Contents
1. Introduction
1.1 Who should read this practice note?
Solicitors who are considering setting up a new practice in England and Wales and want to know about the regulatory requirements they will have to consider.
1.2 What is the issue?
This practice note outlines the regulatory requirements to consider when setting up your practice. There are numerous actions that need to be taken when setting up a firm and doing so will require forward planning.
1.3 Professional conduct
The following sections of the SRA Handbook are relevant to this issue:
- Chapter 7 on 'Management of your business' of the SRA Code
- Chapter 8 on 'Publicity' of the SRA Code
- Chapter 10 on 'You and your regulator' of the SRA Code
- SRA Practice Framework Rules 2011
- Authorisation Rules
- SRA Indemnity Insurance Rules
1.4 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.
1.5 Terminology
Must - A specific requirement in legislation or of a principle, rule, outcome or other mandatory provision in the SRA Handbook. You must comply, unless there are specific exemptions or defences provided for in relevant legislation or the SRA Handbook.
Should
- Outside of a regulatory context, good practice for most situations in the Law Society's view
- In the case of the SRA Handbook, an indicative behaviour or other non-mandatory provision (such as may be set out in notes or guidance).
These may not be the only means of complying with legislative or regulatory requirements and there may be situations where the suggested route is not the best possible route to meet the needs of your client. However, if you do not follow the suggested route, you should be able to justify to oversight bodies why the alternative approach you have taken is appropriate, either for your practice, or in the particular retainer.
May - A non-exhaustive list of options for meeting your obligations or running your practice. Which option you choose is determined by the profile of the individual practice, client or retainer. You may be required to justify why this was an appropriate option to oversight bodies.
SRA Code - SRA Code of Conduct 2011
2007 Code - Solicitors' Code of Conduct 2007
OFR - outcomes-focused regulation
SRA - Solicitors Regulation Authority
IB - indicative behaviour
ARP - assigned risks pool
MTC - minimum terms and conditions
SIIR - SRA Indemnity Insurance Rules 2011 (as amended from time to time)
PII - professional indemnity insurance
ABS - alternative business structure
LLP - limited liability partnership
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2. SRA Principles
There are 10 mandatory principles which apply to all those the Solicitors Regulation Authority (SRA) regulates and to all aspects of practice. When thinking about how to meet the outcomes in the SRA Code, you must consider the principles which apply across the SRA Handbook. You should always bear in mind what the 10 principles are and use them as your starting point when implementing the outcomes.
3. Setting up your practice
Any new business established under the regulation of the SRA must become either recognised (non-ABS businesses) or licensed (ABS businesses), collectively termed 'authorisation'.
You must receive authorisation from the relevant authorities before commencing your practice. You must therefore take into account the length of time it will take to gain recognition/licensing from the SRA. The SRA aims to make a decision on most recognition applications within 12 to 16 weeks of receiving the correct application papers and fees, however the application process to become licensed as an ABS can run into months.
If you are setting up a firm, one of the managers must be 'qualified to supervise'. If you are setting up as a sole practitioner then you must be 'qualified to supervise'. To be qualified to supervise you must have:
You will also need a practising address in England or Wales.
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4 What type of firm is being set up?
The SRA Practice Framework Rules 2011 set out the types of practice through which you may be authorised to operate in England and Wales. When you decide to set up a firm there are numerous options regarding the structure of your firm. You will need to decide what type of firm you wish to set up. This will depend on who you wish to involve in the firm and how you wish it to be managed.
There are three main types of firms regulated by the SRA:
- recognised bodies
- recognised sole practitioners,
- and licensed bodies.
Recognised bodies are firms where all the managers (ie members in an LLP, partners in a partnership and directors in a company) and interest holders are lawyers. Licensed bodies are firms where there is a non-lawyer interest of at least 10 per cent in a firm eg there is a manager who is a non-lawyer or an external investor who is a non-lawyer.
