The Solicitors Regulation Authority’s approach to licensing non-traditional businesses as alternative business structures (ABSs) is “impacting competition, access to justice and negatively affecting consumers”, the Legal Services Board (LSB) has claimed.
It has also emerged that more than a quarter of those seeking ABS status over the past two years have withdrawn their applications.
A report to January’s meeting of the LSB – but only just published – said the SRA’s performance in licensing ABSs has “greatly improved and it has credible plans to improve the capacity and capability of the firm-based authorisation team to ensure that these improvements are sustainable and there is continuous improvement”.
However, it continued: “The most troubling issue remains the apparent difficulty faced by applicants that do not look like traditional legal businesses. Business services type firms and those offering multi-disciplinary services are more likely to withdraw their application or still be under consideration.
“Firms in these categories that do eventually get granted a licence take longer than applications from traditional law firms. Anecdotally those businesses that have been granted licences have had to make changes to their structure and business model above and beyond what they had originally contemplated.
“We conclude that the main driver for these difficulties are the SRA’s rules and its approach to the scope of regulation.”
While welcoming the SRA’s willingness to “talk seriously” about the impact of the separate business rule on applicants and to engage with multi-disciplinary applicants, the LSB said the SRA’s approach is “impacting competition, access to justice and negatively affecting consumers”.
The LSB has been monitoring the SRA’s performance in relation to ABSs since January 2013. Last week, the SRA unveiled plans to encourage multi-disciplinary ABSs  and it is unlikely to be a co-incidence that this was the first announcement made by the regulator’s new policy director, Crispin Passmore, who previously held the same role at the LSB.
The report said that by 15 January 2014, the SRA had received 404 applications for ABS status since it became a licensing authority on 3 January 2012. Of those, it had granted 243 – roughly two-thirds of which were for firms already regulated by the authority – 106 were withdrawn and 55 remain work in progress.
It takes an average of seven months from the submission of an application for a firm to be granted an ABS licence and 20% of applicants had to wait over nine months.
The SRA told the LSB that its new approach of triaging applications for completeness and eligibility should reduce the number of withdrawals, and those that do withdraw should do so at an earlier stage than many of those to date.
The report said: “We have made it clear to [the SRA] that we consider that the reputational damage arising from firms withdrawing applications out of frustration with delay or perceived over-complex investigation of an application is far greater than taking a robust evidence-based decision to refuse an application at an early stage.”
The LSB said the SRA’s “apparent preference” for ABS applicants that look like traditional firms “may be impacting the level of innovation and so competition in the market for legal services”
It identified a series of reasons for this problem, particularly the separate business rule, an initially risk averse manner “in which there was not necessarily a presumption of issuing a licence”, and an assumption that all legal services undertaken by an ABS or connected companies should be subject to SRA regulation even if they are regulated by others or not usually subject to legal regulation.
The paper said the SRA considered that the 1974 Solicitors Act required it to regulate all activities carried out by an authorised firm. However, the LSB took the view that the Act provided the SRA with discretion, and the announcement last week said the SRA was now looking at whether non-reserved legal activities provided by non-legal professionals in an ABS would not need to be regulated by the authority.