Ethics guidance

Does your interest in an ABS require SRA approval?

Updated 7 March 2014

Introduction

  1. This document provides an overview of the approach which the SRA will adopt in determining whether or not a particular role or interest which a person has in an ABS law firm requires notification to the SRA and separate SRA approval under Schedule 13 to the Legal Services Act 2007 ("the LSA" and "Schedule 13").

  2. The LSA provides for the regulation of law firms which are owned and/or managed by non-lawyers and businesses which are not law firms – "alternative business structures" (ABSs). The SRA has previously provided information to assist regulated persons in assessing whether a firm needs to be authorised as an ABS or whether it can practise as a traditional law firm (which are generally managed and owned by lawyers).

  3. Under the LSA the SRA must approve the holding of a "material interest" by a "non-lawyer" in an ABS, as well as authorise the firm as a whole as being appropriate to provide legal services.

  4. The subject matter of this document is technical and so an assumption has been made that the reader will be familiar with the basic legal and regulatory concepts.

  5. The information provided within this document is intended to facilitate understanding of the SRA's approach in this area and should not be relied upon or interpreted as advice or guidance on the law. ABSs, potential ABSs and those involved with such bodies should take great care to satisfy themselves of their legal obligations under Schedule 13 of the Legal Services Act as a failure to meet the requirements of the Act could result in a criminal offence being committed.

Authorised persons and non-authorised persons

  1. In order to assess whether a "non-lawyer" has a material interest in an ABS and therefore requires specific notification to and approval by the SRA under Schedule 13, the LSA distinguishes between:

    • authorised persons – so essentially "lawyers" and law firms1, including solicitors, registered European lawyers, SRA-regulated law firms, barristers, licensed conveyancers and legal executives; and

    • non-authorised persons – so essentially any individual (or entity, such as a company) who is not one of the following:

      • a) an authorised person (see the summary above);
      • b) a registered foreign lawyer;
      • c) a member of an Establishment Directive profession entitled to pursue professional activities in an Establishment Directive state (more information on the Establishment Directive); or
      • d) a firm providing legal services in which all of the managers (the term "managers" generally refers to partners in a partnership, members of an LLP or directors of a company) and owners are individuals within (a)-(c) above or are bodies in which more than 90 per cent of the managers and owners are within (a)-(c) above (further information in this respect is available on our website).
  2. The definitions of "authorised" and "non-authorised" persons are technical. For the purposes of understanding when SRA approval will be required a material interest held by a person (whether it be an individual or an entity such as a company), it may assist to think of "authorised persons" simply as lawyers and "non-authorised persons" as non-lawyers. Care should be taken though as lawyers or law firms of non-European jurisdictions will not generally come under the definition of "authorised persons".

  3. Some simple examples of when a non-authorised person would hold an interest in a law firm are as follows2:

    • nine solicitors and one marketing specialist with no legal qualifications wish to work in partnership together as a law firm;
    • a law firm which is a private limited company wishes to sell some of its shares to another limited company which is not a itself a law firm and has no lawyers involved in the company.
     
  4. In these scenarios the law firm would need to apply to become an ABS3 but, under Schedule 13 to the LSA, if the interest which the non-authorised person will hold in the ABS is of such a size or nature so as to make it "material" then:

    • there will be a legal obligation to notify the SRA of the proposed holding of a material interest and a criminal offence may be committed if this is not done4;
    • the holding of that ownership interest (whether it be shares in a limited company or a non-lawyer being a partner in a partnership for example) by the person in question will need to be approved by the SRA;
    • the SRA may refuse to approve the ownership interest or impose conditions upon the holding of that ownership interest;
    • the SRA may withdraw approval of the holding of the interest or impose conditions at a later date; and
    • the SRA may take action to enforce conditions or remove the material interest from a person in certain circumstances.
     
  5. If the interest held by the non-authorised person is not of such a size or nature so as to be "material" however, then the SRA will simply consider the ownership and management of the firm as part of its broader assessment of the suitability of an ABS to provide legal services.

What tests are used in determining when an interest in an ABS is "material"?

  1. Paragraph 3 of Schedule 13 sets out the tests for assessing at which point an interest in an ABS is "material" and therefore requires separate approval by the SRA.