4.1 Recognised sole practitioners
You must apply to the SRA to become a recognised sole practitioner. You must receive authorisation from the SRA before you commence practising, in accordance with rule 10 of the Practising Framework Rules 2011.
Please note: if you wish to set up your practice with a salaried partner, you will not be authorised as recognised sole practitioner. Salaried partners are treated as full partners for the purpose of authorisation and you would instead have to be authorised as a recognised body.
4.2 Recognised body (partnerships, LLPs and companies)
Recognised bodies are firms that are owned and run by lawyers. Under rule 13 of the SRA Practice Framework Rules 2011 there are three main requirements to be eligible as a recognised body.
The requirement to involve a solicitor or an REL
A firm must have at least one manager who is:
- a solicitor
- a registered European lawyer (REL), or
- a legally qualified body which has at least one manager who is a solicitor or REL.
The requirement to have lawyer managers
All the managers and interest holders must be lawyers or, in the case of a corporate entity, a legally qualified body (see SRA glossary for definition). A legally qualified body may have some non-lawyer involvement but this should be less than a 10 per cent stake.
The service requirement
A recognised body must be a partnership, company or LLP and must fulfil the service requirement. The service requirement means that recognised bodies may only provide services normally provided by solicitors (or lawyers of other jurisdictions) and, where the firm involves a notary, the services of a notary. Recognised bodies may also provide additional services set out in chapter 12 of the SRA Code (Separate businesses).
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4.3 Alternative business structures (ABSs)
ABSs are businesses that allow solicitors and other approved persons to enter business with non-lawyers, as long as at least one of the managers of that business is a solicitor, REL or person authorised by another approved regulator. There are no restrictions on the structure of a licensed body and there is no service requirement.
If you intend to set up an ABS you must apply to the SRA to be authorised as a licensed body before you commence practising. Rule 14 of the Practising Framework Rules 2011 sets out the fundamental requirements and eligibility criteria for becoming a licensed body.
An ABS allows a great degree of flexibility for ownership and management options for businesses to provide reserved legal services through. Three main ABS models are contemplated:
- a model similar to a traditional law firm or legal disciplinary practice, but with involvement of one or more non-lawyer managers, without external ownership, and providing solicitor type services only
- the so-called, 'co-op law' model where there would be complete or partial external ownership operated through a separate entity, and
- a multidisciplinary practice (MDP), which would involve combinations of different services from one entity eg financial services and legal services offered through a single body.
Please note: all authorised bodies (licensed and recognised) must have their managers, owners (who have a material interest, usually 10 per cent) and compliance officers approved under part 4 of the Authorisation Rules.
4.4 Partnership, LLP or company
Traditionally most firms were partnerships. Partnerships were, and are, relatively easy to set up and allow a group of individuals to form a firm in which they all have a stake. Within the partnership, partners share the risks, costs and responsibilities of being in business.
In an ordinary partnership there is no separation between the business and the partners. Partners are jointly and severally liable for any debts of a partnership. As there is no separation between the business and the partners, creditors can claim a partner's personal assets to pay off any debts – even those debts caused by other partners. Therefore, when a partnership fails, partners have no protection from creditors.
Limited liability partnerships (LLPs) offer the benefits of a partnership model but limit the liability of those involved. However, unlike partnerships, LLPs must:
- register with Companies House
- send Companies House an annual return, and
- file accounts with Companies House
An LLP must be incorporated and registered in England and Wales, Scotland or Northern Ireland under the Limited Liability Partnerships Act 2000.
Another option is to form a limited company. As with an LLP, this allows those involved to limit their liability. However, the structure is often more hierarchical than a partnership. A company must be:
- incorporated and registered in England and Wales, Scotland or Northern Ireland under parts 1 and 2 of the Companies Act 2006
- incorporated in an Establishment Directive state and registered as an overseas company under part 34 of the Companies Act 2006, or
- incorporated and registered in an Establishment Directive state as a societas Europaea
If you choose to set up a company (other than an overseas company registered under part 34 of the Companies Act 2006) or an LLP, it must have its registered office at a practising address in England and Wales. The government provides more guidance on the different types of structures and how to set them up.
