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Setting up a practice: regulatory requirements

21 March 2016
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. 

Legal status

This practice note is the Law Society's view of good practice in this area. It is not legal advice.

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.

Professional conduct

The following sections of the SRA Handbook are relevant to this issue:

  • Chapter 7 on of the SRA Code 'Management of your business'
  • Chapter 8 of the SRA Code on 'Publicity'
  • Chapter 10 of the SRA Code on 'You and your regulator' 
  • SRA Practice Framework Rules 2011
  • Authorisation Rules
  • SRA Indemnity Insurance Rules

SRA Principles

There are ten mandatory principles which apply to all those the SRA regulates and to all aspects of practice. The principles can be found in the SRA Handbook.

The principles apply to solicitors or managers of authorised bodies who are practising from an office outside the UK. They also apply if you are a lawyer-controlled body practising from an office outside the UK.


Must - a specific requirement in the SRA Code or legislation. You must comply, unless there are specific exemptions or defences provided for in relevant legislation or the SRA Handbook..

Should - good practice for most situations. If you deviate from this, you must be able to justify why this is appropriate for your firm

  • 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. 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.

SRA Code - SRA Code of Conduct 2011
OFR - outcomes-focused regulation
SRA - Solicitors Regulation Authority
IB - indicative behaviour
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

The Law Society also provides a full glossary of other terms used throughout this practice note

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 practice and doing so will require forward planning.

2 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'.

A new practice may include:

  • 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
  • a practice that has been regulated by another regulator and is applying to be regulated by the SRA

You must receive authorisation from the relevant authority before commencing your practice. Although you can make arrangements for your practice to commence (e.g. acquiring premises, setting up IT systems, etc), you cannot begin delivering regulated services until you have received authorisation. 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. Streamlining of declarations of compliance from authorised role holders, and deemed approval of Compliance Officers for Legal Practice (COLPs) and Compliance officers for Finance and Administration (COFAs) in sole practices and small firms, may speed up the recognition process. However, despite deemed approval of individual managers within ABS corporate owners, 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.

3 What type of practice 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 practice there are numerous options regarding the structure of your practice. What type of practice you wish to set up will depend on who you wish to involve in the practice and how you wish it to be managed.

There are three main types of practice regulated by the SRA:

  1. 1. recognised bodies
  2. 2. recognised sole practitioners
  3. 3. licensed bodies (alternative business structures)

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.

3.1 Recognised body (partnerships, LLPs and companies)

Recognised bodies are generally firms where all the managers (i.e. members in an LLP, partners in a partnership and directors in a company) and interest holders are lawyers (not necessarily solicitors). 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 holding a practising certificate
  • a registered European lawyer (REL)
  • 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 lawyers must be able to control at least 90% of the voting rights.

The service requirement

A recognised body must be a partnership, company or LLP and must fulfil the service requirement. in the SRA Practice Framework Rules 2011. The service requirement means that recognised bodies may only provide:

a) services normally provided by practising solicitors (or lawyers of other jurisdictions)
b) where the firm involves a notary, the services of a notary
c) additional services (which may or may not be considered to fall within (a) above:

  • alternative dispute resolution
  • financial services
  • estate agency
  • management consultancy
  • company secretarial services
  • other professional and specialist support services to business including human resources, recruitment, systems support, outsourcing, transcription and translating
  • acting as a parliamentary agent
  • practising as a lawyer of another jurisdiction
  • acting as a bailiff
  • accountancy services
  • education and training activities
  • authorship, journalism and publishing

Note that recognised bodies are also able to have links with separate businesses (see section 4.1 below).

3.1.1 Partnerships

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.

3.1.2 LLPs

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
  • 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.

3.1.3 Companies

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
  • 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.

3.2 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 Practice Framework Rules 2011.

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.

Sole practitioners are granted life time authorisation and do not need to apply each year for an endorsement on their practising certificate.

The service requirement for recognised bodies (see 3.1) also applies to sole practitioners.

Note that recognised sole practitioners are also able to have links with separate businesses (see section 4.1 below).

3.3 Licensed body - Alternative business structures (ABSs)

Licensed bodies (ABSs) are firms where there is a non-lawyer interest of at least 10 per cent in a firm, e.g. there is a non-lawyer manager or external investor. ABSs 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:

  1. 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 
  2. the so-called, 'co-op law' model where there is complete or partial external ownership operated through a separate entity
  3. a multidisciplinary practice (MDP), which would involve combinations of different services from one entity, e.g. financial services and legal services offered through a single body

Note that all authorised bodies (licensed and recognised) must have their managers, and owners who have a material interest (usually 10 per cent) approved under part 4 of the Authorisation Rules.

4 Considerations before setting up a business

4.1 Separate businesses

The SRA Code allows recognised bodies and recognised sole practitioners' firms to own or manage separate unregulated businesses providing non-reserved legal and other professional services. However, solicitors are prohibited from providing legal services to the public through those separate businesses. You may wish to take this into account when deciding which services you will offer and considering how to set up your practice, including whether some services could be hived off into an unregulated business.

For more information, see the SRA guidance on the separate business rule.