  2. As the LSA deals with a variety of potential business structures, the tests provide for a variety of methods for calculating at what point an interest becomes "material" in different types of firm and structure.

  3. In brief summary, the tests set out in paragraph 3 look at:

    • a) who has ownership shares in the ABS firm;
    • b) who has the power to make important decisions about how the law firm is run – "voting power" or "voting rights" in the ABS firm;
    • c) who can exercise significant influence over the management of the ABS firm;
    • d) whether any persons are "associated" with each other and may be acting together to influence how the ABS firm is run; and
    • e) whether there is a parent business or there are parent businesses of the ABS firm (such as where the ABS firm is a wholly owned subsidiary of another company) and if so who owns, controls and influences the parent business or businesses.
     

a) What are "shares" in an ABS firm in this context?

  1. The first test set out is whether a "non authorised person" holds 10 per cent or more of the "shares" in the ABS (or its parent business – see below for more information in this respect). If so, then the interest in the ABS will be "material" and require SRA approval before it can be held.

  2. The term "shares" as used in the LSA has a much broader meaning than would ordinarily be attributed to it5. In the context of a limited or public limited company, where there is a record of the shares allotted to the persons who own the business, the "10 per cent of shares" test is a relatively straight forward one to apply.

  3. However, the concept of "10 per cent or more of shares" in a partnership or an LLP, for example, requires a different assessment to be made because these structures do not have a share capital. When the term "shares" is used in this context it essentially means 10 per cent of the ownership rights or responsibilities, rather than individual shares which can be evidenced by a share certificate as would normally be associated with a company.

  4. The LSA applies different tests for determining whether a person has a share in such a body depending upon whether it is a "body with capital" or a "body without capital".

  5. A body which is a partnership, for example, might have capital by way of cash contributions made by the partners of the firm. A person could be said to have a "share" of such a body under the LSA if that person has a right to share in that capital. We will generally consider both rights to share in an increase in the value of the capital while a body remains trading and the right to share in surplus assets on winding up as a right to share in the capital of a body for this purpose (though this is not an exhaustive list of the relevant considerations).

  6. Alternatively, some bodies will not have capital. Some partnerships or LLPs for example might be funded by a mixture of bank borrowings and retained profits. Where there is a body without capital, "shares" in such a body in the context of the LSA means interests:

    • a) conferring any right to share in the profits of the body;
    • b) conferring a liability to contribute to losses; or
    • c) giving rise to an obligation to contribute to the debts or expenses of the body in the event that it is wound up.
     
  7. An example of when we would consider an interest to be material in a partnership or LLP with capital would be where a partner or member is entitled by virtue of a partnership or membership agreement to 10 per cent of the proceeds of the sale of the business assets in the event that the business is wound up.

  8. An example of when we would consider an interest to be material in a partnership or LLP with no capital would be where a partner or member is entitled to share in 10 per cent or more of the profits of the business.

  9. Such entitlements or obligations will usually be set out in the constitution of the body, so for example in the partnership or membership agreement. However, some rights may also arise as a matter of law. For example, section 24(1) of the Partnership Act 1890 provides that, subject to any agreement to the contrary, partners are equally entitled to share in the capital and profits of a business and also must contribute equally towards losses (this is a summary only).

  10. In some structures the manner in which ownership rights and obligations are distributed will be complex and we will not adopt one set method of assessing who holds what proportion of shares. In determining when a material interest arises we will take account of the spirit and intention of the test set out in Schedule 13 of the LSA as well as the regulatory objectives (also set out in the LSA).

  11. For example, in a partnership or LLP without capital there may on the face of it be a number of methods by which "shares" in the body could be calculated:

    • a) by reference to the rights to share in profits only;
    • b) by reference to the obligation to contribute to losses only;
    • c) by reference to the obligation to contribute to debts in the event of closure only;
    • d) by reference to an accumulation of the rights in (a) to (c).
     
  12. If 10 per cent or more of any of these rights, obligations or holdings is held by a non-authorised person then we will conclude that the person holds a material interest and would expect the holding of all such interests to be notified to us as a material interest in accordance with Schedule 13 to the LSA.

b) What does "voting power" and "voting rights" mean in this context?

