Contents
1. Introduction
1.1 Who should read this practice note?
This practice note should be read by all solicitors, in conjunction with the practice note on Legal Disciplinary Practices.
1.2 What is the issue?
From 31 March 2009 , provisions in the Legal Services Act 2007 (the Act) and amendments to the Solicitors Code of Conduct (the code) to implement Legal Disciplinary Partnerships (LDPs) will come into force. This legislation will also implement firm based regulation, requiring all legal practices to be regulated as firms, regardless of size.
Although the actual impact on many individuals may not be immediately noticeable, all managers and employees of a recognised entity should be aware of the amended regulatory framework. This practice note provides an overview of the changes and the requirements imposed upon firms.
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2. Firm-based regulation
Under the Act, all legal practices must be authorised in order to provide reserved legal work for the public. To meet this requirement, the SRA has amended the code and other associated rules and regulations so that all legal practices can be properly authorised. To this end:
- all firms must be authorised as 'recognised bodies' from 31 March 2009
- all sole practitioners must be authorised as 'recognised sole practitioners' from 0 1 July 2009
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2.1 Role of the SRA
The move to firm-based regulation is intended to enable the SRA to be more proportionate and targeted in its oversight of the profession. The SRA will now:
control the setting up of new firms and sole practices,
- impose conditions on firms where necessary, and
- apply its rules to non-solicitor managers and employees.
For example, should there be a breach of the code, the SRA can determine whether the breach arose because of:
- a failing of the individual manager or employee
- a systemic failure of the practice, or
- a combination of both.
The SRA will then have the power to take action against the responsible party or parties. A decision penalising the firm will not necessarily have adverse consequences against employees, or individual managers. Practices should therefore ensure that:
- all employees receive an appropriate level of training and guidance in relation to meeting their responsibilities under the code;
- the practice has the necessary systems in place to minimise the risk associated with breaching the rules and requirements of the code.
Note that the term 'manager' refers to anyone who is a:
- partner in a general partnership
- member of a limited liability partnership, or
- director of a limited company (whether or not also a shareholder).
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2.2 Impact on individuals solicitors
The move to firm-based regulation does not reduce or remove the requirements placed on individual solicitors. Solicitors must still be authorised by the SRA to provide reserved legal work to the public.
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2.3 Impact on non-solicitor managers and employees
In addition, from the 31 March 2009 the SRA and the Solicitors Disciplinary Tribunal gain the power to impose sanctions on non-solicitor managers and employees of regulated firms.
Employees of legal practices must comply with the responsibility to report serious misconduct and serious financial difficulty to the SRA - Rule 20.06. In addition, managers and employees have a responsibility to inform the SRA if they have doubts about the integrity of any fellow employees or managers of their practice.
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2.4 Impact on In-House lawyers
Firm based regulation is unlikely to impact on in-house lawyers who primarily provide legal services to their employers.
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2.5 Ownership and management structures
The Act permits legal practices to adopt a wider variety of ownership and management structures. For example, lawyers other than solicitors and non-lawyers will be permitted to become managers of SRA-authorised legal practices through LDP arrangements. Furthermore, once regulations permitting Alternative Business Structures (ABSs) are introduced, legal practices will be permitted both to:
- receive equity from external investors and
- potentially engage in providing a broader range of both legal and non-legal services.
ABSs are unlikely to be in place before 2012.
For further information see the Law Society practice note on Legal Disciplinary Practices.
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3. Requirements for recognised status
All existing partnerships and sole practitioners will become recognised bodies automatically (see section 4).
However, new firms or those who are considering changes to their structure will need to be aware of the specific requirements to become recognised bodies.
3.1 Recognised bodies - Partnerships
From 31 March 2009, all partnerships must be recognised bodies. To be authorised as a 'recognised body' your practice must satisfy three 'fundamental requirements':
- the 'services requirement': that the body can only provide services such as are provided by solicitors and/or foreign lawyers - Rule 14.01(1)
- the 'relevant lawyer requirement': that at least one manager must be a solicitor or a registered European lawyer - Rule 14.01(2)
- the 'management and control requirement' - Rule 14.01(3)
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3.1.1 Management and control requirement
To date, the SRA has not provided detailed guidance as to how voting rights will be determined. However, it is in the best interests of the practice for voting arrangements to be both clearly defined and transparent. It is likely that the SRA and Solicitors Disciplinary Tribunal (SDT) will take a dim view of complex voting arrangements employed to provide non-lawyer managers with, effectively, a greater share in the ownership of the practice than is permitted by the Rules.
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3.1.2 Previously recognised bodies
Bodies corporate have been authorised as recognised bodies prior to 31 March 2009 . Such practices must ensure that their ownership and management structure is consistent with the requirements that will take force from this date.
