Closed Consultation

Sole practice: modernising authorisation

9 March 2011

The deadline for submission of responses to this consultation was 8 March 2011.

The information below is for reference only.

We have now published an analysis of responses.

Executive summary

1. This consultation should be read as part of our implementation of a modern, outcomes-focused, risk-based approach to regulation. The transition to this new approach is explained in the Freedom in Practice section of our website, and in particular in our October 2010 consultation on our draft new Handbook.

2. Our strategic objectives in defining our future regulatory regime for all firms are to

• achieve the same degree of consumer protection for clients of firms of solicitors (regardless of their size and business model) and of alternative business structures (ABSs);
• apply the same standards to all types of legal services providers so far as is justifiable from a risk perspective;
• deliver operational effectiveness and efficiency for the SRA;
• be outcomes focused and risk based both in our Handbook requirements and regulatory processes;
• facilitate transition between the statutory regimes (e.g. for recognised bodies (RBs) and ABSs), since we anticipate that some firms may, during their lifetime, switch status.

3. We are, therefore, seeking wherever possible to achieve "harmonisation" of our regulatory requirements. Where differences exist, the justification for them will be based on the degree of risk posed by different types of firm to consumers and to the public interest.

4. We believe, in particular, that it is in the interests of the public and consumers that all firms are subject to appropriate assessment at the point of authorisation. We also believe that the regulatory burden on firms should be proportionate to the risks that they pose, and that firms should not be subject to unnecessary regulation (for example, annual renewal of "licences" to run a firm, as opposed simply to receiving annual information and fees). (For individual solicitors, in line with other professions, we intend to continue to issue practising certificates (PCs) annually.)

5. In our May and October 2010 consultations on our draft new Handbook (The Architecture of Change: the SRA's new Handbook and The Architecture of Change: Part 2) we made various proposals aimed at: achieving a single authorisation process for all firms; and unlimited (in time) licences to set up and run a firm, as part of broader implementation of risk-based regulation. Both consultations set out reasons why the statutory barriers to achieving these objectives should be removed–see in particular paragraphs 30 to 33 of our October Consultation.

6. The LSB is currently consulting on a draft section 69 Order (PDF) to cover matters such as the SRA 's powers in relation to charging fees for recognised bodies without requiring firms to go through an annual licence-renewal process, and our ability to recover the costs of investigations.

7. This consultation is supplemental to the LSB's, and addresses the mechanisms for authorising sole practice and for taking certain regulatory steps. The proposed section 69 Order will make the necessary statutory changes so that we can treat sole practitioner firms in a similar way to other solicitors' firms and ABSs. It would do this by removing the current practising certificate (PC) endorsement mechanism, and bringing sole practitioners within the definition of a "recognised body".

8. It should be noted that we are not proposing to remove the concept of "sole solicitor" and "sole practitioner", since we believe that there are instances where there are particular risks (e.g. claims against the Compensation Fund) associated with having a sole principal in a firm that need to be addressed at the statutory and regulatory levels.

9. In our May and October Consultations, we explained that as part of the implementation of our risk-based approach, we will be

• subjecting all firms to an appropriate degree of regulatory scrutiny on authorisation (and on an ongoing basis), in the public interest;
• requesting from all firms additional information to that currently received. This information will be supplied on a periodic (generally annual) basis;
• requiring the appointment/designation of a Compliance Officer for Legal Practice (COLP) and a Compliance Officer for Finance and Administration (COFA) in all firms (if appropriate, the role-holder could be an employee and not necessarily the sole principal).

10. It should be clearly understood that the changes summarised in paragraph 9 above will be implemented irrespective of the making of the proposed section 69 Order. This consultation centres on the mechanism for authorisation of sole practitioner firms and the mechanism for taking certain regulatory steps in connection with sole practitioners. Although we are still developing our policy in respect of setting annual fees and initial authorisation fees, our current view is that the changes to be brought about by the section 69 Order will have minimal impact in terms of costs to sole practitioner firms. We expect all fees to be proportionate to the individual circumstances and the risks which apply to each firm.

11. The consultation closes on 8 March 2011. The SRA will review the consultation responses and discuss these with the LSB. The LSB will then determine whether it is minded to recommend a section 69 Order in the terms set out in Annex 1. Assuming this is the case, the LSB would then conduct a short consultation on that Order. The proposed timetable is as follows.