  1. Another test which the LSA6 applies in determining whether a non-authorised person's interest in an ABS is "material" is concerned with how important decisions about the business are taken and the extent to which the non-authorised person has a right to be involved in such decisions.

  2. The test applies differently depending upon whether the ABS:

    • a) has "general meetings" of the owners of the business at which matters are decided by the exercise of voting rights – this would make the business an ABS with "voting rights"; or
    • b) does not have "general meetings" of the owners of the business at which matters are decided by the exercise of voting rights and has some other method of directing the overall policy of the body and amending the terms of the body's constitution – so an ABS where persons involved may have "voting power" (but no "voting rights" as such).
     
  3. Where the ABS is incorporated as a company, for example, with voting rights and general meetings then the test is again more straight forward: does the non-authorised person exercise or control the exercise of 10 per cent or more of the voting rights in the ABS?

  4. However, in an ABS where there are no such general meetings, there is a separate question of whether the non-authorised person exercises (or controls the exercise of) "voting power". The test set out in the LSA is whether the non-authorised person is entitled to exercise (or control the exercise) of the right under ‘the constitution of the body' to:

    • a) direct the overall policy of the body; or
    • b) alter the terms of the body's constitution.
     
  5. Our view is that "constitution" is not limited to articles and memoranda of association in a company and partnership and membership agreements in partnerships and LLPs. It is our view that the constitution of a body could also include other documentation, resolutions, procedures or practices which govern rights, responsibilities and decision making within the business.

  6. Unlike voting rights, the LSA does not require that a particular percentage of the "voting power" must be exercised or controlled by the non-authorised person (as compared with other persons involved in the business) in order for the interest to be "material".

  7. The LSA does not define what is meant by directing "overall policy". It is our view that this includes directions relating to:

    • a) setting the objectives of the business;
    • b) setting the strategy of the business;
    • c) distribution of capital, profits or other income;
    • d) changing the name of the firm;
    • e) the addition and removal of managers;
    • f) the sale of significant assets (relative to the business in question); or
    • g) incurring significant debt (relative to the business in question).
     
  8. As set out above, we will take account of the spirit and intention of the material interest provisions as well as the regulatory objectives set out in the LSA in determining when a material interest arises. In particular, we will take account of the practical reality of how the actions or inactions of the non authorised person will impact upon the exercise of voting rights or voting power in the body.

  9. For example, in some scenarios the practice of a law firm may be so closely tied to a third party, such as a lender or client source, that how overall policy is directed is in practice within the control of the third party.

c) What does "exercising significant influence" over the management of an ABS mean in this context?

  1. Another test which is applied in assessing whether a non authorised person's holding of an interest in an ABS is material is concerned with the extent to which that person exercises influence over the management of an ABS.

  2. Specifically the LSA requires an assessment of whether the non-authorised person:

    • a) is able to exercise significant influence over the management of a body by virtue of the person's voting rights in the body; or
    • b) is able to exercise significant influence over the management of a body by virtue of the person's "shares" in the body.
     
  3. In the approach outlined in (a) above, the LSA refers to "voting rights" and not "voting power".

  4. In the approach outlined in (b), the LSA adopts the broad interpretation of "shares" discussed above. So this could include an interest in a partnership or LLP as well as allotted shares in a company.

  5. The term "significant influence" over management is not defined but is linked in each case to some form of ownership interest or voting rights. This could include a shareholder in a company, a right to share in the capital of a body or a right / obligation to share in the profits / losses and expenses of a body.

  6. Significant influence over the management of a body could take many different forms. We will consider available evidence as to the practical reality of the management within an entity as well as influence which a person has as an express right within the constitution of the body.

  7. In many instances a significant influence by virtue of an ownership interest may also satisfy one of the other tests for assessing whether a material interest exists. However, this will not always be the case.

  8. For example, a non-authorised person might hold less than 10 per cent of the voting rights in an ABS firm which is a company but under a shareholder's agreement has a power of veto over important decisions in the business or some other form of preference.

  9. Another relevant example for assessing influence might be where a non-authorised person's role within an ABS firm is critical to the business model of the firm continuing. The risk of the non-authorised person leaving the body could potentially be so great as to allow that person in practice to significantly influence the management of the business, even though his or her rights and responsibilities under the constitution of the business may be limited.

d) What if a person with an interest is associated with another person with an interest?

