Approval of role holders

Introduction

Purpose and status of this guidance

This guidance is about how we approve persons to be managers1, owners2 or compliance officers3 of firms4 we regulate.

These role holders occupy positions of responsibility and trust. Specifically:

  • Managers have ultimate responsibility for how a firm is run and its legal services delivered. In particular, ensuring that it complies with all legislative and regulatory requirements. That means making sure that the firm has all the systems needed to achieve that objective.
  • Compliance officers have specific responsibility for ensuring the firm, its managers and employees comply with our regulatory requirements. They are also responsible for recording any breaches and reporting those to us, where necessary.
  • Owners can potentially exert significant influence over the business.

As such, we must be satisfied that they are 'suitable'5 to hold that role. This means they:

  • must be of good character
  • satisfy us that they will safeguard regulatory compliance; and
  • meet any specific requirements of the role.

In this document, references to the 'applicant' means the body applying for approval of a new role holder. 'Candidate' means the person that it is proposed will hold the role.

This guidance should be read in the context of decision making at the SRA and other guidance. It is a living document and will be reviewed and updated as appropriate. It reflects our approach to our regulatory role, and any departure must be capable of justification on the individual facts of the case.

When is approval required?

A firm must apply for approval of a new role holder, and this must be granted, before the candidate takes up their role. The only exceptions to this are those who are eligible for deemed approval, in which case no application or formal decision is required, and the following, who may be approved after they have taken up their role:

  • owners in licensed bodies who acquired their interest without taking any steps to do so (eg they inherited shares in a licensed body on the death of the previous owner); and
  • temporary emergency approval of a compliance officer.

Who can apply for which roles in firms we regulate?

A summary of the basic requirements for each type of authorised body is as follows:

  • Recognised sole practices
    These have a sole practitioner that must be a solicitor or a Registered European Lawyer (REL). There are no separate managers or owners. The sole practitioner is approved as part of the authorisation of the recognised sole practice and does not require a separate role holder approval.
  • Recognised bodies
    These can only have authorised persons or registered Foreign lawyers (RFLs) as managers and owners. At least one manager must be a solicitor or REL.
  • Licensed bodies
    These must have at least one authorised individual as a manager and one non-authorised person as a manager or owner.

The roles of manager and owner can be filled by individuals, but may also be filled by bodies, such as a limited company, for example where a firm is managed by a service company, or receives outside financing from a corporate investor. The only exception to this, is that a firm that is a company can only have an individual as a manager.

Each type of firm must have a COLP and a COFA. Compliance officer roles must be filled by individuals, and must be managers or employees of the firm concerned. In addition, a COLP must be an authorised person. 6

Deemed approval

What is deemed approval?

In some cases, a person that is already authorised by us or another legal services regulator can be "deemed" to be approved. By this, we mean that they have automatic approval and no application or formal approval decision is required. In these circumstances, the firm simply needs to notify us that they are appointing that person to the relevant role before they are appointed.

There are only limited circumstances where such deemed approval applies.

Managers and owners

Where an individual (a solicitor, or registered European or foreign lawyer) or firm is authorised by us, we will have the necessary information to determine if they are suitable to be a manager or owner. They will have had their suitability assessed when they were authorised and, from that point on, they will have been under a continuing obligation to notify us of any issues that may affect their suitability.

Therefore, we will deem them to be approved to hold that role, if they meet the following required criteria. They:7

  • are a solicitor, REL, RFL or SRA authorised body
  • are not subject to a condition on their authorisation which prevents them being a manager or owner; and
  • have not had their approval as a manager or owner previously withdrawn.

If someone has had their approval as a manager or owner withdrawn previously, that does not mean they cannot be a manager or owner again. However, they will not automatically be approved under the deeming criteria. We will consider their application on all of the information available to us and will take account of the reasons for the withdrawal of approval and what has happened since.

