Ethics guidance

Chapter 12 of the SRA Code of Conduct 2011 - the separate business rule (SBR)

 

Issued on 21 October 2015

Status of this guidance

This guidance is not mandatory; however the SRA may have regard to it when exercising its regulatory functions.

Who is this guidance relevant to?

This guidance is intended for SRA regulated individuals or entities (or anyone working in those entities) that have links with or are involved with separate businesses.

The SRA Principles

    • Principle 2: act with integrity;
    • Principle 3: not allow your independence to be compromised;
    • Principle 4: act in the best interests of each client;
    • Principle 5: provide a proper standard of service to your clients;

The SRA Mandatory Outcomes

Outcomes 12.1 to 12.4 of the SRA Code of Conduct 2011

Practising in a separate business

  • 1.

    Solicitors and registered European lawyers (RELs) can own and be managers or employees of a separate business. However, they cannot practise as a solicitor or REL in a separate business except as an 'in house' solicitor or REL as permitted by Rules 1- 4 of the SRA Practice Framework Rules 2011 (PFR).

  • 2.

    Solicitors or RELs working within separate businesses (including 'non-practising solicitors' that are on the Roll but do not have a practising certificate) should also read Rule 9 of the PFR on practising certificates; the guidance notes to Rule 4 PFR on what will amount to 'practising'; and the associated guidance. If your conduct amounts to practising then (a) you will require a practising certificate and (b) you cannot provide services to external clients of the separate business except in the limited circumstances permitted by Rule 4 PFR.

  • 3.

    Whether a solicitor or REL supervising legal work provided by others to external clients within a separate business will be in breach of the PFR will depend upon the extent to which the solicitor can be said to be providing the supervision as an 'in house' solicitor as permitted by Rule 4, or whether they are in effect practising by providing a service to an external client. The former will include activities such as providing general advice on how cases or types of cases should be dealt with (and drafting procedures/checklists etc. in that connection) and providing quality control. However, directly supervising the work on a specific matter carried out for a particular external client is likely to amount to providing a legal service to that client and would therefore not be permitted under the PFR.

Outcomes

  • 4.

    The SRA does not regulate separate businesses. However, SRA authorised individuals, entities and their employees that have connections with them are regulated, and the nature of those connections is regulated. Actions by the separate business may lead to you being in breach of SRA rules, especially where you have an element of control over the separate business or you actively participate in it.

  • 5.

    You will always be responsible for your own services and publicity to clients and for the extent to which you refer clients to separate business or divide cases with them, and you must always act in the client's best interests. There may be some circumstances where it would be appropriate for you to consider terminating your links with the separate business altogether as it may be impossible otherwise for you to comply with your obligations; for example where you consider that the separate business lacks integrity or lacks competence to deal with the cases that it is taking on. Bear in mind also that if you are a solicitor or a REL, then you must comply with Principles 1 (proper administration of justice), 2 (integrity) and 6 (public trust), and with Outcomes 11.1 (unfair advantage) and 11.2 (undertakings) in relation to any business activities outside your practice.

Outcome (12.1) you ensure, and have safeguards in place to ensure, that clients are clear about the extent to which the services that you and the separate business offer are regulated.

Outcome (12.2) you do not represent, directly or indirectly, the separate business as being regulated by the SRA or any of its services as being regulated by the SRA.

  • 6.

    Although Outcomes 12.1 and 12.2 apply to you and not the separate business, taking effective steps to comply will mean ensuring that the publicity and information given by the separate business allows compliance. If you are unable to achieve this may be necessary for you to terminate your connection with the separate business to avoid being in breach of the Outcomes.

  • 7.

    The extent of the information to be provided to meet these Outcomes will depend on the likelihood of the confusion arising.

  • 8.

    The more obviously 'separate' the business, and the further away its activities are from legal activities that consumers might expect to be provided by a lawyer, then the less detail will need to be provided.

Example: W & Co (a recognised body) are part owners of G Properties (an estate agency). G Properties is therefore a separate business. The two businesses do not share premises, staff, publicity or a website, although referrals occur between them. G Properties do engage in some legal activity that is routine for estate agents - for example, providing draft leases to residential landlords. However, cases are never 'split' between the two firms and W & Co only refer clients for estate agent activities.

There would seem to be little risk of consumers being confused as to the nature of regulation of the different entities. So for example, it should be unnecessary for G Properties website or other publicity to state that G Properties are not regulated by the SRA. When referring clients to G Properties, W & Co will need to comply with Outcome 12.4. However, this could involve a reference to G Properties being an estate agent and as such not regulated by the SRA, but would generally not need to involve detailed information about the differences in regulation. However, the nature of the links between the two businesses must be made clear on any referrals and the outcomes in Chapter 6 of the Code (introductions to third parties) must be complied with.

  • 9.

