In part A of the consultation, we are seeking views on changes to the 'separate business rule' (the 'SBR') as currently set out in Chapter 12 of the SRA Code of Conduct 2011.
A separate business is a business, wherever situated, that is not authorised by the SRA or any other approved regulator under the Legal Services Act, but which has certain defined links to an SRA authorised person (body or individual).1 These links are that the SRA authorised person owns, is owned by, is connected to, or actively participates in, the separate business.
A separate business is not regulated by the SRA. Instead the SRA regulates the links the SRA authorised person (such as a solicitors' firm, an ABS, or an individual solicitor) has with the separate business. Under the current separate business rule in Chapter 12, SRA authorised persons are forbidden from having the defined links to certain separate businesses. Broadly, these separate businesses are those that specialise in providing non-reserved legal activities (such as drawing up wills, carrying out estate administration or providing general legal advice) or that purport to provide reserved legal services. Since a separate business is not authorised by an approved regulator, it is forbidden by the Legal Services Act from providing reserved legal services such as conveyancing, probate or litigation.
A separate business rule is necessary to:
- Ensure that members of the public are not confused or misled into believing that a separate business is regulated by the SRA or another approved regulator when it is not.
- Ensure that the protections afforded to the clients of practising lawyers are in place in relation to certain legal services (particularly reserved legal services).
- Prevent an SRA authorised person from splitting part of a case with the separate business in such a way that the client loses statutory protection.
However we do not consider that these principles require us to keep the SBR in its current form. We are proposing to remove the prohibitions on links with separate businesses that carry on non-reserved legal activities and instead focus the rule on outcomes that achieve consumer protection. We are making this proposal because:
- It will help level the playing field between traditional solicitors, ABSs and unregulated service providers.
- It will formalise what is being implemented by waivers in a significant number of cases.
- It will align the SRA to a greater extent with the approach taken by other legal services regulators and will address concerns about the SRA's restrictions on business ownership.
- It will mean SRA regulation recognises and keeps pace with changes in the market. We have carried out a market analysis as part of developing our thinking.
Appropriate safeguards will be maintained (via new outcomes) to address the risk of consumer harm as the current separate business rule was originally designed to do.
We propose that the following principles, which broadly reflect those currently contained in the SBR applying to permitted separate businesses, should be included in our redrafted rule:
Where you own, are owned by, actively participate in or are connected with a separate business you must:
- (a) 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; and
- (b) not represent directly or indirectly the separate business as being regulated by the SRA or any of its activities as being carried on by an individual who is regulated by the SRA2; and
- (c) only refer a client to the separate business when it is in the client's best interests to do so and when the client has given informed consent to the referral and has been informed of your connection with the separate business.
There are important protections available to those instructing authorised persons which may be lost by a referral to a separate business. These protections include access to the Legal Ombudsman, the Compensation Fund, compulsory indemnity insurance and legal professional privilege. We have seen examples of misconduct where authorised persons have split matters involving reserved legal activities with an unregulated business to the detriment of clients. The proposed SBR therefore forbid referrals from the authorised person to the separate business in certain circumstances.
In particular, the draft outcomes provide that:
- (a) If you are instructed by a client in relation to a grant of probate you must not refer the client to the separate business for the administration of the estate;
- (b) You must not refer a client to the separate business to provide any of the following services to that client in the same matter:
- administration services in relation to conveyancing;
- litigation support services involving legal activity; or
- pre litigation services involving legal activity in family disputes (except mediation).
The effect of these changes is that authorised persons will be able to set up separate businesses providing non–reserved legal services. They will be able to attract clients to those businesses in competition with providers that are not regulated under the LSA. However, authorised persons will not be able to use their reputation as a regulated entity to gain a client's instructions for a particular case, only to then hive off the case to an unregulated separate business.
As well as draft rules, we have prepared a series of case studies to illustrate how the proposals are intended to work in practice.
As part of changes to ensure that consumers are clear about the regulatory position of separate businesses, we also propose that solicitors that are on the Roll and that provide services to the public within a separate business will no longer be able to describe themselves to clients or potential clients as 'non-practising solicitors'.
1. Note although we refer throughout this document to authorised persons, the provisions of the SRA Code of Conduct also cover their managers and employees.
2. See also Outcome 8.1 in the SRA Code of Conduct 2011 which requires that publicity should be accurate and not misleading.
3. From LSB commissioned Small Business Legal Needs Benchmarking Survey, Pleasence and Balmer, April 2013 https://research.legalservicesboard.org.uk/wp-content/media/In-Need-of-Advice-report.pdf