Seven years after the Legal Services Act, alternative business structures are now a common feature of the market, but the application process can be a daunting prospect. Howard Sears gives us the lowdown on how and why and how to make the change
It’s difficult to believe that it was as far back as 2004 when Sir David Clementi’s review of the regulatory framework for legal services first recommended new forms of legal practice in order to encourage competition, innovation and public and consumer interest. The intervening decade has seen the majority of the recommendations of that report enshrined in law by the Legal Services Act 2007, and the new alternative business structures (ABSs) introduced and now growing in prominence in the market.
When the application process was introduced, it was a long and drawn out undertaking, and it is probably fair to say that the SRA itself was still in the process of understanding and developing that process. The good news is that the time required to gain approval has reduced as the process has evolved
The thinking behind the legislation is that any business structure that can satisfy the regulator that the interests of its clients and the independence of its lawyers are protected, is entitled to an ABS licence. This is an important shift, in a jurisdiction where the legal market has been split in two, between barristers and solicitors. The original rationale behind this division was that higher court advocacy was reserved to barristers, and the conduct of litigation to solicitors. But with solicitors gaining higher court advocacy rights, one of these two pillars has been removed. Now, there is some speculation that barristers and solicitors will increasingly end up practising together, within one regulated entity.
In this article, I outline the potential benefits of becoming an ABS, and how the application process works, both from my firm’s experience of becoming an ABS, and from our work supporting firms with their own applications.
The key benefits
ABSs are more flexible than a traditional law firm in that:
- lawyers and non-lawyers can share management and control;
- ABSs can have external investment and ownership; and
- ABSs can offer multiple services to clients from within the same entity.
This flexibility presents opportunities for firms, investors and clients, which I explore below.
ABSs can widen access to legal services by, for instance, increasing the services offered (particularly via modern communication methods), offering innovative services, operating longer opening hours, and moving away from traditional fee structures.
All of these can, of course, also be achieved by traditionally structured firms. But whether you choose to change to the new structure or not, the message is clear: consumers are becoming more demanding of when, where and how they can access legal services, and all legal businesses need to address this if they want to compete effectively in the new marketplace.
Meanwhile, fundraising from legal partners on their own is not sustainable, and with banks narrowing their lending criteria, the ABS structure offers many potential financial benefits. Firms whose strategy for survival and prosperity requires growth and diversification, which need to be funded and managed externally, can get this support from non-lawyer participation through an ABS, where individuals are interested in a slice of the ownership. Firms which choose to prioritise protecting and increasing market share can become part of a national high street branded franchise ABS, and in doing so, link with a number of other, smaller firms. Many partners make the change with the intention of realising a capital value for their share of the goodwill in the law firm that they own.
ABSs offer new opportunities for external investors where previously none existed. The legal industry has had a record of high profitability and resilience to economic uncertainty. Investors will therefore see an opportunity to make a financial gain. Some external entities will also identify synergies with their existing business interests, enabling them to diversify into related sectors and broaden their influence geographically and industrially.
If firms take the opportunity to expand their offerings, clients will be able to purchase a more diverse range of services from a legal supplier with whom they already have a relationship. With technology continuing to change the nature and speed of services firms can offer, clients will have a chance to shop around for more fixed fees and comparability. New entrants into the market will force firms to revisit their pricing models, and will ultimately result in more transparent fee structures for clients.
The application process
The Solicitors Regulatory Authority (SRA) is one of the licensing authorities for ABSs, and it must work to ensure that its approach promotes and adheres to the regulatory objectives as set out in the Legal Services Act 2007. Those firms that seek to become an ABS will have to demonstrate to the SRA that the legal services that the firm provides are delivered to the required standard, and in a principled manner.
Some applicants, particularly those with complex business models, financial structures and ownership models, will find the licensing process requires a great deal of work on their part. The SRA will ask a lot of questions to ensure that it understands the structure and model, so that it can adequately assess the risks associated with the application.
