ABS countdown

20 May 2011 - Multidisciplinary practices: not necessarily as advertised

I spent an entertaining couple of days recently at the SIFA conference. Given that those attending were mainly a mixture of IFAs, solicitors and accountants, one of the themes was the extent to which the Legal Services Act would be likely to give rise to the formation of multidisciplinary practices (MDPs). Law Society chief executive Des Hudson said that, in his view, full-blown mergers between firms of different disciplines were less likely than firms extending their services via strategic alliances to embrace non-mainstream activities. He is probably right.

It is interesting to note how what started off ten years ago as a move towards multidisciplinary professional practice should have resulted in an Act whose main impact will be to admit commercial organisations to enter the professional world (and to risk diluting professional standards). However, professionals have been slow to take up the challenge of MDP or have failed in their early attempts.

A number of major accountancy firms tried in the early 2000s to blend the legal and accountancy disciplines, in so far as it was allowed at that point, but this ended in failure; and, although research conducted in 2007 detected enthusiasm among regional solicitors for relationships with their accountancy counterparts, this was not reciprocated by their would-be bed-fellows.

Des Hudson mentioned the examples of MDPs in Australia and Scotland, both of which involve legal and financial, and legal and property, configurations; and it could of course be argued that the legal/ financial services combination has been working in practice on a small scale in England for more than ten years now.

Sir David Clementi noted in the report which led to the Legal Services Act that law firms could provide both legal and financial services in house, and were dual-regulated (by the Law Society and FSA) when they did so, and it is deeply ironic that an unintended consequence of an Act which is supposed to encourage MDPs should be to prevent the continuation of one of the few working examples that currently exists.

This situation arises out of the realisation by the SRA that it lacks jurisdiction to regulate ABS firms which are also regulated by another regulator. In consequence, any law firm which admits a non-lawyer partner, even in an administrative capacity, will be denied the concessions which have been enjoyed by solicitors' authorised professional firms (APFs) for the past ten years, thereby effectively snuffing out the integrated legal/ financial business model.

Increasingly, evidence is mounting that many solicitor firms are not considered marriageable, except to each other. Venture capitalists have turned up their noses at law firm acquisitions, preferring the scalability and greater commerciality and lack of baggage offered by outsourcing organisations. All of which adds fuel to the argument that strategic associations are likely to be the best way for law firms to diversify their client offerings. My own experience of facilitating joint ventures has shown that these conveniently permit the focus to be drawn away from law firms' existing internal management problems.

19 April 2011 - Meet the new boss, same as the old boss

I had a fascinating day last Monday at the Legal Futures conference, where one subject du jour was the significance, or otherwise, of the new SRA handbook. One cynic took the view that virtually nothing new would result except more uncertainty about what the new principles and outcomes mean and that the real winners would be those lawyers who make a living out of the litigation which might ensue. In the words of The Who on Won't get fooled again '“ 'meet the new boss, same as the old boss'.

Grossly unfair on the SRA? Perhaps. They have produced the new handbook, in a vastly different form from that of its predecessors, in a remarkably brief period of time by regulatory standards, at the same time as putting together the new system for ABS. However, that same haste may mean that outcomes-focused regulation (OFR) does not have the impact which it should.

We should remind ourselves that the precedent for OFR is the principles-based regulation of the Financial Services Authority, which is designed to accommodate a diverse population of regulated firms by providing flexibility to apply regulatory responsibilities to clients in a way which suits their individual business model. However, the way in which the FSA does this is to demand a disciplined business environment in which process, consistency and management ensure that firms are continually considering management information, considering feedback, seeking means of improving the fair treatment of their clients and laying audit trails which permit their activities to be checked. This vital adjunct to principles-based regulation is absent from the SRA approach, and there is no sign that Lexcel is moving to close the gap.