4.2 Business plan

When conducting the authorisation process, 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 services you plan to offer
  • your target market
  • your marketing strategy
  • your management team
  • HR and recruitment
  • operational plans e.g. premises, IT systems, insurance
  • financial forecasts
  • funding plans
  • a compliance plan

The legal services market is a competitive market. When drafting your plan you should take account of the nature of the market.

4.3 Professional indemnity insurance (PII) - regulatory requirements

It is a regulatory requirement for solicitors in private practice to take out and maintain compulsory minimum PII, in accordance with the rules administered by the SRA (rule 4.2 of the SRA Indemnity Insurance Rules 2013). The only way of obtaining mandatory PII is from a participating insurer.

New firms need to acquire PII before commencing to practise. It is important that you research your PII needs and which insurers might be willing to sell you PII early in the process of setting up a practice (before you make substantial outlays for other costs, such as premises and staff).

New firms can experience difficulty in obtaining PII and at an affordable price because insurers perceive them as inexperienced in business. Insurers will be looking for the new firm to demonstrate that it has appropriate contingency planning in place, understands where its competence lies and that the work areas covered by the practice are within its competence. Insurers will wish to satisfy themselves that your firm has a clear plan as to how it will survive within a competitive legal market, and that it has a clear understanding of the operational side of managing and running a business. These factors will influence the PII premium quoted to a new firm.

Some brokers specialise in advising and offering support to new start-up firms on managing risk and operating as a business. Your regulatory requirements are fully outlined in the Law Society's PII practice note.

4.3.1 How much cover do I need?

In addition to the compulsory minimum level of PII cover ('primary layer' cover) you should also consider whether you require additional cover ('excess layer' or 'top-up' cover). See our further help on excess layer insurance.

The SRA requires firms to assess and purchase the level of PII that is appropriate for the firm's practice, taking into account potential levels of claim by your clients and others and any alternative arrangements you or your client may make.

For further help on purchasing PII, see our PII buyers' guide and insurers' guide.

4.3.2 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
  • 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
  • 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 (e.g. 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
  • 4.3.3 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 publishes further information explaining run-off cover, and the regulatory requirements of ceasing to practise.

    4.3.4 Insuring an ABS

    PII arrangements apply to all SRA regulated entities. The minimum terms and conditions (MTCs) 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 as it is unclear 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.

    The scope of the MTC when there may be professionals within the MDP (e.g. accountants or surveyors) who are subject to more than one regulator, is also unclear. 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. Some ABS models are similar to those already in existence (e.g. firms with non-solicitor managers), and insurers are likely to adopt a similar approach to rating these risks. Others, such as MDPs, may make some insurers wary as insurers are unwilling to provide the broad cover of the solicitors' MTC 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, questions will be asked about the reason for the ABS structure, 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.

    5 SRA regulatory requirements

    As noted above, the SRA will need to authorise 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.

    5.1 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.

    5.2 Communicate with the regulator

    You must consider the outcomes in chapter 10 of the SRA Code on 'You and your regulator'. 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 SRA 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.

    5.3 Management of your business

    The SRA expects you to achieve certain outcomes when managing your business, which will need to be considered when you set up a business. The most relevant outcomes are:

    • 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
    • a compliance plan

    You must also have a system in place to manage documents and records.

    5.4 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. 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 - unless all the money is held or received from the Legal Aid Agency, or the practice has an average client balance of less than £10,000 a year and a maximum account balance of £250,000 (rule 32.1A).

    There is further information on holding client money in our practice note.

    5.5 Compliance officers

    All authorised bodies must have compliance officers approved by the SRA (note there is deemed approval in the case of sole practitioners and small firms). 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 for more detailed information about these roles.

    5.6 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.

    5.7 Records and documents

    Section 5.7 of this practice note is currently under review

    You should put in place a clear system for managing documents and keep records of any files or records you destroy. Failure to put a system in place 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:

    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. 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 notes on file retention: wills and probate and file retention: trusts.

    5.8 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.

    5.9 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.

    6 Other regulatory requirements

    There are numerous other regulatory requirements that apply to all businesses.

    6.1 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. If you plan to process personal data you must notify the information commissioner. Failure to do so is a criminal offence. For more information on data protection requirements see the practice note on data protection.

    6.2 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.

    6.3 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

    6.4 Other

    There are other regulatory requirements that businesses will need to comply with including HMRC requirements, employment law etc. The government provides guidance on these issues. Further information can also be found in our practice note on client care, which discusses referrals to other law firms, and setting up terms of business. You may also wish to consider the implications of the Bribery Act.

    7 More information

    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.

    7.1 Recommended further reading

    The following Law Society practice notes may also be of interest when setting up a practice:

    7.2 Practice Advice Service

    The Law Society provides support for solicitors on a wide range of areas of practice. Practice Advice can be contacted on 020 7320 5675 from 09:00 to 17:00 on weekdays or drop us an email.

    7.3 Risk and Compliance Service

    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.

    7.4 Lexcel

    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.

    7.5 Professional ethics helpline

    The Solicitors Regulation Authority's professional ethics helpline for advice on conduct issues.

    7.6 Law Society Consulting

    If you require further support, Law Society Consulting can help. We offer expert and confidential support and guidance, including face-to-face consultancy on risk and compliance. Please contact us on 020 7316 5655, or drop us an email.

    Find out more about our consultancy services.

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