Introduction

12. A sole practitioner firm is a firm like any other traditional law firm, except that it has only one principal (who can either be a solicitor or a registered European lawyer (REL)). Our view is that the range of regulatory tools available to the SRA to regulate proportionately the risks posed by a sole practice should be consistent with those available to us to regulate the risks posed by other types of firm.

13. The practice of sole solicitors is currently governed by the Solicitors Act 1974 (SA) and recognition as a sole practitioner is obtained by way of an endorsement on an individual's PC. From 31 March 2012, we intend that recognised sole practitioners will be included in the definition of "recognised bodies" and a single authorisation process established for all recognised bodies including sole practitioners. The Authorisation Rules will then apply to all types of firm (see our October Consultation at paragraph 33, and paragraph 26 below and Annex 3 of this consultation for an explanation of the implementation timeline).

14. The LSB has the power to make recommendations to the Lord Chancellor under section 69 of the Legal Services Act 2007 (LSA). This is a mechanism by which legislation can be amended. Under that section the Lord Chancellor may by order modify, or make other provision relating to, the function of an approved regulator. This power enables primary legislation to be amended or repealed by secondary legislation, with or without further parliamentary scrutiny. Any Order made by the Lord Chancellor under section 69 of the LSA must be made by statutory instrument and this must be through the affirmative procedure―i.e. approved by both the House of Commons and the House of Lords to become law.

15. The proposed Order will harmonise the system of regulation by the SRA for "sole solicitors" with:

• (a) the system of regulation for solicitors' partnerships and other bodies recognised by the SRA under section 9 of the Administration of Justice Act 1985 (AJA) ("recognised bodies"); and
• (b) the licensing of ABSs under Part 5 of the LSA.

This will provide an effective, proportionate, risk-based and consistent approach to the regulation of legal services for those regulated by the SRA, and for consumers. The policy is set against the background of the opening up of the legal services market to ABSs, and the SRA's move to risk-based and outcomes-focused regulation.

16. The new authorisation regime for sole solicitors will also apply to RELs who are sole practitioners, just as the current regime for sole solicitors applies to REL sole practitioners. The proposed Order makes the necessary technical amendments to the European Communities (Lawyer's Practice) Regulations 2000 ("the 2000 Regulations") to achieve this.

17. This paper

• explains the policy behind the proposed section 69 Order;
• attaches a draft section 69 Order for comment;
• identifies the impacts of our proposals, including equality and diversity, human rights, cost-benefit and competition analysis; and
• seeks feedback on our proposals.

18. A summary of the questions is available below.

19. A list of abbreviations used is at Annex 6.

20. The deadline for responses is 8 March 2011.

21. [How to respond]

Future authorisation of sole practitioners

22. Although the LSA permits the SRA to make provision for a limited (in time) licence and, therefore, a renewal process, the LSB has indicated that it believes ABS licences should be "unlimited in duration, subject to a requirement to report relevant changes, satisfactory performance of regulatory requirements and an annual broadly cost-effective licence fee". As we explained in our May Consultation, we agree with the LSB and we believe that there are advantages in moving to licences that are unlimited in duration for both firms of solicitors (including sole practitioner firms) and ABSs. Our reasons for this view are that

• streamlined processes could carry cost benefits for the SRA and the profession;
• the regulatory burden on firms (including sole practitioner firms) might be reduced if the full renewal process could be replaced by an information and fee-gathering process;
• licence renewal at a time when a firm is under investigation can create enforcement complications;
• it is more risk-based to allow a firm to operate unless and until there is a problem;
• we envisage that firms may move from one status (ABS) to another (firm of solicitors, including sole practice) during their lifetime. It makes no sense, therefore, for one status to carry a licence of unlimited duration and another status an annual licence.

23. For all of the above reasons, we have decided to implement licences of unlimited duration for all firms. For sole practitioners this will necessitate a change in the AJA and the SA. To achieve the desired outcome, we intend to change the recognition of sole practitioner firms by making such firms a category of recognised body. The effect of this will be that sole practitioners will be subject to the same licensing process as recognised bodies and ABSs.

24. We also believe that the time is right to modernise our approach to the authorisation of sole practitioners because the nature of sole practice is evolving. There are currently a variety of business models. At one extreme the term "sole practice" can mean an individual practising with little or no other support, undertaking, and personally providing, a limited range of services to a relatively small client base. At the other extreme, however, the sole practitioner may control a substantial enterprise, supervising a large number of fee-earners and other staff who provide a wide range of services to an extensive client base, with a considerable turnover and large client account balances. This latter model has more features in common with a medium-sized partnership or incorporated practice, rather than with the perhaps more general perception of sole practice being a "one man band". Therefore, there seems to be no substantive justification for a separate authorisation regime on the grounds of the business model of sole practice.

