Local Authorities and Alternative Business Structures

A number of local authorities have recently announced that they intend to apply for ABS status. The outcome of the first applications by HB Law (London Boroughs of Harrow and Barnet) and Buckinghamshire County Council and Buckinghamshire Fire and Rescue Authority are due imminently. For those local authorities who have made the decision to press ahead and "go ABS" or are thinking of doing so, what does it mean for them and what can they expect from the application process?

How long does it take?

This is the million dollar question…

The SRA has faced heavy criticism from both the private and public sector over the time it is taking to process ABS applications. However, Paul Philip, the new chief executive of the SRA, in one of his first public outings told delegates at Manchester Law Society’s Regulatory Conference that "if you apply today you should be licensed in about 4 months". A word of caution here – the clock only starts ticking once the SRA has received your completed ABS application form and any other information required by the regulator to make a decision. So be warned, if the SRA has to keep coming back to you for missing information or to raise requisitions (and the likelihood is that they will!) this may delay matters. At the moment, any applicant seeking authorisation or recognition from the SRA goes through the same process and completes the same primary form (Form FA1) although the supplemental information required varies, depending on whether or not the applicant is an ABS, traditional law firm or a sole practitioner. The regulator has indicated that it will consider whether or not local authority-owned ABSs need to undergo the same process as private sector applicants, but to date there is no difference. Needless to say the actual submission of the form to the SRA takes place after weeks and even months of preparatory work by the applicant, so be realistic when it comes to preparing your project plan.

Getting to grips with your business model…

The starting point in determining which is the appropriate model is to understand exactly why you need to be authorised and regulated by the SRA and why ABS structures are of particular interest to local authorities. Many commentators tout the ABS route as being the way to save costs, compete with outsourced service providers and provide a revenue stream. Whilst these perceived benefits are worthy of debate they do not really explain why that model works.

Conclusion and implications

The answer to the first part of the question is relatively simple. The rules governing solicitors are (unsurprisingly) prescriptive and solicitors practicing in-house for local government employers are only permitted to provide legal services to persons other than their employer in very limited circumstances. This means that unless those solicitors are able to offer their services through a business model that can be authorised and regulated by the SRA, they simply cannot begin to contemplate offering services to "clients" and making a profit.

The second part of the question is more complex. A traditional law firm or a public service mutual could be used as the chosen vehicle but, as ownership would be with the lawyers, the local authority would firstly not be able to make any profits and secondly, even though legal services are currently Part B services and are not likely to be of cross-border interest, the authority would also need to consider the possible application of the public procurement rules. The only way for the local authority to be able to make profits and directly award legal service contracts to the chosen vehicle without having to consider the procurement rules is if ownership and control vests in the local authority (this is known as the Teckal exemption and detailed analysis is beyond the scope of this article) and the only type of entity that the SRA will regulate with non-lawyer ownership is, you guessed it, an ABS. The authority should also be aware that any support which is given to the vehicle could, on the face of it, amount to state aid. ‘Aid’ for these purposes could include occupation of the council’s premises and/or using the authority’s name. This can be overcome if the aid is effectively paid for on commercial terms or if it is de minimis (currently €200,000 over three years to a single undertaking) but this should be considered and confirmed on a case by case basis.

Getting to grips with your business model right at the outset will help you spot any possible issues that could arise further down the line and give you an opportunity to consult informally with the SRA prior to starting the substantive work that is required to complete the application.

ABS structures can come in a number of shapes and sizes but, for the reasons outlined above, local authorities are always going to want to retain ownership and control. Are you able to sketch out your corporate and governance structure and are you confident that when you have all the pieces positioned, it will still be acceptable to the SRA? An example of a recurring issue in the private sector is over the application of the separate business rules which are there to prevent law firms from providing, through an unregulated limb of the business model, the types of legal services that the public would expect to be provided by a firm authorised and regulated by the SRA. The regulator currently waives this rule in one out of five ABS applications, so for those firms affected, reaching an agreement in principle with the SRA as early as possible is hugely beneficial.

You should also enter into discussions with your proposed insurer at the earliest possible opportunity to make sure that you can get professional indemnity cover which is compliant with the minimum terms and conditions. Insurers take into consideration a variety of material factors when determining premiums and your business model needs to be insurable or it will be back to the drawing board! Without playing devil’s advocate here, the cost of insuring an ABS must be factored into any discussions about cost savings as a perceived benefit. Understanding how the professional indemnity market works, the types of services that can be provided by brokers and the material factors that impact on the price of premiums are crucial to long term financial viability.

And, if that isn’t enough to be getting your teeth into before the form filling even begins, you also need to consider the following:

• Are employees/assets going to transfer to the ABS? If so, have you factored in the wider commercial considerations and are you in a position to agree and negotiate the relevant commercial agreements between the local authority and the ABS? You may require specialist advice on matters such as TUPE, outsourcing and sale and purchase agreements.
• Who will be appointed as COLP/COFA and where will they sit within the business model? Will they be sufficiently senior to discharge their obligations and sufficiently independent? Do they consent to accepting the position?
• Will the ABS have a client account? If so, what safeguards are going to be put in place to protect client money?
• Do you have a business plan? When you reach the next stage of the process, you will be expected to provide the SRA with financial projections and explain how you will manage cash flow, debts and work in progress.

What comes next?

The administrative task of completing the application and supplying the relevant supporting documentation may at times be dry and frustrating, but a mistake at this stage can slow down the process at the SRA end. Ask yourself – are the MySRA records of the current solicitors up to date? Where possible (and it may not always be possible because the ABS vehicle may not exist in any form yet) does the information on FA1 match the information held on public record e.g. Companies House and if not, why not ?

Serious consideration needs to be given to how you answer the questions that ask you to explain how the ABS will meet its obligations in respect of core compliance e.g. conflicts, confidentiality and independence. You should flag anything that may appear problematic and explain how you intend to deal with it e.g. if lawyers within the ABS model are constantly flitting between doing work for the local authority and other clients, this may raise red flags around client confidentiality and conflicts of interest. One common mistake when answering some of the more generic questions on the form is for applicants simply to affix a model office manual to their application as if to say to the regulator "there you go - that is how we intend to comply with xyz so you pick what you want out of it and get back to us if it’s not right". Whilst this may raise a few smiles from readers, it is easier to fall into this trap than you realise - just have a look at some of the questions on the form!

Code of Conduct and in-house lawyers

One thing that will become apparent during the authorisation process and when you are answering any requisitions that the SRA raise as they work through your application is that in-house lawyers will, by offering legal services through an authorised entity, be subject to the SRA Code of Conduct in its entirety and this transition will bring with it a culture change. It would be prudent to support them by arranging for training on the Code of Conduct so that they are up to speed with the new regime and fully conversant with all the nuances of outcomes focused regulation.

Conclusion

As is apparent from the above, the ABS process is complex and littered with potential pitfalls, whilst the decision as to whether to become an ABS is, in itself, something that needs careful consideration and detailed analysis. For advice and assistance on any of the issues raised in this article, please contact Weightmans’ Local Government team.

For further information about Weightmans or to discuss any of the issues in this update, please contact:

Simon Goacher, Partner, on 0151 243 9582 or email simon.goacher@weightmans.com, Michelle Garlick, Partner, on 0161 233 7426 or email michelle.garlick@weightmans.com, Joanne Smith, Risk and Compliance Officer, on 0161 214 0648 or email joanne.smith@weightmans.com.