Compliance officers

Individuals already authorised by us, or who have previously been approved by us as a role holder, will already have been assessed to establish if they are of suitable character and likely to uphold their regulatory obligations in the future. We will therefore deem them to be approved as a COLP or COFA if they meet the following criteria. They must:8

  • be a lawyer manager of the firm
  • not have been formerly disqualified from a compliance officer role
  • not have previously had an application for approval as a compliance officer refused, or had approval as such withdrawn
  • not have any other adverse regulatory history or be subject to a current investigation
  • not be a compliance officer in any other firm.

In addition, the firm must have an annual turnover of £600,000 or less. This part of the criteria is about ensuring we can be satisfied that the candidate can meet the core requirements of the role without further scrutiny. A compliance officer that is a manager in a small firm will likely be one of relatively few managers and therefore have sufficient knowledge of the firm, control and seniority to fulfil their obligations. In much larger firms, we need to assess their ability to do so on a case by case basis, which is why the deeming criteria do not extend to large firms.

Those prospective managers, owners, COLPs and COFAs who do not meet the deeming criteria above, must go through the full approval process.

What we will need from an applicant to reach a decision on approval?

Basic information and initial screening

Before a firm applies for approval of a role holder, they must ensure that the candidate is eligible for the role. If the candidate is not eligible, we will reject the application on receipt. We will also reject an application if:

  • the applicant or candidate (as appropriate) has not fully completed the declarations in the Suitability section of the application form; or
  • the candidate has not provided a Certificate of Good Standing from any other professional body or regulator with whom they are a member (for example, the Bar Standards Board).

If the application is accepted, we will then undertake screening checks. These include checks against our own systems to ensure that there are no regulatory matters we need to take into consideration, and external checks for identity, adverse financial issues and criminal history. The candidate must, if requested, provide information to an external screening provider to allow those checks to be completed.

Supporting information

The applicant must provide evidence to satisfy us that the candidate is suitable to hold the role applied for.9 We therefore expect the candidate to complete a number of questions in the application form, relating for example to their skills and experience, which allow us to assess their suitability to undertake the role.

We may be satisfied from the information provided with the application that the candidate is able to meet the requirements of the role. Where the information provided is insufficient for this purpose, we will ask for further information.

How do we decide if a role holder is suitable?

We can approve an application with or without conditions or refuse this (referred to as an 'objection' for owners of licensed bodies).10  

There is no regulatory or statutory time period to make the majority of role holder decisions, although we adopt the same decision period as for authorisation of firms. That period is six months.11 However, we aim to make the majority of these decisions within three months (or 30 days if we can assess the application as low risk).

The only exception to this, is for owners of existing licensed bodies. In these cases, within 90 days of receiving notice of a proposed new owner, we must:12

  1. approve the holding of the interest in the firm unconditionally
  2. issue a warning notice that we intend to approve the holding subject to conditions; or
  3. issue a warning notice that we intend to object.

On rare occasions, where we consider there is a specific risk to the regulatory objectives in section 1 of the Legal Services Act 2007 set out below, we may approve subject to conditions or object without first issuing a warning notice. This might arise where it is important that our position is protected quickly. For example, the candidate may have a conviction for fraud offences and we have reason to believe they intend to acquire their interest before receiving our decision. Such an action by the candidate poses a risk to the regulatory objectives of protecting the interests of the public and consumers.

Where we do not issue a warning notice, we must make our decision to approve with conditions or object within the 90 day period itself.

If we issue a warning notice, the applicant and candidate have 28 days from the date of the notice to provide representations. We will consider those representations before we make a final decision.

Where approval is refused or granted subject to a condition, a right of appeal exists.

Good character

We will consider each application on its own facts, taking into account criteria set out in our Suitability Test. This highlights the issues that we take into account when assessing suitability, for example: criminal convictions and regulatory or other offences or findings; financial history including insolvency; and evidence of behaviour which indicates a lack of honesty or integrity. Where a suitability issue arises from either the declarations or our external checks, we will require the applicant or candidate to provide detailed information about the matter.

