How the new regulation of Alternative Business Structures affects law firms

ABS Law Firms

The Bar Standards Board (BSB) has now gained parliamentary approval to enable it to regulate Alternative Business Structures (ABSs). This follows a recommendation by the Legal Services Board (LSB) to the Lord Chancellor in April 2016 that this be approved.

Barristers will now have the opportunity to form BSB regulate entities that compete directly with SRA regulated entities, including the involvement of non-lawyer owners and managers.

This follows on from the approval in November 2014 which allowed the BSB to regulate entities for the first time. Such entities were, at that point, limited to those owned and managed by groups of barristers or other legal professionals and could be single or multi-person entities.

Entities or independence?

It would be wrong to underestimate the shift in attitudes required for the Bar Council and BSB to get to this stage. The BSB as a regulator has long been focused on maintaining high standards and, more relevantly to business structures, independence.

Independence is the main reason why traditionally most barristers were self-employed individuals. The traditional barristers chambers model, involving numerous self-employed barristers grouping together to centralise and share costs such as support staff, premises and facilities, evolved primarily from the need for independence.

In practice therefore two barristers who may sit in adjacent rooms in the same chambers can, and do, represent opposite sides of the same court case. This is also the very reason why, for barristers in many specialisms, there will not be a significant incentive to form an entity. For example an entity jointly owned by the very same group of barristers would not be able to represent both sides of a case in this way.

Catching up

Considering the SRA first gained approval to regulate ABSs back in December 2011, the obvious question is why has it taken so long for the BSB to ‘catch-up’ and, indeed, why has it felt the need to?

The Legal Services Act 2007 and the funding reforms to Legal Aid are the main drivers. Before the Legal Services Act 2007 the traditional roles of barristers and solicitors had remained the same or similar for many years, other than the introduction of Solicitor High Court Advocates in the 1990s. Typically the solicitor was instructed and prepared the case and the Barrister gave an opinion and advocated the case in court.

In addition to this, many barristers, by their very nature, are fiercely independent thinkers who may be better suited to being their own boss than working in an entity. A decision on forming an entity will therefore still not be taken lightly.

The Legal Services Act – A catalyst for change

The impact of The Legal Services Act was however a catalyst for change, or, at least, contemplating change! As increased competition began to impact on solicitors, so they began to keep more of the work they would typically have outsourced to barristers in-house, either through directly employing barristers or using their own solicitor advocates. Thus in some areas of law, such as criminal law (and specifically Legal Aid contracts), the only option previously available to barristers wishing to form entities to compete with solicitors in this area was to form an entity regulated by the SRA. This was generally unappealing to most barristers who would then have found themselves regulated by the BSB personally and the SRA at entity level, with the associated administrative costs and complexity.

Under pressure from its members to give barristers the tools to compete for legal aid, local government and other such bulk contracts, the Bar Council in April 2010 launched a compromise, which went under the name ‘ProcureCo’.

Related reading: “The challenges of strategic planning in law firms

This was basically an entity which sat alongside the traditional chambers, allowing barristers to group together to tender for bulk contracts and contracts with solicitors and other experts, all whilst remaining self-employed and not significantly impacting their independence. The guidance was 88 pages long and included model articles, model contracts etc.… However, very few barristers ever adopted this new ProcureCo structure and it now appears to have been consigned to the history books.

Therefore in November 2014 the BSB was finally given approval to regulate entities and it began doing so in April 2015.

At that point it was expected to be an attractive route for individual barristers, not least because of the potential corporation tax savings. However, whilst this could still be attractive in some circumstances, particularly to those barristers with large outstanding WIP and debtor balances, the introduction of the 7.5% dividend rate has removed much of the tax incentive. There are other reasons that barristers may consider this route, with potential limitation of liability being an obvious one.

At the same time, the BSB was also authorised to regulate multi-person entities, if owned and managed by authorised legal professionals. This opened up the possibility of barristers taking back control of the work streams, by creating entities that employ solicitors. They would then have the ability to effectively see the case through from cradle to grave, under the supervision and regulation of a familiar regulator – the BSB. The impact of independence rules means that the take up is likely to be limited, at least initially, but it does allow for innovative new businesses, with barristers at the helm.

Regulating ABS’s

The approval to regulate ABSs will now bring the business model option available under the BSB to a consistent level to those available under the SRA.

It is important to recognise that the BSB is not trying to replicate the SRA. Its stated aim is to regulate businesses specialising in its traditional areas, such as advocacy, litigation and specialist legal advice. It is unlikely to approve a bulk residential property conveyancing entity!

One of the things that BSB regulated entities and ABSs will not be able to do is hold client money, in the same way as SRA regulated entities do. For those entities that require the option, the Bar Council has set up a facility called BARCO, through a separate FCA regulated entity, which it owns and operates. This is basically an escrow account.

The relevant issues surrounding BARCO are as follows:

  • Cost of 2% of fees billed, with a cap of £250 per transaction
  • Mitigation of credit risk, within BSB regulations
  • Approximately one week to access money
  • Client peace of mind – held independently

This gives BSB regulated entities the ability to deal with matters requiring clients to put money on account, whilst removing the need to comply with and manage this money under detailed regulations in the same way as under the SRA client money regulations.

In summary, there are now a significant amount of options available to barristers and other legal professionals wishing to set-up an entity under a realistic, if niche, alternative to the SRA. Clearly those entities which will be approved in this way will be those specialising in barrister type work, such as advocacy, litigation and other specialist legal advice.

For further information and help please contact Darren Amott at darren.amott@pricebailey.co.uk. Darren is a member of Price Bailey Professional Services Sector team, acting for many professional practices and individual Lawyers and Barristers.

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