The Separate Business Rule – changing the rules of engagement
Given the lack of publicity or guidance by the Solicitors Regulation Authority (SRA), solicitors could be forgiven for not realising that one of the most significant regulatory changes has just been made. The announcement by the SRA that as of 1 November there will be fundamental changes to the operation of the separate business rule (SBR) has, at one single stroke, potentially revolutionised the way in which solicitors can deliver legal services to the public and has gone a substantial way towards levelling the regulatory playing field for traditional legal practices.
In many important respects, traditional solicitors firms will no longer be subject to restrictions on the ways in which they can deliver legal services placing them at a disadvantage when compared with alternative business structures. However, as with most things in life, with increased freedom comes increased risk. Now, more than ever, firms need to ensure that if they are undertaking work through entities other than their legal practice, that they ensure that the safeguards contained in the new rule are observed and that clients are made fully aware of the true position.
The SBR was for many years a key element in the regulation of solicitors. As far back as the 1960s, the “Guide to the Professional Conduct and Etiquette of Solicitors” contained a duty not to carry on a separate business except in certain limited circumstances – and indeed it was actually one of the few specific duties to which solicitors were then subject (alongside other now largely defunct provisions including not sharing profits with a non-solicitor, not advertising and not charging less than the scale fee for conveyancing). Recent years, however, have seen others such as Licensed Conveyancers and Alternative Business Structures (ABS) given a greater latitude, not only in terms of the means in which they can provide services but also in terms of those to whom services can be provided. Something needed to be done to create a greater degree of equality of service.
Not that the SBR was without its supporters. In 2011, the Legal Services Consumer Panel backed the preservation of the SBR, stating that since many consumers assumed that all legal services were regulated, “it would be unhelpful to create a regulatory environment that went even further against consumers’ expectations”, and that removing the rule would “lead to consumers losing existing protections”.
Those objections aside, the Board of the SRA agreed to the changes to the SBR at its meeting on 3 June and that decision has now been ratified by the Legal Services Board (LSB), thus paving the way to the introduction of the new SBR with the updated edition of the SRA Handbook to be published on 1 November.
What did the old SBR provide?
To understand fully the changes to the SBR is first necessary to understand what the old rule sought to achieve. The old SBR was not one of the clearest pieces of regulatory drafting with the result that many in the profession were unaware of how far reaching its provisions were. Enacted to prevent solicitors’ firms hiving off non-reserved legal work into a business that would not be regulated by the Law Society – the “separate business” referred to – the aim of the old SBR was to ensure that members of the public knew whether a service was provided by a solicitor practising as such (and thus regulated by the Law Society and affording clients certain statutory protections) or outside the scope of a solicitor’s practice (and thus outside the regulation of the Law Society, and not affording any of the statutory protections extended to the clients of a solicitor).
Contained in Chapter 12 of the SRA Code of Conduct 2011 (the Code), the old SBR provided, made a distinction between “prohibited separate business” and “permitted separate business”. This meant, in essence, that all mainstream legal activity, including drafting wills, legal advice and the drafting of other legal documents had to be conducted through an SRA regulated firm. This went far wider than the requirement set out in the Legal Services Act which required only that “reserved legal activity” be carried out through a regulated structure.
Thus the old SBR was widely drawn so as to prevent, inter alia:
- Solicitors or regulated firms owning or actively participating in a separate business which conducted “prohibited separate business activities”;
- firms being owned by or connected with a separate business which conducts prohibited separate business activities;
and requiring that:
- solicitors who actively participate in, own or, if a firm, are owned by or connected with, a permitted separate business, have in place safeguards to ensure that clients are not misled about the extent to which the services that you and the separate business offer are regulated;
- any permitted separate business is not held out as being regulated by the SRA or any of its activities as being provided by an individual who is regulated by the SRA.
Where the old SBR became particularly problematical for many was in the breadth of its application. The old SBR applied to everyone within the practice including non-lawyer owners, managers and employees, applied even if the separate business has a different name and operated from different premises, applied whether or not clients were provided with full disclosure and even caught the situation where a person had indirect control through another person such as a spouse. In theory, therefore, a consultant doing part-time work for a firm as an employee could not then carry on his or her own non-regulated business if that business engaged in mainstream but non-reserved legal activity.
What does the new SBR provide?
As at the time of writing (October 2015) we not only await SRA guidance on the new SBR but have yet to see an easy to access version of what it will look like. There is a draft of the provisions but they are only to be found in the papers sent to the SRA Board and to the LSB.
