Separation: is a rule the best way to protect consumers?
The rule which prevents solicitors and in the future alternative business structures (ABSs) from hiving off unreserved legal work into unregulated businesses may stifle new entrants to the market, the Legal Services Board (LSB) has warned.
The LSB is now considering a review of the “continuing relevance” of the separate business rule, saying that putting conditions on individual ABSs’ licenses would be better approach, and that in the meantime the Solicitors Regulation Authority (SRA) should grant waivers where appropriate.
In its formal decision approving the SRA’s application to become an ABS licensing authority, the LSB said: “In the ABS environment, the board expressed concern that [the rule] may have exclusionary side effects on legitimate business structures that have the potential to bring significant consumer benefits through diverse delivery methods, new investment, and new ways of running firms with better links to clients through association with other services.
“In addition, the basis on which turnover based fees are calculated may pose a barrier to entry through the disproportionately high cost of regulation.”
The SRA had argued that the statutory protections attached to the provision of legal services will be lost if businesses sever part of their work into unregulated firms to avoid regulation, and that they would be under no obligation to tell consumers that these protections did not apply.
Nonetheless, the LSB said conditions attached through the licensing regime would be “a more proportionate way to address the risks highlighted by the SRA”.
It added: “There is also a risk that the rule has the potential to achieve what it seeks to prevent: by driving legal services providers away from the provision of reserved legal activities, in order to avoid regulation altogether. In the ABS context in particular, the rule may also provide a barrier to entry for certain business models.”
Pending a possible review of the rule as part of its wider work on the scope of regulation, the LSB has sought assurances from the SRA on its approach to the use of waivers where unintended or unjustifiable restrictions are created and the SRA can be satisfied there is a low risk to consumers in allowing the waiver.
“The board considers that this action will mitigate the risk that the rule has an exclusionary effect,” it said.
During consultation on the SRA’s application, the rule was supported by the Law Society, Lord Chief Justice and Legal Services Consumer Panel, although the Office of Fair Trading expressed its concern that it could restrict competition.
Brian Rogers 
This is good news. The Separate Business Rule has been one of the major bars to ABSs to date. Ironically, it has dissuaded businesses with a track record of delivering (unreserved) legal services, setting up an ABS, favouring business with no sector experience.
Of course, the SRA are more than happy with an MDP model for organisations currently delivering unreserved legal activities. But, quite frankly is not an option for most existing businesses, for all sorts of reason: most obviously, it means that their unreserved work previously carried out would becomes SRA regulated. Effective corporate governance and exposure to costs and risk (including the £50m potential ABS fines), are other dissuading factors against MDP. Tell an existing national organisation that the SRA would prefer them to turn their entire company into an MDP ABS, rather than create a separate company within the group, and they will run a mile.
In addition, I have to say, I have yet to be convinced that the so called “ringfencing” of regulation within a MDP is anything other than fraught with difficulty, confusion and regulatory overlap (and therefore increased cost).
It has also concerned me that the Separate Business Rule has been a method for introducing regulation through the back door. If the Legal Servies Act deemed that the 6 reserved legal activities only required regulation within an ABS, I do not see the justification for the SRA to take a different view.