There are just fewer than 500 practices that have converted to LDP status since this format of practice became possible. Their special position has not received quite the same emphasis as the majority of more conventional law firms. Bronwen Still explains the situation they now find themselves in
A Legal Disciplinary Practice (LDP) is a firm which is either (a) owned by solicitors and other lawyers (described as “authorised persons” in the Legal Services Act 2007) or (b) solicitors and/or other lawyers with at least one non-lawyer owner or ‘manager’, defined for these purposes as a partner of a partnership, a member of an LLP or a director of a company. This new forms of legal practice became possible from 31 March 2009 following changes to the Administration of Justice Act 1985 and various other enactments, thus allowing the SRA to approve them for the first time as ‘recognised bodies’. The changes therefore enabled solicitors to go into business with other lawyers and non-lawyers alike. Previously the rules against ‘fee sharing’ meant that solicitors could only share profits with other solicitors and Registered European Lawyers (RELs) and/or Registered Foreign Lawyers (RFLs), subject to very limited exceptions.
This article is concerned with the type of LDP which has non lawyer manager/ownership as they will need to become ABSs. Those which are composed only of lawyer managers will be able to continue as recognised bodies.
Allowing LDPs opened up new opportunities for law firms and suitable individuals alike. Those concerned seem to have been mostly highly placed practice managers who may have, in many cases, been with the firm for some time, or legal executives or conveyancers who might already have been heading up a department or making a significant contribution to the overall earnings of the firm. In all such cases the firm stood to benefit from bringing such persons into the equity, while they were likely to have been incentivised by being recognised as being part of the equity, as opposed instead to being merely an employee, however senior. Other firms have, however, been able to extend the range of their services via this route, especially in specialist areas such as intellectual property work, through the recruitment at partner level of non-solicitor specialists.
The LDP with non lawyer involvement always represented a ‘halfway house’ arrangement between the traditional ‘solicitor-only’ law firm and the more radical Alternative Business Structure (ABS) that were then set to follow. There remain, however, several significant limitations to the activities of non-solicitors within the LDP structure. First and foremost, a non-solicitor manager has to play an active part in the management of the practice and could not be merely a funder or investor: the SRA were keen that organisations should not jump the gun by being able to involve external investors through this medium. In order to ensure that LDPs remained essentially lawyer-led organisations there was always, and indeed remains, a 25% limit of non-solicitor involvement. In a four-partner LDP practice, therefore, where one of the solicitor partners retires, resigns or dies the practice would have only 28 days to replace them or to enforce the resignation of the non-solicitor member. In effect, therefore, LDP status was never available to smaller firms or sole practitioners.
The non-solicitor manager could also only take on work for which they were suitably experienced, which would mean conducting reserved legal activities under supervision in most cases. Nor would the appointment of, for example, an accountant mean that the LDP could then offer audit services since this would remain outside the scope of a solicitor’s practice. The accountant could, however, provide the firm’s clients with more general tax or management advice since these would be within the scope of a solicitor’s practice.
The status of the non lawyer LDP was only intended to be temporary since the SRA Practice Framework Rules provide that all ‘authorised bodies’ must be either a ‘legal services body’ (lawyer only practice with at least one solicitor, REL or RFL) or a licensed body (ABS). It has not therefore been possible to become an LDP with non lawyers managers since 6 October 2011 when Part 5 of the Legal Services Act 2007 became effective. Since then, all firms wishing to appoint non lawyer owners or managers were, in effect, forced to apply to be licensed as ABSs. This had been intended to coincide with the start date for the new SRA Handbook, but the much publicised delay in the SRA opening up for ABS applications did mean that it was not possible to admit non-solicitor managers for several months, or to established new organisations on this basis.
It was always intended that all non-lawyer LDPs would have to undergo a conversion process to become ABSs and now that the SRA is open for such applications we have entered this transitional phase. The transitional arrangements can be found in the SRA Practice Framework Rules 2011(PFR) relating to all firms that continue as LDPs with non lawyers and provide two options: either such firms can be ‘transitioned’ to ABS status at some future date which has not yet been fixed, or – as have some to date - elect at any earlier date to become an ABS (PFR rule 13.1(b)).
The authority for firms which were recognised as LDPs with non lawyers before 6 October 2011, or had applications pending, to continue as such until they elect to become an ABS or until the transitional period ends is to be found at rule 22. At first it had been supposed that the transitional arrangements would expire in October 2012, but the net effect of the delays to the opening up of the ABS applications process, along with the considerable backlogs that have since developed and the time taken to process them, has led to indications from the Legal Services Board that it may now be as late as April 2014.
These options in practice
First, an LDP can now elect, at any point, to acquire ABS status by notifying the SRA that this is what it would like to do. It would not need to apply to be an ABS under the procedure set out in the Authorisation Rules as it is already recognised and its non lawyer manager(s) will already have been approved. However, it is likely that the SRA would scrutinise any such request to check that the LDP had not already exceeded the 25% non-lawyer control. If it had, it is likely that the LDP would have to go through the full ABS application process.
Also, it is not entirely clear how auto-matic the election process will be as the SRA has issued no guidance on how it will deal with this process.
Notwithstanding these potential disadvantages, there may still be good reasons to obtain ABS status now. If the composition of an LDP were likely to change within the transitional period so that the non lawyer(s) would own more than 25%, it might be sensible to apply before this were to happen. Acquiring ABS status now would enable a firm subsequently to be able to change the composition of its owners and managers without having to make a full application, provided it met the basic requirements for the composition of an ABS. Again, a word of caution: it is not entirely clear how trouble-free the election process might be and what enquiries the SRA might make about the LDP’s immediate ownership plans. The firm would, of course, in any event, have to notify the SRA of any subsequent change of owner or manager and obtain any necessary approval for these personnel under the Authorisation Rules in any event.
The alternative is for the LDP to wait until the transitional period ends when all will automatically be accorded ABS status. If it is fairly clear that the composition of the firm is unlikely to change in any material way, and that there will not be any problems with the 25% rule in particular, this would seem to be the easiest option.
Whichever option is chosen, the SRA Handbook, including the Code of Conduct, will apply to both LDPs and ABSs. In particular, the need for a COLP and COFA applies to both and all the conditions which must be met for continuing authorisation.
Once an LDP has converted into an ABS, however, the compliance officers will instead become respectively the HOLP (Head of Legal Practice) and HOFA (Head of Finance and Administration) as set out in sections 91-92 of the Legal Services Act 2007. For all practical intents and purposes this will make no change to those concerned.
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