Getting in shape

With the SRA starting to accept applications for ABSs in the New Year, potential applicants will be wondering what the chances are of their applications being successful, and what can be done to maximise their chances of success.

In the case of firms that are offering external investors an opportunity to take an interest in their law firms, the chances of the applications being successful may well hinge on whether or not the investor can satisfy the 'fit and proper' tests. The SRA has indicated that the ability of an owner to satisfy the fit and proper tests will depend upon the extent of their share in the firm, but it would be wise to assume that they will need to be satisfied as any external investor will be likely to take a significant stake in the law firm, and, in most cases, a bigger stake than any of the existing partners.

As an external investor, the standards of client service cannot necessarily be expected to be the same as for solicitors, and, in the case of some investors, it may be that the investor has no experience whatsoever of having to comply with a code of conduct in the same way solicitors have had to.

So, what can an external investor expect will be required of it in order to satisfy the fit and proper tests? The SRA has not been very specific in spelling out exactly what will constitute an external investor being a fit and proper person. By contrast, the FSA has spelt out that, for those applying to be authorised, a number of factors will be considered, such as honesty, integrity, reputation, financial soundness, competence and capability; part 4 of the SRA Authorisation Rules sets out certain criteria for approval, including the SRA suitability test, for which the SRA needs details of criminal offences, financial behaviour and regulatory history. But, even with these details, the SRA will be the sole arbiter of whether or not an applicant passes the fit and proper tests, and, until it has considered a number of applications and applicants have a clearer understanding, based on precedent, as to what is considered to be sufficiently fit and proper for the application to be successful, there will always be some uncertainty as to the outcome of an application.

For some investors, satisfying the fit and proper tests will be easier than for others because of the relevance of their previous experience to the business of law firms. For example, a retired solicitor who wishes to be an external investor in a law firm will in the past, through his or her experience as a solicitor, have had to comply with a code of conduct in order to be a solicitor. However, for non-solicitors, it will not be the same.

Into the unknown

Although I question whether there is much substance to the rumours, it is rumoured that a number of overseas investors are keen to invest in the UK legal sector, but, with their own set of regulations that apply, how will they know how they will be viewed by the SRA and whether they will be considered to be sufficiently fit and proper? And will the SRA, in considering whether they are fit and proper, look at the way they have conducted themselves according to the regulations that apply to them in their own jurisdictions, or according to the regulations that would have applied had they carried on their business in the UK?

Although the changes brought about by the Legal Services Act in allowing external investment in law firms are potentially far-reaching, the extent to which they are will depend upon how the SRA applies the fit and proper tests for external investors. If, at one extreme, it were to take the view that only those with previous experience of working in law firms are sufficiently fit and proper to manage and own law firms, the changes brought about by the Act will in practice be negligible; if, however, anyone who can show that they have conducted their business affairs in a fit and proper way will be approved, the changes will be significant. We shall have to wait and see how the SRA chooses to exercise its authority when considering applications before we have a clearer idea as to who will be considered a good enough applicant to pass the fit and proper tests.