Policy statement, September 2014
The regulation of non-reserved legal activity
A multi-disciplinary practice (MDP) is a licensed body that combines the delivery of reserved legal activities with other legal and other professional services. ‘Reserved legal activity’ and ‘legal activity’ have the meaning prescribed by s12 of the Legal Services Act 2007(LSA).
When licensing an MDP, our approach to the regulation of non-reserved legal activity performed by non-legal professionals will be a flexible one - driven by the risks posed by the particular circumstances. However, we will exercise this particular discretion having regard to the principles set out in this statement.
The context when any particular non-reserved legal activity will be excluded from SRA ‘regulated activity’ is that:
- a) Reserved activity will always be SRA regulated
- b) The MDP as a whole will be authorised and regulated by the SRA. The MDP and those who own it and work within it will need to comply with the terms of the SRA Authorisation Rules for Legal Service Bodies and Licensable Bodies, as well as with the SRA Principles and other authorisation and practising requirements applicable to licensed bodies and their owners managers and employees as set out in the SRA Handbook. For example, the SRA Disciplinary Procedure Rules will apply to all employees and managers. Information from across the MDP will be disclosable to the SRA in accordance with the provisions of s93 LSA and any misconduct of the firm or its members or employees in non-SRA regulated areas may be taken into account in relation to the firm’s fitness to hold the licence, or compliance with conditions.
- c) Solicitors, RELs and RFLs will continue to be subject to personal regulation by the SRA. Other authorised individuals will be subject to the relevant personal requirements of their own regulator1.
- d) However an activity that falls out of SRA regulated activity will not be subject to many of the other detailed provisions in the Handbook – including the professional indemnity insurance and Compensation Fund provisions, the Accounts Rules and many of the provisions in the SRA Code of Conduct.
Reserved legal activity and immigration legal activity will always be SRA regulated activity, as will those activities that are integral to them. Linked to this requirement is the obligation to act in the client’s best interests and not to ‘case split’ in a way that removes appropriate protections or which will leave the client confused as to the regulatory position. The following is a non- exclusive list of activity that we prescribe as integral to reserved legal activity or immigration activity when carried out within the MDP:
- Claims management, when the MDP is instructed to conduct the litigation
- Administering an estate when the MDP is acting on the grant of probate
- Legal advice on liability or quantum when the MDP is instructed to conduct the litigation
- Providing employment advice on a client’s right to enter or remain in the UK when the MDP is acting for the client in relation to the visa application.
- ‘Administering’ a client’s conveyancing matter whilst the MDP is instructed to draft the reserved instruments
We are particularly concerned that cases involving the provision of reserved legal activities do not move between regulated and unregulated services in a way that causes detriment. However the same principle will also apply when an authorised individual is providing unreserved legal activity in the same matter as another professional
Subsidiary but necessary
Where the non–reserved legal activity is performed as a subsidiary but necessary part of the activity of a non-legal professional (whose main activity does not involve the provision of legal advice or services), then subject to any risks posed in the particular case we will generally be prepared to agree to exclude this from the description of SRA regulated legal activity on the licence. Examples could include an IT consultant whose work may from time to time involve ‘legal activity’ such as providing advice on installing a new IT system that includes compliance with data protection legislation, or a human resources consultant who designs new disciplinary systems for firms which need to include procedures that are compliant with equalities legislation. As the MDP as a whole will be required to comply with the SRA Principles, this will include a duty to ensure that the matter would be referred to an authorised individual when it is in the client’s interests to do so, as well as to ensure the accuracy and competence of any advice provided.
The greater the amount of legal activity involved, and/or the closer it may be to reserved legal activity, the less likely we will be to exclude this activity from SRA regulated activity on this ground. So, for example, we are unlikely to exclude will writing, general legal advice, debt recovery, legal advice on debt or personal injury liability or the work of a chartered accountant who regularly acts in disputed tax matters from SRA regulation under this heading (but the suitable external regulation exception may apply).
We think it important in the interests of certainty for providers and the effectiveness and transparency of supervision and enforcement by the SRA that a description of the activities that are excluded from SRA regulation is contained on the terms of the licence.