On a parochial front, one specific which disappoints me is the failure of the SRA to address the uncertainty created by rule 9 of the 2007 Code of Conduct, which defines the restriction against solicitors referring clients other than to independent financial advisers for financial advice. The new wording, thankfully, omits the reference to that un-mourned relic of the financial services scene, the endowment policy, but persists in qualifying the reference to investment with the otiose words 'such as life insurance with an investment element and pensions'. This gives rise immediately to the question 'is a unit trust or OEIC (the staple of most investment portfolios) an investment 'such as life insurance and pensions''? The answer is, possibly not. To have said 'including' rather than 'such as' would have been an improvement, but which qualify the word 'investment' at all?

It does occur to me that by looking at the detail in this way that I am probably doing exactly what the SRA hopes that solicitors will cease from doing '“ looking at the exact wording and detail rather than concentrating upon the desirable outcome. However, the new handbook feels, from the solicitor perspective, to have been produced in a vacuum. Because of the haste to get it finished, hearts and minds have not been won.

17 March 2011 - Putting the brakes on ABS

According to Wikipedia: 'An anti-locking braking system (ABS) is a safety system that allows the wheels on a motor vehicle to continue interacting tractively with the road surface as directed by driver steering inputs while braking, preventing the wheels from locking up (that is, ceasing rotation) and therefore avoiding skidding.'

The reactionary element in the profession, led by the Sole Practitioners Group, who are calling for a special general meeting of the Law Society with a view to denying the society's subsidiary organisation, the Solicitors' Regulation Authority, the power to regulate alternative business structures (ABS), threaten not only to put the brakes on the SRA's aspirations but also to cause the wheels to fall off the entire Law Society vehicle.

At the heart of the issue is the failure of the legislators to achieve a clear break between the regulatory and the representative functions of the Law Society. The division of these responsibilities was one of the principal objectives of the Legal Services Act but, anomalously, it is the Law Society which is named in the Act as the regulatory body. Hence the friction between the Law Society and the SRA which has dogged their relationship: the society exercising its de jure rights with its members' interests in mind, and the SRA anxious to demonstrate its independence to its superior regulator, the Legal Services Board.

The objectors, whom the more progressive elements in the profession are inclined to brand as Luddites, do have a precedent. In 2010, during the progress of the legal services Scotland bill, a substantial and vociferous minority of the Scottish solicitor community represented by the Law Agents Association revolted against the introduction of ABSs in Scotland and secured a modification of the draft legislation whereby legal services may only be provided by firms controlled by solicitors or other professionals.

The Scottish scene is different from that in England, in that most solicitors are also estate agents and there is a much higher proportion of small local firms with whom Tesco Local would have been in direct competition. Also, the Scots rebelled before the legislation had been finalised, whereas in England and Wales the Legal Services Act is fait accompli and as the Justice Minister, Jonathan Djanogly, has emphasised, ABS will happen on 6 October 2011, come what may.

The LSB has made clear that if the SRA does not regulate ABSs it will step into the breach and do so itself. Indeed, it has already begun preparing for this eventuality, though it will have its work cut out, with its relatively tiny staff, to establish the required systems by 6 October. There are in fact ten front-line regulators which have been granted 'approved regulators' status by the LSB to enable them to regulate the provision of legal services, but of these only the Council for Licensed Conveyancers has included ABSs in the scope of its application. Hence the necessity for LSB to gird its loins.

The Law Society Council will meet on 22/23 March and one of the agenda items is to take a final decision as to whether to confirm the society's application to the LSB for the SRA to be licensed to regulate ABS. Meanwhile, the SPG will have canvassed the profession and presented to the council the result of the voting in favour of its requisition for an SGM. If the SPG is successful in playing the hand of the council, the SGM itself will in fact be of less significance, because if the council fails to approve the application in March the window in the parliamentary timetable for affirming the decision will have closed and the SRA will have missed the 6 October deadline. Rather than appearing to do a U-turn, having voted to allow ABSs in 2004-05, the council may choose to blame its actions on the perceived inadequacies of the SRA.

