LSB attacks “arbitrary nature” of separate business rule

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10 October 2014


SRA: separate business rule already under review

The Legal Services Board (LSB) has attacked the “arbitrary nature” of the separate business rule used by the Solicitors Regulation Authority (SRA), and said the list of what is permitted and what is not is “confusing”.

In a report on restrictions on business ownership, the oversight regulator said: “The SRA appears to accept that certain legal services providers are capable of operating with prohibited separate businesses, subject to conditions regarding disclosure and separation, but others are not.

“It has not, however, published a policy about how it determines whether a waiver is appropriate and the conditions imposed appear to vary with no clear rationale.”

Noting that there is no statutory requirement for the rule, the LSB said there was no evidence to justify blanket restrictions on separate businesses, but there could be situations where conditions would be appropriate to protect consumers.

The LSB said that a solicitors’ firm could be connected with a business dealing with company formation, as company secretarial services are permitted.

“But, seemingly, not with one that compiles and files a company’s accounts, as this may constitute tax advice and so be considered by the SRA as the conduct of any matter that may come before court.

“Both services may appear to have similar characteristics to a consumer. Therefore, it is unclear why one should be considered to be a mainstream legal service (and so prohibited) but the other will not.”

The LSB said this confusion, together with the number of waivers issued to the separate business rule, made it “doubtful” that the rule achieved its objective of ensuring that solicitors’ clients were properly protected.

The SRA board approved measures designed to help multi-disciplinary practices become alternative business structures (ABSs) at its board meeting last month, and has also promised a wider review of the rule with an apparent view to abolishing it.

The LSB said it did not know how many waivers the SRA had issued to so-called recognised bodies – essentially traditional law firms – but the regulator had told it that two were issued in 2011 and two in 2012.

“The SRA does not publish details of how many recognised bodies have been granted waivers to the separate business rule so we do not know how many there are.”

However, by August this year, 57 ABSs had been granted waivers from the separate business rule, or 17% of the total.

“The existence of so many waivers, particularly for new entrants, exposes the arbitrary nature of having a list of activities that legal services providers can be connected with and a list with which they cannot.”

Comparing the SRA with other legal regulators, the LSB said the SRA imposed the most restrictive rules and there was “little evidence” that the restrictions achieved their goals.

Chris Kenny, chief executive of the LSB, said it was clear that there were some regulations in place that “are not needed and should not be there”.

He went on: “Saying that we strongly support the work that the SRA is doing to review the separate business rule and hope that this thematic review assists with this exercise.

“We also support the exploration of collaborative work between regulators to consider the issue of consumer confusion about what is and what isn’t subject to legal service regulation, the effectiveness of disclosure and whether more consistent approaches can be developed.”

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