Example 1: a firm of chartered surveyors wants to open a legal department to act in contested planning matters and apply to the SRA for authorisation as a licensed body. The normal work of the surveyor may from time to time involve providing what is effectively legal activity in relation to planning requirements. We are satisfied that the applicant firm has to date successfully delivered this service outside of legal services regulation with no consumer protection issues and has in place appropriate arrangements to refer the client to the legal team (e.g. if the matter becomes contested or there is an issue of disputed law). We therefore agree to exclude this activity from SRA regulated activity. In this case, the relevant wording on the licence could read:
- "The following will be SRA regulated activity:
- - All reserved legal activity and immigration work
- - All non–reserved legal activity except for any such activity carried out by a surveyor as a subsidiary but necessary part of the provision of surveying services"
Suitable external regulation
Where there might be a substantial overlap between legal activity provided by a non -legal professional and the kind of legal work that an authorised individual2 would also provide or would be expected to supervise, then we are likely to include the work as SRA regulated activity unless it is subject to suitable external regulation. Taxation advice is one such activity, but providing legal advice on transactions or disputes in the role of a general consultant and legal advice on debt or insolvency are others. In those cases, where providing legal advice could be said to be the core part of the service, we consider that extra protections should be in place.
For us to accept that an external regulatory scheme would be suitable for these purposes, we will need to be satisfied that compliance with the scheme will ensure that the SRA principles will be complied with. These principles are set out below, together with any specific comments on what we would expect to see in this context.
- 1. Uphold the rule of law and the proper administration of justice
- 2. Act with integrity
- 3. Not allow your independence to be compromised (We would expect rules to provide for referrals to be made in the best interests of the clients and for any interest the firm has in the referral to be declared).
- 4. Act in the best interests of each client (We would expect rules to protect clients in the event of conflicts of interest, and rules to ensure the confidentiality of clients’ information).
- 5. Provide a proper standard of service to clients (We would expect there to be arrangements for qualification, for competence of service, and for supervision of staff)
- 6. Behave in a way that maintains the trust the public places in you and in the provision of legal services
- 7. Comply with your legal and regulatory obligations and deal with your regulators and ombudsmen in an open, timely and co-operative manner (We would expect the regulatory scheme to provide for complaints, disciplinary procedures and enforcement. We would not consider external regulation to be suitable unless there are effective mechanisms to enforce the rules. If, for example, a member can escape liability by simply resigning their membership and yet continue in practice, this could not provide an effective remedy. We would also expect the regulator to maintain regular reporting requirements and to carry out assurance checks/visits on a risk basis)
- 8. Run your business or carry out your role in the business effectively and in accordance with proper governance and sound financial and risk management principles
- 9. Run your business or carry out your role in the business in a way that encourages equality of opportunity and respect for diversity; and
- 10. Protect client money and assets. (We would expect rules to make specific arrangements for protecting client assets and money)
We agree that we need to apply the text flexibly in order to achieve a purposive approach, and there may be some circumstances where we may need to impose extra conditions to address what may be gaps in the external regulation.
We have already reviewed the schemes of the following regulators using these principles and are satisfied that they currently meet the test:
- The Association of Chartered Certified Accountants
- The Association of Taxation Technicians
- The Chartered Institute of Taxation
- The Financial Conduct Authority
- The Insolvency Practitioners Association
- The Institute of Chartered Accountants in England and Wales
- The Royal Institution of Chartered Surveyors
Subject to the paragraph below, any legal activity carried out by authorised individuals or under their direction or supervision will remain SRA regulated activity.
However there will be circumstances where the non-reserved legal activity will be provided under suitable external regulation by a mixed team of legal and non-legal professionals and that activity will be under the direction and supervision of the non –legal professionals. Therefore, if allowed on the terms of the MDP licence, an authorised individual may provide a non–reserved legal service as part of a mixed team and be covered by the suitable external regulation exception where all of the following conditions are met:
- the activity is carried out at the direction and under the supervision of the non-authorised person (i.e. the non-legal professional)
- the authorised person is not providing a reserved service in the same matter
- the authorised person is not holding client money
For the activity to be carried out under the supervision of the non-authorised individual he or she must be responsible for managing the engagement and be personally competent to supervise the services being delivered under the terms of the engagement (including any non-reserved legal activity).
In the circumstances outlined in the paragraph above, although the work will not be SRA regulated activity, the SRA Principles will continue to apply to the work of the authorised individual. These principles include acting in the best interests of each client, upholding the rule of law and the administration of justice and not allowing your independence to be compromised. The authorised individual will remain subject to the SRA Disciplinary Rules – and in practice disciplinary action is often taken on the basis of a breach of a principle rather than breach of a detailed rule. If that individual is a solicitor, REL or RFL then the following provisions of the SRA Code of Conduct will also apply to them in conducting this activity:
- Chapter 1 – the following outcomes: O1.7, O1.9 to O1.11
- Chapter 4 (confidentiality and disclosure) – the entire chapter
- Chapter 10 (you and your regulator) – the entire chapter
- Chapter 11 (relationships with third parties) – the entire chapter
- Chapters 13 to 15 (application, waivers and interpretation)
In addition the solicitor, REL or RFL will be under a general duty not to act where there is a conflict of interest unless the client has given informed consent and appropriate safeguards can be put in place that are consistent with the SRA Principles. This will include acting in the client’s best interests – in these circumstances this includes an element of an objective test i.e. that a reasonable onlooker would regard your view that you are acting in the clients best interests as a reasonable one in light of the information available at the time.
