The Solicitors Regulation Authority (SRA) is to consult on the options to changing the part it plays in regulating authorised professional firms (APFs) now that some may choose to become alternative business structures (ABSs).
It was agreed by the SRA's Board meeting on Wednesday 16 May to consult with key stakeholders that have a vested interest in the matter. No-one can carry out financial services activities unless authorised by the Financial Services Authority (FSA), or are exempt.
The majority of law firms rely on an exemption and are described as exempt professional firms, carrying out activities under the supervision of the SRA. They do not have to be regulated by the FSA, but instead comply with the SRA Financial Services (Scope) Rules 2001 in the Specialist Services section of the SRA Handbook.
A small number of law firms are not exempt because they provide mainstream financial services to their clients, so are authorised by the FSA and the SRA as APFs. The SRA has made it clear since 2009 that it will only regulate legal services, as measures put in place to protect the public against errant solicitors - such as the Compensation Fund - could be liable for losses caused by non-legal activities.
That means that the non-legal activities of ABSs will not be regulated by the SRA, and therefore those APFs that become ABSs will no longer receive the amnesty they enjoy from FSA regulations. The SRA was concerned this would lead to a gap in regulatory protection for customers of such businesses.
There is also regulatory inconsistency between ABS APFs and other law firms that are SRA-authorised APFs. The SRA has been in discussion with the FSA on the issue and has formulated three options to address the situation and it's on these three different ways forward that it will consult on over the next 12 weeks.
Agnieszka Scott, SRA Financial Regulation Policy Manager, said: "The introduction of ABS has created a very small gap in our regulatory regime, so we need to rethink our strategy. The number of firms likely to be affected is quite small when compared to the rest of the profession, but we still need to give the issue due consideration.
"We're therefore going to consult on the matter and have drawn up three options that we'll be inviting comments on over the summer."
The three options are:
Bring ABS APFs into the regulation model which currently applies to other APFs
Extend the current ABS approach to all APFs
Apply SRA regulatory requirements only to the conduct of non-mainstream regulated activities of all APFs and no longer regulating the mainstream regulated activities of any APFs, therefore excluding such work from the Compensation Fund
The consultation runs for 12 weeks and will end on Friday 17 August.
Go to the consultation.