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A beginner's guide to SRA fee policy 2010/2011

Last updated 5 October 2010

Introduction and background

Why the SRA is moving toward a new fee structure

The way the cost of regulation was allocated among the profession through the practising certificate fee led to anomalies and unfairness in the context of modern legal practice. However, the Legal Services Act 2007 changed the SRA's statutory powers in enabling firm-based regulation alongside the regulation of individuals.

This new fee structure creates a fairer system reflecting regulatory activity, as it allows the SRA to allocate less of the cost to individuals and more to private practice firms.

Rationale behind the new regulatory fee structure

The new policy shifts from collecting the cost solely through the practising certificate fee charged to individual solicitors, to collecting approximately 40 per cent from individuals and 60 per cent of the cost from firms (i.e. recognised bodies and recognised sole practitioners), with the attempt to achieve a fairer system.

In the light of feedback we received to an initial consultation on broad principles, and after having conducted further analysis and modelling, we found a general consensus among respondents that the fairest, simplest and most transparent fee structure for 2010 would be to use banded turnover model as the basis for calculating the regulatory fee for the firms. This was perceived to have advantages relating to the "ability to pay" principle of the new fee policy, as those who earn less would be likely to benefit.

Change is essential

Prior to firm-based regulation, approximately 90 per cent of the income to support the activities of the Law Society, the SRA and the Legal Complaints Service was collected through the practising certificate fees paid by or on behalf of individual solicitors. However, between 60 per cent and 80 per cent of regulatory activity was focused on firms rather than individuals, making the previous system unfair.

How the new fee policy has been developed

We built a number of complex models to understand what the likely impact of various options would be for the new fee structure based on sample data to determine valid options. Three formal consultations, along with a number of meetings and workshops with key equality stakeholders and members of the profession, were carried out to help us develop and agree on the new fee structure. We have carefully considered responses to the consultations and feedback received at the meetings and workshops in relation to each of the proposals. Equality and diversity implications have been considered throughout the development of the policy, and legal advice has been sought when relevant.

All three consultations were published on the SRA website and were sent directly to key contacts at a range of equality groups and key stakeholders. In addition, approximately 2,500 stakeholders who subscribe to SRA consultation alerts were emailed to notify them of the consultations. There were also a number of publicity events and press releases and articles in the legal press (including the Law Gazette) and other communication channels (e.g. the Law Society's Professional Update e-newsletter, SRA Update e-newsletter), in order to notify and encourage stakeholders to take part in the consultation process.

We contacted the Association of Women Solicitors (AWS), met with the Lawyers with Disabilities Division (LDD), the Junior Lawyers Division and Lord Ouseley's External Implementation Group (made up of representatives of black and minority ethnic groups) to gain their input into this scheme. We organised a number of workshops at the different stages of the consultation process to identify the potential impact of the proposals on various groups and invited to these representative groups representing the equality groups.

Aims and objectives of change

We have set out and consulted (and had a positive response from the profession) on the following principles, which require that any new fee policy should:

1. Be fair to fee payers;
2. Be efficient and economical to administer;
3. Ensure a predictable income to meet the cost of regulation;
4. Be stable—charges should not vary considerably year on year;
5. Be as simple as possible—to enable the regulated profession to predict their likely fees;
6. Be based on data that can be verified;
7. Ensure that, whenever possible, the costs of processes that are not of general application should be borne by those making such applications, as far as possible, on a cost recovery basis;
8. Take some account of ability to pay, in particular in relation to small and new businesses—fees should not be a deterrent to new entrants.

Logistics

Fee due date

You will receive your total bill during the 2010/2011 renewal cycle, which begins in September 2010. The bill should be paid on or before 31 October 2010.

New compensation fund contribution structure – timing of implementation

The new fee policy has been implemented for the 2010 practising certificate/registration fee renewal process, alongside the changes to the regulatory fees structure.

Correcting your firm's turnover figure

If the turnover figure used to calculate your fees needs to be updated the last available date for you to update your turnover figure was the 31 August 2010. After this date it is at the discretion of the SRA whether to accept your updated turnover figure. If you had further queries relating to turnover, you were required to contact operationsfees@sra.org.uk by 27 August 2010 with the following information:

• Firm ID
• Firm name
• The turnover figure we have currently
• The turnover figure you believe we should have
• Period that the new figure relates to (i.e. dates to which the turnover figure applies)
• Explanation for why this is different, including any additional information requested in the guidance notes (e.g. in case of new, merged, split firms, change in accounting period)

The last possible date to update the turnover figure was 31 August 2010. After this date it is at our discretion whether we accept your updated figure.