  1. Another test which determines when a non-authorised person holds a material interest is intended to address the scenario where there is a risk that two non-authorised persons may act together to influence or control an ABS firm.

  2. The LSA does this by categorising certain relationships between persons – such as between husband and wife and civil partners – as requiring a joint assessment of the interests held by those persons.

  3. For example, if a non-lawyer Mr A proposes to take 6 per cent of the allotted shares in an ABS which is a company and his wife Mrs A (also a non-lawyer) proposes to take another 6 per cent of the allotted shares then the LSA requires consideration of those interests collectively. The LSA refers to such persons as "associates"7. Taken individually, 6 per cent of the allotted shares in a company and no other interests or influence would not normally constitute a "material" interest which requires specific SRA approval or notification. However, owing to their relationship both Mr A and Mrs A would be deemed to hold a material interest as the interests of associates need to be looked at collectively. This means that both Mr A and Mrs A would become subject to the SRA's material interest approval process before either of the investments in the ABS could proceed and the legal obligations to notify the SRA of the proposed material interests would arise8.

  4. Alternatively, if one associate is a lawyer – an "authorised person" – then our view is that it would only be necessary to consider the non-lawyer associate's interest as a material interest for the purposes of the LSA.

  5. The LSA lists the types of relationship which constitute an "association". The full details are set out at paragraph 5 of Schedule 13 to the LSA but in summary if Mrs B holds an interest in an ABS called ABS Co then her associates are:

    • Mrs B's spouse or civil partner;
    • Mrs B's child or stepchild who is under 18 years old;
    • a trustee of a settlement under which Mrs B has an interest (specifically, a life interest in possession);
    • a body in which Mrs B is a director;
    • an employee of Mrs B;
    • a partner of Mrs B in a partnership (i.e. a partnership other than ABS Co if that is the business model used);
    • a person with whom Mrs B agrees or arranges to acquire, hold or dispose of interests in ABS Co; or
    • a person with whom Mrs B agrees or arranges to act together in exercising voting power or voting rights in relation to ABS Co.
     
  6. It should be remembered that the LSA uses the term "person" for both individuals and entities. In keeping with this approach the "associate" provisions also apply if the investor were an ‘undertaking' such as another business. For example, if Investor Co took an ownership interest in ABS Co then its associates could be:

    • a director of Investor Co, if it were a company;
    • a "subsidiary undertaking" (for example, another business which Investor Co itself owned and controlled) of Investor Co; or
    • a director or employee of such a subsidiary undertaking.
     

e) What are parent and subsidiary undertakings?

  1. For every test which the LSA applies in ascertaining whether an interest in an ABS is "material"– the proportion of shares or ownership rights held, the exercise of voting power and voting rights or exercising significant influence by virtue of an interest – the same tests are applied to any "parent" of the ABS.

  2. An example of a "parent" and "subsidiary undertaking" relationship would be if ABS Co Ltd wished to provide legal services and 90 per cent of its allotted shares and voting rights were held by a separate limited company, Parent Co. Continuing this hypothetical example, if Mr C wished to make an investment, purchasing 10 per cent of the allotted shares and voting rights in ABS Co Ltd would give him a "material interest" requiring specific SRA notification and approval (because as discussed above, 10 per cent of allotted shares and voting rights are two of the tests set out in Schedule 13). However, Mr C would also be obtaining a material interest in ABS Co Ltd if he purchased 10 per cent of the allotted shares and voting rights in Parent Co. This is because Parent Co holds the majority of the voting rights in ABS Co ltd and so would be classed as the "parent undertaking"9 (making ABS Co Ltd the "subsidiary undertaking").

  3. Therefore the "material interest" tests apply to, for example, investing in "parent" businesses as well as the primary business which will be providing the legal services.

  4. An "undertaking" could include an individual10, a partnership, an LLP or company. It could also be an unincorporated association which carries on a trade or business (whether for profit or not). It is perhaps unusual to think of a "parent undertaking" as including an individual rather than some form of entity but this is possible under the LSA.