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3.2 Sole practitioners
All sole practitioners must have their practising certificate endorsed with a 'sole solicitor endorsement' in order to continue practising after 01 July 2009, see Rule 20.03 . This will occur automatically for existing sole practitioners.
As a recognised sole practitioner you must also meet the following specific requirements of Rule 20:
- Solicitors: Rule 20.01(6)(a)
- RELs: Rule 20.01(6)(b)
You should also take into consideration both:
- the additional duties and responsibility that you have for all your employees
- the additional duties and responsibilities that firm based regulation places on your employees
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3.2.1 Exemptions
There are some grounds upon which you may be exempt from the obligation to become a recognised sole practitioner. These exemptions are specified in Rule 20.03(2).
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4. Recognition of existing practices
In practical terms, most existing legal practices will not be required to take any significant action to become 'recognised.' The main consideration is to ensure that the relevant information held by the SRA on the practitioner(s) and the practice is current.
4.1 Passporting
For partnerships that are not currently recognised bodies, the SRA will change its records so that the practice is authorised as a recognised body from 31 March 2009 . This will be achieved through a process called 'passporting'.
Similarly, for existing sole practitioners, the SRA will ensure that its records indicate that they are recognised sole practitioners from 01 July 2009 .
If the SRA has any questions regarding the structure of you practice, they will contact you prior to passporting your records. Otherwise, they will notify you once your records have been passported.
There will be no charges associated with the passporting process.
More information on passporting can be found at the SRA website.
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4.2 Practices which are already recognised
Under the Administration of Justice Act 1985 (AJA), legal practices that are either LLPs or companies must already be recognised bodies.
In most cases, if a practice is already operating as a recognised body, it will not be required to take any actions to facilitate the move to firm-based regulation.
However, practices should ensure that records regarding the composition and structure of the practice are up to date and consistent with the amended rules. In particular, they should review the provisions relevant to the practice's corporate structure. For example, practices who are already incorporated as a limited liability partnership should consider Rule 14.05 regarding who may be a member.
Practices should also ensure that the management and ownership structure is consistent with the three fundamental requirements outlined in section 3.1 of this practice note. Practices should take particular care where they have international partners, international offices or where the ownership includes corporate bodies.
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4.3 Complex structures and bodies corporate
Section 9A of the AJA allows the SRA to recognise a legal practice with a relatively complex structure, including those with various tiers of ownership. Note, however, that if a company owns a share in a recognised body, it must itself be a 'legally qualified body,' as one of following:
- a recognised body
- an authorised non-SRA firm or
- a European corporate practice
In addition, at least 75% of the ultimate beneficial ownership in both the recognised body and in any 'legally qualified body' must be in the hands of lawyers.
It is particularly important that international practices confirm whether their partnership, LLP or company is permitted under the rules.
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4.4 Further international issues
The Act only has indirect effect, and firm based regulation does not wholly apply for firms which only practise overseas and have no office in England and Wales. However, Rule 15: Overseas practice' has been radically rewritten as a result of the Act. Affected practices should take appropriate advice on the way in which the Act applies.
Where a firm has international offices in addition to those in England and Wales , the whole firm must become a recognised body and the passporting exercise will encompass these offices.
The provisions to the code relating to Rule 16: European Cross Border Practice have also been amended as a result of the Act.
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5. Setting up in practice after March 31 2009
5.1 Setting up a new recognised body
You should consider the following actions before applying for recognition of a new body:
- Determine who the managers of the firm will be and which of the permitted forms of structure will be used for the practice:
- Gather and maintain the required information regarding the suitability of the individuals and corporate bodies that will become the managers of the practice. This is particularly important if non-lawyer managers are envisioned - see the Law Society practice note on Legal Disciplinary Practices for more details.
- Ensure that the ownership and management structures are consistent with the fundamental rules for recognition
- Obtain relevant documentation regarding the legal status of the practice. For example, if the practice is a limited liability partnership the relevant documentation must be obtained from Company House to verify its incorporation.
Once the entity has been established, you must apply for to the SRA for its recognition. The SRA will process the application within a month of receipt.
Forms for registering all new firms are available at the SRA website.
The SRA Professional Ethics and Guidance Team can provide guidance in the early stages of planning a new practice.
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5.2 Setting up as a sole practitioner
SRA endorsement is required to practice as a sole practitioner from 01 July 2009. The practice must meet the requirements discussed in section 3.2 of this practice note in order to be authorised by the SRA.
Forms will be available online when published. Check the SRA website for details.
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5.3 Renewing recognised body status
From the 2009/10 practising year, all practices must apply to renew their recognition annually on 1 November.
The necessary forms and processes for renewing a practice's recognised status will be made available by the SRA in the lead-up to 31 October 2009.