If you have sent the SRA a letter with updated turnover information and you have not heard from us, it is likely that we have accepted your figure.

Some firms identified as new companies in turnover validation letters

In cases where firms have changed their status since 1 November 2009, these firms have been identified as new firms on our database as you completed an initial application form for firm recognition (or in the case of a sole practitioner, an initial application for authorisation to practise as a recognised sole practitioner). Your letter will have invited you to provide us with your estimated turnover figure for your first 12 months of trading. If you are a new firm as a result of a change of status, please provide us with your most recent closed accounts turnover figure up to 31 October 2009 as if you had not changed status. If you are a successor firm e.g. a firm who has succeeded to the whole or part of another firm, please provide us with a turnover figure according to the guidance (available online and in your letter) provided regarding split and merged firms. Please respond with your turnover figure to operationsfees@sra.org.uk, quoting your letter reference number.

Online fee calculator

We encourage you to use the online fee calculator.

Go to the fee calculator

Impact

Rational for using turnover to determine the firm fee

Turnover is a sensible variable, as it is a figure that the profession already captures as part of their annual accounts processes, and it is often used when renewing indemnity insurance. For most firms, this should minimise additional cost or effort. However, this would depend on the insurers used and the information they collect. It also takes into account how much business a firm does, and allows for a good fit in terms of ability to pay. This is a particular benefit for firms with a relatively low level of earnings per practising certificate holder.

The turnover model, in particular, allows for a positive impact for low income solicitors, in that those who were just above the threshold of £20,000 would previously have incurred much higher fees, whereas, under the new system, there is a more gradual increase in fees.

Some firms will pay more than they did in the past

In the past, some firms were paying too little and were, in fact, being subsidized by others within the profession. Turnover was specifically chosen as a basis for calculating fees as it forms a good proxy for the volume of work that a firm has undertaken. As such, the new fee system is fairer.

Impact on individual solicitors

The vast majority of employers pay for the practising certificates of their employees and will continue to do so. There will continue to be a practising certificate fee for each regulated individual whether they are in the public sector, industry or in private practice, albeit one which is substantially lower.

Impact on in-house solicitors

Those working in-house (i.e. public sector, commerce and industry) or in not-for-profit organisations will only pay towards the individual practising certificate fee and will not pay an additional firm-based regulatory fee.

Regulatory fees structure

Distribution of costs between individuals and firms under the new fee policy

For each aspect of the funding requirement (i.e. regulation and compensation fund), there is both an individual and a firm component. As the SRA is part way through its move to regulate more through firms, the individual component is about 40 per cent and the firm component (which applies to all recognised bodies and recognised sole practitioners) about 60 per cent. This may well change in the following years to reflect our increasing focus on firms.

Practising certificate and registration fees

There is an individual fee and a firm-based fee. The firm-based fee is calculated on turnover (defined as England and Wales gross fees). A letter sent out in May 2010provided indicative details of your practising/registration fee cost. To help you see how we've worked out your fee, please use our online fee calculator, which has now been updated with the final fee structure and turnover bandings. The individual practising certificate (PC) fee is £428, less than half of the current year's PC fee.

Changes to current discounts

Previously, a number of discounts applied to both the individual practising certificate fee and the compensation fund contribution. Given the significant reduction in individual fees, we are reducing the number of available discounts significantly. The only discount we are maintaining is for maternity leave.

Turnover model versus number of fee earners

As part of the exercise to introduce the new funding structure, the SRA published a number of consultation papers. Our first consultation sought views on the various charging proposals. In brief, respondents found the fee-earner model to be unfair, easy to manipulate, and unable to take account of a firm's ability to pay. There was broad agreement that the preferred option was the turnover model, as it is a good proxy for the volume of work a firm undertakes, is fairer on firms of different sizes and takes some account of a firm's ability to pay.

Banded turnover

The banded turnover model is the SRA's approved structure for calculation of firm fees. This model is simple, cost effective, provides a reasonable proxy for the volume of work a firm undertakes and takes some account of a firm's ability to pay. The bandings allow a sliding scale to be applied to reflect the fact that firms generate very different gross fees, from low to very high. This also allows us to ensure that no one group (identified broadly by size) is shouldering more than their fair share of the fee burden, making it fairer on firms of different sizes.

Maternity leave discount

A discount for maternity is given at a rate of £238. This is 50 per cent of the regulatory individual fee (excluding a £48 charge for handling the application).