We consider some issues more serious than others. For example some, such as criminal convictions for dishonesty or fraud offences, are likely to result in refusal, unless there are exceptional circumstances. We will consider whether circumstances are "exceptional" on a case by case basis. However, in order to meet this test they do not need to be unique, but must be unusual and cannot arise regularly or be commonplace. Therefore, the test is unlikely to be met solely as a result of a relationship breakdown or redundancy.

We may also require evidence of rehabilitation. For example, a candidate may demonstrate that in the years since being made subject to an individual voluntary arrangement (IVA), they have: complied with that arrangement; paid all sums required under the arrangement on time and in full; and have managed their finances appropriately since.

Where a suitability issue is not declared but is identified from our screening checks, we will infer that this is a dishonest attempt to conceal the information and this is likely to result in a refusal of the application. It may also result in disciplinary action. We will raise this with the applicant and candidate and we expect to receive a full and satisfactory explanation of the failure to disclose. If one is not received, we will make our decision on the information available.

Regulatory compliance and requirements of the role

We need to be satisfied that there is nothing to indicate the candidate will compromise the regulatory objectives,13 or compliance by the authorised body, its manager or employees with their regulatory obligations.

The regulatory objectives, as stated at section 1 of the Legal Services Act 2007, are as follows:

  1. protecting and promoting the public interest
  2. supporting the constitutional principle of the rule of law
  3. improving access to justice
  4. protecting and promoting the interests of consumers
  5. promoting competition in the provision of [legal] services
  6. encouraging an independent, strong, diverse and effective legal profession
  7. increasing public understanding of the citizen's legal rights and duties
  8. promoting and maintaining adherence to the professional principles.

For example, if during consideration of the application a role holder indicated their intention to share client information with a separate business, that would be a risk to the professional principle to protect client confidentiality. We would explain our concerns and advise of how that needed to be dealt with but, if the individual could not appreciate the issue or satisfy us that they would protect that confidentiality, then we may consider that their appointment would compromise the regulatory objectives.

The candidate also needs to meet any requirements of the specific role.

The following sub-sections detail what we expect of each role-holder.

Owners

Owners, unless they are also managers, will have little involvement in the day-to-day running of the firm and there is no specific knowledge or experience required to be an owner.

However, there are obligations set out in legislation in relation to non-authorised owners of licensed bodies14 which provide that:

  • the person's holding of the interest does not compromise the regulatory objectives; and
  • non-authorised owners do nothing which causes, or substantially contributes to, a breach by the licensed body or its employees or managers of our regulatory arrangements.

We will need to be satisfied that there is nothing to suggest the candidate does not, or will not, meet these obligations before approving them.

Managers

Managers are expected to be aware of, and ensure their firm complies with all statutory and regulatory obligations. They must also ensure that any obligations imposed on the firm, its managers, employees or interest holders are complied with.15

In addition, a non-lawyer manager in a licensed body must do nothing which causes, or substantially contributes to a breach by the licensed body, or its employees or managers of our regulatory arrangements.16

In all cases, we will need to be satisfied that the candidate understands their duties and will comply with those. We cannot foresee their future actions, so we base our assessment of their ability to comply on the information available. If they have an adverse history, then we will consider if that shows a lack of knowledge of, or a risk of failure to comply with our requirements. For example, if they have previously been found to have breached our client care requirements, in circumstances which demonstrated a reckless disregard for our rules. This may mean we cannot be satisfied that they will be able to fulfil the duties of a manager.

Where a new firm is seeking authorisation, if we are not satisfied that there is sufficient understanding across the managers as a whole about their regulatory obligations, we may consider refusing the authorisation of the firm. Such refusal will be on the basis that we are not satisfied:

  • the managers as a group are suitable to operate a business providing regulated legal services;17 and/or
  • the management or governance arrangements are adequate to safeguard the regulatory objectives.18

This can happen even where all managers are deemed to be approved and do not require specific approval as managers.

Refusing authorisation of the firm on the above grounds does not require refusal of any specific person, as it is about the management of the firm as a whole. However, we may refuse any role holder who needs approval as well if we do not consider they are suitable to be a manager at all.

