ABS basics
What are ABSs?
ABSs or alternative business structures are a new form of practice that will allow non-lawyer organisations to provide legal services, and lawyers much greater flexibility in the way they practise. The introduction of ABSs will allow much wider options in how lawyers and non-lawyers can share the management and control of a business which provides reserved legal services to the public. ABSs will allow external investment and ownership of law firms.
Will there be different types of ABS?
We think that there will be broadly two models of ABS, although we expect a lot of variations on these themes:
- ABSs providing legal services only—these could involve many ownership/management options from traditional law firms and legal disciplinary practices which have at least one non-lawyer manager, ranging to complete or partial external ownership of the ABS with legal services being provided through a ring-fenced entity.
- ABSs providing mixed services—this would be a multi-disciplinary practice made up of different professional service providers providing a range of services within one entity, the "one stop shop".
What models will the SRA allow?
Our plan is not to prohibit any models provided that they meet the minimum requirements, such as the involvement of at least one non-lawyer owner or manager, and at least one lawyer manager. Our emphasis in considering applications for licences will be on ensuring that the organisation satisfies any fit and proper tests for non-lawyer owners/managers and that it is a suitable regulatory model, for example in relation to risks to clients.
Why are ABSs being permitted?
The Government introduced the Legal Services Act 2007 under which ABSs will be permitted to allow greater competition in service delivery and innovative ways of meeting consumer demand for legal services, subject to appropriate consumer safeguards.
When can we set up an ABS?
The SRA is working hard to be in a position to license ABSs in the latter half of 2011 at the latest.
What is the SRA doing about ABSs at the moment?
ABSs can't be authorised until the LSB has finalised the detail of its new licensing scheme so that regulators, such as the SRA, can prepare their own licensing regulations and apply to the LSB to become licensing authorities for the purpose of regulating ABSs. The SRA has already begun work on the project—the process will involve consultation and formation of new policies, rules and procedures. Assuming the LSB approves the SRA's application, secondary legislation will be needed to give the SRA the necessary powers.
Is a licensing authority the same as an approved regulator?
It can be. The approved regulators are those that are approved for the purpose of regulating any of the reserved legal activities. Only an approved regulator can apply to be a licensing authority so all of the licensing authorities will be approved regulators. However, some approved regulators may not (at least initially) apply to become licensing authorities.
What will ABSs mean in practice?
Will we be able to sell 100 per cent of our firm to a non-lawyer owner?
When ABSs are permitted you will be able to sell all or part of a legal practice to a non-lawyer owner, whether it’s an individual or an organisation. You may wish to explore possible commercial arrangements before the new regime becomes effective but, before 2011, beware of jumping the gun—see our guidance on alternative business structures (ABSs).
Can a private equity company take an option now to buy a firm when ABSs are permitted?
Some types of option arrangement may be possible at this stage but you must be careful not to put your independence at risk—please refer to our guidance for help.
We are a panel firm for a leading insurance company which may want to invest capital—will there be conditions on them doing so?
They should be able to do so, but factors such as the potential for conflict of interest will need to be considered—putting conditions on a licence may be an option to deal with any areas of perceived risk. Further work will need to be undertaken on how we approach this type of issue.
A private investor wants to invest in my firm when he can but wishes to remain anonymous—will this be possible?
It is unlikely. We will need to know the ultimate beneficial ownership of ABSs (as we do with traditional firms). Whether owners of ABSs need to satisfy any "fit and proper" tests will depend on the extent of their share in the firm so the SRA will need details of all owners and their interest in the firm.
Will I be able to work as an in-house solicitor for a high-street store doing legal work for their customers?
Provided the company is licensed by a licensing authority, such as the SRA, you could be employed as an in-house lawyer to act for the company’s customers. The work that you could do will depend on the range of regulated activities that the licensing authority can regulate. Note that if you are not going to provide reserved legal activities your employer should not need to be licensed.
Will there be scope for firms operating with shared central services?
Yes, one of the opportunities will be for firms to get together and set up new arrangements for supporting their practices. For example, you could have a "hub and spoke" arrangement between legal firms and a central administration company (wholly or partly owned by non lawyers) under which the company might own part of the individual firms and take part of the profits whilst providing support such as updating systems and procedures and standard documents.
Will we be able to set up an ABS in Europe and how will this be regulated?
This will depend on the jurisdiction. If ABSs are permitted in the jurisdiction you want to practise in, we are likely to relax our regulations to allow it provided there are equivalent safeguards in place.
Solicitors are already able to practise wholly overseas with non-lawyers through firms not regulated by the SRA, provided the firm is 75 per cent owned and managed by lawyers and, generally, as long as it doesn't breach rules for local lawyers. Although no decisions have yet been made, when ABSs are permitted in England and Wales, our aim would be to allow greater flexibility to solicitors overseas too. However, we will need to consider this area in some detail because many jurisdictions do not permit lawyers to practise with non-lawyers.