    Factors that will require more specific information to be provided to consumers will include:

    • (1) You and the separate business sharing
      • the same or a similar name, and/or
      • premises, and/or
      • staff - especially if the staff will deal directly with consumers.
    • (2) You and the separate business having shared (or linked) websites, contact details or publicity.
    • (3) The extent to which the separate business provides legal services that consumers would expect to be provided by a lawyer.
    • (4) Whether clients seeking legal services will be first directed to the separate business.
    • (5) Whether matters will be divided between you and the separate business -see also Outcome 12.4

Example: R Solicitors own R Estates, a separate business. The two firms share a website which directs clients that require estate administration or probate services to R Estates via e-mail contact or a helpline number. These clients are only referred to R Solicitors in order to obtain the grant of probate, and R Estates deal with the administration throughout. This will bring into play Outcome 12.1, 12.2 and 12.4. The website itself will need to explain clearly that R Solicitors are regulated by the SRA and that R Estates are not. However, there will be a need to go further and obtain the client's informed consent to the matter being divided between the firms and provide specific information as to the differences in regulation and redress. See paragraphs 15-21 below.

  • 10.

    The duties in Outcomes 12.1 and 12.2 are continuing. For example, if a client has instructed both you and the separate business then that client should be clear throughout about the extent to which the different elements of the work are regulated and about who is performing each element.

O (12.4) you only:

  • (a) refer, recommend or introduce a client to the separate business
  • (b) put your client and the separate business in touch with each other; or
  • (c) divide, or allow to be divided, a client's matter between you and the separate business,

where the client has given informed consent.

  • 11.

    What will constitute the client's 'informed consent' will depend on the circumstances.

  • 12.

    'Informed consent' will always involve the client being made aware of the nature of your links to the separate business and any interest you have in making the referral. (For the purposes of this guidance the terms 'referral' or 'referring' cover all of the circumstances in O12.4 (a) and (b)).

  • 13.

    This reflects the requirements in Outcome 6.2 (your client and introductions to third parties) and the Outcomes in chapter 9 (fee sharing and referrals).

  • 14.

    However, if the referral is to a separate business for a separate matter, not involving legal activities, then it may be unnecessary for detailed information about regulatory redress to be supplied. Clearly, you will require the client's agreement before passing on details to the separate business - but the client may of course contact the separate business directly having been given the appropriate information. (See also the obligations in Chapter 6 of the Code).

Example: RTA & Co handles personal injury claims. They are part of a group of companies which includes a separate business 'Fast Car' that hires out cars following accidents. RTA & Co can recommend Fast Car for car hire to their personal injury clients provided that it is in the client's best interests to do so, that the provisions of Chapter 6 of the Code of Conduct, relating to introductions to third parties, are satisfied and the client understands the nature of the links between the two businesses. The client's agreement would be needed to pass their details to Fast Car.

  • 15.

    If a matter is divided with a separate business or the referral is for the primary purpose of the separate business carrying on legal activity, then it is important for the client to be made aware of the differences in regulatory protection and of redress between the two businesses. The concept of informed consent includes the client understanding the consequences of these differences, not just the facts of them. This is likely to require going further than the more general obligations in Outcomes 12.1 and 12.2, which apply in all cases.

  • 16.

    In these circumstances, the information will need to be at an appropriate level of detail and it is likely to be necessary to explicitly draw it to the client's attention, for example in a client care letter, rather than the information just being contained in terms and conditions of engagement.

  • 17.

    The starting point is that clients should be informed that the work carried out by the separate business will not be regulated by the SRA and that:

    • there will be no right to complain to the Legal Ombudsman,
    • there will be no right to apply for a grant to be made out of the Compensation Fund,
    • the work will not be covered by compulsory professional indemnity insurance (PII) (you may explain what insurance arrangements the separate business has in place),
    • the work will not be covered by legal professional privilege,
    • the protections in the SRA Accounts Rules 2011 in relation to client money will not apply.
  • 18.

    This is only a starting point - the test is whether the client has actual understanding of the differences in regulation and redress and the potential consequences and it is your responsibility to ensure that this is the case.

  • 19.

    Where there are factors increasing vulnerability, it may well be necessary to explain these issues in more detail to ensure that the client understands the potential consequences.

  • 20.

    Where the separate business is regulated elsewhere then the information may be amended to reflect the protections and rights of redress offered by that regulation. For example, other professionals will often have their own compulsory PII schemes, and those instructing regulated Claims Management Companies have the right to complain to the Legal Ombudsman.

  • 21.

    Other factors that may be taken into account in deciding the appropriateness of the information is the client's existing knowledge and whether the client would have a reasonable expectation that protection relating to legal services would apply. In some circumstances, certain elements of the information will not be relevant or necessary. For example, corporate clients with a turnover of £2m or more will not have the right to access the Legal Ombudsman or the Compensation Fund in any event. However, all clients are entitled to clarity about their regulatory position and the information provided should be sufficient so that they can understand the risks they are taking on - including the potential loss of legal professional privilege.

Considering the client's best interests

  • 22.

    Under principle 4 of the SRA Principles 2011, you are obliged to act in the best interests of your client and you need to consider this carefully when Outcome 12.4 applies.

  • 23.