Drawing upon those provisions it looks likely that the current Chapter 12 will be replaced with the following:
“OutcomesYou must achieve these outcomes:
O (12.1) you 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;
O (12.2) you do not represent, directly or indirectly, the separate business as being regulated by the SRA or any of its services as being regulated by the SRA;
O (12.3) the separate business does not carry on:
- reserved legal activities; or
- immigration work unless that work is regulated by the Office of the Immigration Services Commissioner;
O (12.4) you only:
- refer, recommend or introduce a client to the separate business;
- put your client and the separate business in touch with each other; or
- divide, or allow to be divided, a client’s matter between you and the separate business,
where the client has given informed consent.”
In addition to various consequential changes to other Rules within the SRA Handbook, the Glossary is to be amended so that the definitions of “permitted separate business” and “prohibited separate business” are deleted and the definition of “separate business” becomes:
“separate business means a business, wherever situated, which you own, are owned by, actively participate in or are connected with and which is not any of the following:
- an authorised body, an authorised non-SRA firm, or an overseas practice; or
- an in-house practice or practice overseas which is permitted by the SRA Practice Framework Rules.”
Finally, there is to be a new paragraph (c) inserted into Rule 13.2 of the SRA Practice Framework Rules 2011 which lists the services which solicitors can provide alongside the usual legal services. These are:
- alternative dispute resolution;
- financial services;
- estate agency;
- management consultancy;
- company secretarial services;
- other professional and specialist support services to business including human resources, recruitment, systems support, outsourcing, transcription and translating;
- acting as a parliamentary agent;
- practising as a lawyer of another jurisdiction;
- acting as a bailiff;
- accountancy services;
- education and training activities; and
- authorship, journalism and publishing.
What do the new SBR provisions mean in practice?
So what are the practical implications of these changes and what do they mean in reality?
(i) Unreserved Work
Thus, for example “Probate activities” means preparing any probate papers “on which to found or oppose— (a) a grant of probate, or (b) a grant of letters of administration.” It does not mean the administration of the estate after a grant of probate is made.
Similarly, in relation to conveyancing, “Reserved instrument activities” means (a) preparing any instrument of transfer or charge for the purposes of the Land Registration Act 2002, (b) making an application or lodging a document for registration under that Act or (c) preparing any other instrument relating to real or personal estate for the purposes of the law of England and Wales or instrument relating to court proceedings in England and Wales. In other words, all of the other work associated with a conveyancing transaction is outside of the scope of reserved legal services.
The practical implication of this is that, subject to the safeguards set out in Chapter 12 such as informed client consent, work can be shared between the “regulated” solicitors firm and the “unregulated” separate business with the potential for savings and reduction in overheads.
(ii) Understanding the extent to which the separate business is regulated
The extent to which a client could be confused will depend to a large extent on the nature of the work that the law firm and the separate business undertake. The more “separate” the work of the separate business is, the less likelihood there will be for confusion. Thus, if a single or related matter is being handled jointly by the regulated firm and the separate business then the more difficult it will be for the client to understand which elements are undertaken by which of the two businesses and how the clients practical redress will be affected in the event, for example, of a failure by the unregulated separate business. We will look in more detail at shared matters in a moment in relation to Outcome O (12.4).
Care will also need to be exercised in relation to how the client perceives the regulated nature of the separate business in certain other situations, including:
- where the regulated business and the separate business share:
- the same or a similar name;
- staff – especially if the staff will deal directly with consumers
- contact details, or
- where the separate business provides legal services that consumers would expect to be provided by a lawyer, and
- where clients seeking legal services are first directed to the separate business.
It should be noted that these duties are not a one off which only applies at the outset of a matter. They are ongoing obligations and firms must monitor the situation and ensure that the client is clear about the extent to which the services that the regulated firm and the separate business offer are regulated throughout the course of a transaction.
(iii) Regulation of Separate Businesses
In the draft guidance set out in the SRA board papers, the first paragraph specifically states that even though the SRA does not regulate separate businesses, “authorised persons that have connections with them are regulated, and the nature of those connections is regulated. Actions by the separate business may lead to you (i.e. the regulated person) being in breach of SRA rules, especially where you have an element of control over the separate business or you actively participate in it.”
Looked at in relation to specifics, therefore, Principles 1 (uphold the rule of law and proper administration of justice), 2 (act with integrity) and 6 (maintain the trust the public places in you and in the provision of legal services) all apply outside of regulated practice.