  5. The example provided above is only one way in which a "parent" and "subsidiary" relationship might exist. In summary11, one business, Parent Co, will be the parent undertaking of another business, ABS Co, if Parent Co:

    • holds a majority of the voting rights or has "voting power" in ABS Co (voting power is assessed in this instance in a similar way to that considered above);
    • has the power to exercise (or actually exercises) dominant influence or control over ABS Co (dominant influence in this sense is not defined);
    • is managed on a unified basis with ABS Co;
    • has the right to impose its directions on the operating and financial policies of ABS Co by virtue of:
      • i. provisions contained in ABS Co's "articles" (the articles of association for example are a key part of a company's constitution); or
      • ii. "control contract", which is essentially a lawful written agreement giving rise to such a right; or
       
    • is a shareholder / member of ABS Co and either:

      • i. has the unqualified right (i.e. there is no need for another person's agreement) to appoint or remove a majority of the directors of ABS Co; or
      • ii. alone controls under a shareholders or members agreement a majority of the voting rights in ABS Co.
       
     
  6. Depending upon the complexity of a business structure, the tests may need to be applied to a number of separate legal entities. In particular it should be noted that:

    • in the case of (e) above, Parent Co will be deemed to be a member / shareowner of ABS Co if any of its other subsidiaries are a member of ABS Co or if any shares in ABS Co are held by another person acting on behalf of Parent Co or acting on behalf of any of Parent Co's other subsidiaries; and
    • the material interest test also applies where a separate subsidiary undertaking of Parent Co has an interest in ABS Co. So if a subsidiary of Parent Co called Middleman Co were instead to hold an interest in ABS Co then the material interest tests (i.e. shares, voting power, influence and associates) would need to be applied to those non authorised persons involved in ABS Co, Middleman Co and Parent Co. In essence, a chain of parent and subsidiary companies between the ABS firm and an ultimate parent undertaking increases the number of entities in respect of which the material interest tests must be applied.
     
  7. By extending the "parent undertaking" provisions to individuals as well as entities the LSA extends the tests which will need to be applied to a non authorised individual in assessing whether or not a material interest is held. For example, as well as considering if an individual has shares, voting power or influence over an ABS firm as discussed above, a material interest may also arise if an individual has entered into a control contract with the ABS firm or otherwise has the power to exercise dominant influence over it. An individual parent undertaking of an ABS firm would in our view hold a material interest in the ABS firm.

  8. It is likely that a non authorised parent undertaking will itself hold a material interest in the ABS firm as a legal person, as well as potentially other non authorised persons who have an interest in that parent undertaking. This is on the basis that satisfaction of one of the tests for determining whether one undertaking is a parent undertaking of another undertaking would often also mean that one of the material interest tests has also been satisfied. For example, Food Retailer Co (a non authorised person) may be a parent undertaking of ABS Co by virtue of Food Retailer Co holding the majority of the voting rights in ABS Co. This would mean that, firstly, Food Retailer Co would itself be a material interest holder in ABS Co as it is a non authorised person which holds 10 per cent or more of the voting rights. Secondly, the material interest tests would also need to be considered for non authorised persons with an interest in Food Retailer Co.

  9. The full provisions are detailed at section 420 of the Financial Services and Markets Act 2000 and section 1162 and schedule 7 to the Companies Act 2006 and should be considered very carefully by regulated persons and investors or potential investors in an ABS alongside the LSA in determining whether there is a legal requirement to notify the SRA of a material interest.

The material interest test - conclusions

  1. The information provided above is an overview of the different tests which the LSA sets out for assessing when a non-authorised person's proposed interest in an ABS is material and therefore requires separate SRA notification and approval.

  2. Pulling these different strands together to summarise, the test for whether a non authorised person (an individual or an entity) has a material interest in an ABS is whether that person:

    • i. holds at least 10 per cent of the "shares" in either the ABS or a parent undertaking of the ABS (as above, "shares" can include ownership rights and responsibilities in unincorporated bodies such as partnerships);
    • ii. is entitled to exercise or control the exercise of:
      • a) 10 per cent or more of the "voting rights" in the ABS or the parent undertaking of the ABS (if decisions are taken at general meetings); or
      • b) "voting power" in the ABS or the parent undertaking of the ABS (which could include the right under the constitution to direct overall policy of the ABS or alter its constitution if there are no general meetings);
       
    • iii. is able to exercise significant influence over the management of the ABS by virtue of the person's "shares" or entitlement to exercise, or control the exercise, of voting rights in the ABS; or
    • iv. is able to exercise significant influence over the management of the parent undertaking of the ABS by virtue of the person's "shares" or entitlement to exercise, or control the exercise, of voting rights in the parent undertaking of the ABS.
     
