A few more bricks

Scottish ministers have now made the commencement order bringing fully into force, from 2 July 2012, those parts of the Legal Services (Scotland) Act 2010 dealing with alternative business structures and licensed legal services providers, together with a suite of regulations. Does that mean we are now up and running?

Not yet, says Philip Yelland, the Law Society of Scotland’s Director of Regulation. Several more sets of regulations will be needed before the Society (or anyone else) can apply to be approved as a regulator of licensed providers, and therefore to begin considering applications from those seeking to operate as such.

One issue still to be resolved is which services offered by licensed providers will come within the regulation scheme. With a solicitors’ firm, the Society regulates every activity. With a licensed provider, only those services comprising “legal services” as defined in the Act would fall to be regulated. The Society is hoping the Government can be persuaded to exercise its power under s 12(5) of the Act to extend the definition, relative to the Society’s application, to matters such as incidental financial business and work under the Society’s consumer credit group licence, if offered by licensed providers.

That apart, the Society has been working up its proposed model for regulating ABS providers, so far as it can where some questions have still to be answered by Government, and has put some initial proposals to ministers regarding registration and licensing.

“We need to be sure that in taking the proposals forward and fleshing them out, the Government are in agreement with the direction in which we’re travelling”, Yelland explains. “We’ve done quite a lot of work in looking at how the Solicitors Regulatory Authority in England & Wales, for example, are looking to assess and license the equivalent of licensed providers and we’re learning one or two lessons from them. But there is no point in us producing a hugely detailed model, if the Government are going to turn round and say, we don’t like the approach or the principles you are using. So at this stage we really need them to come back to us on whether they are content with what we’re doing.”

Waiting in the wings

Since last autumn the Society has been appealing for intending applicants to get in touch, to help it work out what its scheme would have to cover. On that front the pace is quickening, Yelland says.

“In recent weeks we have seen an upsurge in the number of enquiries. Some people have come to us talking quite openly about their plans; others have been looking at ABS as one of a number of options that might be available to them; but there is certainly more interest. If you look at what’s happening in the marketplace with the number of cross border mergers, it’s clear that a number of businesses are considering what will be the best model available to take their business and make it profitable going forward.”

Enquiries, he adds, are coming from various sizes of practice, smaller and larger. “What’s been quite instructive as well is that most of the people who have spoken to us to date are talking about bringing other professionals into the business, not about external capital.” Here, of course, unlike south of the border, a firm will have to be 51% owned by solicitors or other regulated professionals.

So we are really talking about different solicitor firms seeking to broaden their ownership model, with nothing much changing when viewed from the outside?

“So far as we’re concerned that’s what we’ve been seeing so far”, Yelland agrees. “One question I’ve been asked by several people is, have you been approached by any new entrants into the market? And the reality is, not at this stage.” He suspects that may not happen until the Society, or someone else, is approved as a regulator, and intending entrants can see how it is going to operate.

But it’s still too early to predict when that stage might be reached – the end of this year at earliest, he thinks. “And it may be beyond that, because in dealing with some of these issues, for example the regulations, we need approval not only from Government but from the Office of Fair Trading and the Lord President, and the timescale is really out of our hands.”

Another conflicting role?

Some solicitors – generally those who argue that the Society cannot effectively perform its dual representative and regulatory roles due to inherent conflict of interest – believe that this difficulty will only be exacerbated when the Society takes on the additional task of regulating practices part owned by non-solicitors. Yelland make three points in reply.

“First, any solicitor who holds a practising certificate, whether they are in a legal firm, a licensed provider or currently work for example in public service, will be regulated by us in terms of their individual licence to practise. It doesn’t matter where you are, we will regulate you.

“Secondly, in terms of licensed providers it’s worth remembering that in the 2010 Act the Government specifically allowed for the Society to make an application to become an approved regulator: they actually amended the 1980 Act to allow that.

“And it’s also instructive to look at the legislation in terms of what it will expect of an approved regulator. There is specific reference to the representative and regulatory functions being separate, so in effect with licensed providers the Regulatory Committee will have an involvement in overseeing the regulatory regime, and it will be no different to the way in which we would regulate a traditional firm.

As to the alleged conflict of interest itself, he adds: “I think there is a different way of looking at it, and that is that if we are regulating not only traditional firms but also licensed providers, then as experienced regulators we will be able to bring about a level of consistency in terms of that regulation, and I think that is actually beneficial to the profession.”

Access by licensed providers to the Guarantee Fund has also been a point of concern. Here Yelland insists that clear rules will be put in place to set out their responsibilities, and the circumstances in which a claim can be made. “Again it’s worth emphasising that the Guarantee Fund, in opening up to licensed providers, only applies to legal services. The rules we are constructing are going to dovetail in with that, specifically to ensure that there is the maximum protection of the fund as a statutory fund, learning from experiences we’ve had and endeavouring to make sure that the concerns of many of the profession that were expressed during the passage of the legislation are covered.”

Keen to move on

Summing up, Yelland says the Society is keen to get on with the task of overseeing the new forms of business: “There are clearly people interested for different reasons as you would expect, but we are not in control of the timetable there. But compared to where we were six months ago we’re further forward, we’ve got the first set of Government regulations, we’ve done a lot of talking to people, we’ve built our regulation and licensing part based on that, and we just need to see how quickly we can move it forward.”

Taking time

Nearly nine months after the English ABS legislation came into force, there are still only 10 licensed providers. There has been some comment about the length of time applications are taking to process – probably not helped by the SRA tailoring its application form for each business in light of its declared intentions, something the Society intends to run in a more standardised fashion in Scotland. And while there are about 130 applications pending, many of these are legal disciplinary practices (previously allowed to operate with up to 25% non-solicitor ownership) seeking to convert, as they now must, to licensed provider status.

That said, significant developments are taking place south of the border at an increasing pace – see feature in this issue.