Earlier this year, we wrote an article for Counsel magazine about entity regulation for barristers; given the winds of change in the legal sector at the moment, we felt it would be beneficial to write about entity regulation for both solicitors and barristers.
It seems that wherever you look in the legal sector presently, change and disruption is afoot. Be it the crisis facing the criminal bar, the toxic work cultures furore or increased regulatory focus in AML and competence, lawyers feel the future is uncertain. These and other factors have led to many practitioners taking a long hard look at their position and their future.
We are dealing with a significant increase in requests for support for qualified lawyers wishing to transfer to the Bar – no doubt drawn to this by the opportunities for independence and control. Conversely, we are seeing an increase in barristers developing portfolio careers and becoming dual practitioners in order to make their practices more sustainable and secure. No doubt there is an element of this which would fall under the cliché of “the grass is greener” but what is clear is many in the profession are seriously considering change, whether that be to give them flexibility, independence, sustainability and/or security.
Long-standing tradition means that for most barristers, the business of being a barrister is undertaken in a self-employed, sole-trader capacity, whereas solicitors have traditionally found a home in law firms, in an employed setting, working alongside other solicitors.
According to the Bar Standards Board (“BSB”) statistics, the total number of practising barristers in 2021 was 17,263 of which 13,622 were self-employed, 3,076 were employed and 565 were dual capacity practitioners[1]. Conversely, the Solicitors Regulation Authority SRA”) regulate a much larger number of solicitors, with the figure totalling 21,8932in September 2022[2]. Furthermore, the SRA regulates 1,755 sole practitioners, 1,256 partnerships, 5,170 incorporated companies, 1,505 limited liability partnerships and 35 ‘other’ firms[3].
Many developments over the years have meant that the line between barristers and solicitors has become increasingly blurred. For instance, solicitors traditionally dealt directly with clients, conduct litigation, and had little to no time undertaking advocacy in court; however, barristers can now become Public Access accredited and have litigation extensions added to their licence enabling them to work directly with members of the public and conduct litigation. Solicitors can also undertake training to gain their higher rights of audience and appear before higher courts in England and Wales.
As times change, many solicitors and legal executives are leaving large law firms and seeking flexibility, independence and hoping to avoid toxic office culture. This has led to a considerable increase in the number of consultant solicitors joining one of the new models of firms offering consultancy arrangements as can be seen in this Legal Futures article. The downside to such arrangements, however, is this does not always provide the same extent of opportunities for legacy and business succession as establishing your own entity.
Interestingly, this comes at a time when many barristers are looking to be more corporate minded, client focused and have more security. Could the solution for these frustrated and innovative lawyers be to set up a regulated entity? This may be a way to increase the amount of control and security they have with their own practices both in the immediate as well as for the long-term legacy.
A bit of regulatory history
When the Legal Services Act 2007 (“LSA”) came into effect in 2008, it introduced an option for a new business model to provide legal services, called an Alternative Business Structure (“ABS”). The SRA licensed the first ABS in 2012, whereas the BSB did not authorise Entities/Authorised Bodies until 2015 and Licensed Bodies/ABS’ until 2017.
Under an ABS lawyers and non-lawyers can work together to form, manage, and invest in companies that provide reserved legal activities. This offers much more flexibility and innovation when it comes to business structures than had previously been available. In typical style for the legal sector, despite such opportunities been available for over a decade, the take-up has been more of a slow burn than the “big bang” anticipated when the concept of ABSs was first introduced. You may recall that at the time, this was nicknamed “Tesco Law” because apparently it was meant to make buying legal services as easy as buying a tin of beans according to the Financial Times! You can read more in these pieces from the Financial Times or the Guardian.
The BSB
When it comes to the terminology used, the BSB use the term ‘BSB Entity’ to refer to both:
- A BSB Entity/Authorised Body: an entity owned and managed by authorised individuals (under the LSA) who all hold practising certificates; and
- A Licensed Body/ABS: an entity jointly owned and managed by authorised and non-authorised individuals.
