Rachael Eyre says it’s time to look again at alternative business structures (ABSs).
The Legal Services Act fundamentally changed the way the legal profession works
The 2007 Act created the Legal Services Board, the Legal Ombudsman and the Solicitors Regulatory Authority (SRA). It set out the reserved legal services that can only be undertaken by a lawyer and introduced ABSs as a way of law firms being owned by and managed by ‘non-lawyers’.
Applications opened in January 2012, with the first firms licensed by March the same year.
There were great fears in the profession that this would bring about ‘Tesco Law”, where buying legal services was as easy as buying a tin of beans and big businesses would dominate the legal services market. The resulting splash would drown out many smaller practices.
Nine years on, Tesco Law has not yet happened in the way many had feared. Instead, the profession has used the flexibility to innovate and diversify.
Many firms convert to an ABS structure to enable non lawyer (including corporate) owners, even as far as setting up Employee Ownership Trusts.
In days gone by, a would-be partner would typically have to buy into the partnership. This was either through savings, mortgaging property or some other financial backing. With the cost of education now being so high through student loans, and the cost of rent/buying property likewise high, it is ever more difficult for those without financial backing or substantially high salaries to buy in. ABSs have allowed for a myriad of innovative ownership models.
The profession has also used the opportunity to offer a greater breadth of services to clients through joint ventures and non-legal expertise.
We’ve also seen other professionals, such as accountancy firms and financial advisers, become ABSs to add legal services to their menu of services.
What an ABS enables you to do
In short, lots! We always like to start from the position that your preferred structure and business model can probably be accommodated in an ABS vehicle. For example:
- Have non lawyer ownership (think investors, family members, public listings)
- Bring in non legal expertise to the partnership/Board (such as an financial, marketing, financial services)
- Joint ventures with non legal businesses
- Set up a group structure, including holding companies for tax planning
- Benefit from legal professional privilege and conduct reserved legal services. You don’t have to but it is expected that legal services will be a significant part of the business.
Some fun examples we have seen:
- Nottingham Law School Legal Advice Centre Limited – this is a charitable company as part of Nottingham Trent University’s Law Department. Advice is offered to client either pro bono or for low fees. It helps the local community and helps students gain practical experience in areas of law such as employment, business, housing etc. A great use of the ability to diversify ownership of a law firm.
- Accountants using the ABS system to add legal services to their offering, such as Churchgate Accountants and Deloittes LLP.
- Co-Operative – this is probably the closest to Tesco Law, where the Co-Op expanded their legal services in general to the public and not just members, alongside expanding into different areas of law.
How to become an ABS
Step 1 – A Cunning Plan: Develop your business plan
- What is your legal structure? Partnership? Limited Liability Partnership? Limited Company? PLC?
- What services are you looking to provide, both regulated and unregulated?
- Who is your target market? How do you know you will have clients?
- Can you demonstrate a viable business model?
- Who will be in your team? Who will be a Beneficial Owner, Officer or Manager (BOOM), who will be the Compliance Officer for Legal Practice (COLP), the Compliance Officer for Finance and Administration (COFA), the Money Laundering Compliance Officer or Reporting Officer (MLCO/MLRO)? All of these important roles will need approval by the SRA and the addition of their CVs to your Business Plan will help with Insurance, SRA approval and, if you need it, funding.
Step 2 – Cover Your Back
You will need to have a Professional Indemnity Insurance quote based on the SRA minimum terms. This is sadly the hurdle where many potential firms fall down.
Professional Indemnity Insurance, like most of the insurance industry, is currently in a very hard market. Insurers’ risk appetite has fundamentally shifted with an impact on premiums.
A report in the Law Society Gazette on 8/3/21 said that premiums have gone up by 5 – 50%, often where firms still have a clear claims history. ABSs are possibly seen as more risky than standard law firms, and there are only a handful of insurers that will look at a start up ABS. We suggest starting this part early, getting an expert insurance broker and having a clear business plan that addresses risk areas head on.
Step 3 – Applications
There are a lot of forms to complete once you have your PII quote(s). Depending on your model the minimum you need are:
- Main application (FA1 form)
- Individual applications for every person who needs authorisation (FA2 form)
- Individual applications for every entity (e.g. holding company) that needs authorisation (FA3 form)
- Notice of succession if taking over an existing practice
- Financial services notification if you conduct insurance distribution or any other exempt financial services (most law firms are on the FCA register as exempt professional firms) (FA8 form)
- Money laundering application if you are caught by the Money Laundering Regulations (FA10 form), along with DBS checks for all “BOOMs”
- Professional indemnity insurance quote, or held cover letter
- Organisation structure
- Financial projections and business plan
- Certificates of good standing for any individuals who are or who have previously been regulated under a separate regulator (e.g. Bar Council).
