By Neil Rose


The Solicitors Regulation Authority (SRA) last week urged solicitors to be 'particularly cautious' if approached about taking advantage of new business structures to be allowed under the Legal Services Act.



The warning came as a survey of top law firms by accountants Smith & Williamson found that 22% were likely to seek external capital in the next two to five years. Of them, 43% would look at a public listing, 57% at private equity or venture capital and 71% at structured finance.



Just over three-quarters of those firms said they would be looking to raise less than £20 million, which Smith & Williamson director Gavin Murphy said indicated that it may not be the largest firms which go public first.



The most popular use for the money was 'to fund the long-term development of the business', followed by funding the acquisition of teams and providing a means by which partners can realise value in their firm.



But in a high-level strategy paper on how it plans to implement the Act, the SRA said the alternative business structure (ABS) licensing regime is unlikely to be in place before 2011 at the earliest, and it is too early to say what restrictions will be placed on those seeking licences - even though some commercial organisations and investment groups are 'making preliminary soundings of existing firms and others are, we believe, making firm proposals'.



The regulator said there could be conflict issues that prevent or restrict certain types of commercial entities from providing legal services.



While the ban on fee-sharing was relaxed in 2004 to give solicitors access to a wider range of investment, the SRA said that 'contractual arrangements which include provision for the future sale of an ownership interest in a firm, in return for investment or services now, could breach the fee-sharing rule and compromise independence'.



It added: 'The SRA would therefore urge solicitors to be particularly cautious if approached by others with a view to committing to changes in business structures predicated on assumptions that have not yet been established about what type of ABSs will be permitted in future.'



The SRA paper also outlined how it intends to move to the firm-based regulation permitted by the Act. 'Solicitors will remain individually accountable to the SRA, and will still need practising certificates, but the mechanisms for delivering regulation (and, therefore, the regulatory burden) are likely to shift increasingly towards the organisation... The SRA considers that a firm-based regulation system based on risk will provide a more effective regulatory regime.'



l The paper can be found at www.sra.org.uk/consultations/338. article and comments are sought by 14 December.