In deciding whether to allow this exception, the factors that we will consider will include the firm’s arrangements for clear terms of engagement and for deciding when it will be in the client’s interests for the matter to be supervised by an authorised individual; as well as the nature of their client base (for example are the clients principally corporate and professional clients who are likely to have experience of purchasing legal services and other professional services?).
The MDP should ensure that the activity is carried out at the direction and under the supervision of an authorised individual when it is in the client’s interests to do so – for example when it is important for the work to attract legal professional privilege.
Example 2: An accountancy firm is regulated overall by the Institute of Chartered Accountants in England and Wales (ICAEW). All of its activities are subject to the ICAEW Code of Ethics, professional indemnity insurance provisions, and (if the activity forms a significant part of turnover) the inspection regime. As well as providing taxation advice and assistance in taxation disputes, the firm provides general consultancy services that are likely to include legal activities which would fall into the normal range of what a lawyer would deliver .We agree that a mixed team exception is appropriate.
If the firm is authorised, the description on the licence could read:
- “The following will be SRA regulated activity:
- - All reserved legal activity and immigration work
- - All legal activity prescribed by the SRA as integral to reserved activity
- - All non–reserved legal activity performed under the supervision of an authorised individual
- - All non- reserved legal activity performed by an authorised individual (except where: (a) the authorised individual is operating at the direction and under the supervision of a non- authorised individual as part of a team providing accountancy, auditing or business consultancy services and (b) the authorised individual is not providing a reserved service or holding client money in the same matter.”
The background to this decision will be that the rest of the firm’s non-reserved ‘legal activity’ will be regulated by ICAEW. We would place a condition on the licence that the MDP has a duty to notify us if their regulatory position changes or there is disciplinary action taken against them by another regulator.3
Clients, complaints and the Legal Ombudsman
Any MDP must have procedures in place to ensure that clients are aware of their regulatory position – and which activity is SRA regulated and which is not in their particular case.
The exclusion of work from SRA regulated activity does not impact on the right of a client to take a complaint to the Legal Ombudsman or on the duties of the entity in relation to complaints. The following duties in the SRA Code of Conduct will apply to all activity engaged in by the MDP, whether or not it is ’SRA regulated’ activity:
- to inform the client in writing at the outset of the matter of their right to complain and how complaints can be made (O1.9);
- to inform the client in writing, both at the time of engagement and at the conclusion of the complaints procedure of their right to complain to the Legal Ombudsman, the timeframe for doing so and the full details of how to contact the Ombudsman (O1.10);
- to deal with clients’ complaints promptly, openly, fairly and effectively (O1.11); and
- to co-operate fully with the SRA and the Legal Ombudsman at all times (O10.6).
The Compensation Fund
Under the SRA Compensation Fund Rules 2011, the Fund will only cover defaulting licensed bodies where losses are incurred in the course of performance of a “regulated activity”. Therefore, defaults will not be covered if they fall outside of SRA regulated activity.
Professional Indemnity Insurance
We would prefer the same insurer across the MDP to avoid consumers being prejudiced by disputes over which policy covers a particular situation. We would expect that all legal activity whether SRA regulated or within the external regulation exception should be covered by a policy that meets the SRA’s minimum terms and conditions. However, we will consider requests for waivers on a case-by case basis where acceptable alternative arrangements may be in place.
Appendix 3 to the SRA’s fee determination for licensed bodies defines turnover for the purposes of SRA periodical fees as: “a firm’s total estimated gross fees arising from regulated activities undertaken from offices in England and Wales......”
Non-reserved legal activities that fall out of SRA regulated activity will therefore not be included in turnover for the purpose of calculating periodical fees.
1 Note that S52 LSA provides that in any conflict between the rules of the Approved Regulator (an entity requirement) and the rules of another regulator (an individual requirement) the entity requirement prevails.
2 As defined in the SRA Glossary –meaning an individual referred to in s18(1)(a) LSA who is authorised to provide one or more reserved legal activities.
3 Note the firm may well have additional regulators, for example the FCA for investment advice.