Sole practitioners – no double charging

The new policy shifts from collecting the cost solely through the practising certificate fee charged to individual solicitors, to collecting approximately 40 per cent from individuals and 60 per cent of the cost from firms (i.e. recognised bodies and recognised sole practitioners), with the attempt to achieve a system which is fairer. Those working in-house (i.e. public sector, commerce and industry) or in not-for-profit organisations only pay towards the individual practising certificate fee and do not pay an additional firm-based practising fee.

As a sole practitioner, you are not only an individual but also a firm and therefore it is appropriate that you pay both the individual and the firm practising fees. This is no double charging and it is not designed to increase the fee income for the SRA.

Compensation fund fee structure

Need for change to the current approach to the compensation fund

The previous approach to allocating the cost of the compensation fund was complex and had some of the same anomalies as the current practising certificate fee model. The collection of the compensation fund contribution was also one of the most complex aspects of the previous renewal process. This complexity led to a significant number of queries and mistakes in renewal forms and, accordingly, increased the costs borne by the profession as a whole.

New approach to compensation fund fees

The nature of the compensation fund is that it protects the public against loss incurred through a "failure to account" by a member of the profession or regulated firm. It benefits all individuals and firms in that it maintains public confidence in the profession. Accordingly, it is appropriate that all solicitors contribute something to the fund. Most respondents agreed that the cost of maintaining and operating this fund should fall on the profession as a whole rather than only on the smaller firms, which are statistically most likely to have claims made against them. That said, the decision to operate a flat fee per firm holding client money is fairer than the previousmodel, which disproportionally penalises the larger firms.

The new structure includes changes to compensation fund contributions. It is fairer to allocate part of the cost of the compensation fund among firms rather than just among individuals.

New structure of compensation fund contributions

Feedback from our consultations supported the general principle that all individual members of the profession should contribute and that contribution should be affordable, but also that firms who hold client money should contribute.

In the new structure there is a small, fixed contribution from all individuals of £10 and a fixed contribution from firms that hold client money of £120.

Turnover definition and guidance

Definition of firm turnover

1. The recognised body's turnover figure means the total gross fees arising from work undertaken from offices in England and Wales.
   • Gross fees includes all professional fees of the firm, including remuneration, retained commission, and income of any sort whatsoever of the firm (including notarial fees).
   • Specifically excluded are interest, reimbursement of disbursements, VAT, remuneration from a non-private practice source, dividends, rents, and investment profit.
2. The figures that will be used when billing firms in October 2010 will need to be based on closed accounts, audited where possible. Therefore, all firms that previously provided estimated turnover should now provide the SRA with an update of their closed accounts figures. Closed accounts are defined as having ,in order of preference,
   1. an audited set of financial statements,
   2. an unaudited set of financial statements signed off by an accountant,
   3. a submitted tax return for the year.
3. The turnover figure must be for a 12-month period.

Work in progress (WIP) must be included

The opening and closing WIP should be accounted for when calculating turnover.

Accounting for bad debt

Bad debt should be handled under normal accounting procedures. Where it has been allowed for in the turnover figure for your last closed accounting period prior to 1 November 2009, that is acceptable. If a bad debt has been discovered after closing your accounts, your turnover figure cannot be re-adjusted. Those adjustments could potentially be accounted for in the following year's closed accounts.

Inclusion of notarial fees in turnover figure

We had a number of responses to our first 2010 consultation on fairer fees from notaries. After consideration, the SRA Board concluded that the SRA's new entity-based regulatory powers mean that, if notarial services are provided through a firm regulated by the SRA, the SRA bears some regulatory responsibility—if not for the notarial act itself, then for the way in which the firm offers and delivers the service to clients. For example, if the firm were to advertise notarial services in a misleading way, that would be a matter for the SRA; it might also be an issue for the notary regulator, in relation to the individual. Including gross fees from notarial activities delivered by the firm can therefore be justified. As such, notarial fees should be included in a firm's turnover figure.

International turnover

For the purposes of the fee calculation, the SRA only requires a firm's total gross fees arising from work undertaken from offices in England and Wales. International turnover should not be included.

Gross fees versus turnover

For the purposes of the SRA renewal period, "gross fees" is used synonymously with the term "turnover".

Definition of closed account

Closed accounts are defined as having one of the following (in order of preference):

1. An audited set of financial statements;
2. An unaudited set of financial statements signed off by an accountant;
3. A submitted tax return for the year.

Period of turnover data

The turnover figure should, wherever possible, be for the last complete (12 months) accounting period prior to the 1 November 2009 (e.g. 31 March 2009). The latest acceptable annual accounting period end date is be 31 October 2009.