It is important to understand that there is a distinction between certain entities under the BSB regime to avoid confusion during the research and application process.
The SRA
The SRA distinguishes between two different types of authorised bodies, these are:
- Licensed body or ABS
To be authorised as a licensed body, there must be at least one manager who is an authorised person, but the managers/interest holders can be both lawyers and non-lawyers.
- Recognised body
To be authorised as a recognisable body all the managers and interest holders must be legally qualified.
All non-authorised persons and anyone holding a material interest in a licensed body must have BSB or SRA approval. Both regulators have similar requirements that need to be met, structured around their character and suitability criteria.
For the purposes of the SRA, authorised persons include those who are authorised by another legal regulator under the LSA, such as: barristers, European lawyers or regulated law firms etc. A non-authorised person will be anyone who isn’t: an authorised person; an advocate/solicitor in Scotland; a registered foreign lawyer; a barrister or solicitor in Northern Ireland; and a legally qualified body.
Why an entity?
The instinct when thinking about establishing a new legal entity is to assume that the entity needs to be a regulated entity, however, this may not be the case, as it will depend on whether you intend to deliver reserved legal activities, as defined by section 12 and schedule 2 of the LSA. It is important to remember that if you are delivering non-reserved legal activity work within an entity which is not regulated, you must make it clear to clients that you are not doing so in your role as a regulated person. Depending upon your objectives, this option may have significant cost savings in terms of insurance (including the significant issue of run off insurance) and regulatory compliance.
If you are looking to deliver reserved legal activities, the assumption may be that the perks of an entity are limited liability and tax efficiency, but these have limited persuasion in practice due to recent and forthcoming (probably!) changes to taxation and the effect of professional indemnity insurance on liability. The most tangible and long-lasting benefits are often less talked about- they are the opportunities for legacy and business succession.
Given the self-employed status of a barrister, their practice is inevitably seen as ‘finite’, with the clear end being retirement. This has the unintended consequence of a short-term, self-protecting, strategic approach to business. Recently a barrister client described themselves as being “like a footballer” with a successful, but time limited career (even though a barrister is not restricted by the same physical constraints). The Bar is known to be resistant to change, but given the finite approach to practice, is it only natural that the Bar struggles to see beyond the horizon?
When it comes to solicitors there has been much in the news lately about the pressure faced by those working in law firms and increased discussions around toxic work cultures, particularly during the Covid-19 pandemic when many were working from home. Subsequently, since the concerns of Covid-19 have dwindled there has been pressure for solicitors to return to working from the office more or permanently. Long hours in the office, office politics and commuting has been something which many have been reluctant to return to. This has led to many individuals seeking out more flexible working where they have more control over their work/life balance.
Lawyers frequently have high intellect, business acumen and sufficient reputation which would allow them to create genuine legacies. Without an entity, these legacies are reduced to reputation and mention in legal tomes. Creating an entity gives genuine substance to legacy in the form of business succession. Further, it is a way to create a saleable asset to support family, retirement and/or other projects.
Another benefit of establishing an entity is to explore professional collaboration which can significantly extend horizons, whether that be by combining forces within the same practice area to highlight specialism; developing more efficient cross referral work through complimentary practice areas; or creating an ABS to have a non-lawyer involved in the business, whether from an investment or complementary services perspective. There are lots of options available and the models are flexible in this regard. This kind of diversification allows lawyers to collaborate with other professionals who may have more experience or exposure to commercial considerations. Adopting this approach not only offers exciting changes for lawyers, but positives can be filtered down to the client who could benefit from more flexible, transparent, and cheaper services.
These concepts are all relatively new to the Bar where isolated working has generated a self-reliance and it is not surprising that the concept of joining forces, to the level necessary, is viewed by some with scepticism and reluctance. It is likely to be a much more natural transition for solicitors, although it is a big step away from the traditional set up most will have experienced in traditional law firms and can be a big leap to take for those working in larger firms.
