Separate businesses – introduction
The Solicitors Regulation Authority, has reduced substantially the length and complexity of the SRA Standards and Regulations 2019. However, the result of that simplification appears to have been the need for the SRA to continue to review and expand its guidance – leading to a plethora of guidance notes which, whilst not part of the Standards and Regulations themselves, are nevertheless expressed to be something to which the SRA “may have regard” when exercising its regulatory functions.
One such area where the SRA has recently published guidance is in relation to separate businesses.
The obvious attraction of having a separate business is that it can be operated outside SRA regulation. This has the consequence of reducing costs enabling savings to be passed on to clients and making the business as a whole more competitive. Since further relaxations made in 2019 by the SRA to its rules, all non-reserved legal services can now be offered through a separate business. This is in line with the overall intention of the Legal Services Act 2007 which included allowing all non-reserved activities to be conducted outside the regulated sector, thereby making the legal services market more competitive.
As if that was not complicated enough, solicitors can now practice both through an authorised firm and at the same time as a freelance solicitor where the practice is not authorised. Needless to say all of this brings with it regulatory danger. With those dangers in mind, the SRA has decided that the time has come for some additional Separate Business Guidance.
Definition of a separate business
The SRA Glossary defines a separate business as follows:
“Separate business means, where you are an authorised body or own, manage or are employed by an authorised body, a separate business:
(a) which you own;
(b) which you are owned by;
(c) where you actively participate in the provision of its services, including where you have any direct control over the business or any indirect control over the business through another person, or
(d) which you are connected with,
and which is not an authorised body, an authorised non-SRA firm, or an overseas practice”.
Thus the definition catches not just an authorised firm which is involved with a separate business but any individual who owns, manages or is employed by it. The involvement is also wider than just ownership and includes active participation or control or some form of connection, which may be through a spouse.
What are the regulatory issues with separate businesses?
The SRA guidance makes clear that, first and foremost, the issue is one of clarity for clients in relation to the extent to which regulatory protections exist – or more precisely don’t exist in relation to separate businesses. Where clients are referred from an authorised firm to a separate business, they must be told what this entails in terms of loss of regulatory protections. The main danger is, of course, that the distinction between authorised firm and separate business can become extremely blurred. For example, there is increased scope for confusion where non-reserved legal services are offered through a separate business or where the services of authorised and unauthorised businesses are offered under a common branding through the same name and/or website. The confusion can be compounded by having the same staff working for the authorised firm and separate business and where the businesses share premises.
The need for clients to have clarity about the distinction between authorised and unauthorised businesses, and what this means in terms of protections, is dealt with in both the SRA Codes of Conduct 2019 (i.e. those for for firms and for individuals) and the SRA Transparency Rules 2019.
Paragraphs 8.10 and 8.11 of the SRA Code of Conduct for Solicitors RELs and RFLs (the “Code for Individuals” and see also paragraph 7.1 of the Code for Firms) deals with the firms’ and the individual’s obligations to ensure that clients understand how services provided to them are regulated.
“8.10 You ensure that clients understand whether and how the services you provide are regulated. This includes:
(a) explaining which activities will be carried out by you, as an authorised person;
(b) explaining which services provided by you, your business or employer, and any separate business are regulated by an approved regulator; and
(c) ensuring that you do not represent any business or employer which is not authorised by the SRA, including any separate business, as being regulated by the SRA.
8.11 You ensure that clients understand the regulatory protections available to them”.
Firms which operate separate businesses need to make it absolutely clear in written materials, in communications with clients and prospective clients, and on their websites, how their business model works, which services are SRA regulated, which are regulated under another regime and which are unregulated. This needs to be the case even when clients are not being referred from the SRA regulated firm to the separate business since the clients may be going direct to the separate business unaware of its regulatory status.
Furthermore, Paragraph 5.3 in the Code for individuals (applied to the Code for Firms through paragraph 7.1) deals with situation where referrals are made of clients to the separate business or a client’s matter is split between the two.
“5.3 You only:
(a) refer, recommend or introduce a client to a separate business; or
(b) divide, or allow to be divided, a client’s matter between you and a separate business;
where the client has given informed consent to your doing so”.
In both instances, the client’s “informed consent” must be obtained before the client is referred or their matter is divided between the regulated firm and the separate business. What constitutes “informed consent” will always involve:
- explaining your firm’s connection to the separate business and
- the loss of regulatory protections.
With regard to the latter, more may need to be said if the separate business provides legal services, such as the estate administration, which clients would normally expect to be provided through the regulated firm. Similarly, where clients are less sophisticated or vulnerable, firms will need to judge just how much explanation is needed of the loss of protections such as the Minimum Terms and Conditions relating to indemnity insurance and money held in accordance with the Accounts Rules.