The inevitable consequence will be that the status of the SRA as the lead legal regulator will diminish, and the Law Society itself will suffer the reputational damage in appearing to have stood in the way of progress. Consumers, who are beginning to feel the impact of the recession, will have little patience with what could well be seen as an attempt by a group of privileged professionals to avoid competition, one of the consequences of which would be to reduce the cost of legal services. As far as the government is concerned, its patience has already been sorely tried by the internecine struggle, and it might well regard this as the opportunity to act decisively to effect a clear separation of the society's regulatory and representative functions.

Those solicitors who might be minded to support the revolt might wish to consider whether the interests of the profession as a whole should be driven by those of the sole practitioners.

3 March 2011 '“ Variations on a theme

I see that the latest scheme to be launched with a view to assisting solicitors to address the challenges presented by the Legal Services Act, Face2Face Solicitors, refers to itself as a franchise but is essentially an outsourcing arrangement established in conjunction with the software house SOS.

Usually the essence of a franchise proposition is that franchisees are entrusted with a brand name, subject to their conforming to clearly defined business management procedures and standards. Well-known examples include McDonalds, Subway, Café Rouge and Best Western hotels.

Face2Face Solicitors, according to reports, 'will provide franchisee solicitors with centralised back-office systems '“ including accounts, IT and regulatory compliance '“ and central marketing and business development, to enable them to focus on the legal work'.

This model is more akin to the one offered by Capita to Optima, the volume law firm, which went so far as to involve the transfer of 130 of Optima's non-legal staff to Capita and fell foul of the SRA by including an option for Capita to acquire control of Optima. This, in the view of the SRA, constituted an ABS at a time before the necessary consumer protections were in place; and the regulator demanded that it should be unwound.

The fragmented nature of the legal software market, which is driven by the 'matters' which are the parochial concern of individual specialists within firms, underlines the crying need for the provision of firm-wide systems centred on clients and databases, which not only provide an administrative platform but also the basis for marketing and client communications. It is this need which Face2Face and SOS are addressing, and it could be supplied either by an outsourcer or at the level of individual firms by the cloud-based technology now being promoted among others by Microsoft, whereby systems are rented online rather than being installed locally.

QualitySolicitors is in reality closer to the established franchise model than F2F, although, whereas the traditional model assumes that a turnkey business package will be provided which is identified by a brand name, QS is starting with the brand name and promoting the proposition that, even though the participating firms provide different services with different business models, the fact that they claim to offer quality will serve sufficiently to distinguish them from their competitors, and enable them to become the first truly national high street brand of solicitors.

The QS model is in fact reminiscent of the way in which Eversheds created its national footprint, by inviting firms with similar market standing to adopt the word Eversheds as a prefix to their existing names and to work together so as a cohesive network. It remains to be seen whether QS might ultimately propose that members should ultimately follow the Eversheds precedent and abandon their existing names.

Significantly, both F2F and QS see financial advice as a useful component in their business proposition and each has finalised a deal with a financial services provider. QS has negotiated what appears to be an exclusive referral agreement with a national IFA firm, and F2F is reported to be negotiating with a number of IFAs. The objective of providing what F2F refers to as a 'complete end-to-end service' is clearly laudable, but it is hard to predict whether solicitors are willing to be corralled into centrally negotiated arrangements of this sort.

4 February - Lawyers by any other name: The rise of ILEX

More mature readers will recall a Two Ronnies sketch from the late 1960s, which had the Ronnies and John Cleese as representatives of Britain's class system and featured Ronnie Corbett, as the working class representative, saying 'I know my place'. For many years, legal regulators '“ in the shape of the Bar, Law Society and ILEX, seemed to have accepted a similar hierarchy. However, one effect of the Legal Services Act has been to throw all this up into the air and as far as the legal executives are concerned their place in the pecking order may be changing.

ILEX announced last week that the number of candidates for their Level 3 examinations had increased by 40% in 2010 compared with the previous year. This reflects a remarkably successful period for the Institute, whose approach to the Legal Services Act has been one of steady and thoughtful progress, in contrast to the Law Society's rather more rollercoaster journey.