Regulator shopping
There are several things to consider when ‘shopping’ for a regulator, but it is important to choose the right regulator for you. Your choice is likely to depend upon the type of services you want to deliver. It is worth noting that if there is an intention to, at the outset or as part of strategic growth, partner with other professionals and form a multidisciplinary partnership (“MDP”) then the BSB would not be the right regulator. The SRA, who is prepared to regulate MDPs, would be more suitable. It is also important to realise, however, if regulated by the SRA, the entity would be a licensed body and the SRA has significantly increased fining powers in relation to these types of entities. Although that too is likely to change soon as the SRA are looking to increase their fining powers for all those regulated by them.
Schedule 4 of the LSA 2007 sets out the approved regulators; presently, six of these are permitted to regulate entities of different types. The BSB and SRA are the most common choices. The other four regulators (the Institute of Chartered Accountants in England and Wales; the Council for Licensed Conveyancers; the Intellectual Property Regulation Board; and the Chartered Institute of Legal Executives) may be more appropriate if you are undertaking specialist work which would fall within their remit or if you are going into business with someone who undertakes the type of work which that particular regulator specialises in.
The BSB make it clear in their Entity Regulation Policy Statement that they prefer concentrating on entities that do not hold client money and whose activities are similar to the traditional activities of the bar. Although it is still possible to be regulated by the BSB and handle client money by using a BSB approved Third Party Managed Account, the SRA has more experience of regulating such entities and is likely to be the better fit.
Whilst the BSB is prepared to regulate entities conducting litigation, conducting litigation and handling client money are associated with factors which the BSB does not have any appetite for, including high-volume, standardised legal advice or transactional services. Also, if the work would involve recommending insurance products, then this is more complicated under BSB regulation. Unlike the SRA, the BSB does not benefit from the exemption within the Financial Services and Market Act 2000, which allows SRA regulated entities to undertake insurance mediation.
Practical considerations
Our top five practical considerations when setting up an entity are:
1. Professional Indemnity Insurance
If your entity is going to be regulated by the BSB and practice in a similar way to the traditional role of a barrister’s practice, then you will probably find that the Bar Mutual Indemnity Fund (BMIF) is likely to be cheaper than the open market. You will need to ensure that your insurance meets the Bar Standards Board: Minimum Terms of Entity Cover.
If you decide to become regulated by the SRA or your entity is too unusual or complex for BMIF, you will need to obtain insurance via the open market – which as far as the SRA is concerned requires you to take out qualifying insurance with a participating insurer (namely that the insurer has a valid agreement with the SRA).
2. Cost
As well as the cost of insurance, there is the cost of the application process and renewal costs.
Under the SRA, the application fee for a licensed body consists of an initial payment of £2,000 and £150 for each new person who needs SRA approval under r13.1 of the SRA Authorisation of Firms Rules. Licensed Bodies must also pay a periodical fee on authorisation, which is calculated based on the estimated turnover, paying one twelfth of that amount for each month between the date of authorisation and the end of the practicing year[4]. If you intend to hold/receive client money or have offices outside of England and Wales, there are further additional charges to consider.
The BSB fees for authorised and licensed bodies consist of an application fee, an authorisation fee and an annual renewal fee. These amounts vary depending on the number of authorised individuals that are providing legal services through the entity. For an Authorised Body authorisation will cost between £590 – £4,250, plus a renewal fee of between £365 – £2,900[5]. For a Licensed Body, authorisation will cost between £2,650 – £6,450, plus a renewal fee of between £1,725 – £4,195[6]. An extension for litigation authorisation is an additional £90.
3. Timescales
The BSB states their application process takes up to six months[7]; however, the Authorisation Team Service Update currently asks that applicants allow six – nine months for the BSB to complete their assessment[8].
Following a malicious cyber-attack in April, the BSB took their IT systems offline in order to prevent any data loss. The BSB were without access to the systems for a time and this meant that many applications were not processed, and new applications could not be submitted. This is likely to result in delays for BSB entity authorisations for the near future.