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5 Things to consider before setting up a business
5.1 Business plan
When authorising a licensed body the SRA and insurers will consider the firm's business plan. It is important to have a comprehensive plan. A business plan might include:
- what you plan to offer
- your target market
- your marketing strategy
- your management team
- operational plans eg premises, IT systems, insurance
- financial forecasts
- funding plans
The legal services market is a competitive market. When drafting your plan you should take account of the nature of the market.
5.2 Professional indemnity insurance (PII) – regulatory requirements
New firms have, in recent times, experienced difficulty in obtaining PII. New firms are entering into a highly competitive market for legal services and you must have PII to practise.
Insurers will be looking carefully to satisfy themselves that your firm has a clear plan as to how it will survive within this competitive legal market. It is important that you start looking for insurance early in the process of setting up a practice (before you make substantial outlays for other costs, such as premises and staff). Insurers will also want new firms to demonstrate that they have appropriate contingency planning in place and understand where their competence lies and that the work areas covered by the practice are within its competence.
All firms have an obligation to take out and maintain a mandatory layer of PII (rule 4.1 of the SRA Indemnity Insurance Rules 2012). You must get a PII minimum terms and conditions policy from a qualifying insurer and have it in place before you commence to practice.
Your regulatory requirements are fully outlined in the Law Society's PII practice note. You should review this advice prior to setting up a practice as it contains important information about the scope of the minimum terms and tips in applying for cover.
How much cover do I need?
The rules establish a compulsory level of cover for all solicitors' firms:
- relevant recognised bodies and relevant licensed bodies (ie ABSs and partnerships that are limited companies eg LLPs) must have at least £3m for any one claim in compulsory cover.
See the SRA's glossary for the definition of a relevant recognised body and relevant licensed body. - in all other cases for example, sole practitioners and partnerships, must have at least £2m for any one claim in compulsory cover
This is sometimes referred to as 'primary layer' cover.
These limits do not apply to defence costs as there is no monetary limit on defence costs under the minimum terms and conditions (clause 2.2).
While you must take out primary layer cover, you should also consider whether additional layers of cover should be purchased to protect the firm, and, depending on the firm's structure (see section 4 of this practice note), its individual principals, from liability in the event of a large claim that is not covered by the monetary limits of the primary layer policy. The total amount of PII you need will depend on your firm's size and exposure to risks. You should seek advice from your broker and/or insurer to ensure that you have a sufficient level of cover for your firm.
If you decide to obtain cover above the compulsory level, known as 'excess layer or top up cover', this cover will not be subject to the rules. This means that you can obtain it from any insurer, not just a qualifying insurer, and on different terms and conditions to the minimum terms and conditions. It is not necessary to buy all of your cover from one insurer.
Further help on excess layer insurance
You must not exclude or attempt to exclude liability below the minimum level of cover (outcome 1.8 of the SRA Code of Conduct). If you seek to limit your liability to a level above the minimum level of cover, the limitation should be in writing and you should bring it to your client's attention (IB 1.8).
Who can provide cover?
The only way a new firm can obtain primary layer PII is from a qualifying insurer, which is an insurer authorised by the Financial Services Authority that has entered into a Qualifying Insurer's Agreement with the SRA. A list of all qualifying insurers is available on the SRA website.
Neither the Law Society nor the SRA vets, approves or regulates qualifying insurers. This means that despite the terminology 'qualifying insurers', this is not a guarantee about the financial integrity of the insurer. This is an important factor to consider when purchasing PII, see the Law Society's guidance:
New firms are not eligible to apply for PII from the assigned risks pool. A new firm includes:
- a start-up not previously connected to any other firm
- a firm resulting from a breakaway or split from an existing practice in circumstances where the firm is not a successor practice, and
- a practice that has been regulated by another regulator and is applying to be regulated by the SRA.