  3. As part of this assessment, the SRA will consider interests held by "associates" collectively and consider also the parent undertakings of the ABS's parent undertaking.

  4. In most cases the parent undertaking of the ABS firm will itself as a legal person hold a material interest in the ABS (particularly if the parent undertaking is an individual natural person).

  5. The annex to this document sets out a checklist in flowchart format which provides an overview of how we will assess whether a non authorised person holds a material interest in an ABS. However, regulated persons must satisfy themselves of the regulatory and legal obligations which apply to their individual circumstances. The general information provided here must not be relied upon for this purpose. The relevant statutory provisions should in particular be considered carefully and include:

     

SRA process for identifying whether a non authorised person holds a material interest in an ABS

Part 1 - Parent Undertaking Assessment (Section 420 of the Financial Services and Markets Act 2000)

In summary, another individual or entity would be a parent undertaking of an ABS firm called ABS Co if that individual or entity:

  • a) holds a majority of the voting rights or has "voting power" in ABS Co;
  • b) has the power to exercise (or actually exercises) dominant influence or control over ABS Co (dominant influence in this sense is not defined);
  • c) is managed on a unified basis with ABS Co; d) has the right to impose its directions on the operating and financial policies of ABS Co by virtue of:
    • i. provisions contained in ABS Co's "articles" (the articles of association for example are a key part of a company's constitution); or
    • ii. "control contract", which is essentially a lawful written agreement giving rise to such a right; or
     
  • e) is a shareholder / member of ABS Co and either:
    • i. has the unqualified right (i.e. there is no need for another person's agreement) to appoint or remove a majority of the directors of ABS Co; or
    • ii. alone controls under a shareholders or members agreement a majority of the voting rights in ABS Co.
     

An entity or individual will also be a parent undertaking of ABS Co if ABS Co is a subsidiary of that individual or entity's subsidiary.

Question 1: Checking for undertakings

Flowchart of Question 1

View text version  

Part 2 – Associates Assessment (paragraph 5 of Schedule 13 to the Legal Services Act 2007)

In summary, if an individual A holds an interest in an ABS called ABS Co then his or her associates are:

  • a) Person A's spouse or civil partner;
  • b) Person A's child or stepchild who is under 18 years old;
  • c) a trustee of a settlement under which Person A has an interest (specifically, a life interest in possession);
  • d) a body in which Person A is a director;
  • e) an employee of Person A;
  • f) a partner of Person A in a partnership (i.e. a partnership other than ABS Co if that is the business model used);
  • g) a person with whom Person A agrees or arranges to acquire, hold or dispose of interests in ABS Co; or
  • h) person with whom Person A agrees or arranges to act together in exercising voting power or voting rights in relation to ABS Co.

Also, if Person A is an undertaking such as a business then that person's associates could include:

  • i) a director of Person A, if Person A were a company;
  • j) a "subsidiary undertaking" of Person A; or
  • k) a director or employee of such a subsidiary undertaking.

Question 2: Checking for associates.

Flowchart of Question 2

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Part 3 – Material interest Assessment (paragraph 3 of Schedule 13 to the Legal Services Act 2007)

Question 3: Shares

Flowchart of Question 3

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Question 4: Voting power

Flowchart of Question 4

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Question 5: Influence

Flowchart of Question 5

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Notes

1. See section 18 of the LSA for the full definition.

2. In these scenarios it is assumed that the firms will wish to conduct reserved legal activities (such as litigation, conveyancing or advocacy) and so would wish to become licensed as an ABS.

3. Note however that there are currently some transitional provisions in place for legal services bodies with SRA approved non lawyer managers.

