THE recent granting of Alternative Business Structure (ABS) licences by the Solicitors Regulation Authority (SRA) to Kingston Smith and Churchgate in Bury St. Edmunds illustrate the evolving approach adopted by the SRA to accountancy firms providing legal services.
They illustrate that the SRA is becoming increasingly pragmatic and flexible in how it applies its rules, particularly in the context of so-called ‘multi-disciplinary practices’ (MDPs) – accountancy firms which can provide a broad range of ‘reserved’ legal services to their clients.
It has become clear to the SRA that rigid application of its regulations were acting as a significant barrier to accountancy firms becoming MDPs, and has increasingly waived some of the more onerous requirements. These waivers were critical in KPMG, EY, Kingston Smith and Churchgate being granted their ABS licences, and the SRA is expected to make substantial changes to its Handbook in November to encourage more firms to follow the same path.
Taking the plunge
While many firms already provide ‘non-reserved’ legal services to their clients (such as tax advice, employee incentive arrangements, will writing and, to the extent authorised by the ICAEW, reserved probate work) an SRA ABS licence permits the full range of legal services to be offered.
Moreover, an SRA ABS licence allows all legal services to be provided through solicitors who can be held out as such. From a client point of view this is attractive, and the recent results of the KPMG and EY legal offerings clearly provide evidence of the potential demand.
However, any decision to apply should not be taken lightly. There are obvious direct costs involved and the effect on the firm’s existing referral arrangements with solicitor firms should be carefully considered.
The application process itself can also be time-consuming, particularly as there are a number of potential issues which need to be carefully considered prior to final submission.
More importantly, an ABS licence opens the firm, its partners and staff to varying degrees of regulation by the SRA, and statutory responsibilities under the Legal Services Act 2007. These should not be taken on without fully understanding the implications both for the firm and its staff.
For example, all managers of an SRA-regulated firm (which unless a waiver is secured, includes all partners in a partnership or members of an LLP) have a personal responsibility to ensure that the legal practice complies with its regulatory obligations. However, if the application is properly structured, the impact of many such rules can be mitigated – the managers subject to SRA’s regulation can be restricted to only those involved in the legal practice.
The two approaches to ABS licencing adopted by accountancy firms break down as follows:
Multi-Disciplinary Practice (MDP)
• Main practice is licenced entity
• Used by KPMG, EY, Kingston Smith and Churchgate
• Integrated service for clients
• Concerns over dual regulation and double insurance, although SRA approach to these is becoming more pragmatic
• Separate business set up as licenced entity
• Used by PwC
• Separation needed from parent firm to ensure confidentiality/legal professional privilege
• Clarity over regulation and insurance issues
An MDP’s main advantage is that it can offer a true ‘one-stop shop’ for clients, but until recently it had been hampered by problems over dual regulation, especially in areas like tax that are just as much part of accountancy as they are legal practice. Concerns had also been raised over the SRA’s rules on insurance for the legal practice, which could have resulted in double insurance issues. However, the experience of KPMG, EY and Kingston Smith show that the SRA is now willing to take a more pragmatic approach to these regulations.
For an ABS with a separate entity, these issues are avoided, but the ‘joined-up service’ aspect can be hindered by the degree of separation required by the SRA. However, current rules over regulated legal firms being unable to be connected with non-regulated legal firms – in areas like tax advice, for example – are set to be abolished shortly. That raises the intriguing prospect of accountancy firms potentially being able to acquire law firms in the future.
It has taken time to get here, but the deregulatory effects of the Legal Services Act are finally beginning to have a real impact. The successful Kingston Smith and Churchgate MDP applications show the potential for other types of firm in the marketplace to benefit from this, and the forthcoming SRA regulatory changes should encourage more accountancy firms to take the leap into legal services.
James Johnson is a partner at law firm Wilsons
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