The Solicitors Regulation Authority’s (SRA) decision to allow solicitors to practise from unregulated law firms opens up the prospects of insurers and others offering their customers legal advice and law firms restructuring themselves to handle all unreserved work in an unregulated business, it was predicted yesterday.
The regulator said yesterday that it was pushing ahead with its plan in the face of strong opposition from the Law Society in particular.
Currently, solicitors can work in unregulated firms but must give up their practising certificates. They will not have to do so under the new blueprint, making them subject to the code of conduct, but they will not be obliged to carry indemnity insurance.
Legal regulatory specialist Iain Miller, a partner at London firm Kingsley Napley, said: “We can expect a range of service providers such as insurance companies and other financial services firms to start employing solicitors to offer legal advice to their customers.”
He continued that a further consequence of the change – alongside earlier reforms to the separate business rule – would be to allow law firms to restructure themselves in order to minimise the services that must remain regulated by the SRA.
The Legal Services Act 2007 only requires those offering the six reserved activities – advocacy, litigation, reserved instrument activity (conveyancing), probate, notarial work and the administration of oaths – to be regulated, and much of what solicitors do falls outside them. Many still choose regulation because of the solicitor brand.
Mr Miller said: “If you’re Slaughter and May, would you do that? Perhaps not. But if you are a smaller firm looking to reduce overheads, it could be something to look at.”
While the two businesses could be similarly branded, firms would have to make sure that clients understood what they were getting.
He suggested it would be easier for new firms to organise themselves like this, with the regulated law firm a subsidiary of the unregulated company.
The main cost saving, he said, would be from lower indemnity insurance premiums – “you could possibly run the entire unregulated business without a client account”. Also, the unregulated business would not be subject to the minimum terms and conditions of insurance.
Mr Miller added: “The announcement widens the way solicitors can practise and will therefore will generate a raft of new employment opportunities.”
The Law Society, which lobbied strongly against the move, greeted the SRA’s decision with “dismay”.
President Robert Bourns said: “The SRA’s role is to regulate solicitors to ensure consumers are protected – yet here it is opening the door for some solicitors to work in unregulated entities, sweeping away long-standing rules referencing conflicts of interest, proper professional indemnity insurance and access to the compensation fund (underwritten by the profession), so if something does go wrong consumers could struggle to recover any losses…
“The purpose of the SRA is to regulate the solicitor profession ensuring the protection of consumers – that it is pursuing a deregulatory agenda to the detriment of both members of the public and a profession regarded the world over as the gold standard is frankly baffling.
“At the moment a member of the public can walk into a solicitor’s office on any high street in England and Wales and be assured they are fully protected in the unlikely situation something goes wrong – now, if the SRA proceeds, we will have the current clarity blurred so consumers cannot easily tell what kind of outfit their solicitor works for.
“For the SRA to claim that these consumer protection risks can be managed by a ‘consumer information strategy’ to be developed in the future, is simply not realistic. They acknowledge the harm of consumer risk and confusion – also recognised by consumer groups and the Competition and Markets Authority – but carry on regardless.”
Paul Bennett, a legal regulatory specialist and partner of Aaron & Partners in Shrewsbury, argued that the public would struggle to distinguish between a firm of solicitors and a solicitor working on unreserved matters in an unregulated businesses.
“Many solicitors do not understand reserved and unreserved activities, in my experience. For the public, they face much higher risks and that is not something which should be supported.”
More generally, however, he “broadly welcomed” the simplified code of conduct. “The current SRA Code of Conduct 2011 with 18 versions in less than six years has been a specular failure and has undermined the SRA’s credibility with the profession and public.
“But the focus on professional judgement under a less prescriptive code is a concern. We already see the SRA seeking to over prosecute cases before the Solicitors Disciplinary Tribunal based on breaches of specific rules and/or principles. This revised code is open to misapplication by the regulator. The application of hindsight is a feature already and can only increase.”
Michelle Garlick, a partner at Weightmans and head of its Compli division, said it was “disappointing but not at all surprising” that the society had pressed ahead with its reforms.
“I remain to be convinced that we will have a shorter, sharper or clearer Handbook once the ‘comprehensive’ guidance and toolkit resources sitting alongside it are produced.
“Until the profession can be confident that there is a clear and consistently applied strategy to enforcement, it will be difficult to assess the full impact of these changes.”
Mr Bennett was more positive about the decision to drop the new definition of ‘client money’ in the revised accounts rules. “The proposals would have created adverse VAT implications and the SRA are to be congratulated on accepting that what seems obvious to a regulator can have hidden implications.”
He added: “Third-party managed accounts are a revolution which will help smaller firms have options. It will take a while to understand and those thinking of doing so will need to speak to their advisers to make sure they operate them within the rules.
“I expect a spate of errors and issues short term given how totally different it is, but longer term it will be the option of choice for smaller, niche firms within a few years.”
Gary Cook, partner and head of the legal sector group at Stockport law firm Booth Ainsworth, said: “It is good that the SRA is listening to the profession. It is sensible to reduce the detail in the rules as they currently result in numerous trivial breaches that have to be noted, investigated and followed up by the COFA and the reporting accountants.
“It is far too complex and good to see that the SRA are putting faith in individual solicitors to run their firms in a professional and efficient manner without having to observe the complex prescriptive accounts rules that are currently in play which creates excessive costs of compliance.
“The SRA helping the profession to maintain their extremely high standards is what it is all about going forwards.”