25. Our May Consultation proposed a single, harmonised process for authorising firms of all types. Responses focused on the challenges of the new approach to authorisation (additional information requirements, COLP and COFA) rather than the removal of the endorsement mechanism, although there was some comment from the Sole Practitioners Group on the necessity for "firm" authorisation. We have always held the view that sole practice does constitute a type of firm, and the proposed Order will enable us to regulate such firms more effectively.

Impact on SRA Handbook

26. Our proposals have developed since our May Consultation, and our October Consultation consults further on our draft new Authorisation Rules. We intend that the Authorisation Rules will apply to recognised bodies from 31 March 2012. Assuming that the proposed section 69 Order is made, on the same date sole practitioners will become, under the SRA's Handbook, a form of recognised body. As a result they too will be subject to the Authorisation Rules. Our implementation timeline for sole practitioners is at Annex 3.

27. We propose that existing recognised sole practitioners will be "passported" on that date to the new regime, i.e., these firms will be granted unlimited licences, subject to any existing licence conditions.

28. Consequential changes, to reflect the proposed section 69 Order and the transitional arrangements, have been made to the draft SRA Handbook and are detailed in our October Consultation (see paragraphs 148 to 177 of our October Consultation). A schedule of proposed consequential changes is at Annex 4.

Solicitors (Keeping of the Roll) Regulations – consequential amendments

29. These Regulations sit within the Authorisation and Practising Requirements section of the draft new Handbook. They set out what we have to do to maintain the Roll, including content and public access to the Roll, as well as forms, fees and processes.

30. Regulation 2C(g) contains provisions about the information to be kept on the Roll concerning sole practitioners who have been suspended from practice. This provision will be amended to remove such references in the light of the proposed section 69 Order, whilst preserving on the Roll the historical information we need to retain. We are consulting on the new wording for regulation 10.2(k) of the SRA Practising Regulations (and indeed for regulation11.2(k), which is the equivalent provision in the Practising Regulations for RELs) in our October Consultation, but the approach will now follow our proposals for these Regulations.

31. We have also taken the opportunity to amend Regulation 14(e) to update the period for appeal to the High Court to 21 days (from the current 28), in line with the change to the Civil Procedure Rules (CPRs). There will be further consequential changes to the SRA Practising Regulations, the Authorisation Rules and the SRA Recognised Bodies Regulations in respect of the period for external appeals so that these accord completely with the CPRs. The draft amendments to the Solicitors (Keeping of the Roll) Regulations 1999 are at Annex 5.

Proposed section 69 Order

32. Key provisions of the Order are set out below. It should, however, be noted that this is a draft Order and may be subject to further change.

33. Article 1, paragraph 1(3): definition of a "sole solicitor". The definition used here is identical to that previously set out in the SA (section 87).

34. Article 2: the proposed policy is that when the Order comes into force, solicitors with an existing valid annual "sole solicitor endorsement" will be "passported" into the new authorisation system. A sole solicitor's existing endorsement will come to an end, and the sole solicitor will instead be granted recognition by the SRA pursuant to section 9 of the AJA (recognised bodies). That recognition will not be limited in time, but the SRA will have the power to impose such conditions as it considers appropriate on the recognition (Article 2(2)). (We will also have power, as in relation to other recognised bodies, to suspend or revoke a sole solicitor's recognition in circumstances set out in rules under section 9 – see section 9(2)(d).)

35. Article 3: makes equivalent transitional provision for RELs, in line with the regime for RELs set out in the 2000 Regulations. It should be noted that an REL practising as the sole principal in a firm is referred to in the statutory regime as a "sole practitioner" rather than a "sole solicitor". That is because RELs may not be solicitors by profession.

36. Schedule 1, paragraph 2: amends section 9 of the AJA to make it clear that references to a "body" in sections 9 and 10 of, and Schedule 2 to, that Act are references to a "legal services body" as defined (which will include a sole solicitor as well as the bodies corporate and unincorporate referred to in section 9A(1) of the AJA). This amendment is included so as to make it entirely clear that where reference is made to a "body" that includes reference to a sole solicitor as well as to the other "legal services bodies" referred to in section 9A(1).