Turnover figure must be based on closed accounts

See our definition of "closed account" above. The figures that will be used when billing firms in this year's practising certificate renewal process will need to be based on closed accounts. Therefore, all firms that previously provided estimated turnover should now provide the SRA with their closed account figures. Firms that do not yet have accounts which closed within the period from 1 November 2008 to 31 October 2009 should provide us with an estimated turnover figure as well as the previous year's turnover figure from closed accounts. They should then contact the SRA as soon as they have a final turnover figure from closed accounts. The SRA will determine at our discretion whether to use the 2008 figure if we have still not received an updated audited 2009 figure by the end of August 2010.

Approximate turnover figures

The turnover figure should be an exact figure if at all possible. For firms that have had to disaggregate international turnover, a figure rounded to the nearest £1,000 will be acceptable if more detail is unavailable.

Turnover data for new firms

The turnover figure provided must be for a 12-month period.

For a brand new firm (i.e. not a successor firm nor one resulting from change in status), an estimate for the first 12 months of practice (irrespective of whether this is after 31 October 2009) will be accepted; the basis upon which the firm has made the estimate should be provided. In many circumstances, VAT Returns Box 6 could potentially be used as a reasonable proxy for estimation purposes and pro-rated (scaled up to a 12-month period) as necessary.

Change in accounting periods

The turnover figure provided must be for a 12-month period.

If a recognised body has changed its annual accounting period, its latest closed accounting period prior to the 1 November 2009 will be shorter or longer than 12 months. The following approach should be used, and an explanation of how the turnover figure has been derived should be provided:

• Preferably, provide the turnover for the 12-month period immediately preceding the new accounting period end date (as long as prior to 1 November 2009).
• Alternatively, if this is not possible, take the last closed accounts period prior to 1 November 2009 and scale it appropriately (e.g. if the last closed accounting period was for six months, it should be doubled; if the last closed accounting period was for 15 months, it should be divided by 15 and multiplied by 12)

Incorrect turnover information

Under the SRA enforcement policy, we are able to penalise or refer those members of the profession who have submitted incorrect turnover data to the Solicitors Disciplinary Tribunal. In extreme circumstances, we have the right to revoke recognition.

Recent mergers or splits

If a firm is a successor practice (e.g. merged firm, firm that has succeeded to the whole or part of another firm), then it should provide the SRA with turnover information for the last accounting period prior to 1 November 2009 for each of the previous practices, along with an explanation of what has happened, and calculating turnover in the following manner:

• In a simple merger between firms A and B, add the turnover figures for the previous practices together.
• In a merger of one firm (Firm A) with part of another firm (say one-third of Firm B), Firm A should add the corresponding proportion of Firm B's turnover (Firm A's turnover plus one-third of Firm B's turnover). Firm B should provide the remaining proportion of their turnover (two-thirds of Firm B's turnover) along with an explanation. In the case outlined here, it must be clearly shown how 100 per cent of the turnover figure for Firm B is to be distributed between the successor practices.
• If a new firm is set up that succeeds to whole or part of a previous practice or previous practices, the turnover figure provided should include the appropriate proportion of the turnover of the previous practice(s).
• The principle here is simple. However, the variety of different types of structure change means that this can be a complex area in practice. Firms should contact the SRA if they are unclear how to respond, but should provide the SRA with the turnover information requested for each of the previous practices, with an explanation of the situation. Responses to "Moving toward a fairer fee policy: Second consultation (CP21)" indicated overwhelming support for firms working out for themselves how turnover should be apportioned between successor entities. The SRA is in the process of determining the approach to handling situations in which firms are unable to agree on the split themselves. Firms will not be able to renew their recognition without an appropriate turnover figure being determined, as it is required in order to calculate the appropriate firm fees.

Income from locum activity

Income from locum work is excluded from turnover; the income received is received by the firm employing the locum and, as such, will be reflected in their turnover figure.

Secondment fees

The turnover figure should include income received through secondment fees. Secondment fees are still fee income derived, in part, from the individuals being regulated and the firm's reputation.

Income from commission received

Yes, income received from commission is included as per the definition below:

The recognised body's turnover figure means the total gross fees arising from work undertaken from offices in England and Wales.

• Gross fees includes all professional fees of the firm, including remuneration, retained commission, and income of any sort whatsoever of the firm (including notarial fees).
• Specifically excluded are interest, reimbursement of disbursements, VAT, remuneration from a non-private practice source, dividends, rents, and investment profit.

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