Whereas in comparison, the SRA have a much quicker turnaround time as they state they usually make a decision within 90 days, but if there are suitability issues, their decision could take up to 180 days[9].
4. Experience of the regulator
Another important consideration is the experience of the regulator. The SRA has much more experience when it comes to the regulation of entities, and they have been regulating entities longer than the BSB. The BSB currently regulates 13 Licensed Bodies and 135 Authorised Bodies[10], whereas the SRA currently regulates 1,391 Licensed Bodies[11] and as at 2020/21 9,860 other law firms.
5. The process
The BSB and SRA have different application requirements, although there is some cross over, such as the requirement for: a business plan; financial plan; compliance plan (or document setting out how the regulatory obligations of the entity will be met); and a risk management plan with detailed processes and procedures.
It is required, prior to authorisation, that there is confirmation that professional indemnity insurance can be obtained. Therefore, from a practical perspective it makes sense to apply to the BMIF and/or a specialist professional indemnity insurance broker, before submitting an application to either regulator. The BMIF or broker will highlight any gaps in an application, which can then be swiftly resolved.
Conclusion
Getting started with an application can be quite daunting and overwhelming, but it is important to do your research and really think about how your new legal venture will operate on a practical level. Here at Beyond Compliance, we can advise on the specifics of your application or answer any questions you may have about the rules and options available. We can also assist in the creation of the required documents, such as the compliance or risk management plan.
Should you have any questions or require any assistance, the team at Beyond Compliance would be happy to assist. Please get in contact on: 0121 288 5227 or [email protected]
Whatever you need, we are here to help.
Chelsea Sparks and Michaela Hardwick
[1] (The BSB, 9 February 2022) <https://www.barstandardsboard.org.uk/news-publications/research-and-statistics/statistics-about-the-bar/practising-barristers.html> accessed 26 April 2022
[2] (The SRA, May 2022) < https://www.sra.org.uk/sra/research-publications/regulated-community-statistics/data/population_solicitors/> accessed 28 October 2022
[3] (The SRA, May 2022) < https://www.sra.org.uk/sra/research-publications/regulated-community-statistics/data/solicitor_firms/> accessed 28 October 2022
[4] The SRA, ‘Apply for authorisation of a new firm’ (February 2022) < https://www.sra.org.uk/solicitors/firm-based-authorisation/authorisation-recognition/> accessed 27 April 2022
[5] The BSB, ‘Fees and charges for BSB entities’ (January 2020) < https://www.barstandardsboard.org.uk/for-barristers/bsb-entities/fees-and-charges-for-bsb-entities.html> accessed 27 April 2022
[6] Ibid.,
[7] The BSB, ‘How to apply and the BSB entity application process’ (September 2020) < https://www.barstandardsboard.org.uk/for-barristers/bsb-entities/how-to-apply-and-the-entity-application-process.html> accessed 27 April 2022
[8] The BSB, ‘Authorisations Team Service Update’ (April 2022) < https://www.barstandardsboard.org.uk/about-us/how-we-regulate/the-decisions-we-take/authorisations-decisions/authorisations-team-service-update.html> accessed 27 April 2022
[9] The SRA, ‘Apply for authorisation of a new firm’ (February 2022) < https://www.sra.org.uk/solicitors/firm-based-authorisation/authorisation-recognition/> accessed 27 April 2022
[10] The BSB, ‘Register of BSB entities’ (April 2022) < https://www.barstandardsboard.org.uk/for-the-public/search-a-barristers-record/the-entities-register.html> accessed 15 November 2022
[11] The SRA, ‘Search for a licensed body (ABS)’ (April 2022) < https://www.sra.org.uk/solicitors/firm-based-authorisation/abs/abs-search/?FirmLicensedFrom=True&FirmsLicensedFromMonth=04&FirmsLicensedFromYear=2000&FirmsLicensedToMonth=04&FirmsLicensedToYear=2022&QuotedFirms=False&FirmsWithWaivers=False&FirmsCeasedToPractice=False&resultsPerPage=10&page=1> accessed 27 April 2022
