Preparing for ABS – view from the SRA

This article takes a brief look at the point we have reached, and looks forward to our journey’s end – a new beginning in which alternative business structures (ABS) will be a feature of the new landscape for the delivery of legal services. It highlights the guidance that we first issued in January 2009 and reissued in July 2009 entitled “Preparing for alternative business structures” and which is intended to help practitioners navigate the legal and regulatory waters.

The LSA – an overview

The LSA does four main things:

• It creates the Legal Services Board (LSB), which will supervise the regulation of legal services by all “approved regulators”, for example, the Law Society (through the SRA) and the Bar Council (through the Bar Standards Board);
• It creates the Office for Legal Complaints (OLC) – a new independent ombudsman service to deal with all consumer complaints about legal services. The OLC will cover the work of all lawyers and will deal with redress – not with regulation;
• It enables new forms of legal practice to develop: legal disciplinary practices (LDP) – which are firms involving different kinds of lawyers and up to 25 per cent approved non-lawyers, but still providing
  legal services; and, ABS – which will allow external ownership of legal businesses, multi-disciplinary
  practices (providing legal and other services) and many other permutations. ABS will be available from mid-2011 at the earliest; and,
• It enables firm-based regulation – a risk-based approach to regulation by the SRA, making available new powers to bring regulatory, administrative and disciplinary measures to bear on firms wherever appropriate, rather than, or as well as, on individuals.

These changes are being introduced in an incremental way. For example, the LSB is now well established and will be formally taking up its oversight role in January 2010. The OLC is expected to be established later in 2010. LDPs became a reality in March 2009, and the provisions to
support firm-based regulation were also implemented during 2009. At the time of writing, 114 firms have opted for LDP status, involving 75 non-lawyer ‘managers’ and 54 ‘other’ lawyer ‘managers’.

That leaves ABS as the key creation of the LSA that, although not yet available, is very much under development. You need take no more than a glance at the legal press to become well aware of the extent of the debate and furious activity concerning how ABS should be established and regulated that is going on right across the whole legal community (including regulators, academics and professional bodies) and other stakeholders, both here in the UK and overseas. For example, the LSB and the
SRA have both recently consulted on our ideas on the right approach to take. Although both consultations are now closed, please do take a look at our website (www.sra.org.uk/lsa) for updates on our progress and for future consultations. We welcome your contributions and views on these exciting developments.

SRA’s guidance

We shall now look at the some key features of SRA’s guidance, published in July 2009, on preparing for ABS. Readers are, however, encouraged to visit the SRA’s website where they will find the complete version.

Can I make arrangements now to prepare to set up an ABS?

Yes, indeed you can! Although ABSs are not yet available, we do encourage firms wishing to do so to make appropriate preparations for the setting up of ABS in anticipation of their launch. The guidance suggests some possible steps:

• Discussions with potential business partners;
• A non-binding arrangement with a potential business partner for the setting up of an ABS (for instance, an arrangement ‘subject to contract’);
• Registration of company names, acquisition of domain names, and so on;
• An agreement to enter into exclusive negotiations with a potential business partner; or
• Certain conditional contractual arrangements to be activated once the regulatory requirements have been relaxed and all necessary approvals granted – for example, an agreement to accept new non-lawyers, or an outside investor, into partnership.

What are the current legislative brakes preventing ABS?

The regulatory outcome that we wish to see achieved is that solicitors’ clients continue to benefit from the statutory protections that parliament has made available. The SRA has no power yet to recognise a firm whose structure or business arrangements are in breach of section 9A of the Administration of Justice Act 1985 (AJA). Until the necessary legislative changes come into force under which the ABS regime can be established, practitioners need to have regard to the current legislative requirements.

This means that non-lawyer businesses are currently prohibited from having any ownership interest in a law firm and from exercising any control or management over a law firm. Arrangements must remain within this framework permitted by the current legislation and by the SRA’s rules (Solicitors’ Code of Conduct 2007 – the Code). Participants in any “pre-emptive ABS” would be beyond the current regulatory reach of the SRA or LSB (both of whose powers are statute-based), and therefore clients – the protection of whose interests is the primary purpose of regulation – would not be adequately protected from harm. The SRA’s rules have recently been revised in the light of section 9A AJA to allow for LDP and FBR. Section 9A reinforces our current rule 1.03 (independence) of the Code, and forms the basis of our current rule 14 (recognised bodies) of the Code.

What arrangements should I avoid?

We are currently investigating a number of firms that appear to be operating pre-emptive ABS – for instance whose arrangements may involve breaches of rules 1.03 or 14, or related rules in the Code. The consequences of non-compliance for the solicitors involved may be serious – these could include, depending on the circumstances, revocation of the firm’s recognition and disciplinary proceedings. There may also be adverse long-term consequences to solicitors’ firms and to currently unregulated businesses that fail to pay regard to the current regulatory provisions and legal constraints that affect solicitors. This is because the SRA may take this conduct into account if and when the SRA eventually considers applications to set up an ABS.

The guidance sets out a number of arrangements, some of which we have come across in our investigations, which should be avoided:

• Arrangements that compromise your firm’s independence – for example, you should avoid any funding agreement (other than a normal bank loan or overdraft) that would give the funder control over the management of your firm;
• Selling your ownership interest in the practice or any part of it (or its service company) before ABS are permitted;
• Putting your future business partner in control of decisions about your business;
• Putting any outsider in de facto control of any votes in a meeting of the partners, members, shareholders or directors, as this would put the firm outside the definition of a “legal services body” under section 9A of the AJA;
• Allowing your firm to become, in effect, a subsidiary of an outside organisation; and,
• Allowing an outside investor to buy into your firm’s service company. 

We are currently working with certain firms that appear to have established a “pre-emptive ABS” to achieve regulatory compliance. We will later consider whether disciplinary action is appropriate in any particular case, depending on
the circumstances.

Help is available – for more help about what the LSA changes will mean for you please visit our website
www.sra.org.uk/lsa or contact our ethics guidance team at professional.ethics@sra.org.uk.