How will ABSs be regulated?
Who will be able to regulate ABSs?
ABSs will be licensed and regulated by licensing authorities which are designated as such by the Lord Chancellor on the recommendation of the LSB. The SRA is working to be one of the first licensing authorities. Other regulators may also seek designation. The LSB's role will include overseeing the licensing authorities.
Will ABSs be able to choose their regulator?
In theory, yes. However, in large measure who can regulate an ABS will depend on the type of work that it wishes to carry out. An ABS will only be able to carry out reserved work that their regulator is able to authorise the firm to deal with. Other than notarial activities, the SRA can authorise the full range of reserved work.
Will our ABS have to comply with the SRA's or the LSB's rules?
If the SRA grants your ABS its licence, the SRA will be the licensing authority that regulates it, and you will need to comply with the SRA's rules. The LSB will fulfil the role of oversight regulator of all of the licensing authorities (and the approved regulators) to ensure that they are regulating effectively and in accordance with the regulatory objectives in the Act. The LSB is also able to regulate directly as a licensing authority in its own right but it has not yet decided whether to do so.
Will ABSs have the same rules as current solicitors' practices and legal disciplinary practices (LDPs)?
Our aim is that ABSs regulated by the SRA will be subject to the same regulatory requirements as the other firms that we regulate so that clients will receive the same consumer protections whatever type of firm they use. We aim to have one set of rules applying to traditional law firms and ABSs which are clear and easily accessible to clients and firms as well as to any other interested parties. The rules will be outcomes focussed giving more flexibility and responsibility to firms by setting out clear outcomes, with firms deciding the best way to deliver these for their type of business.
If the SRA licences an ABS will everyone in it be regulated by the SRA?
Our rules currently apply to all managers, owners and employees of a solicitor’s practice or an LDP, and we are aiming to take a similar approach to those involved in ABSs. ABSs are likely to involve others, particularly members of other professions, who will also be subject to individual regulation by their own regulators, for example in multi-disciplinary practices which provide a range of different professional services. Each ABS will only have one legal entity regulator, but some ABSs may also have other regulators. This could happen where, for example, a firm of solicitors is also directly authorised by the FSA to provide mainstream investment services.
Would I still be regulated by the SRA if I joined an ABS licensed by another regulator, such as the Council for Licensed Conveyancers?
Yes, as an individual. At present where solicitors work for a firm of licensed conveyancers, their work through that firm will be regulated by the CLC, although they still need a practising certificate and remain subject to rule 1 (Core duties) of the Solicitors' Code of Conduct. As similar public interest issues will apply, this will be the most appropriate approach with ABSs.
Setting up an ABS
Will there need to be a majority of lawyers?
No—there needs to be at least one lawyer who is a manager in an ABS but the majority of managers and all owners could be non-lawyers.
Will an ABS licensed by the SRA need to have a solicitor in it?
Although the requirement under the Act is that all ABSs have a lawyer manager, we may decide that we will only license ABSs in which at least one of the managers is a solicitor or a registered European lawyer (REL). This is still to be decided and, in any event, would not prevent the ABS having other types of lawyer as managers.
Will anyone be able to be a non-lawyer manager or owner of an ABS?
We expect that, provided they satisfy any "fit and proper" test set by the SRA, anyone will be able to be a non-lawyer manager and/or owner of an ABS. Two significant differences from the current position with LDPs will be that a non-lawyer will be able to be an owner without also being a manger in an ABS, and it will also be possible for corporate non-lawyer bodies to be owners and/or managers (although they cannot be directors of a company ABS).
Will non-lawyer managers need to be approved? And will it be the same for owners?
Yes, our proposal is that any non-lawyer who wishes to be a manager of an ABS must be individually approved as "fit and proper"—the process for approval will be very similar to what we currently do to approve a non-lawyer as suitable to be a manger of an LDP. Some owners will also need to be approved—who this will be will depend on the extent of an individual’s or organisation's ownership (and therefore potential influence) in the ABS, for example it may be that anyone owning 10 per cent or more of the ABS will need to be approved.
Will non lawyers be able to be owners without working in the firm?
Yes. The current restrictions that require a non-lawyer owner of an LDP also to be a manager of it will not apply to an ABS so a non-lawyer could be just an investor.
I've heard that all ABSs must have a HOLP and HOFA—what are these roles?