Thus, for example, poor service by the separate business could reflect upon you and the regulated practice which referred the client to the separate business. As the draft guidance states:
(iv) The nature of “informed consent”
That which constitutes informed consent will vary according to circumstances and the relative “sophistication” of the client. Thus, in all cases the client should be made aware of the nature of any links between the regulated firm and the separate business and of any interest – whether financial or otherwise, that the regulated firm has in making the referral.
How that information is transmitted to the client, and the extent to which the regulated firm needs to spell out the implications, will depend upon the firm’s analysis of the client’s ability to understand and appreciate the implications of the referral to the separate business. Thus a commercial client might require a simpler explanation than a first-time buyer in a conveyancing transaction. In other words, the information given to the client will, as the draft guidance states, “need to be at an appropriate level of detail and explicitly drawn to the client’s attention, for example in a client care letter, rather than just being one of the terms of engagement or contained in terms and conditions on a web page.”
However, where the work to be undertaken by the separate business is a completely separate matter, and possibly one which does not involve legal activities, then it may be unnecessary for detailed information about regulatory redress to be supplied. Thus, for example, if the separate business is a removals company and the regulated firm is undertaking conveyancing services, then the information provided may need to be less detailed than if, for example, the regulated firm was undertaking the reserved activity part of a conveyancing transaction and the separate business the unreserved part.
In all cases the starting point in terms of the information that needs to be given is that clients should be informed:
- that any work that the separate business undertakes will not be regulated by the SRA;
- there will no right to complain about the quality of the work to the Legal Ombudsman – although it is not clear as yet as to the extent to which the Legal Ombudsman might feel able to exercise jurisdiction against the regulated firm for poor service by the separate business;
- there will no right for the client to make a claim on the Compensation Fund;
- the work undertaken by the separate business will not be covered by a solicitors’ compulsory PII (although the separate business may have its own cover, in which case details of this will need to be provided to the client);
- the work will not be covered by legal professional privilege;
- SRA Accounts Rules protections will not apply in relation to client money paid to or held by the separate business.
Note, however, that this is only a starting point and other information may need to be provided to the client depending upon the client’s level of understanding and the circumstances of the case
Also, bear in mind that if the separate business is itself a regulated entity then the client may need to be given relevant information as to any protections and rights of redress offered by that regulation and the regulated firm must make sure that it does not inadvertently breach any restrictions placed upon referrals to such a regulated business.
How the informed consent is dealt with in practice is not defined with in the new SBR or particularly touched on in the draft guidance. It is probably not going to be sufficient for general information to be included in the regulated firm’s terms and conditions or engagement letters. It is far more likely that the firm would need to ensure that the issues were addressed specifically – possibly in writing alone in certain circumstances but also, conceivably, orally and in writing to ensure both that the client had understood the implications and that they had an ongoing record of what the arrangements are.
The new SBR does not deal, also, with how consent is to be communicated. The LSB in their Decision Notice of the 20th July questioned whether that consent needed to be in writing and sought clarification from the SRA on the point. The SRA stated in response that they were not going to be prescriptive in that regard and that whilst some firms in some cases would want to get written confirmation from the client that they had understood the issues involved, others might in different circumstances assume informed consent. The onus would, however, be upon the firm to demonstrate that consent had been given and that in cases where matters were being divided it was suggested that written consent should be the norm.
Finally the regulated firm should make sure in all cases that it has the client’s agreement before passing on details to the separate business so as to avoid a breach of confidentiality.
(v) Dividing a matter
There is no specific definition of what constitutes the same matter and indeed the complexity of many legal matters means that it would be very difficult to provide one that was capable of applying in all circumstances. The starting point here, therefore, has to be what the client’s reasonable expectations would be. In other words would the client reasonably regard it as the same matter.
In their draft guidance the SRA have stated that in their view the following will always be part of the same matter for these purposes:
- The grant of probate and administration of the estate
- All legal activity in relation to conveyancing
- All legal activity in relation to the same cause of action in a civil dispute
- All legal activity in relation to a family dispute.
The fact that it is the same matter does not prevent part of the work being undertaken by the separate business – it merely predicates the need for informed consent.