Step 4 – Waiting for Godot
After submission to the SRA Authorisations Team comes the waiting period, which is typically between two and three months.
During this period the SRA may raise a lot of questions. A common one is where a person is wearing several hats (e.g. Managing Director, COLP, MLCO and fee earner or even positions outside of the firm) – how they will ensure sufficient time is allocated?
The process is not usually adversarial. Most of the Authorisation Officers are willing to engage properly with applicants, although you do get the odd reversion to “old” regulator.
The SRA can of course refuse an application. If they are so minded, they will usually invite the applicant to withdraw the application first. (Refusals don’t look good for their stats).
If they have an area of concern, firms will be given the opportunity to develop their business case. In general, firms with more typical structures will have a decision much faster than a firm with something unusual and particularly risky, such as a case management company being part of the structure or offshore ownership.
During the waiting period, a firm should start developing its full compliance structure, getting the policies, procedures, and controls (PCPs) ready so that trading can commence as soon as authorisation is given. As a minimum, most firms will need PCPs for:
- Anti Money Laundering and related legislation.
- Anti Bribery.
- Equality and Diversity.
- Financial Controls, especially around the client account.
- Information Security and Data Protection (don’t forget to register with the ICO).
- The website, use of IT and access to systems.
Don’t underestimate the amount of work involved getting the firm ready to trade – bank accounts, practice management systems, compliance, employer responsibilities, VAT registration etc.
Finally, with SRA authorisation in hand, PII activated, bank accounts open, Companies House registrations sorted, compliance handbook in place, IT systems gleaming and staff on the floor, you’re ready to launch. Fabulous.
Don’t forget the ongoing duties under the registration and the Standards and Regulations. Staff will need training, both in the practicalities and the ethos and compliance requirements, culture will need to be developed. Tone from the top and accountability are key to this.
You don’t have to launch on day 1 of authorisation. You can delay the launch for a couple of months to sort out any snagging issues (like delay with bank accounts – a surprisingly common issue).
- How long does authorisation take? 2-3 months for a decision. Around 4-6 months from start of a project to day one trading.
- How much does it cost to apply? ABS fee £2000 plus £150 per individual/entity needing authorisation (plus DBS checks for BOOMs).
- PII – you will probably already have cover – it is a case of getting approval from the insurer to convert. If you told the insurer in your last renewal that you are not considering becoming an ABS, you will need to explain why things have changed.
- Approval of Individuals – those already approved within the firm will usually not have to reapply for authorisation (although SRA officers are inconsistent on this). The focus will be on the new individuals/entities.
- Set up – you will probably already have PCPs, IT systems, employees etc in place. This is just a case of tweaking to the new ownership. It is a good moment to reflect whether this is all up to date and up to standards.
“Would you like a divorce with that?”
In general, big consumer companies like Tesco have not become ABSs. For the Competition and Markets Authority, who did want to open up legal services, this was a bit of a problem.
To push the opening up of legal services, the SRA introduced the Freelance Solicitor role under the 2019 Standards and Regulations. With the advent of the freelancer position, again the prospect of Tesco Law arose, this time with the company not being regulated by the SRA and all responsibility falling on the shoulders of the freelance solicitor.
Just over a year in, and there has been no big splash, just some solicitors restructuring to a more ‘gig style’ or ‘open access’ style of work. Of source, this may be the result of the pandemic, with people unable to go shopping on the high street or lingering in supermarkets as before, but it could be that the profession will, as with ABSs, take a hard look at what is allowed under the rules and use them when they wish to evolve their practice for the benefit of themselves and their clients.
Future for ABSs?
There has been no shortage of ABS applications and granting of licences. Some 1100+ ABSs exist.
So long as the indemnity insurance market does not prevent ongoing innovation, we see the future for ABSs as strong.
The flexibility has been adopted with caution and is working within a strong legal service sector, every week here at JBL we receive calls by innovators looking to set up new ABSs. Some along traditional practice lines but with a non lawyer owner involved, some looking to innovate legal services and change the delivery for the benefit of potential clients and the profession.