Preparing for alternative business structures (archived)
This guidance, issued in July 2009, replaces the version issued in January 2009.
The guidance does not form part of the rules and is not mandatory, but the SRA may have regard to it when exercising its regulatory functions. Solicitors, and others subject to the rules, who do not follow the guidance may be required to demonstrate how they have nevertheless complied with the rules.
New opportunities for providing legal services
1. The Legal Services Act 2007 (the LSA) permits new possibilities for the more flexible and competitive delivery of legal services. This can benefit clients, and at the same time offers attractive commercial opportunities to lawyers and others who wish to go into business with lawyers. The SRA welcomes these developments, and encourages solicitors and others to consider how they will respond to these challenges and opportunities.
2. Since 31 March 2009 "legal disciplinary practices" (LDPs) can be established under section 9A of the Administration of Justice Act 1985 (the AJA), allowing different types of lawyer, and up to 25 per cent of individual non-lawyers, to work together as "managers" of firms delivering legal services.
3. From about 2011 "alternative business structures" (ABSs) will be permitted under Part 5 of the LSA, allowing participation by a larger proportion of individual non-lawyers in a firm, as well as external ownership or part ownership of law firms, and the possibility of firms providing novel combinations of legal and non-legal services. We aim to have rules in place to govern the conditions under which ABSs will be permitted as and when the legislation allows.
Can I make arrangements now to prepare to set up an ABS?
4. Yes, you can. The SRA encourages appropriate preparations for the setting up of ABSs, and these can include, for example
- discussions with potential business partners,
- a non-binding arrangement with a potential business partner for the setting up of an ABS (i.e. an arrangement "subject to contract"),
- registration of company names, acquisition of domain names, etc.,
- 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—e.g. an agreement to accept new non-lawyers, or an outside investor, into partnership.
5. However, it is a fundamental requirement that, when practising solicitors provide legal services, they do so through a regulated firm so that clients and others benefit from the protections laid down by Parliament in the Solicitors Act 1974 (SA) and the AJA—including the SRA's rules, made under Part II of the SA to protect clients and the wider public interest.
6. As the law stands, the SRA has no power yet to recognise a firm whose structure or business arrangements are in breach of section 9A of the AJA. This means that non-lawyer businesses are currently prohibited from having any ownership interest in a law firm, or exercising any control or management over a law firm. Your arrangements must, therefore, remain within the framework permitted by the current legislation and by the SRA's rules. These rules have been recently revised in the light of section 9A to allow for LDPs and firm-based regulation. Section 9A reinforces our current rule 1.03 (independence), and forms the basis of our current rule 14 (recognised bodies).
7. Even after ABSs are allowed, certain arrangements will remain prohibited because they would be contrary to the public interest, for instance any arrangement which would
- compromise your ability to give independent advice to your clients, directly or indirectly; or
- allow a third party access to confidential information concerning your clients.
8. Certain other arrangements may be acceptable under the ABS regime, or may be acceptable in some circumstances or subject to appropriate safeguards, but as section 9A and the professional rules currently stand, you cannot enter into any arrangement which would
- compromise your firm's independence—e.g. you should avoid any funding agreement (other than a normal bank loan or overdraft) which would give the funder control over the management of your firm or allow it to use the threat of putting the firm out of business to influence daily operational behaviour, or a fee sharing agreement which would involve parting with such a proportion of the firm's profits as to jeopardise the firm's independent financial survival, or the granting of a "call option", which could indicate that control of the firm has already passed. For a recent judgement of the Divisional Court concerning independence of a solicitor's firm and fee sharing agreements, see Reed v. Marriott [2009] EWHC 1183 (Admin); or
- involve you in co-ownership structures which could put you in breach of the separate business rule (rule 21) prior to the implementation of checks on "restricted interests" under Schedule 13 to the LSA.