In this respect, it is worth noting that we do not require all managers to have managerial experience or competence in this field. We acknowledge there will always have to be a first managerial role for any given person. However, we do need to be satisfied that at least one manager of the firm either has suitable experience or can otherwise demonstrate they fully understand what managing a firm entails.

Therefore, where an application for approval is made for a manager of an existing firm, we are unlikely to assess whether they can competently manage a firm, as the management as a group will already have been assessed as suitable. However, if something has happened in the interim to suggest that they cannot (for example, an investigation into the firm's operations) or the firm's more experienced managers have left, then we will want to check that the candidate has sufficient knowledge to adequately manage the firm. We may do this by asking for copies of the firm's policies and procedures, and key documentation, as well as their plans for the business.

More detailed guidance about how we consider authorisation of a firm is in our separate decision making guidance.

Compliance Officers

COLPs have a key role in maintaining regulatory compliance, including a personal obligation to ensure the firm and its managers, owners and employees comply with their regulatory obligations. They must record breaches and, where appropriate, report these to us. COFA’s have an equivalent role in relation to compliance with our Accounts Rules regarding the handling of client money. We therefore need to be satisfied that the applicant has adequate arrangements to ensure that its COLP and COFA are able to discharge their duties under our rules19 and the individual is suitable to do so.

As an example, the application form asks for information about the compliance officer's position in the firm, their work history, and an explanation of how they have sufficient seniority and responsibility in the firm. If we do not have sufficient information from that to be satisfied the COLP or COFA will have the unfettered ability to report breaches, we may request a copy of the firm’s compliance reporting procedure. We may also need to question the managers as to their understanding and support for the role.

The decision

Unconditional approval

If the candidate is suitable, meeting the limbs described above, we will approve them unconditionally. 20  

Example 1

A licensed body wishes to bring in a new non-lawyer investor who will own 20 percent of the company.

The firm submits an application to have the proposed investor approved as an owner.

The new owner undergoes our screening checks which include a criminal check, identity checks and adverse financial checks through our external screening provider. All information received on the application form is verified, the outcome of which shows nothing adverse against the investor. There is no information from our checks on the new owner, or his associated companies to suggest that the regulatory objectives or the requirements of the Handbook will be compromised. The new owner is therefore considered suitable to hold such an interest.

The application for approval of the new owner is granted.

Approval with conditions

Where we are not satisfied that an unconditional approval should be granted, we will consider whether the risk posed by the candidate can be managed by way of conditions imposed on the firm. Our reasons for imposing those conditions must be tied to one or more of the grounds under Rule 9 of the Authorisation Rules, which essentially gives us wide powers to restrict or prevent the person carrying on activities where we believe these present a risk to clients or the public or in order to safeguard or monitor compliance with our regulatory arrangements. Compliance with the conditions must be capable of mitigating a real and identifiable risk, which the candidate poses.

Example 2

A recognised body seeks approval of a new lawyer manager.

The candidate is a solicitor with a current practising certificate. He is subject to a condition that he cannot be a manager without our approval.

He declares an ongoing Individual Voluntary Arrangement (IVA) which has previously been declared to us and is the reason for the current practising condition. He has no other issues.

The candidate entered into the IVA as a result of financial difficulties caused by an acrimonious divorce. Since then, he has settled the financial aspects of his divorce and has been paying off his debts in accordance with the terms of the IVA for over three years.

The firm is asked questions about its governance. It is not that large and each manager plays a substantial role in governing it.

The existence of the IVA raises a risk that the candidate is unable to properly manage his finances and potentially, therefore, the firm's finances. This presents a risk to client money.

In considering the candidate's suitability, it is noted that he made full disclosure of the IVA and provided evidence of rehabilitation. While the circumstances and the rehabilitation goes some way to supporting the position that this was a one-off event, we cannot be fully satisfied about that until he has managed his own finances suitably outside of his IVA.

We consider that, while the candidate does not meet the suitability criteria in full, the risks can be mitigated by limiting his activities in the entity until at least a period of time has elapsed after his IVA is satisfied.