    Where you are making a referral of all or part of the matter to the separate business, the fact that it may be in the client's best interests for you to refer them elsewhere (e.g. because you do not have expertise in the particular area) does not necessarily mean it is in their best interests to refer them to the separate business. It might, for example, be in the client's best interests for you to refer that client to another business authorised under the Legal Services Act 2007.

  • 24.

    Factors that you will need to consider when deciding whether it is likely to be in the client's best interests to refer to, or divide the matter with, the separate business will include

    • the suitability and competence of the separate business to deal with the matter,
    • the importance of retaining regulatory protections available to an authorised person in the particular case,
    • what other regulatory protections exist in the separate business (for example, is the separate business a member of a certified ADR entity and/or subject to a quality assurance scheme),
    • whether the client's information will remain confidential within the separate business,
    • whether client money is to be held by the separate business and whether adequate protections will be available (bearing in mind, for example, the size of the funds involved),
    • whether it is likely to be important to retain legal professional privilege, and
    • whether dividing (or allowing to be divided) the matter is likely to lead to uncertainty as to who is managing the matter or aspects of the matter or as to what protections exist in any particular circumstances.

What is the same 'matter'?

  • 25.

    It is not possible to give an exhaustive definition of a 'matter'. This will often be a question of what the client's reasonable expectations would be - i.e. would the client reasonably regard it as the same matter?

  • 26.

    However, in our view, the following will always be part of the same matter for these purposes:

    • the grant of probate and administration of the estate,
    • all legal activity in relation to conveyancing,
    • all legal activity in relation to the same cause of action in a civil dispute, and
    • all legal activity in relation to a family dispute.
  • 27.

    It is important to note that Outcome 12.4 does not apply where work is outsourced to the separate business i.e. you retain conduct of and responsibility for the whole matter. However you should note the requirements in Outcome 7.9 and 7.10 of the Code in relation to outsourcing.

Allowing a matter to be divided

  • 28.

    Outcome 12.4 (c) is concerned with dividing a legal matter. So, giving legal advice to a client in relation to an aspect of a separate non-legal service provided by a separate business may well not be 'dividing or allowing a matter to be divided' with that business.

Example: A client has instructed the separate business (a financial services firm) to provide investment advice. At a certain point the separate business refers the client to the connected authorised person for advice on the tax implications of the investments. The authorised person accepting the instructions does not constitute allowing a matter to be divided with the separate business.

  • 29.

    There will be circumstances where a client has directly instructed a separate business to handle a matter that primarily involves legal activity. At some point in the case it may be in the client's best interests for an authorised person (e.g. a solicitor regulated by the SRA) to be involved, for example, to carry on reserved legal activities or provide specialist advice. In those circumstances, if the matter is divided with you by the separate business then Outcome 12.4 will apply and you will require informed consent and will also need to ensure that Chapter 9 of the Code (relating to fee sharing and referrals) is complied with.

  • 30.

    If a matter is referred to you in part by the separate business, it may sometimes be in the client's best interests for you to take over conduct of the whole matter from the separate business. . This could be where, for example, it would be difficult for you to carry on a reserved legal activity for the client effectively unless you had full conduct of the matter, or where the client's interests are likely to be seriously prejudiced unless they benefit from legal privilege in relation to the whole matter. In those circumstances you should consider refusing to act unless the separate business is willing to refer the whole matter.

Some other key issues relating to separate businesses

  • 31.

    SRA Principle 3: not allowing your independence to be compromised. The interests of the separate business should not be put before the best interests of the client. Where you are dividing a matter with the separate business, you will need to ensure that you are able to act independently - so that, for example, where you represent the client in litigation you and not the separate business have conduct of the litigation.

Conflicts of interest

  • 32.

    Own interest conflict (Outcome 3.4) will include situations where the referral to, or division of the case with, the separate business would benefit the separate business but is not in the client's best interests.

  • 33.

    Potential conflicts of interest between clients (Outcome 3.5). The separate business will be a separate entity and therefore you are able to act for clients who may be in conflict with clients of the separate business. However, it is vital to ensure that confidential information is not passed between the businesses.

  • 34.

    Confidentiality requirements - Chapter 4 of the Code. Separate businesses that are closely linked to the authorised body, whether or not they share premises, may bring a number of risks to confidentiality. These include:

    • (a) IT systems - if you share an IT system with a separate business it is important that this is suitably secure and set up so that only you can access your firm's client information and cases.
    • (b) Telephones - clients should be clear which firm they are speaking to. Ideally, there will be separate phone numbers for you and the separate business.
    • (c) Sharing of information - you cannot share information with the separate business (or vice versa) without the client's consent.
    • (d) Sharing of staff.
  • 35.

    The client's consent to waiving their confidentiality must be clear and they cannot be forced to do so - this means a client confidentiality waiver should not form part of your general terms and conditions which clients must agree in order to enter into a retainer. A request to the client for consent to waive their confidentiality must be clear in, for example, the engagement letter and be separate from agreement to any other terms. It is important to consider that a waiver of confidentiality could lead to a loss of legal professional privilege and it may not be in the client's best interests to be asked to agree to it.

  • 36.

    SRA Accounts Rules 2011 - the client account of an SRA regulated entity must not be used to hold money for the separate business.