Nor can you enter into any arrangement which would
- involve selling your ownership interest in the practice or any part of it (or its service company) before ABSs are permitted—e.g. you should avoid granting any option to purchase your interest in the firm for nominal value, in circumstances which would suggest that the ownership and/or control of the firm has already passed. However, there is nothing to preclude an arrangement which would enable transfer of control in the future, so long as it is clear that a positive decision has to be made by the firm at the appropriate moment,
- put your future business partner in control of material decisions about your business,
- put your firm in the position of acting as a "front" for another organisation,
- put 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,
- create a situation where a third party becomes a "shadow director" of your firm with effective blocking power on decisions made by your firm; or
- allow your firm to become, in effect, a subsidiary of an outside organisation—which could jeopardise the protections put in place for the clients of regulated law firms, as well as being contrary to the current law. By contrast, there is no objection to a firm adopting a common logo or branding style to link the firm's image with that of other service providers.
9. Note that the Solicitors Disciplinary Tribunal has stated in a recent case:
"The Tribunal considers that it is incumbent upon solicitors to have proper regard for the principles which lie behind the written rules or codes of conduct and not to seek justification for their actions by dissecting the letter of such rules. Because the rules are in place to protect the public, a solicitor has always to bear those fundamental principles in mind when applying the letter of the rules to his own situation."
Service companies
10. A regulated firm's service company has to be wholly owned by the firm. By a "service company" we mean a company which, while it has no face to the public, carries out "support functions" essential to the running of the firm, such as the employment of staff and the leasing of premises and equipment.
11. If, however, management and control of a service company has been passed to an outside body, the SRA is unable to regulate it. A regulated firm, therefore, cannot invite an outside investor to buy into the firm's service company because this will almost inevitably result in a breach of rule 1.03 (independence), rule 12.01 (framework of practice), rule 13 (employed solicitors), rule 14 (structure of a recognised body) and/or rule 21.02 (provision of core legal services through a separate business). See also guidance note 30 to rule 14, and guidance notes 14 and 15 to rule 21.
12. Note that allowing an outside investor to buy into a firm's service company should not be confused with a firm contracting out ("outsourcing") some particular service function to a wholly unconnected business on arm's length terms.
What are the possible consequences of non-compliance?
13. The SRA cannot turn a blind eye to firms which attempt to gain an improper advantage by ignoring the public protections recently put in place by Parliament in section 9A of the AJA to govern LDPs, or the additional public protections under Part 5 of the LSA, which will set the standards for ABSs. The SRA is currently investigating a number of firms which may be in breach of rules 1.03 or 14, or related rules. A non-compliant firm could have its recognition revoked, or could even be subject to disciplinary proceedings.
14. If a solicitors' firm or a currently unregulated business shows, by breaching the current rules, or by encouraging others to do so, that it fails to pay proper regard to compliance with regulatory obligations, this could in serious cases be a relevant factor for the SRA to take into account if and when the SRA eventually considers an application from the firm or business to set up an ABS.
15. Another possible problem is that you could find yourself contractually bound to establish business arrangements which are at odds with the ABS rules which are eventually made. If, in the light of this guidance, you think that you may have made inappropriate arrangements, do talk to us.
How can I get guidance about my own situation, or about a specific proposal?
16. For more help about what the LSA changes will mean for you, see www.sra.org.uk/sra/legal-services-act/lsa-questions-faqs.page for frequently asked questions and answers.
17. We have been asked by solicitors' firms and potential investors whether we can give "safe harbour" clearance for investment schemes. Our Ethics Guidance Team is always willing to give advice in as helpful a way as possible—and if you can show that you have asked for advice and followed it, that will be evidence of an intention to comply. We encourage you to contact us. The SRA is, however, unable to give formal "clearance" of schemes. This is because whether or not an arrangement is in fact compliant will depend upon a number of factors, including the precise manner in which a scheme is implemented.
18. For further guidance please contact the SRA's Ethics Guidance Team.
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