisdictions do not permit non-lawyer owners or managers of the type permitted by the ABS rules. Some jurisdictions' local regulations may also not recognise as lawyers some people who are not solicitors and barristers, even though they may be considered as such under the Legal Services Act 2007.

You should therefore make a careful analysis of any local regulations which may affect your firm. The Law Society's International Department can offer background information on many foreign jurisdictions. See the International Practice section of the department website or contact the department directly on +44 (0)20 7242 1222.

9. Further information

9.1 Professional conduct

The following parts of the SRA Handbook are relevant:

  • Practice Framework Rules - Rule 14
  • Authorisation Rules

9.2 Statutory provisions

9.3 Status of this note

Practice notes are issued by the Law Society for the use and benefit of its members. They represent the Law Society's view of good practice in a particular area. They are not intended to be the only standard of good practice that solicitors can follow. You are not required to follow them, but doing so will make it easier to account to oversight bodies for your actions.

Practice notes are not legal advice, nor do they necessarily provide a defence to complaints of misconduct or of inadequate professional service. While care has been taken to ensure that they are accurate, up to date and useful, the Law Society will not accept any legal liability in relation to them.

For queries or comments on this practice note contact the Law Society's Practice Advice Service.

9.4 Terminology

Must - a specific requirement in the Solicitor's Code of Conduct or legislation. You must comply, unless there are specific exemptions or defences provided for in the code of conduct or relevant legislation.

Should - good practice for most situations in the Law Society's view. If you do not follow this, you must be able to justify to oversight bodies why this is appropriate, either for your practice, or in the particular retainer.

May - a non-exhaustive list of options for meeting your obligations. Which option you choose is determined by the risk profile of the individual practice, client or retainer. You must be able to justify why this was an appropriate option to oversight bodies.

A glossary of other terms used throughout this practice note is available on the SRA website

9. 5 More information and products

9.5.1 Law Society practice notes

9.5.2 SRA guidance

See the SRA website.

9.5.3 Law Society International department

Information on foreign jurisdictions is available via the department website, or you can contact the department directly on +44 (0)20 7242 1222.

9.5.4 Law Society Practice Advice Service

Support for solicitors on a wide range of areas of practice. Practice advice can be contacted on 020 7320 5797 from 9:00 to 17:00 on weekdays

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