Rules to Change on Separate Businesses
In a news release optimistically entitled “levelling the Playing Field”, the Solicitors Regulation Authority (SRA) have announced changes to the rules relating to separate businesses which, they state, will “cut bureaucracy that restricts the way traditional law firms operate, by removing restrictions on solicitors having links with outside businesses.”
The Separate Business Rule (SBR) has been for many years a key part of the solicitors’ rule book. 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 such 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).
For the past few years, however, the SBR has come increasingly under attack – both from those solicitors who see it as an unwarranted restriction on what they can do, in comparison with that which a commercial organisation operating an alternative business structure (ABS) can do, as well as from bodies such as the Legal Services Board (LSB) who regard it as incompatible with the SRA’s regulatory objectives and better regulation principles.
The SBR also has its supporters, however. 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”.
The changes to the Separate Business Rule were agreed by the SRA Board at its meeting on 3 June, following a consultation which produced only 19 responses, 6 of which were from representative bodies on behalf of their members, including the Law Society and several local law societies. Assuming LSB approval, the SRA’s intention is to bring them into effect on 1 November when version 15 of the Handbook will be published.
What did the old SBR provide?
To understand the changes to the SBR is first necessary to understand what the current rule seeks to achieve.
The old SBR was not one of the clearest pieces of regulatory drafting and whilst many in the profession were aware of it few realised how far reaching its provisions were.
Essentially the SBR came about 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 thinking behind this was, as was stated in the 1994 Separate Business Code, “to ensure that members of the public know whether a service is 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).
The current SBR is to be found in Chapter 12 of the SRA Code of Conduct 2011 (the Code). It provides, inter alia, that:
- those subject to Code must not own or actively participate in a separate business which conducts what are defined as “prohibited separate business activities”;
- firms must not be owned by or connected with a separate business which conducts prohibited separate business activities;
- where you actively participate in, own or, if a firm, you are owned by or connected with, a permitted separate business, you have safeguards in place to ensure that clients are not misled about the extent to which the services that you and the separate business offer are regulated;
- you do not represent any permitted separate business as being regulated by the SRA or any of its activities as being provided by an individual who is regulated by the SRA;
- you are only connected with reputable separate businesses; and
- you are only connected with a permitted separate business which is an appointed representative if it is an appointed representative of an independent financial adviser.
For these purposes a “prohibited separate business” means:
- the conduct of any matter which could come before a court, whether or not proceedings are started;
- advocacy before a court;
- instructing counsel in any part of the UK;
- immigration work ;
- any activity in relation to conveyancing, applications for probate or letters of administration, or drawing trust deeds or court documents, which is reserved to solicitors and others under the LSA;
- drafting wills;
- acting as a nominee, trustee or executor in England and Wales, except for the services of a wholly owned nominee company where such services are provided as a subsidiary but necessary part of the work of a separate business providing financial services; and
- providing legal advice or drafting legal documents not included in (i) to (vii) above where such activity is not provided as a subsidiary but necessary part of some other service which is one of the main services of the separate business.
whilst permitted separate business is defined as:
- alternative dispute resolution;
- financial services;
- estate agency;
- management consultancy;
- company secretarial services;
- acting as a parliamentary agent;
- practising as a lawyer of another jurisdiction;
- acting as a bailiff;
- acting as nominee, trustee or executor outside England and Wales;
- the services of a wholly owned nominee company in England and Wales, which is operated as a subsidiary but necessary part of the work of a separate business providing financial services;
- providing legal advice or drafting legal documents not included in (i) to (x) above, where such activity is provided as a subsidiary but necessary part of some other service which is one of the main services of the separate business; and
- providing any other business, advisory or agency service which could be provided through a firm or in-house practice but is not a prohibited separate business activity.
What should particularly be borne in mind when applying this rule is that:
- it applies to everyone within the practice – the handbook makes it clear in the introduction that its provisions apply to “anyone in the firm including non-lawyer owners, managers and employees” ;
- it doesn’t matter if the separate business has a different name and operates from different premises – it is involvement that matters;
- it is irrelevant whether clients are provided with full disclosure or not – if the separate business is prohibited then that is sufficient to invoke the provisions; and
- the rule even catches the situation where a person has indirect control through another person such as a spouse.
Given, then the somewhat draconian extent of the prohibitions set out in the rule, it comes as little surprise, therefore, that over the years – and especially in recent years following the introduction of the ABS – the rule has had more than just a few critics who have condemned it as restrictive and against fair and open competition.
Attitudes to change
The paper that went to the SRA Board on 3 June showed that there was an element of disagreement amongst those who responded to the SBR consultation.
Thus, whilst the responses were largely supportive of the proposals (described by the Sole Practitioners Group as “arbitrary” and by the City of London Law Society “[beginning] to appear arcane”) others highlighted the need for strengthened consumer protection measures or for the reforms to go further in order to achieve a level playing field.
