More flexible regulation of solicitors: opportunity or threat?

31 August 2017

The Solicitors Regulation Authority (SRA) has published its long-awaited response to its consultation on the future framework of the regulation of solicitors: ‘Looking to the future: flexibility and public protection’

This consultation is part of a trilogy and sits alongside the SRA’s already published plans to shake up the qualification process by the introduction of the Solicitors Qualifying Examination (SQE). Yet to be published is the third element which is a new set of detailed rules dealing with authorisation and enforcement. A consultation paper on these will be published in the autumn. The other issues that are under review by the SRA are insurance arrangements and how to implement the Competition and Market Authority’s recommendation that there be more transparency in law firm pricing to allow consumers to compare prices through online price comparison sites.

The most controversial part of the ‘Looking to the future: flexibility and public protection’ consultation is the proposal to relax the restrictions on the ways in which solicitors can practise. This was strongly opposed by the Law Society in its consultation response and it has greeted the SRA’s announcement that it plans to press ahead with the changes with ‘dismay’. However, there seems little chance that the SRA will reconsider its approach and therefore firms need to begin thinking about how these changes, which are likely to come into force at the end of 2018, are likely to affect them. This is for two reasons. First, firms may wish to take advantage of the changes. Second, the changes are likely to introduce further competition into the market. Firms will need to understand how that might affect their business. The purpose of this article is to assess the likely impact of these changes. However, it might be helpful to start with a short summary of why the current restrictions exist.

Origin of the restrictions on the way solicitors can practise

Prior to the Legal Services Act 2007 (LSA 2007) there were long-standing restrictions on solicitors sharing their fees with non-solicitors. These restrictions were first enacted by the Law Society before any thought of separating the regulatory and representative function. It may be fairly observed that these restrictions were more about protecting the profession than public protection. An example is rule 4 of the Solicitors’ Practice Rules 1936 which provided:

‘A solicitor shall not agree to share with any person not being a solicitor … his profit costs in respect of any business either contentious or non-contentious.’

A complete restriction on fee-sharing created a practical difficulty in relation to in-house practice. There are legitimate reasons why a solicitor employee might want to recover costs on behalf of his or her employer. While this was technically feesharing, that was not the purpose of the activity. In Galloway v Corporation of London [1867] LR Eq 90, 36 LJ Ch 978, the High Court found it was acceptable for the Corporation to recover its costs of litigation when acting through its employed solicitor even though the fees would benefit the Corporation of London. Over the years, a number of exceptions to the general rule against fee-sharing developed for those involved in in-house practice. These are now contained in rule 4 of the SRA Practice Framework Rules. These read like a haphazard by-product of special pleading by in-house solicitors working in different sectors. There is certainly no common public interest thread. The rule 4 exceptions were just that and the general rule remained that a solicitor who was employed by a non-solicitor could not act for anyone but their employer because that would lead to fee-sharing.

This structural dividing line was an important feature of the regulatory framework prior to the LSA 2007 and created a bright line between private practice solicitors and those that worked in-house. The pre-2007 restrictions placed greater emphasis on where solicitors worked than what they actually did.

The effect of the SRA’s reforms is to blur further the distinction between in-house and private practice.

The position changed radically with the regulatory settlement contained in the LSA 2007 which permitted alternative business structures (ABSs). These are, of course, entities that avowedly enable lawyers to share profits with others. There could therefore be no place for an arrangement based around feesharing and a new boundary was needed. As part of its statutory framework, the LSA 2007 defined the boundary around regulated legal services in sections 15 and 16. This boundary makes it an offence for authorised persons (which includes solicitors) to provide reserved legal activities through an unauthorised entity to the public or a section of the public. In brief the reserved legal activities are: (1) advocacy in a court; (2) litigation in a court; (3) reserved instrument activities which includes contracts for the sale of land; (4) taking out a grant of probate; (5) administering an oath; and (6) notarial activities. Notably, providing legal advice, tribunal litigation and advocacy, drafting a will and most commercial contracts not involving land are not reserved legal activities. There is nothing in the LSA 2007 that prevents solicitors who are not working within an authorised entity from providing non-reserved legal activities to the public. While the LSA 2007 created this new framework in 2007, the old rules around fee-sharing remained. When the SRA revised its rules in 2011 it simply re-adopted the old framework. Thus, the SRA’s rules remained more restrictive than the LSA 2007.

