New ABS rules will smooth path for group structures and private equity, says SRA

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11 August 2016

SRA: welcomes proposed reform of ownership rules

SRA: welcomes proposed reforms

Freeing up the rules on licensing alternative business structures (ABSs) will help the Solicitors Regulation Authority (SRA) deal with more complex applications, such as those from businesses that form part of a group or have private equity investment, it has told the government.

The SRA threw its weight behind government proposals to give regulators freedom to make up the rules on ownership of ABSs.

Plans to amend schedule 13 of the Legal Services Act and remove the existing detailed rules defining who has a “restricted” interest in an ABS, among other changes, were proposed by the Ministry of Justice last month and reflect the view that ABSs have proved no more risky than traditional law firms.

Those with restricted interests – meaning they have a material or controlling interest in an ABS – are subject to the a ‘fit and proper person’ test, but problems have been caused in particular by the Act’s extended definition of those with restricted interests by including consideration of that person’s “associates”.

In its response to the MoJ, the SRA said the rules as currently drafted cause “problems in its application, and [do] not provide sufficient flexibility for us to deal with less than straightforward business structures. The complicating factor usually revolves around the associates rules, and how those apply in the case of group structures, private equity structures, unincorporated owners [and] minors.”

Last year, we reported on a case where a six-month-old baby was felt to have a material interest under the Act, while some ABSs having hundreds of people being caught by the provisions in private equity deals, such as where the fund is made up of lots of little funds.

The current rules envisaged dealing with risks from non-lawyer ownership that “have not been realised” in the SRA’s experience of licensing ABSs in the last five years, the authority said. This was not conclusive, but suggested schedule 13 “is not appropriately targeting those we need to assess”, it added.

Problems occurred in particular in relation to “less than straightforward” business structures, the SRA said, continuing: “The criteria capture people who are actually very unlikely to have a significant interest because, for example, they are far up the corporate chain, or – in many cases – fall within the ‘associates’ provisions. Conversely, structuring the business in certain ways can circumvent the criteria entirely.”

It said the legislation should make regulators “ensure that all non-authorised individuals with significant influence or control over the provision of legal services are fit and proper persons to provide those services”. How it was done should be left to the regulator’s discretion.

The SRA did not think there should be a statutory obligation on the Legal Services Board (LSB) to provide guidance, as the MoJ proposed.

The regulator said schedule 13’s current levels of prescription, together with schedule 11 – dealing with what the licensing rules must cover – were “unnecessary”.

Such prescription could lead to over-regulation in some areas and under-regulation in others; introduced unjustified differences in regulation for ABSs compared to traditional law firms; and created unnecessary “barriers, blockages and inconvenience for new entrants”.

Plans to alter regulation on ABS ownership were also accepted, although with less enthusiasm, by the Bar Standards Board (BSB) – which does not authorise ABSs at present – and the Bar Council.

The BSB said it “broadly” supported the reform as being “sensible”. It went further: “Our preference, wherever possible, would be to give discretion to the regulators to make such rules as they see fit, rather than obliging them to create rules [which] would be more proportionate and permit greater flexibility to adapt to changes in the market.”

The Bar Council’s endorsement was more equivocal. It did “not oppose” the proposed reform but stressed it was “of constitutional significance” that there was “complete confidence” in the owners of ABSs.

It said: “We do not oppose some greater flexibility than is currently permitted under schedule 13, but given the importance of this issue, the Act ought at least to contain clear, minimum requirements in this regard.”

The Law Society last week cautiously backed the MoJ proposals, but warned that “at this stage in the development of the market” it was unsurprising that no evidence existed so far that ABSs posed no greater risks to the public than traditional law firms.

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