Indeed, some respondents (e.g. The Law Society and Junior Lawyers Division) were opposed in principle to the proposals. Their main concern was that that the growth of the market of unregulated legal services would lead to detriment for consumers (particularly vulnerable consumers) due to the inability of regulators to ensure good standards of practice and service and that, as a matter of principle, solicitors should be subject to the same regulatory regime and requirements for all of the work that they do.
Having taken on board these reservations, the SRA has concluded that there was a need to achieve a balance between consumer detriment (from the removal of some non-reserved activity from SRA regulation) on the one hand, and the potential advantages of increased access to services at a potentially decreased cost to consumers on the other.
What are the changes?
Until such time as the revised Chapter 12 is approved, we can of course only assume that the precise nature of the changes that will be made will be those set out in the SRA’s paper to the SRA Board of 3 June at Annex 5 (See below as to the proposed wording).
The SRA have acknowledged that the market in which solicitors now operate is already a large and growing one for legal and other professional services, which are not required to be subject to legal service regulation – one which has developed in ways which combine alternative and solicitor services, under arrangements which are not caught by the SBR. They therefore believe that it is appropriate to tailor regulatory requirements so that apply proportionately to the various sectors and not uniformly, in a “one size fits all” approach. That by allowing those regulated by the SRA (who they state will continue to be subject to their principles in all that they do) to participate as owners and managers in other businesses will increase opportunities to enhance standards in this sector through normal management controls.
Thus, going forward the position will, in essence, be that firms will be permitted to own or be connected with separate businesses which offer non-reserved legal service.
The reserved legal activities set out in the Legal Services Act 2007 (LSA) are limited to litigation and advocacy, reserved instrument activities (conveyancing – but limited to preparing contract and transfer documents and submitting them to the Land Registry), probate activities (preparing probate papers but not the administration of an estate), notarial activities and the administration of oaths. However, from 1 November firms will be able to offer a vast range of other legal services through an unregulated business. Drafting contracts, preparing wills, giving legal advice on any subject and immigration work will all be capable of being conducted outside the SRA regulated firm.
Controls when referring clients to a separate business
Despite its appetite for change, the SRA remains mindful of the concerns raised by respondents about the potential for consumer detriment. The risk of consumer confusion regarding what is and is not subject to regulation was one highlighted by many of the respondents to the consultation. This is a particular risk where services or matters are split between separate entities.
The consultation proposed placing a ban on the referral of certain specific activities from an authorised individual/firm to a separate business. However, whilst there was some support for such a ban, nevertheless the SRA were persuaded by arguments that this proposal should not be pursued – if only because of the difficulties of framing and enforcing such a restriction. Indeed, some respondents pointed out that “appropriate referrals between businesses can be cost effective and act in the interests of consumers, and that an outright referral ban would frustrate consumer choice.”
The conclusion reached by the SRA was, therefore, that rather than introduce a ban on certain referrals, they should ensure that the authorised individual or firm obtains the client’s informed consent in all circumstances where they propose to refer, divide (or allow to be divided) a client’s matter with the separate business.
The SRA have stated that informed consent should include:
- the client being made aware of the respective regulatory position of the two firms,
- the differences in safeguards (and the consequences of those differences), including legal professional privilege, and rights of redress (including access to the compensation fund and recourse to the Legal Ombudsman).
This will be in addition to the requirement that firms must act in their clients best interests.
The SRA have proposed that Chapter 12 of the SRA Code of Conduct should, therefore, be amended so that it reads as follows:
“You 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:(a) reserved legal activities; or
(b) immigration work unless that work is regulated by the Office of the Immigration Services Commissioner;O (12.4) you only:(a) refer, recommend or introduce a client to the separate business;
(b) put your client and the separate business in touch with each other; or
(c) divide, or allow to be divided, a client’s matter between you and the separate business,where the client has given informed consent.”
And that The SRA Handbook Glossary 2012 shall be amended as follows:
(a) in the definition of “connected with”, replace “(i) having one or more partner(s), owners(s), director(s) or member(s) in common with the separate business” with the following:“(i) where an owner or manager of an authorised body is a partner, owner, director, member or member of the governing body of the separate business;”;(b) delete the definitions of “permitted separate business” and “prohibited separate business”; and(c) replace the definition of “separate business” with:“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.”
Other changes are planned to Rule 13.2 of the SRA Practice Framework Rules 2011 (see Annex 4 of the SRA Board paper (www.sra.org.uk/documents/SRA/board-meetings/2015/board-2015-06-03-separate-business-rule-changes-10.pdf)
All firms should be using the time between now and November to decide whether they want to take advantage of the separate business relaxations. Would it offer real cost savings to set up and run a separate business which offered, for example, will writing? How would the separate business be staffed and managed? What would clients think? Would they prefer the legal services they buy to be from a regulated firm or would they want to buy them from an associated business if it was cheaper?
Whatever decision firms make, it seems certain that the legal services market faces another shake up come November and, following that, when changes to the regulation of in-house solicitors come on stream. Standing still is not an option!