It is this gap between what the LSA 2007 allows and what the SRA’s current rules allow that the SRA is seeking to address inits rules. In essence, the SRA is seeking to align its rules with the framework of the LSA 2007. The argument put forward by the Law Society is that these restrictions provide a level of protection to clients which would be lost if solicitors could offer services to the public outside a regulated law firm. In effect, while the origin of the rules is protectionist, it now serves the public interest. It looks like the SRA will have its way and this somewhat technical issue may lead to quite radical change.

The three existing models

As matters stand, there are three allowable models within the SRA regulatory framework. The first is the traditional law firm. Both the entity and the solicitors within in it are regulated. The firm is authorised to provide reserved legal activities to the public and is also regulated by the SRA in relation to the nonauthorised legal services it provides. With this level of regulation come a number of added benefits to clients. The firm is required to carry insurance on the SRA minimum terms which has a greater level of client benefit. For example, the insurer cannot avoid for material non-disclosure by the insured. Where insurance is not available, the Compensation Fund acts as an extra layer of client protection. Advice given to clients is covered by legal professional privilege (LPP) where that applies.

The second model is the in-house legal team. As already observed, the current restriction, subject to exceptions, is that in-house legal advisers can only provide legal services to their employer. As such, there is no need for insurance protection and the Compensation Fund as the only person likely to suffer loss is the employer. LPP remains available.

In recent years there has been a blurring around the edges of the in-house model. This is most notable in local government. The current SRA Practice Framework Rules allow local authority solicitors to provide legal services to anyone to whom their client is statutorily able to provide services. Arguably, this is wider than the LSA 2007 provisions. This has enabled local authority legal teams to share and sell services more widely. However, so far this has had a limited impact on the overall market.

The third model is the ABS. This can have some similarities to an in-house model in that the solicitors do not need to own the business. However, there is a regulatory wrapper around the entity in the form of a licence and, as such, the clients enjoy the same insurance, Compensation Fund and LPP as a traditional law firm. The distinction is that the firm can be owned or managed by persons who are not authorised legal professionals.

The new model

The effect of the SRA’s reforms is to blur further the distinction between in-house and private practice by creating the possibility of a fourth model. Solicitors will be allowed to offer legal services to the public when working in an organisation that is not regulated by the SRA as long as they do not provide reserved legal activities. The individual solicitors will continue to be regulated by the SRA. This new, mezzanine, model sits between private practice and in-house teams and has features of both.

The starting point is that an unregulated organisation will be able to take advantage of the solicitor brand to provide a level of assurance to the legal advice they are selling. As ever with regulatory change, it is difficult to be certain about the likely uptake of this new model but the following are possible:

  1. in-house legal teams selling their services to other in-house legal teams or the wider public to offset operational costs;
  2. brands and other providers add legal advice by solicitors as a natural extension to their existing services without the need for the regulatory cost of becoming an ABS;
  3. existing unregulated legal services providers can now overtly provide a solicitor-led service; and
  4. new businesses can provide a wider range of services using solicitors without the need to become an ABS.

Any of the above models could partner with a regulated law firm or ABS to effectively sub-contract out the reserved legal activities where necessary during the course of the overall transaction. Given the narrow nature of the reserved legal activities, this may be a small part of the work.

However, these new organisations will not offer the same level of client protection as regulated law firms or ABSs. In particular, they will not be required to have SRA minimum terms cover; they will not be able to hold client money; and will also not have access to the Compensation Fund. Of course, this also means that the overheads of these new law firms will be lower. They are also unlikely to have LPP because the contract for the services is with the non-authorised organisation rather than the individual solicitor.

There is also a further cultural issue. Academic research has suggested that in-house lawyers face particular issues in maintaining an ethical framework in a corporate environment (see, for example, ‘Mapping the Moral Compass’, a report by the UCL Centre for Ethics and Law www.ucl.ac.uk/laws/lawethics/cel-news/2016/mapping-the-moral-compass-report). There is therefore a greater risk that solicitors providing legal services to the public in a non-regulated entity may face different pressures. There is a greater potential for a conflict between professional rules binding on the solicitor, such as in relation to conflicts and confidentiality, and the obligations on the entity.

Existing law firms will need to consider whether these changes will affect them. For those where reserved legal activities are a small part of their business, this may be an attractive alternative, although lower overheads need to be balanced by the potential loss of LPP. These changes will also enable non-regulated businesses to bring themselves closer to solicitors’ practices in that they can market the fact that they are employing solicitors. This will make the market more competitive.

For most, this will seem like an additional complication in a market that is already changing. It is easy to see why the old Chinese proverb, ‘May you live in interesting times’, is indeed a curse.

This article first appeared in the July Edition of the Law Society’s Legal Compliance Bulletin.

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