See: Assigned risks pool changes
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5.2.1 Tips for obtaining PII for new firms
- get professional advice - work with a specialist PII broker to put together a quality package. For information about selecting the right broker for you, view our PII buyers' guide (PDF 250kb).
- provide a detailed business plan – insurers need to understand the structure of your new business and the risk that you are asking them to insure
- demonstrate your experience in your proposed practice areas - it is highly likely that you will be asked to provide CVs for all partners of the new firm. Make sure the CVs are complete, up-to-date and demonstrate partners' experience in practice areas and also in managing a business
- demonstrate financial viability of the practice - well worked out estimates of turnover that can be justified and supported are key as well as demonstrating external capital (eg investment by partners into the business)
- start early - it can be difficult for new firms to get PII and without insurance you will not be able to practise
- a full suite of PII guidance is available on the Law Society website
- insurers are more likely to consider your proposal favourably if you demonstrate effective risk management practices. These practices are important in lowering the likelihood of future claims. For example, Lexcel - the Law Society's practice management standard - or being a member of its accreditation schemes such as the Conveyancing Quality Scheme (CQS) can help to demonstrate good risk management practices. Some insurers may offer you more competitive terms if your firm is Lexcel or CQS accredited.
5.2.2 Retirement planning
Although when you start up the practice, closing it down is probably the last thing on your mind— it shouldn't be.
The SRA requires all firms to have effective systems and controls in place to comply with their regulatory obligations (O7.2). This may be demonstrated by identifying and monitoring financial, operational and business continuity risks (IB(7.3)).
As part of your business continuity plan, you should plan for your retirement and the succession of the practice. You must consider the PII implications on closing your practice.
You must purchase six years' run-off cover on ceasing practice. You should budget for the cost of run-off cover as part of your succession/retirement planning. The Law Society has designed a retirement calculator to assist you in budgeting by providing an indicative cost of run-off cover.
The Law Society also publishes further information explaining:
5.2.3 Insuring an ABS
The SRA made amendments to the SRA Indemnity Insurance Rules for ABSs to provide that the PII arrangements will apply to all SRA regulated entities. The minimum terms and conditions insure an ABS for all civil liability arising from the provision of services in respect of its regulated activities.
Insurers have adopted a case-by-case approach towards insuring ABS firms, however, they continue to seek clarification from the SRA as to how PII requirements will work in practice, particularly in respect of multi-disciplinary practices (MDPs). Insurers are concerned that the SRA may license ABSs in a way that expands the scope of work conducted within private legal practice and expose insurers to greater risk.
Further clarification is required from the SRA as to the scope of the minimum terms and conditions (MTC) when there may be professionals within the MDP (eg accountants or surveyors) who are subject to more than one regulator. The SRA has stated that any licence conditions will be clear as to the scope of the regulated activities, although there remains the potential for coverage disputes if different insurance arrangements apply to different activities conducted within the same entity.
The insurer's approach will depend on the type of ABS model adopted (see section 4 of this practice note). Some ABS models are similar to those already in existence (eg firms with non-lawyer managers or non-solicitor lawyer managers), therefore, insurers will have seen models such as this before and are likely to adopt a similar approach to rating these risks.
Others, such as MDPs, may make some insurers wary – particularly given that solicitors' MTC are the broadest available to any profession and insurers are naturally unwilling to provide the broad cover of the solicitors' wording across all professional services.
If you are considering setting up an ABS, you should talk to your broker, who should be able to advise you on the likely effects on PII that different business structures may have. You should start conversations with your insurer at the same time, if not before, you approach the SRA to commence the ABS application process.
Regardless of the model you adopt, insurers will be looking to ensure that there are strong supervisory procedures in place and comprehensive risk management processes. Questions will be asked about the reason for structural change, sources of external investment and the extent of external control and management. As with any new firm, a detailed business plan with projections will also be essential.
For articles on ABSs, see Insurance Matters - issue 6 (PDF 1.5mb) and Insurance Matters - issue 8 (PDF 1.1mb).