Quietly, and almost unnoticed by many, ILEX has made applications to the Legal Services Board which, if approved, would allow its members to perform virtually the same set of reserved legal activities as their solicitor counterparts. The last piece in this particular jigsaw was put in place in November 2010 when ILEX Professional Standards (IPS), the Institute's regulatory equivalent of the SRA, announced its intention to apply for permission to undertake conveyancing work without supervision from a solicitor or barrister. This followed similar applications for probate rights, litigation services and advocacy.

It is unlikely that ILEX will be in a position to progress from its current status as an Approved Regulator under the Legal Services Board in time for the 'Big Bang' for ABS on 6 October this year, and it will probably be 2012 before it can become a Licensing Authority. However, legal executives have already made a significant impact on the profession through their inclusion in the Legal Disciplinary Practices (LDPs) which have been set up since early 2009 under SRA regulation. There are now over 340 LDPs, all with non-solicitor managers. Of the non-solicitor lawyers involved, over 100 are legal executives, more than two thirds of the total. Last year also saw the appointment of the first ILEX member to become a judge, when Ian Ashley-Smith became a deputy district judge.

ILEX seems to have avoided some of the internecine conflicts which have dogged the solicitors' body, arising out of the structural anomaly whereby the SRA is simply a trading name of the Law Society. IPS, by contrast, was created as a separate limited company and appears to co-exist in relative harmony with ILEX's representative arm.

Should solicitors be worried about the rise of ILEX? Yes and no. On the one hand, there is no shortage of candidates wanting to be solicitors '“ the numbers holding practising certificates grew from 112,000 to 120,000 last year and this trend shows no sign of slowing. So solicitors are not exactly going out of fashion. On the other hand, qualifying as a solicitor is still a difficult and expensive way of practising law.

Those looking at the ILEX route are attracted by the fact that a degree is not needed, with candidates earning money as they learn and take examinations. The difference that the Legal Services Act and other recent changes have made is that there is no longer a ceiling on what can be achieved once the ILEX qualification is gained. It is now entirely possible to be a partner in a solicitors' firm, or a judge or, after 6 October, to own a law firm.

ILEX does not see itself as a threat to the Law Society, but rather as an alternative. When David Clementi wrote the report which led to the Legal Services Act it was often thought that what he really wanted to do was recommend the fusion of the legal professions. He realised that this was politically unachievable so his recommendations were a little more subtle. Consequently, what the Act does do is to promote the notion of 'lawyers' rather than 'solicitors' or others.

But herein lies the rub. Most consumers do not differentiate between the terms 'solicitor' and 'lawyer', and to the extent that ILEX members can trade as lawyers, competition is bound to arise. It might even be suggested in hushed tones that the lawyer brand might have greater customer appeal than the solicitor brand.

21 January - The invisible hand

Some people might struggle to see the similarity between the SRA and the Football League. However, they do have a shared problem - namely, how to make sure that the people who own the organisations for which they are responsible are fit and proper.

The FA Cup replay between Leeds United and Arsenal could not be reported by The Guardian in the orthodox way because their reporters are not allowed into the Leeds ground. Ken Bates, Leeds' chairman, has banned them because of questions they asked about who owns the club. Football League clubs are obliged to identify all individuals who have a 10 per cent or more stake in them. The company which owns Leeds United is currently registered in Nevis, a tax haven which guarantees anonymity to its shareholders. Leeds have told the Football League that no individual owns more than 10 per cent and that has been accepted. The public does not know who the real owners are, although the Football League, privately, probably does.

So what has this got to do with the SRA? Well, it may well foreshadow some of the issues which come to the surface when it starts to authorise the new Alternative Business Structures in August this year. All those with a 'material interest' in ABSs i.e. those who propose to acquire a 10% or greater share in a law firm, will be subject to a 'suitability test' to assess their fitness and propriety. The SRA has said that it will also look at associates of those with a material interest who cumulatively own a 10 per cent share and it will require an ABS to disclose the ultimate beneficial owners of the firm. The same suitability test will also apply to managers, other interest holders, new solicitors and holders of the new COLP/COFA positions in firms. The Legal Services Act creates the obligation for a fitness and propriety test but doesn't define what it means. The current SRA Training regulations require individuals to satisfy the SRA of their 'character and suitability' in order to become solicitors but the Solicitors Act 1974 doesn't define those words.