Some firms may benefit from a professional practice manager from outside the profession to help them with the change, but many ABSs will be solicitors’ practices with simple added features that are now allowed, such as having no lawyer partners, or securing external investment.
The application process consists of a main body application form, and individual approval application forms for each manager, owner, the firm’s compliance officers for legal practice and finance and administration, and, if relevant, each corporate managers / owners. The forms are in PDF format and contain editable fields. They are completed electronically and submitted via email to the SRA’s authorisation team.
The following additional information must be submitted with an application:
- monthly cashflow forecast for first period of trading;
- forecast profit and loss account and balance sheet;
- copy of the company’s business plan;
- corporate governance structure;
- organisational chart; and
- background of the business.
An initial payment of £2,000 will be applied, plus an additional £150 for each candidate subject to approval by the SRA under part 4 of the Authorisation Rules (excluding those deemed to be approved under rule 13.2). Where the SRA’s costs in considering the application exceed these amounts, such additional costs will be charged at a day rate of £600. Where the nature of the application means that the SRA has to seek external assistance, the full cost of that assistance will be charged to the applicant body. For overseas branches, an additional charge of £200 per branch office will be levied. Once the firm has received authorisation, it will be required to pay a periodical fee, based on the estimated turnover for the first 12 months of trading.
We have assisted three clients in the ABS process so far. There is no doubt that when the application process was introduced, it was a long and drawn out undertaking, and it is probably fair to say that the SRA itself was still in the process of understanding and developing that process. The good news is that the time required to gain approval has reduced as the process has evolved.
However, there is still a lot of work required for an ABS application, and it shouldn’t be taken on lightly. An application needs careful thought and planning before proceeding. The ABS structure may not be right for your firm, and there is no point in making the application if it adds no benefit. And whatever you decide, you should always look at alternative or additional options – especially LLP or limited company status – alongside any ABS application.
Interestingly enough, the SRA states that it positively welcomes complex and innovative applications, as it appreciates the potential such applications bring to stimulate choice and innovation within the legal services market.
Our own ABS application
Price Bailey was one of the first accountancy firms to receive a licence by the SRA to carry out “reserved legal activities”. Our impetus for making the move was actually a recruitment exercise. We advertised for a head of department in the Cambridge local press, and the candidate to whom we decided to offer the job happened to be a qualified solicitor specialising in employment law. It has also been the case that, for many years, we have got involved in basic employment law issues through our payroll work. When this has happened in the past, our internal HR team often got involved – helpful to the client, certainly, but not really what that team is there for. We therefore saw an opportunity to develop the work of the payroll team through the expertise of this new colleague.
However, we had to be able to describe her as a solicitor in order to differentiate ourselves in the market. Back then, we had to call her an ‘employment law specialist’, which wasn’t nearly as powerful. So, in order to be able to use the term ‘solicitor’, we had to apply for an ABS licence. Price Bailey Legal Services LLP was incorporated and granted an authorisation to act as a licensed body by the SRA on 29 March 2013. The new entity, while part of the whole firm, is managed appropriately, and client advice has to come from those qualified to provide it – a regulatory situation that we are well versed in handling through our work in financial services, fiduciary and audit.
One of the niche sectors that we are known for is advising law firms. As well as sorting out the usual SRA compliance, tax and accounting needs, we also advise many law firms on their strategies, structures and other policy areas, such as governance, profit-sharing and partner performance management. So the last thing we wanted to do was upset a significant group of clients by setting up in competition with them.
However, one term often touted around ABSs is the multi-disciplinary practice: a professional firm that combines the services of different professionals, such as accountants and lawyers, in a one-stop-shop that might also be attractive to the business, commerce and private wealth markets. If the market moves that way, then we will be ready, and I suspect several firms would want to talk about joining together rather than starting from scratch.
So for us, as for others in the professional services sector, it’s a case of ‘wait and see’. Who knows what might be in store for professional practices in the years ahead, but there is no doubt that the Legal Services Act has begun to impact the industry in a very real way, and it is unlikely that the shift has yet run its course.