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6 SRA regulatory requirements
As noted above the SRA will need to approve any entity before it can provide services. The SRA will also place regulatory requirements upon a firm and these should be considered when setting up a firm, along with other relevant legislation.
6.1 Outcomes-focused regulation (OFR)
The SRA regulates legal services by way of a system of OFR. For more information see the practice note on OFR - an overview.
6.2 Communicate with the regulator
You must consider the outcomes in chapter 10 on 'You and your regulator' of the SRA Code. Furthermore, any authorised body must adhere to the formation criteria under rule 15 of the SRA Practice Framework Rules 2011 and provide any documentation relating to composition and structure as and when requested by the regulator under rule 18. The SRA requires firms and those working within them to report matters to them. More information on the reporting requirements can be found on our website.
6.3 Management of your business
The SRA have put in place outcomes that you will need to achieve when it comes to managing your business. These outcomes will need to be considered when you set up a business. The most relevant outcomes are summarised below:
- clear and effective governance structure and reporting lines (O7.1)
- you have effective systems and controls in place to achieve and comply with the SRA's requirements (O7.2)
- you identify, monitor and manage risks to compliance with SRA requirements and you take steps to address issues identified (O7.3)
- you maintain systems and controls for monitoring the financial stability of your firm and risks to client money, and you take steps to address issues identified (O7.4)
- you comply with legislation applicable to your business (O7.5)
- you train individuals working in the firm to maintain a level of competence appropriate to their work and level of responsibility (O7.6)
- you have a system for supervising clients' matters (O7.8)
The Authorisation Rules also highlight the need to have systems in place to ensure compliance with the SRA's requirements. SRA guidance is provided on the systems a firm may put in place. Suggestions include:
- clearly defined governance arrangements providing a transparent framework for responsibilities within the firm
- appropriate accounting procedures
- a system for ensuring that only the appropriate people authorise payments from client account
- a system for ensuring that undertakings are given only when intended, and compliance with them is monitored and enforced
- appropriate checks on new staff or contractors
- a system for ensuring that basic regulatory deadlines are not missed e.g. submission of the firm's accountant's report, arranging indemnity cover, renewal of practising certificates and registrations, renewal of all lawyers' licences to practise and provision of regulatory information
- a system for monitoring, reviewing and managing risks
- ensuring that issues of conduct are given appropriate weight in decisions the firm takes, whether on client matters or firm-based issues such as funding
- file reviews
- appropriate systems for supporting the development and training of staff
- obtaining the necessary approvals of managers, owners and COLP/COFA
- arrangements to ensure that any duties to clients and others are fully met even when staff are absent
You must also have a system in place to manage documents and records.
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6.4 Client money
The rules on client money are set out in the SRA Accounts Rules 2011. You must familiarise yourself with them and put in place a robust system for holding client money to meet these requirements.
You must keep client money separate from your or your practice's money. Any money belonging to others must be held in a bank or building society account identifiable as a client account. One area of high risk is transfer of costs.
You must comply with rules on the transfer of costs. Once funds from a client account have been earmarked for costs they must be transferred from the client account within 14 days. The SRA provides further guidance on this area.
You must provide an annual accountants report if you hold or receive client money, or if you operate a client's own account.
There is further information on holding client money in our practice note.
6.5 Compliance officers
All authorised bodies must have compliance officers approved by the SRA. The SRA Authorisation Rules outline the requirements for the roles of compliance officer for legal practice (COLP) and compliance officer for finance and administration (COFA). See our practice note on compliance officers and FAQs for more detailed information about these roles.
You should consider contingency planning if, for whatever reason, a compliance officer cannot fulfil their role and you or your firm have to manage in their absence. If a practice ceases to have a compliance officer, it will need to do the following immediately or, in any event, within seven days:
- inform the SRA
- designate another manager or employee to replace its previous compliance officer, and
- make an application to the SRA for temporary emergency approval of a compliance officer, as appropriate (rule 18 of the SRA Authorisation Rules).