In order to ensure compliance with Principle 4 – act in the best interests of each client – and Outcome O (6.1) – whenever you recommend that a client uses a particular person or business, your recommendation is in the best interests of the client and does not compromise your independence – regulated firms must have consideration for the best interests of the client and must therefore have regard to many factors, (including some that would apply to the firm itself), including:
- Can the separate business provide services to your clientsin a manner which protects their interests in the matter, subject to the proper administration of justice?
- Does the separate business have the resources, skills and procedures to carry out your clients’instructions?
- Is the service provided to the clients by the separate business competent, delivered in a timely manner and able to take account of your clients’needs and circumstances?
- Is the arrangement suitable for the client’sneeds and does it take account of the client’s best interests?
- Have you considered the value to the client of any regulatory protections that they would have had if the matter had been dealt with by the regulated firm and not the separate business?
- Have you considered whether the separate business is actually better placed than your firm to provide services to the client?
- If client money is to be held, would these be safer for the client if they were not held by the separate business?
- Can confidentiality of client information be guaranteed by the separate business?
- Will referral to the separate business lead to uncertainty – either in terms of who does what or in relation to outcome?
- What will be the position in relation to claiming costs from another party or the availability of public funding?
It should also be borne in mind that the initial instructions do not have come to the regulated firm in the first place for the need for informed consent to apply. The separate business may have been instructed to handle a non-reserved activity but needs to involve the regulated firm to deal with reserved activity aspects of the matter or simply to provide non reserved advice or services that the separate business is unable to provide. In such a case the regulated firm should give thought to the matter as a whole and must decide whether, for example, it is in the best interests of the client for the whole of the matter to be handled by the regulated firm rather than split with the separate business. Depending upon the relationship between the separate business and the regulated firm this could be quite a difficult call to make – especially if the separate business does not want to hand over those non reserved elements. In a situation such as this the regulated firm may need to consider declining to act.
A final point to bear in mind is that a matter will not be divided between a regulated firm and a separate business where the regulated firm is outsourcing work to the separate business but conduct and control of the overall matter is being retained by the regulated firm.
(vi) Conflict and Confidentiality Implications
We have already touched briefly upon the issue of confidentiality in so far that regulated firms should not refer matters to a separate business without first getting the client’s consent to them doing so. It is recommended that such consent be in writing or, that contacting the separate business is left in the hands of the client. Moreover, it must be made clear to the client that they are being asked to waive confidentiality and that they are not obliged to do so. In practice, therefore, this means that the waiver of confidentiality should not form part of a regulated firm’s general terms and conditions forcing the client to agree if the firm is to agree to enter into a retainer.
A further factor is that agreeing to waive confidentiality could also lead to a loss of legal professional privilege and it may not be in the client’s best interests to be asked to agree to that.
There may also be general confidentiality issues – not related to any specific client – depending upon the nature of the separate business and how it is operated. Thus, there may be general confidentiality risks if the regulated firm and the separate business share:
- Telephone systems;
- IT systems; and
- Other utilities and services – for example if there is a shared canteen or shared reception.
Where issues become more complex is in relation to the position where there is a potential for breach of confidence to someone within the separate business who also has interests that may run counter to those of the client – e.g. where someone within the separate business acts for a competitor of the client in a situation of conflict. Whilst it may be possible to put in place information barriers within the separate business similar to those envisaged in Chapter 3 of the SRA Code of Conduct. Bear in mind, however, that the separate business may be unregulated and that therefore there may be no method by which such barriers can be enforced.
There are two further issues in relation to conflict which should be taken into account.
The referral of a matter to the separate business could lead to a potential conflicts of interest between different clients of the separate business. Because the separate business is not necessarily a regulated entity therefore it may be able to act in situations where there would be a conflict were it a regulated firm.
Secondly, there is a potential for an “own interest conflict” where the separate business dealing with a matter could potentially benefit the solicitor referring the matter to the separate business whilst not necessarily being in the client’s best interests.
As with all regulatory changes – especially deregulatory ones – we cannot predict with any accuracy the impact that the changes will have upon the way in which firms practise and upon the ways in which the legal sector constitutes itself. As yet, ABSs have not had the profound affect upon the legal marketplace that many prophesied they would. Licensed Conveyancers did not spell the end of the high street solicitors practice.
The announcements from the SRA about the changes to these rules have, it is suspected, been deliberately low key – to the extent that many firms are unaware that they have been made.
Perhaps firms are not champing at the bit to set up separate businesses to undertake aspects of their work that are currently regulated. However, at least from the 1st November they will have the opportunity to do so if they wish.