For owners in licensed bodies, we can impose conditions directly on the person's approval (instead of, or in addition to, conditions on the firm).21

For example, if we had reasons to be concerned an owner with majority control of a licensed body would pose a risk to the regulatory objectives, we may impose a condition which prevents them being involved in certain decisions about the business, or limits the number of shares they can hold. For instance, a candidate may have a disciplinary finding from another regulator, in which they were found to have referred people to a business in which they had an undisclosed personal interest, representing a risk to the professional principles of independence and integrity. However, if the finding was not recent or so serious as to justify refusal, we may still require that the candidate should not have majority control.

This enables us to take action against the owner if they are not complied with. However, our powers in respect of non-authorised individuals are not as wide-ranging as they are for authorised persons, as they do not allow us to take any disciplinary action (eg to fine or rebuke) against non-authorised owners. Our only power directly against an owner is withdrawal of their approval and divestiture of their ownership in the firm. Therefore, depending on the reason for the condition, the level of risk and the nature of the condition, we may also impose a condition on the firm's authorisation that mirrors the one on the owner themselves. That allows us to take disciplinary action for a breach of the condition against the firm and its managers if necessary. This helps to ensure they will take some responsibility for maintaining compliance with those conditions.

Refusal

Where a candidate does not fully meet our suitability requirements, we will always first consider if conditions will meet the risk posed by them. If, following such consideration, we are not satisfied that conditions will adequately mitigate the risks posed, we will refuse the application.

This will happen when the candidate falls so far short of being suitable, and the risk they pose to the public interest is so high, we cannot adequately protect against it by use of conditions.

For example, where:

  • a history of dishonesty poses a very high risk both to clients and to public confidence and there is no control that can be applied to protect against it;
  • a history of non-compliance with our regulations means we cannot be satisfied they would comply with any conditions that may otherwise address the risk;
  • there are no conditions that can manage the risk posed (see example 3 below).

Example 3

A small, two-partner firm makes an application for approval of a new COFA.

The candidate is a non-authorised person and will be an employee of the firm. He is new to the firm, but has worked as COFA for other small practices. He discloses no adverse matters. However, our screening checks identify that the candidate is under investigation for extensive cash shortages at the practice at which he previously worked. The individual is aware he is being investigated, as he has been interviewed about it on three occasions in the last 12 months.

He is asked to explain why he did not declare the investigation and reminded of the fact that his failure to do so may be considered as evidence of dishonesty. He responds that as nothing has been found proven yet, he does not consider that it requires disclosing. The application form makes it clear that all regulatory matters that are under investigation must be disclosed.

The matter is raised with the applicant who tells us they were unaware of the ongoing investigation but would still like the candidate to work for them. As the investigation is ongoing and nothing is proven, they wish to give him the benefit of the doubt.

On the basis of all the information, the candidate does not meet the suitability requirements as he did not disclose the ongoing investigation and there is evidence to suggest he may not comply with his regulatory obligations and be unable or unwilling to perform the duties of a COFA. It is the COFA’s role to ensure compliance with the SRA Accounts Rules and we cannot be satisfied on the information available to us that he will comply with that requirement, and will not repeat the alleged previous behaviour. While we note the allegations are not yet proven, we must consider not just his own position but also the public interest and specifically that of the clients of the firm.

Had the candidate applied for a different role, such as a manager in a licensed body, it may have been possible to manage the risk he posed by restricting his involvement with client account or accounting records. However, the role of the COFA is to ensure compliance with the SRA Accounts Rules. He therefore would need to have access to the records in order to fulfil the role of COFA. Therefore, we are not satisfied that there are any conditions which could mitigate the risks posed while still allowing him to carry out that role and enabling us to be confident in his ability to fulfil his obligations.

Withdrawal of approval

We have power to withdraw approval granted to a manager, owner or compliance officer, including deemed approval. 

Temporary emergency approval of compliance officers

Where a firm unexpectedly loses its COLP and/or COFA, the firm may be able to obtain temporary approval of a replacement compliance officer until a full application is considered. Where such approval is granted, it will run from the date the previous compliance officer ceased in their role.

