Everything you wanted to know about ABS applications but were literally afraid to ask

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By Legal Futures

22 June 2012


By Neil Rose, Editor,  Legal Futures

Barrass: frustrated applicants should pick up the phone

Seven alternative business structures (ABSs) in more than five months does not seem to be a great achievement on the part of the Solicitors Regulation Authority (SRA), and increasingly Legal Futures has been hearing complaints about delay and a lack of transparency in the process.

Interestingly, nobody wants to put their heads above the parapet – there is a real fear of retribution from the regulator if people are seen to publicly criticise the ABS process. This says much about how applicants and their advisers view the SRA rather than, one hopes, the reality.

Having gathered together the views of several people involved in or advising on ABS applications, Legal Futures spoke to SRA executive director Samantha Barrass to gain some clarity about what is happening.

Though cast as a two-stage process, Ms Barrass says that in reality applying to become an ABS has three stages. There is the initial stage one expression of interest, and then the stage two application form. The SRA has six months, extendable by a further three months, to decide on an application, but – and this may come as a surprise to many – the clock does not start ticking at the point the form is submitted.

It is not widely appreciated that at this stage the SRA can ask further questions and for more information; it is only once the SRA has everything it thinks it needs to decide on the application that it is deemed complete and an invoice for the application fee is raised. After that is paid, the clock starts to tick.

Some of the applications received are very complex and can change as the process progresses, explains Ms Barrass. “The critical issue for me is transparency and the coming together of expectation and understanding… You would be surprised just how much applications change in quite fundamental ways during the application process.” This can even mean the SRA requiring applications to be resubmitted.

This gap in understanding has been one of the key lessons of the first few months, and next week the SRA will be publishing revised guidance so as to put more information about the application process in the public domain. Other issues that have come to the fore is the extent to which people who are seemingly only tangentially involved in an ABS end up having to pass the suitability test. This too has caused confusion and delay, and will also be addressed in the guidance.

Nonetheless, there is a suspicion that an overwhelmed ABS team uses this post-submission period as a way to buy time. Ms Barrass emphatically denies this, saying that it would be “completely contrary to our ethos as a regulator and totally inappropriate”.

Her answers over the issue of staffing are a bit contradictory, however. Part of the problem, she says, is that despite last year encouraging potential ABSs to get in touch with the SRA to discuss their applications in advance, relatively few did – resources were planned on what the authority knew at the time (last October the SRA said it was in “serious discussions” with just 15 would-be ABSs).

“We have been surprised by the number of applicants who have come completely out of the blue… but have clearly been thinking about it for some time,” Ms Barrass admits. As a result, the SRA is now looking to recruit more staff.

At the same time, the message is that the ABS team is very busy but not swamped; despite popular rumour that there are only four people working on ABS applications, there are in fact 10 in the core team who deal with applications (though the final decision is made by a senior manager), supported by a further 15 or so from elsewhere within the SRA to help while the recruitment process is ongoing.

There have so far been 230 stage 1 applications, 130 stage 2 and a further 25-30 that are now ‘complete’. This workload is seen as acceptable for the current staff numbers.

It would seem that the level of complexity has also come as a surprise; for example, there have been fewer than expected “straightforward” applications for ABS conversion by, say, sole practitioners who want to bring their spouse into partnership, or existing legal disciplinary practices. Though all LDPs with non-lawyer partners will have to convert eventually, those applying at this stage are doing so because they are looking to change their structures more fundamentally.

Among the other issues coming out of the process are the difficulties that the separate business rule can cause applicants; Ms Barrass acknowledges that this controversial rule is a “very clutzy regulatory tool”, although the SRA has long defended the need for it, but says the SRA will grant waivers where the firm can make it unambiguously clear to clients that the separate business does not benefit from the regulatory protection afforded by ABS status. A linked problem that the SRA is still “bottoming out”, she continues, are the “complex legal and regulatory issues” that surround some multi-disciplinary practices, such as those providing tax advice or independent financial advice.

Interestingly, the SRA is about to get much more transparent about waivers. Those that have been granted to ABSs will be published next week, ahead of introducing a presumption that all of the different types of waivers issued by the SRA should be published unless there are good reasons not to.

More generally on delay, Ms Barrass says: “We are very aware of the need to ensure that the ball in not in our court for too long, so there is quite a lot of senior involvement at an early stage.” Along with fellow executive director Richard Collins, she sits down with the ABS team every week to review all the applications and any issues that have arisen.

She emphasises how useful it is for both the SRA and applicants to begin the engagement process as early as possible; Co-operative Legal Services, one of the first three bodies to receive an ABS licence, did so and this “helped hugely”. Another lesson of the last five months is to have more face-to-face discussions.

One of the common complaints about the length of time applications are taking is the problems this is causing companies with the financing they have already put in place in anticipation of a licence. One adviser suggests that listed companies, which have to make disclosures and profit forecasts based on business plans, including intended acquisitions, may be forced to issue profit warnings because of the time being taken by SRA.

On this, Ms Barrass says she is “unapologetic” – it is not a problem of the SRA’s making. “Some applicants have made the mistake of putting in place the financing before talking to us about how long we think the application will take.”

Back in January the SRA made an error by predicting when the first licences would be granted, only to miss the date by a month and encourage the perception of delay and struggle. Ms Barrass is therefore reluctant to be drawn on when we might see the next ABS announced (the last was on 25 May), but says that a few are “quite imminent”.

And she is surprised to hear that so many people are afraid of the SRA. “If anyone’s feeling very frustrated, they can pick up the phone and talk to me,” she says.

 

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