In its Policy Statement on delivering outcomes-focused regulation, the SRA indicated that it had established a specialist ABS team within its authorisation function to work closely with those who apply to become an ABS. We have yet to see any detail on how the new regime will work in practice, although the SRA is due in 'early 2011' to publish a 'Guide to Admissions'. This document is promised to detail the requirements for each type of firm and is to include some worked examples. However, previous pronouncements from the SRA and Legal Services Board indicate that, although the regulators may know the identities of real owners of ABSs privately, they will not be making them known to the public, thus placing themselves in exactly the same position as the Football League. I am less than convinced that this is really what is meant by regulation 'in the public interest'.

16 December 2010 '“ To control or be controlled

The SRA is proposing to extend to law firms the requirement laid down by the Legal Services Act that that every ABS must appoint a head of legal practice (HoLP) and a head of finance and administration (HoFA). The SRA is suggesting slightly different terminology, referring to 'compliance officer for' rather then 'head of', so that the acronyms become CoLP and CoFA. However, the role is the same.

The concept is borrowed from the FSA, whose 'principles based' approach provides the precedent for the new code of conduct and its 'outcomes focused regulation'. This requires regulated firms to appoint individuals to 'controlled functions', which carry both authority to demand compliance within their firms and frontline responsibility to the FSA for carrying out their defined roles. However, lawyers are proving less receptive to such appointments than their counterparts in the world of financial services.

Law Society chief executive Des Hudson, speaking at Managing Partner magazine's conference earlier in the month and wearing his hat as the champion of solicitors' interests, expressed concern on behalf of the potential office holders at their personal accountability to the FSA, while solicitor speakers suggested that law firm partners might not welcome the oversight to which they would become subject.

The reservations are understandable, but they overlook two important facts. First, that if the precedent of the FSA regime is followed it will be firms' management as a whole which will be held accountable. Second, lack of managerial control and corporate disciplines within law firms is one of their main vulnerabilities as they confront the competition which will be unleashed by the Legal Services Act.

Most solicitors enter the law because they want to practise law, and have little or no interest in management. This encourages the 'confederation of sole practitioners' syndrome, with partners effectively enjoying the autonomy to do things their own way. In too many firms, management is regarded as a subordinate function, and the comments made at the conference assumed that CoLP and CoFA would be non-lawyers to whom partners would be understandably reluctant to defer. The reluctance would be the more acute if, as is not beyond the bounds of possibility, members of the Institute of Legal Cashiers and Administrators were to offer themselves as appointees for the role of CoFA.

Under the FSA regime, it is assumed that the controlled functions will be held by the most senior practitioners within a firm. Only they have a sufficient understanding of the firm's work to ensure compliance, and it is in their own interests to ensure that the firm is efficient and profitable.

Paul Marsh, the former Law Society president, said in this foreword to Financial Services for Solicitors: 'Today we are not just solicitors, we are all business people.' If solicitors shirk their managerial responsibilities there is a risk that they will end up as backroom boffins in organisations over which they have little or no control. The SRA may help them a little by ensuring that the CoLP and CoFA roles go to partners rather than others.

11 November 2010 '“ Competition between regulators: the referee appears confused

As ever in football's Premier League, referees have been under close scrutiny after some strange decisions which appeared to favour the biggest clubs. It seems that the Legal Services Board, which finds itself operating a similar function in the equally cut-throat world of legal regulation, may also be a little confused as to what, exactly, it is seeking to achieve.

Last week the LSB chairman David Edmonds, speaking at the Bar Standards Board's annual conference, said he thought the idea of a number of different regulators all regulating advocacy was a bad idea, and that the BSB should be the sole regulator for advocacy. Lord Neuberger, the Master of the Rolls, expressed the same sentiment when he told the conference that having alternative regulators of advocacy would be 'ridiculous'. These comments will be unwelcome to the Joint Advocacy Group, the collaboration between the BSB, SRA and ILEX Professional Standards and its Quality Assurance for Advocates Scheme.