The LSA requires all ABSs to have a Head of Legal Practice (known as the HOLP) and a Head of Finance and Administration (known as the HOFA). The HOLP must be a lawyer and will be responsible for ensuring compliance with the terms of the ABS's licence and for reporting to the licensing authority any failure to comply with the terms of the licence. The HOFA (who does not need to be a lawyer) will be responsible for ensuring compliance with the licensing rules that relate to the treatment of money held by the ABS and keeping of the firm's accounts, and is also required to report any breach of those rules to the licensing authority.
Will the HOLP/HOFA need to be approved?
Yes, they will both need to be approved by the licensing authority. It is not possible to apply at the moment but please keep an eye on our website for the up to date position.
Can the same person be the HOLP and HOFA?
It may be possible for the same person to do so provided they are approved for both roles by the licensing authority.
Can our Compliance Manager who is not a lawyer be the HOLP when we become an ABS?
No, because the Act requires the HOLP to be a lawyer, as well as to be approved by the licensing authority.
Will ABSs need to have the same insurance cover as traditional practices?
We think it is important that clients receive the same level of consumer protection whether they use a traditional firm or an ABS and so are looking at how this can be achieved across a wide variety of business types. We will be consulting on what the best approach will be so please look out for this—you can sign up for our consultation alerts here.
How much will it cost to apply for an ABS licence?
We don't know yet what the fee will be but we are working to develop our systems of fee calculation to make them as fair and simple as possible.
Will an ABS licence continue indefinitely?
This is still something to be decided but may be the case. However, even if a licence does not need to be renewed each year, we would expect to have an annual process for updating the information that we hold about ABSs and to collect regulatory fees.
If I want to set up an ABS, what can I do now?
Although you can’t make an application yet, as long as you don't commit to something too soon, there is nothing to prevent you looking at the options and making preparations so that you are ready when "ABS day" arrives. As soon as we can we will publish on our website the applications forms for approval of a HOLP and a HOFA, approval of a non-lawyer manager and owner, as well as the form to apply for the ABS licence itself. This won’t be possible until the SRA has been approved as a licensing authority and a system for regulating ABSs is set up, which is unlikely to be before late spring 2011.
What will these changes mean for me?
Ours is a traditional firm and all our partners are solicitors—will the SRA’s requirements change for us?
The new requirements for regulating ABSs will generally apply only to ABSs. However, there may be some changes that affect all firms such as further developments in our renewal process for PCs and recognition of firms (for example online applications). We are also developing the conduct rules which we hope will apply to all firms, including ABSs, to become more outcomes focussed.
Our firm is an LDP—will we be affected by the introduction of ABSs?
Possibly. If you have any non-lawyer managers in the firm you will no longer be eligible to be an LDP and will therefore need to become an ABS. We and the LSB are proposing to have transitional arrangements for firms in that situation. If the firm is a lawyer-only LDP you will be able to continue as an LDP when the ABS regime comes in.
Will our LDP be passported?
We are considering whether the transitional arrangements could include a passporting exercise to move LDPs with non-lawyers into the ABS regime in a similar way to the passporting of partnerships to recognised body status in March 2009. The details of this will need to be developed nearer to "ABS day".
I'm an in-house lawyer—will anything change for me?
This will depend on the type of employer and on whether you carry out reserved legal activities for the public. If your role is purely to advise and act for your employer and you do not (and don’t plan to) provide such services to the public, your position should remain unchanged and you would not need to advise your employer to become a licensed body.
If you work for a commercial organisation such as an insurance company providing legal services, which include reserved legal activities, to the public or a section of the public your employer will almost certainly need to become licensed as an ABS. The only exemption will be if you act only for clients who are specified as not forming a section of the public, for example members of a trade union.
If your employer needs to apply for a licence but does not wish its whole business to become licensed as an ABS, an option would be for it to set up a separate body which is licensed and which employs you to provide the legal services.
What happens if I'm employed by a "special body"?
If you are employed by a "special body" such as a not for profit organisation providing legal services to the public which include reserved legal activities, your employer will need to become an ABS. However, a tailored ABS regime will be developed for these types of organisation and this will be to a later timetable than for commercial bodies. It may also be that, as such bodies are not commercially motivated, they can be regulated differently to commercial ABSs.
I am a solicitor in a firm regulated by the Council for Licensed Conveyancers. Will I be affected when ABSs come in?
Whether you are a manager or an employee in the firm, the answer will depend on who are the managers. Like an LDP regulated by the SRA, provided the firm doesn’t have any non-lawyer managers when ABSs are introduced, the firm should be able to continue as a lawyers' practice under the regulation of the CLC. If it has any non-lawyer managers when ABSs are introduced the firm will need to become licensed as an ABS—it is hoped there will be transitional arrangements to deal with this.
Keeping up to date
How can we keep up to date with what's happening?
Add www.sra.org.uk/LSA to your favourites and visit us regularly for the up-to-date position.