4. See for examples paragraphs 10, 11 and 22 of Schedule 13 to the Legal Services Act 2007.

5. See section 72(6) of the LSA

6. See paragraphs 3(1) and 5(4) of Schedule 13 to the LSA

7. See paragraph 3(3) and 5 of Schedule 13

8. See paragraphs 10, 11 and 22 of Schedule 13 to the LSA for example.

9. The definition of parent undertaking is taken from section 420 of the Financial Services and Markets Act 2000 which itself adopts a large part of its definition from the Companies Act 2006. As such, it is not appropriate simply to apply the LSA definitions discussed elsewhere in this guide to the terms used in respect of parent and subsidiary undertakings.

10. The term "undertaking" is not limited to entities. See the definition of parent and subsidiary undertakings adopted by the LSA (at paragraph 5(4) of Schedule 13) as set out in section 420 of the Financial Services and Markets Act 2000.

11. It should be stressed that this is only a summary of a complex legal definition. Regulated persons and others connected with ABSs such as investors or potential ABSs should take great care to satisfy themselves of the relevant legal requirements under the LSA as a failure to identify and report a material interest could result in a criminal offence being committed.


Text version of the flowcharts

Q1. CHECKING FOR PARENT UNDERTAKINGS

Applying the tests in Part 1, could another individual or entity be said to be a parent undertaking of the ABS firm?

  • If No, questions 2-5 need only be applied in respect of the ABS firm.
  • If Yes, questions 2-5 should be applied to each parent undertaking as well as the ABS firm.

Q2. CHECKING FOR ASSOCIATES

Applying the tests in Part 2, are any of the non- authorised persons who or which hold any level of interest in the relevant body (i.e. the ABS firm or the parent undertakings of the ABS firm) "associated"?

  • If No, questions 3-5 need only be applied in respect of each non authorised person individually.
  • If Yes, questions 3-5 should be applied to the interests held by the associates collectively.

Q3. SHARES

Apply the relevant tests depending upon the structure of the body:

  • For bodies with share capital (i.e. allotted shares): does the person hold 10% of more of the allotted shares in the body?
    • If No, move on to Q4.
    • If Yes, The person (and the person's associates if relevant) do appear to hold a material interest in the body. The SRA would expect to be notified of the proposed interest and would then determine whether to approve or object to the holding of the interest.
     
  • For bodies with capital but no share capital (i.e. the body is funded by non share capital)
    • If No, move on to Q4.
    • If Yes, The person (and the person's associates if relevant) do appear to hold a material interest in the body. The SRA would expect to be notified of the proposed interest and would then determine whether to approve or object to the holding of the interest.
     
  • For bodies without capital (i.e. the body is not funded by capital)
    • Does the person hold 10% or more of the interests:
      • conferring rights to share in the profits of the body;
      • conferring a liability to contribute to losses; and/or
      • giving rise to an obligation to contribute to the debts or expenses of the body in the event that it is wound up.
       
     

Q4. VOTING POWER

Apply the relevant tests depending upon how decisions are taken in the body:

  • For bodies with general meetings at which matters are decided by the exercise of voting rights: does the person exercise (or control the exercise of) 10% or more of the voting rights in the body?
    • If No, move on to Q5.
    • If Yes, the person (and the person's associates if relevant) do appear to hold a material interest in the body. The SRA would expect to be notified of the proposed interest and would then determine whether to approve or object to the holding of the interest.
     
  • For bodies without general meetings at which matters are decided by the exercise of voting rights: is the person entitled to exercise (or control the exercise) of the right under "the constitution of the body" to 1) direct the overall policy of the body; or 2) alter the terms of the body's constitution?
    • If No, move on to Q5.
    • If Yes, the person (and the person's associates if relevant) do appear to hold a material interest in the body. The SRA would expect to be notified of the proposed interest and would then determine whether to approve or object to the holding of the interest.
     

Q5. INFLUENCE

Is the person able to exercise significant influence over the management of the body by virtue of the person's "shares" or voting rights?

  • If No, the person does not appear to hold a material interest in the body in question.
  • If Yes, the person and the person's associates do appear to hold a material interest in the body. The SRA would expect to be notified of the proposed interest and would then determine whether to approve or object to the holding of the interest.
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