SRA investigated baby with ‘material interest’ in ABS

Adam Entwistle

Entwistle: “quite a farcical situation, but it was resolved”

The lengths to which the Solicitors Regulation Authority (SRA) goes to approve people involved in alternative business structures has been highlighted by the case of a six-month-old baby.

Adam Entwistle, compliance consultant at Compli, part of Weightmans, said the baby was deemed to have a ‘material interest’ in the ABS because he was the son of the chairman of the group which owned the business.

“I couldn’t believe it,” Mr Entwistle told Legal Futures. “I’ve never known anything like it. I said to the SRA: ‘Surely you don’t need to approve a baby as shareholder in an ABS.’”

He said the saga began when the chairman of a group of companies which had set up an ABS wanted to transfer some shares to his partner and baby son.

Mr Entwistle said that both holdings, at around 6%, were well below the 10% threshold set by the Legal Services Act for a ‘material interest’ in an ABS.

However, he said that in this case the baby was considered to have a ‘material interest’ as a relative of the chairman of the group, who had already been approved as an ABS owner. The boy’s mother, who was unmarried, was approved.

“Technically the son is an ‘associate’ of the chairman, but common sense should prevail,” Mr Entwistle said.

“I suggested that there was no reason to approve the baby, on the grounds that his parents had been approved and he had no influence on the business.”

Mr Entwistle said the first thing the SRA asked for was the documents relating to the trust under which the baby would hold the shares.

“A lot of non-lawyers are bewildered by the SRA’s approach,” he said. “The mother said no trust had been created.

“It was quite a farcical situation, but eventually it was resolved. For the SRA to sign it off, they needed a paper trail.

“In the end we reached a compromise where we agreed to send them the birth certificate with the parents’ names on it.”

In an unexpected twist, Mr Entwistle explained that the birth certificate turned out to be Scottish and failed to state the names of the parents.

“I thought that was a nightmare and they wouldn’t accept it, but they did. This showed it was a question of jumping through hoops and they just need to justify the decision.

“There is no risk whatsoever if both guardians of a child are approved,” Mr Entwistle added. “Sometimes the regulations just don’t work in practice.”

The SRA launched a consultation last month on the rule requiring the SRA to approve the individuals who own companies that in turn own ABSs. In the case of the baby, Mr Entwistle said this would require a further change to the Handbook.

A spokeswoman for the SRA said that in general where there was a change in ownership at an ABS, the SRA was required under the Legal Services Act to look into the change to determine suitability.

She went on: “We will need to verify that the shareholder is who they say they are, and if they are unable to do this for whatever reason, we would need to ask for further verification.”


    Readers Comments

  • Jane says:

    If Mr Entwistle is at all familiar with the legislation in respect of ABS ownership, he would know the SRA would have had no discretion to exercise ‘common sense’ or change their rules in this case – the requirement to approve a minor as a material interest holder when it is an associate is enshrined in legislation, namely under Schedule 13 of the Legal Services Act (Sch13(5)(2)(b)). Does Mr Entwistle suggest the SRA should consider itself above the law when licensing ABSs and their owners?

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