Access to new markets

Clients purchasing legal services already have a choice between regulated and unregulated providers. You can, for instance, get a will from a solicitor or a will-writer, as you please. There will soon be a third option: purchasing legal services from an unregulated business owned and managed by solicitors. At the same time, solicitors will be allowed to provide certain non-legal services such as accountancy through their firm, without the need to convert to an alternative business structure.

The new approach will allow solicitors to operate dual businesses which are part regulated, part not. But will clients understand the implications?

Regulation brings with it the SRA Code of Conduct and other rules, including the Solicitors Accounts Rules. Clients have the right to refer complaints to the Legal Ombudsman, benefit from the protection of mandatory professional indemnity insurance and have access to the SRA Compensation Fund. Take this away, and perhaps reduce the involvement of well-paid qualified staff, and the service may be cheaper.

The activities reserved to lawyers by statute are relatively narrow, encompassing litigation, advocacy, preparing conveyancing and probate documents, notarial activities and the administration of oaths.

Until now, solicitors have been excluded from ownership of non-regulated legal service providers and have only been permitted to own and manage regulated law firms (including ABSs). Solicitors providing services to the public (reserved or not) must do so through a regulated firm.

The relaxation of the SRA’s ‘separate business rule’ from 1 November 2015 will remove many of the restrictions on solicitors’ involvement in unregulated businesses. The SRA argues that allowing solicitors to participate in the unregulated market as owners and managers will increase competition and consumer choice.

 Confusion

The effect of the changes is that solicitors will be able to own and manage a separate business providing non-reserved legal services. They will not, however, be able to practise as solicitors through the separate business, which will need to use non-lawyers to deliver services to clients.

Parts of the same matter could be conducted by the regulated firm and parts by the separate business. For example, an unregulated firm owned by a solicitor might offer estate administration services, referring the preparation of an application for a grant of probate to a regulated firm of which the solicitor is a principal.

There is an obvious risk that this will lead to uncertainty and confusion for clients. They will wonder which services are being provided by the regulated firm and which by the separate business, and therefore which activities have the benefit of regulatory protections such as rights to redress and the benefit of professional indemnity insurance cover.

The SRA addresses this risk by requiring solicitors to:

• Make clear to clients  which services are SRA-regulated and which are not.
• Not represent (directly or indirectly) the separate business as being regulated by the SRA, or any of its services as being regulated by the SRA.
• Obtain informed consent from the client where they refer work to the separate business, introduce their client to the separate business, or divide a client’s matter between the regulated firm and the separate business. This includes making the client aware of the nature of the solicitor’s links to the separate business and any interest the solicitor has in making the referral.

Risks

In theory, it is desirable for the client to have a choice between the regulatory protections applicable to solicitors and the offering of a non-regulated provider. It might mean some consumers can access services which would be too expensive if purchased from a regulated provider.

However, informed choice requires sufficient information in a form that the client can understand. The market is imperfect and professional services by their nature often involve an asymmetry of information between providers and clients. Many clients are infrequent purchasers of legal services and are not well placed to make judgements about right balance of risk, quality and price in their particular circumstances.

At present, clients may chose between solicitors and non-regulated providers of non-reserved legal services. The new choice between a regulated service from a solicitor and an unregulated service from what may seem like the same solicitor requires the client to grasp some fairly sophisticated distinctions.    

There is a risk that, in practice, many consumers do not have the ability to make an informed choice about the division of a service between a regulated and non-regulated provider. The SRA’s guidance emphasises that the extent of information firms are required to provide to clients about a separate business depends on the likelihood of confusion arising. The more obviously ‘separate’ the separate business is from the firm, the less detail will be needed. More specific information will be required where the firm and the separate business share the same or a similar name, share staff or premises, or have shared marketing. It seems risky that the same or similar name is permissible at all.

It remains to be seen how diligent firms will be in providing appropriate information and ensuring their clients understand it. The solicitors involved remain under an obligation to act in the best interests of their clients, and will need to be satisfied that referring them to an unregulated separate business is appropriate. Firms will also need to consider their obligations in relation to confidentiality, conflicts and independence. Where services are provided though a separate business the client will not benefit from legal professional privilege and this will also need to be explained.

The arrangements which providers put in place may well be complex. There will inevitably be cases where something goes wrong and consumers who find they are let down by a solicitor’s unregulated business are left without redress. In some cases, this may lead to disputes concerning the division of responsibility between a regulated firm and a separate business.

Alongside these changes, the SRA is also expanding the range of services which law firms are permitted to provide without the need to become an ABS. Currently firms which are not ABSs can only provide professional services of the type provided by solicitors.

In future, a firm will be able to provide a broader range of professional services including accountancy services, estate agency, management consultancy and business support services including human resources and recruitment. This reflects the fact that ABSs are not limited to providing solicitor services and provides firms with the ability to develop ‘one-stop shops’ and more integrated services without the need to convert to an ABS.

These changes alone are unlikely to lead to significant restructuring in the legal services market, although they may allow services to be bundled (or indeed unbundled) in new ways.

Michael Stacey is an associate solicitor at Russell-Cooke and a contributor to John Gould’s The Law of Legal Services, published by Jordan Publishing