Legal EyeFrom Legal Futures Associate Legal Eye.

Much like Game of Thrones, the latest handbook plans from the SRA have plenty of strategic intrigue, a long political backstory, and ancient traditions at stake. Will winter come for the average high street firm, or will the barriers to entry of the legal services market (let’s call it ‘The Wall’) keep them out?

Opening up of the Legal Services market has been on the agenda for longer than any of us have been alive, but it hasn’t been achieved yet. It started with barristers granting rights to solicitors in the 1800s. In latter day terms, control of legal services came under review from the Benson Commission in the 1970s, saw the introduction of Licensed Conveyancers in the 1980s, and in more recent years the suggestions of the OFT and Clementi led to the introduction of Alternative Business Structures.

Outside investment has transformed some individual firms and legal services groups, but has not been the ‘big bang’ many anticipated. Six years on from the last major handbook review, the SRA have recently confirmed their intent for a further relaxation of the rules, aiming to promote business flexibility.

Looking to the Future means solicitors will be able to practice in non-regulated businesses, while still carrying the title solicitor, provided they are not conducting reserved work. Two new draft codes (one for the individual, and one for firms), will sit alongside reformed (and individually focused) principles, and – of course – the new Competence Statement, which underpins the professional ability of the individual.

While the detail of the new Handbook and potential structural changes isn’t confirmed yet, there are some thoughts worth considering now, whether your firm intends to stick or twist:

Stick

For those busy working in firms, the changes to the new Handbook are unlikely to impact much on the day to day operation of the firm. Although the draft handbook is smaller, most of the overarching themes of the current handbook are still there. The SRA have indicated an intention to publish guidance, and firms will undoubtedly need to take that into account. Approaches to conflict will be interesting as the new wording appears to be a slight relaxation of the current position (although the SRA do not present it that way).

Firms who do not wish to change their structure or way of working should be aware of the potential for increased competition and that there may yet be further changes aimed at opening the market.

Consumers informed the SRA that they would value being told about the protections afforded by the compensation fund and compulsory levels of PII. Regulated firms should note the consumer campaigns run by the SRA and consider whether to take advantage of this promotional point.

Twist – Working in an unregulated firm

Should a firm decide to adopt a different strategy, they could consider hiving off part of their firm which does unreserved work.

New entrants to the market could also set up providing solicitor-led non-reserved legal services in unregulated firms.

However, there are a number of considerations for those taking an unregulated route, including:

  1. Compliance – this is here to stay. The SRA has specified that unregulated firms will need ‘systems’ to help solicitors manage conflict. Unregulated firms will likely still have to assist the individual solicitor(s) in complying with the obligations in the individual handbook, as well as the SRA’s guidance. If a number of solicitors worked for a business, the compliance obligations would be broadly similar to current arrangements, but without the overarching management and structure requirements.
  2. PII cover – Although this would not be a regulatory requirement it is probably sensible to have some in place. Solicitors will still have to be clear with clients about when they make a mistake.
  3. A position on the issue of Legal Professional Privilege, and how this would work (or not) in their individual business. The SRA say this is a matter of law. The similar issue of ‘privileged circumstances’ in reporting AML matters also arises, although the SRA have not addressed this. The question arises – will it be attractive to firms or clients to operate without privilege if necessary?
  4. A position on intervention – the SRA will still have the right to intervene into the practice of a solicitor based in an unregulated firm. Where does that leave work product, papers, and monies belonging to an unregulated provider? The unregulated business may look for additional insurance against this eventuality.
  5. Branding and marketing – hiving off part of a firm may also mean it needs a new identity. To what extent will an existing firm require different branding to differentiate it from a regulated SRA firm? The detail of the new Handbook should hopefully provide answers.
  6. Other regulatory concerns – if you move to an unregulated provider do your activities fall under the scope of another regulator? Firms using the exemptions in consumer credit work may need to be regulated by the FCA, for example.

Twist – New entrants to the market

Do the changed regulatory requirements make it easier to enter the market? Possibly not; ‘The Wall’ is still quite high. New entrants to the market will need to consider all of the above, and more.

There will be barriers to exit – it’s not easy to ‘test’ entry to legal services on a trial basis. The rate of growth and profitability varies between unregulated areas so we should not make the mistake of assuming new entrants will see each opportunity as attractive. There is, importantly, also the extent to which new unregulated businesses can build a brand. Consumers have thus far proven fairly loyal to the current legal services model. They understand and trust the solicitor name. Joint ventures or integration between solicitors and other current players in the market seem more likely than brand new ventures.

Those in watching these developments see other movements on the horizon, from the possibility of the single legal regulator, to the question of reserved and unreserved work. If the new handbook doesn’t stimulate competition in the market, further attempts may be made.

Whichever route firms choose maintaining an ongoing relationship with their professional advisers – from compliance advisers like Legal Eye; outsourcers (of compliance and cashiering function) such as the Cashroom; to insurers/insurance brokers such as J M Glendinning, will be essential. Adapting your business model could result in additional compliance and financial risks and a significant change to your insurance exposure.

Author: Katie Jackson (Legal Eye / Honne Limited)

Published by Legal Eye and Honne Limited following a business breakfast hosted by Jake Fox (J.M. Glendinning (Insurance Brokers) Professional Risks Limited), and Mills & Reeve, at which Katie Jackson (Legal Eye) and Alex Holt (The Cashroom) spoke on the strategic impact of the new SRA Handbook.

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