There are strict criteria that govern both how to apply for, and how we may grant, temporary approval of a compliance officer.

A firm is eligible to apply for temporary approval if they notify us within seven days of their existing approved COLP or COFA ceasing to hold the role.

Due to the temporary and emergency nature of these approvals, our checks are necessarily limited. Any decision to grant temporary approval does not affect our ability to refuse, or impose conditions in respect of, the substantive application for approval. The applicant must submit the substantive application within 28 days of commencement of the temporary approval.

We will only grant the temporary approval if:

  • we are satisfied that the firm could not reasonably have started the application for approval in advance of the previous compliance officer ceasing to hold the role
  • on the face of the application and any other information immediately before us, there is no evidence suggesting that the new compliance officer is not suitable to carry out the duties imposed on them under the rules; and
  • we are satisfied that the candidate consents to the designation; is not disqualified from acting as a COLP or COFA in a licensed body; and, in the case of the COLP, is an authorised person. 22

If we decide to reject the application as ineligible, or we refuse to approve, there is no right of appeal. This does not affect the applicant's right to seek a judicial review of the decision if the grounds are met.

We may grant a temporary approval subject to conditions being imposed on the firm. In such cases, the firm has a right of appeal in respect of those conditions.

Notes

1. We define manager to include someone who is a member of a Limited Liability Partnership; a director of a company; a partner in a partnership; or, in relation to any other body, a member of its governing body.

2. We define an owner as a partner in a partnership or a person who holds a material interest in any other type of body. What constitutes a material interest can be complex. In its simplest form, it means having an interest of 10% or more in an authorised body or in the parent undertaking of an authorised body. There are a number of additional, more complex factors to consider in determining if an interest is material. Read more about approval of owners and the relevant legislation (Schedule 13 Legal Services Act 2007).

3. Compliance officer means a COLP or a COFA. A COLP is a Compliance Officer for Legal Practice and a COFA is a Compliance Officer for Finance and Administration.

4. References to 'firm' includes all SRA authorised bodies, namely recognised sole practices, recognised bodies and licensed bodies (sometimes called an 'ABS').

5. A candidate who is suitable may also be described as 'fit and proper'.

6. The term authorised person refers to an individual or firm that is authorised to provide reserved legal activities by an approved (legal services) regulator or a member of an Establishment Directive profession under Article 1.2(a) of the Establishment of Lawyers Directive 98/5/EC.

7. Rule 13.2 SRA Authorisation Rules 2011 (the Authorisation Rules).

8. Rule 13.3 SRA Authorisation Rules 2011.

9. Rule 14.1 SRA Authorisation Rules 2011.

10. Rules 14 and 15 SRA Authorisation Rules 2011 and, for licensed bodies, Part 2 of Schedule 11 to the LSA 2007 (COLPs and COFAs) and Parts 2 and 3 of Schedule 13 LSA 2007 (Owners).

11. Rule 5.2 SRA Authorisation Rules 2011 and extendable to nine months under Rules 5.3 and 5.4.

12. Paragraph 25 Schedule 13 LSA 2007.

13. as detailed at Section 1 LSA 2007.

14. Section 90 LSA 2007 (reflected in Rule 8.2(b) of the Authorisation Rules) and Paragraph 6(1) to Schedule 13 LSA 2007.

15. Rule 8.1(a) SRA Authorisation Rules 2011.

16. Section 90 LSA 2007 and Rule 8.2(b) SRA of the Authorisation Rules 2011.

17. Rule 6.3(a) SRA Authorisation Rules 2011.

18. Rule 6.3(c) SRA Authorisation Rules 2011.

19. Rule 8.5 SRA Authorisation Rules 2011.

20. In particular, we are required to do so for non-authorised owners in licensed bodies - Paragraphs 6, 16 and 27 of Schedule 13 LSA 2007.

21. Paragraphs 17 and 28 to Schedule 13 LSA 2007.

22. Rule 8.5(g) SRA Authorisation Rules 2011.