6.6 Complaints handling procedure
It is essential that all authorised bodies have a complaints handling procedure in place – chapter 1 of the SRA Code. For more information see the practice note on complaints management.
6.7 Records and documents
You should put in place a clear system for managing documents and keep records of any files or records you destroy. Failure to put in place system may lead to loss of records and will present a problem if you wish to close down the firm at a later date. You should inform clients about your policy on storing documents and records and put in place systems to ensure that your policy is complied with.
You must keep certain records for defined periods, for instance:
You should consider these provisions in the event of closing down your firm. There may also be records that would be helpful to keep in case an issue arises at a later date eg agreements relating to financial arrangements with an introducer or evidence of a client's consent to you retaining commission.
There may also be legal requirements to keep documents eg VAT records. There is limited guidance on the length of time that client files need to be retained and on the destruction of files. Many of the documents within a file will belong to your client(s), such as:
- documents prepared for the client by you eg deeds, copies of briefs and instructions, letters written by you to third parties if kept in the client file and used for the purpose of client business
- documents received by you as the agent of the client eg letters sent to you by third parties, medical and witness reports, counsel's opinion
The following documents belong to you:
- copies of letters written to the client by you
- originals of letters written to you by the client
- documents prepared by you for your own use or benefit eg file notes as to time taken or made for protective record purposes: cautionary advice given to the client, copies of letters received on behalf of the client or of any other document (where the copies are for your own benefit and kept in your office correspondence file), unless a charge has been made to the client, in which case they belong to the client
- accounting records, including vouchers and instructions
Documents should not normally be destroyed without the consent of the owners. Therefore it is often advisable to reserve the right to destroy a file after a specified period of time (either at the outset of a retainer, or by agreeing this with your client prior to placing the file into storage).
We provide advice on the storage of wills and related documents in our practice note on file retention: wills and probate and file retention: trusts.
6.8 Equality and diversity
You must consider equality and diversity aspects of the SRA Handbook. For more information, see the practice note on equality and diversity requirements.
6.9 Publicity
Any new business will need a marketing plan. The SRA sets out it outcomes on publicity in chapter 8 of the SRA Code. These outcomes prevent certain types of marketing e.g. cold calling. The SRA also requires that your letterhead, website and emails show the words 'authorised and regulated by the Solicitors Regulation Authority'.
Further information about these requirements can be found in our practice note on information on letterheads, emails and websites.
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7 Other regulatory requirements
There are numerous other regulatory requirements that apply to all businesses.
7.1 Data protection requirements
It is essential that all practice managers and all staff involved in day-to-day operations in practice adhere to data protection laws. Failure to do so is a criminal offence. If you plan to process personal data you must notify the information commissioner. For more information on data protection requirements see the practice note on data protection.
7.2 Trading name
You must nominate a trading name for your business and consider any legal requirements in this respect. You must give details of any trading names you want to adopt in your application form to the SRA.
7.3 Money laundering
You must familiarise yourself with the substantive criminal law and regulations in relation to anti-money laundering. For more information see the anti-money laundering practice note.
7.4 Other
There are other regulatory requirements that businesses will need to comply with including HMRC requirements, employment law etc. The government provides further guidance on these issues. You may also wish to consider the implications of the Bribery Act.
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8 Law Society support
The Law Society continues to look for ways to help its members in complying with the necessary rules and regulations. Our Risk and Compliance Service may be able to help.
Lexcel is the Law Society's international practice management standard. It is a scheme for any type of practice to certify that certain standards have been met following independent assessment. Benefits include effective risk management, better customer service and help with new rules.
9 More information
9.1 Practice Advice Service
The Law Society provides support for solicitors on a wide range of areas of practice. Practice Advice can be contacted on 0870 606 2522 from 09:00 to 17:00 on weekdays or email practiceadvice@lawsociety.org.uk.
9.2 Professional ethics helpline
The Solicitors Regulation Authority's professional ethics helpline for advice on conduct issues.
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