Business ownership restrictions

One of the key reforms of the Legal Services Act 2007 (the Act) was to allow non-lawyers to invest in, own and manage entities, known as alternative business structures (ABS) that offer legal services.

Despite these freedoms, regulatory arrangements of some approved regulators continue to place ownership restrictions on lawyers and legal businesses by preventing them from being connected with, investing in and owning a range of businesses.

Such ownership restrictions can prevent legal businesses from innovating in the way that they deliver services to consumers.

The Solicitors Regulation Authority’s (SRA) separate business rule is an example of this type of rule. While the SRA says that it puts such ownership restrictions in place to protect consumers, research carried-out by the Legal Services Board into the proportionality of regulation suggests that the separate business rule does not secure the protection that it has been put in place to provide.

To take this research to the next stage, the LSB has carried out a thematic review and published a report on this issue, which examines:

  • what business ownership restrictions are in place at each approved regulators (if any)
  • the statutory basis for having these restrictions in place
  • whether these restrictions are compatible with the eight regulatory objectives set out in the Legal Services Act, government’s Better Regulation Principles as well as best regulatory practice.

The main findings of the thematic review are:

  • there is nothing currently in statute that requires a regulator to restrict legal services providers’ ability to be connected with, invest in or own any other business
  • research shows that individual consumers do not know what is regulated; they assume that all legal services are regulated in some way. Because of this there may be some legitimate reasons why additional regulatory requirements may be imposed on lawyers with connected businesses
  • however blanket bans are likely to be disproportionate and cause more harm than good by deterring innovation
  • the Costs Lawyers Standards Board (CLSB), the Institute of Accountants in England and Wales (ICAEW) and ILEX Professional Standards (IPS) do not impose any restrictions on legal services providers to prevent them from being connected with, investing in or owning other businesses
  • the Bar Standards Board (BSB), the Council for Licensed Conveyancers (CLC) and the Intellectual Property Regulation Board (IPReg) operate, or intend to operate, a notification process. Following notification these regulators may, depending on the risks posed to consumers, impose conditions, grant certain permissions or supervise the regulated entity differently
  • the Master of the Faculties and the Solicitors Regulation Authority (SRA) impose specific restrictions to prevent legal services providers from being connected with, investing in or owning other businesses.
  • the SRA impose the most restrictive rules regarding businesses connected law firms and there is little evidence that their restrictions achieve their goals.
  • we support the work of the SRA in reviewing the rule and hope that this thematic review assists with this exercise.
  • we also support the exploration of collaborative work between regulators to consider the issue of consumer confusion about what is and what isn’t subject to legal service regulation, the effectiveness of disclosure and whether more consistent approaches can be developed.

The full report can be found here.