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6. Fees and charges
There are no charges associated with passporting your records.
There will be a fee associated with establishing a new recognised body after 31 March 2009 . Similarly, there will be a charge associated with establishing a new recognised sole practitioner after 01 July 2009 .
Published fees are available at the SRA website.
However, if a practice is already a recognised body and has paid for registration beyond the 2008/09 practising year, the SRA will provide it with a 'credit' that can be used towards payment the annual renewal fee.
From the 2009/10 practising year, there will also be a fee for renewing your practice's authorisation. This will be in addition to the fees for individual practicing certificates.
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7. Other business management considerations
The change to firm-based regulation is unlikely to have a significant impact on the day to day operations of your practice. However, there are some changes to the code that you must be aware of:
7.1 Business practice
RELs, RFLs or lawyers authorised by an approved regulator other than the SRA should not be held out to be solicitors, or undertake work which they are not authorised to provide. This is stated under:
- Rule 12: Framework for practice
- Solicitors Act 1974 sections 22-24
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7.2 Publicity
A recognised sole practitioner or manager of a recognised body must ensure that any publicity produced by or for the practice meets the requirements of Rule 7 of the code. See supporting guidance at the SRA website.
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7.3 Information provision
To facilitate the move to risk-based regulation, all legal practices must provide the SRA with information about their business on an annual basis. Much of this will be new information, but will be similar to that required by insurers.
The SRA will require firms to provide certain information regarding, for example:
- ownership
- turnover
- work types
The SRA may also collect other types of information over time, for example, by requesting information pertaining to:
- equality and diversity
- internal complaints
- training
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7.4 Providing proper supervision
The move to firm-based regulation will empower the SRA to impose sanctions upon both
- a practice as an entity, and
- any manager or employee of the practice, including those who are not solicitors.
Managers of legal practices will therefore have a greater responsibility to ensure that their employees receive the 'proper' level of supervision and training.
Rule 5.02 states that every firm must have at least one manager, or sole practitioner, who is qualified to supervise - i.e. he or she must have been qualified to practise as a lawyer for 36 months within the last 10 years, and must have completed 12 hours of training in management skills.
Rule 5.01 sets out standards of management and supervision for all firms, and the guidance to rule 7 provides further guidance on the provision of appropriate supervision and training.
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7.5 Changes to the management structure of a practice
A manager of a recognised body must ensure that the information held by the SRA regarding the ownership and management of the practice is up to date.
The SRA must be notified within seven days of any changes.
For practices with non-lawyer managers, a restructure may be required if changes in ownership or management place the practice in breach of the manager and control requirement referred to in section 3 of this practice note.
For more information pertaining to non lawyer managers, see practice note on Legal Disciplinary Practice.
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7.6 Corporate and non-corporate structures
Becoming a recognised body does not have any impact on the corporate structure chosen for the practice. For example, if the practice is a partnership, becoming a recognised body does not affect the relevant tax and liability obligations of partnership status.
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7.7 Incorporating a practice
Recognised status does not prevent a practice from changing its structure. For example, a firm which is recognised as a partnership may be incorporated to become a body corporate. However, the firm cannot practice as a body corporate until it has obtained recognition from the SRA as a recognised body. Such firms will become a new recognised body, not a continuation of the old recognised body.
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8. More information
8.1 Professional conduct
8.1.1 Solicitors Code of Conduct
The following rules of the code have been revised significantly:
- Rule 12: Framework of practice
- Rule 14: Recognised bodies
- Rule 20: Rights and obligations of practice
There have also been some important changes made to:
- Rule 5: Business management in England and Wales
- Rule 7: Publicity
- Rule 9: Referrals of business
- Rule 15: Overseas practice
All amended rules are available online from 31 March 2009. See the Code of Conduct pages on the SRA website for details.
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8.1.2 Recognised Bodies Regulations
The SRA has also made a number of changes to the Recognised Bodies Regulations to allow the recognition of all firms, and to allow non-lawyers to become managers in recognised bodies.
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8.2 Statutory Provisions
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8.3 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.
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8.4 Terminology
Must - a specific requirement in the code or legislation. You must comply, unless there are specific exemptions or defences provided for in the code 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.
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8.5 Further Information and advice
8.5.1 Law Society publications
8.5.2 Practice advice service
The Law Society provides support to solicitors on a wide range of areas of legal practice. The service is staffed by solicitors and can be contacted on 0870 606 2522 from 09.00 to 17.00 on weekdays.
Visit the Practice Advice Service website.
8.5.3 Solicitors Regulation Authority
Visit the SRA website.
8.5.4 Training and events
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8.6 Acknowledgements
The Law Society thanks the SRA for assistance in drafting this practice note.
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