Alternative Business Structures

This post is a newsletter which was published in August 2011.

On 6th October 2011, utilising the provisions of the Legal Services Act 2007 permitting the establishment of Alternative Business Structures, the Solicitors Regulation Authority will start licensing solicitor’s practices operating as an Alternative Business Structure, rather than a traditional law firm.

The effect of this switch is potentially seismic, in terms of its consequences for the solicitor’s profession.  But it could have particularly beneficial consequences for personal injury litigators who may otherwise struggle to cope with the imminent reforms to costs and funding intimated by the Jackson report and currently proceeding through Parliament in the Legal Aid, Sentencing and Punishment of Offenders Bill.

The purpose of this newsletter is to consider briefly some of the practicalities of the changes taking effect later this year.

An Alternative Business Structure differs from a traditional firm of solicitors owned and run by solicitors, in that practices constituted as Alternative Business Structures will be able to accept external investment and ownership of the firm maybe by non-lawyers.  Such firms will, it can be reasonably anticipated, be run as limited companies with shareholders, rather than remaining as partnerships or even LLPs.

This has been referred to, only half-jokingly, as “Tesco law” as, in the post October 2011 world, law firms may be bought or created by organisations such as Tesco in order to penetrate lucrative legal markets and create profits for the shareholders.

The idea, derived from the policy underpinning the Legal Services Act 2007, is that the creation of ABS’s will permit greater competition in the delivery of legal services and a better deal for consumers.

ABS’s, as well as acting as conventional law firms, may also constitute a multi-disciplinary partnership, with accountants, barristers, surveyors or others, also being part of the structure.

The potential to operate as an ABS might be thought to be of most relevance to large firms, with significant volumes of work, large profit streams and partners, who are eager to realise some of their equity, by “floating” the firm.  But the reforms will be of interest to all firms who need to introduce extra capital to their business.

Extra capital will be a requirement for virtually every firm of personal injury lawyers after the end of recoverable additional liabilities and, in particular, the end of the ability to recover an ATE premium.

The reason is simple.  Qualified One Way Costs Shifting, as envisaged by Jackson to provide costs protection to personal injury claimants simply will not work.

No one in their right mind who owns a house or has significant assets, will take a personal injury claim to trial in circumstances where ,on judicial whim, they might find themselves liable to pay substantial costs personally because the court holds they have, in some shape or form, acted unreasonably.

Instead, Middle England (and Wales) will seek to instruct firms of solicitors who can ensure that any potential for adverse costs is removed through BTE insurance, sourcing ATE insurance or a Trade Union indemnity or even an indemnity from the solicitor’s own firm, and can cover the disbursements, rather than requiring sums on account from their lay clients.

Firms will find a need to draw on deep pockets to meet the disbursement and cost protection requirements of their clients. Those firms who do not, will simply lose market share to those who can and will do this.

In addition, it should be noted that the additional extraneous benefits of limited company status may prove attractive in their own right: limited liability, probably a more favourable taxation regime through payment of salary and dividends, rather than salary alone and of course, the potential to sell up and realise equity in the business.

The overarching regulator created by the Legal Services Act 2007 is the Legal Services Board and it is that body which permits the Solicitors Regulation Authority to regulate ABS’s. The SRA will do so by means of a licensing regime. No licence, will mean no permission to act as an ABS.

The reforms are sufficiently radical that the SRA has recently published a completely revised Handbook, indicating how it will regulate a solicitors profession, now at least partly comprised of ABS’s.

Under the Legal Services Act 2007, all ABS’s will have to have a Compliance Officer for Legal Practice (COLP) and a Compliance Officer for Finance and Administration (COFA).  The COLP must be a lawyer and bears the responsibility for ensuring compliance with the licensing regime.  The COFA’s role is to ensure compliance with those licensing rules, which relate to the treatment of money held by the ABS and the keeping of the firm’s accounts.  The HOLP and the HOFA can be the same individual.

The new Handbook repays careful study.  It is published in hard copy by the Law Society later this month but, as with all such matters these days, the up-to-date version is to be found on the SRA webpage.

In brief, the SRA has adopted a philosophy called OFR, an acronym derived from the phrase “Outcomes Focussed Regulation”. The old Code of Conduct of 2007 is swept away and replaced with a new approach that starts with 10 Principles, which are meant to underpin all the regulatory requirements.

The finer detail is brought out through dividing the rest of the guidance into what are termed mandatory outcomes and non-mandatory indicative behaviours.

Outcomes are simply that.  They are statements of what a solicitor is expected to achieve in order to comply with the Principles, in specific contexts. Indicative behaviours are examples of the kind of behaviours which will establish outcomes and prove compliance with principles.

How is an ABS created or how is an existing firm of solicitors converted into an ABS? The steps are relatively straightforward and key points will include:

  • Setting up a limited company to sell the solicitors practice to, via a Sale Agreement.
  • Creating a Shareholders Agreement, to regulate the way that the respective shareholders do business with each other.
  • Transferring whether by assignment or novation the work in progress, bearing in mind the sensitivities of the retainer relationship.
  • Application for an ABS licence.
  • Applications for approval of the HOLP and HOFA.
  • Application for non lawyer managers of the ABS to be cleared as “fit and proper” persons to be managers of a legal practice.

Applications for licences for ABS’s will be capable of being submitted from next month to the SRA: it will be interesting to see how the first round of applications is decided and which firms take the plunge into the new era of regulation.

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