The Ministry of Justice consults on lightening the regulatory load for Alternative Business Structures (ABS)

9 August 2016

On 7th July 2016 the Ministry of Justice issued a consultation on proposals to amend the Legal Services Act 2007 (the 2007 Act) in order to reduce the barriers to market entry and regulatory burdens on Alternative Business Structures (ABSs).  ABSs are regulated organisations which provide legal services and which have some form of non-lawyer involvement either at the management level or as an owner; they were first licensed to provide legal services in 2010. To meet concerns arising from the perceived risk of non-lawyer involvement, the 2007 Act imposed on these new bodies regulatory burdens and barriers to entry that were more onerous and prescriptive than those for traditional law firms.

Since they were first licensed, more than 600 ABS firms have entered the market. The consultation argues that contrary to expectation there has been no evidence to suggest that ABSs inherently pose greater risks to consumers or the public interest than traditional law firms and further that in increasing competition in the market the introduction of ABSs has made available a wider variety of legal services that are more accessible and affordable to consumers. These two factors appear to be key factors in the decision to try and reduce the regulatory burden on ABSs, something that has been supported by the Legal Services Board and front-line regulators, such as the SRA.

The consultation recommends a number of changes; the key ones are set out below.

  • Removing the requirement for ABSs to have a practising address in England and Wales from which they provide services which consist of or include the carrying on of reserved legal activities. The consultation concluded that these requirements act as a barrier in two ways, firstly that the requirement to have an address could prevent online businesses being licensed as ABSs and secondly that the requirement that ABS business’s offer reserved activities could prevent those ABSs which want to offer only legal advice from being licensed.
  • Regulators should be able to make their own rules on ownership of an ABS in line with guidance to be provided by the Legal Services Board (the LSB) and as approved by the LSB. The consultation justifies this proposed change on the basis that the current rules on who it is that can own an ABS (for example as an investor or shareholder) are lengthy and prescriptive and require regulators to take an inflexible approach undertaking unnecessary checks on non-lawyer owners and managers who have no real control or influence over the ABS whilst being prevented from undertaking checks on others whose influence may be of more concern but who fall outside the definitions in the Act.
  • Removing the statutory requirement to consider whether an ABS explicitly meets the regulatory objective of improving access to justice. The 2007 Act currently requires that regulators, when considering an application for an ABS license consider how the proposed ABS will improve access to justice. The consultation considers that this is an unnecessary burden on applicants and regulators given that regulators are required in any event to promote the regulatory objectives of the 2007 Act, which include promoting the public interest, supporting the rule of law and improving access to justice. 
  • Amending the Act so that heads of legal practise (HOLP) and of finance and administration (HOFA) (COLPs and COFAs in traditional firms) only have to report “material” failures to comply with licensing rules, rather than “all” failures as now. The consultation justifies this proposed change on the basis that regulators do not consider that the more stringent obligations on HOLPs and HOFAs to be necessary and that those in the same role in non-ABS firms are only required to report “material” failures to comply with, or breach of, licensing rules.

This consultation and the proposed changes have been welcomed by professional bodies such as the Solicitors Regulation Authority and the Law Society. The latter in its response, however, recommends caution with the respect to the amendment of the regulatory framework, pointing out that despite the government’s claims the Law Society “are not aware of any robust evidence demonstrating that ABS are proving cheaper legal services and thereby increasing access” and further that (as observed by the LSB Chair) “it is still early days in the licensing of ABS and not enough time has passed to come to a definitive view on the long-term impact of ABS on the market”. Urging for continued vigilance in relation to ABS the Law Society in its response makes a number of proposals:

  • that the LSB keeps under review the risk profile for ABSs, particularly as they become a more fully entrenched part of the profession;
  • that the LSB guidance regarding ownership of ABSs sets outcomes for licensing authorities around the need to deliver rigorous risk based scrutiny capturing non-lawyers and managers that have control or influence over an ABS;
  • that the LSB make a regular assessment of the impact on access to justice of the licensing of ABSs and the provision of legal services across different sectors and geographically, as well as an assessment of how effectively the duty incumbent on licensing authorities to promote the regulatory objectives (including access to justice) has been applied in regulatory processes and decisions;
  • that there is on-going collection, analysis and reporting of workforce data to analyse whether the implementation of the measures proposed in the consultation paper have an adverse effect on workforce diversity.

The consultation closed on 3rd August 2016; given the general level of support for the proposed measures it appears likely that they will be adopted. What difference it will make to the long term future of ABSs, their impact on traditional law firms and access to justice remain to be seen.

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