37. Schedule 1, paragraph 3: makes the necessary substantive amendment to section 9A(1) of the AJA to ensure that sole solicitors are brought within the "recognised body" regime. It achieves this by extending the definition of a "legal services body" to include sole solicitors (subsection (1)(b)) as well as the bodies (corporate or unincorporate) already included in that term (subsection (1)(b)). "Legal services bodies" are then recognised by the SRA under section 9 of the AJA – see in particular section 9(1)(b) and section 9(8) (defining the term "recognised body"). Thus, sole solicitors will be subject to recognition pursuant to section 9 of the AJA (because they will be "legal services bodies").

38. Schedule 1, paragraph 4: defines the term "sole solicitor" in terms identical to those currently found in the SA. It also retains the SRA's existing power (currently found in section 1B(2) of the SA) to make rules providing that a solicitor is not to be regarded as practising as a sole solicitor in prescribed circumstances. That existing power has been used by the SRA to make provision for circumstances in which a solicitor is deemed not to be practising as a sole practitioner – see the Solicitors' Code of Conduct 2007, Rule 20.03(2) (this will be superseded by rule 10.2 of the SRA Practice Framework Rules [2011]) – these include, for example, cases where a solicitor's practice consists entirely of providing professional services without charge for family and friends. In such cases, the rules about sole solicitors will not apply to a solicitor at all.

39. Schedule 1, paragraph 6: preserves the SRA's existing powers of intervention in relation to sole solicitors. Those powers are currently found in Schedule 1, paragraph 1(1)(b), (ee), (i) and (j) of the SA. We consider that it is probably preferable for all our intervention powers in relation to recognised bodies to be found in one place. Our powers in relation to recognised bodies generally are in paragraphs 32 to 35 of Schedule 2 to the AJA – so we propose that the special powers in relation to sole solicitors be moved to that Schedule. The content and scope of these intervention powers are unchanged. Similarly, we propose that paragraph 2 of Schedule 1 to the SA, which makes special provision in relation to the client accounts of a sole solicitor, is located with the other provisions on recognised bodies which are sole solicitors. Note, however, that although the SRA considers that the LSA provides the necessary power to make these provisions, it should be remembered that this draft Order may be subject to change.

40. Schedule 1, paragraph 7: repeals section 1B of the SA, which currently requires professional conduct rules under section 31 of that Act to make provision for the sole solicitor endorsement regime. The effect of that will be that there is no longer any requirement on the SRA to provide for sole solicitor endorsement, and the SRA intends to repeal its rules relating to sole solicitor endorsement from 31 March 2012 (when the Order comes into effect – see paragraph 26 above, Annex 3 to this consultation, and paragraph 33 in our October Consultation).

41. Schedule 1, paragraph 8: makes a number of changes to the SA which are consequential upon the removal (by Schedule 1, paragraph 7 ) of the sole solicitor endorsement regime.

42. Schedule 2, paragraph 1: makes the equivalent provision in relation to section 9A(1) of the AJA for RELs who are sole practitioners as that made by Schedule 1, paragraph 3 for sole solicitors. RELs who are sole practitioners will therefore be authorised by the SRA under the "recognised body" regime pursuant to section 9 of the AJA.

43. Schedule 2, paragraphs 2 to 4: make the necessary consequential amendments to the 2000 Regulations in order to apply the same regime for sole solicitors to RELs who are sole practitioners. In particular, Article 14(a) makes clear that there is no longer any requirement for the SRA to operate an endorsement regime in relation to RELs who are sole practitioners. Such practitioners will instead be authorised under the "recognised body" regime.

44. The draft section 69 Order (and explanatory note) is at Annex 1.

Impact assessment

45. Our impact assessment on the proposed section 69 Order is at Annex 2. Our view is that the section 69 Order will have minimal impact in terms of costs to firms and that any impact is outweighed by the benefits to firms and the SRA. In terms of competition, we believe that the impact will be positive. Our view is that these changes, in themselves, will have no adverse equality impact.

Annex 6 - list of abbreviations

Downloadable document(s)

• Annex 1 - Draft section 69 Order (and explanatory note) (PDF 5 pages, 53K)
• Annex 2 - Impact assessment (PDF 9 pages, 53K)
• Annex 3 – Timeline for implementation of changes for sole practitioners (PDF 1 page, 19K)
• Annex 4 – Schedule of amendments to the draft new SRA Handbook (PDF 9 pages, 53K)
• Annex 5 – Draft amendments to the Solicitors (Keeping of the Roll) Regulations 1999 (PDF 4 pages, 31K)