David Edmonds went further, saying he did not believe there should be competition between regulators. This represents a complete volte face to the position hitherto taken by the LSB, which has consistently promoted the concept of competition between regulators '“ which was indeed one of the objectives of the Legal Services Act.

The concept may seem strange to many but the theory goes that competition encourages regulators to perform better and thus makes them do a better job for consumers of legal services. A little tenuous, perhaps, but this is the line which the LSB has until now taken in its public pronouncements and in relation to the approved regulators with which it deals. There are now ten such approved regulators in England and Wales (in contrast to the two expected in Scotland). The latest additions are the accountancy bodies ACCA and ICAS (both for probate work), and the ICAEW has recently announced its intention to join the club.

Lord Neuberger also said in his speech that if the Legal Services Act 'does not lead to activity-based regulation, it will have failed'. Fair enough, although I don't recall that being a major issue at the time the Act was drafted. However, there does appear to be some inconsistency here. Why should the LSB take a different view of advocacy work than, for example, of probate work?

The Legal Services Act permits different regulators, including the Law Society, Bar and ILEX, to authorise firms to conduct advocacy and others, including the Law Society and the Bar, to authorise the conduct of probate work. If the logic of David Edmonds and Lord Neuberger allows them to conclude that the Bar/Bar Standards Board is an appropriate single regulator for all advocates, then surely the same logic should allow them to conclude that the Law Society/SRA is similarly placed to regulate all probate practitioners. Could it be that the LSB is poised to announce this in the next few weeks? Surely it cannot be worried about upsetting the Bar.

6 October 2010 '“ Referral fees: where is the moral high ground?

Last week the Legal Services Board announced its latest proposal that there should be no outright ban on referral fees, but all agreements between introducers and lawyers should be published.

The LSB consultation paper '“ and we should remember that is all it is for the time being '“ comes after Sir Rupert Jackson's report in April recommended a total ban in the area of personal injury work, which is probably where the referral fees debate is at its most lively.

In a previous existence I listened for about ten years to many interminable debates on this subject by the Law Society Council and the SRA board, much of which consisted of various individuals claiming to speak with a true sense of altruism, having only the best interests of the profession at heart. In truth, many of those speaking stood to gain commercially by allowing referral fees, or would suffer by dint of their rivals using them. The whole question turned into a competition as to who could claim the moral high ground. As a result the Law Society/SRA has yo-yoed from one position to another, without ever giving a strong lead.

The argument of the anti-referral fee brigade is that payments are, as the LSB puts it, 'economically inefficient and morally indefensible'. It is simply wrong to trade individuals' legal requirements, and doing so drives up costs and charges, they say.

The pro-referral fees faction meanwhile says they are a legitimate client acquisition cost, that lawyers are poor at marketing their services and that some clients are left unserved.

The LSB's position is that an outright ban and a laissez-faire approach are both unacceptable. In its view, a ban would be 'economically disproportionate' and transparency is paramount. The board has found very little evidence that consumers of legal services are particularly bothered, provided they have access to reasonably-priced legal services.

The LSB needs to get this right when it makes its mind up on this subject in the second quarter of 2011. The advent of alternative business structures in October next year will see all sorts of new ways of using referral fees, often stimulated by external investors, who have very little interest in the profession's moral compass and rather more interest in making money quickly.

I can't help seeing a parallel with the debate over commission payments. The SRA is now enforcing strictly its requirements that solicitors account to their clients for such payments. In doing so, it may be taking its cue from the Financial Services Authority which is set to outlaw the remuneration of financial advisers by commission with effect from the end of 2012. That is the right decision and, likewise, I am convinced the LSB will eventually decide an outright ban on referral fees is the only plausible long-term solution. Or am I just trying to claim the moral high ground?