Entity Regulation

Matthew Nicklin outlines what BSB regulation could entail for those seeking to form advocacy-focused alternative business structures, legal disciplinary practices and barrister-only entities

The final stage of the Bar Standards Board (BSB) consultation on entity regulation –New handbook and entity regulation – closed on 28 June 2012. After working its way through the responses, a report will be published by the BSB in due course.


For the BSB, the starting position is that it is in the public interest for the BSB to operate as a specialist entity regulator, providing a scheme suited to the efficient and cost-effective regulation of entities whose permitted range of services is broadly the same as those permitted to the self-employed Bar and whose risks and regulatory requirements are also similar. In that way it can keep its regulatory arrangements simple and targeted at the areas of practice where it has the capacities and capabilities to regulate effectively, rather than seeking to introduce a costly regime that replicates what is being provided by other regulators.


Two-stage process

Entities seeking BSB regulation will have to complete a two-stage process. The first stage will involve confirming that certain mandatory criteria have been satisfied. Examples of that criteria include: at least one barrister member, that the entity has appropriate insurance in place, that a HoLP [head of legal practice] and HoFA [head of finance and administration] have been appointed, that all owners will be managers (ie, no outside ownership allowed), that services are limited to legal activities (ie, no multi-disciplinary partnerships) and that the entity will not hold client funds. In respect of the latter, the BSB will permit entities, and the Bar more generally, to use a third-party client money account that has been approved by the BSB. Such an account will allow entities and barristers to have their fees paid up front, hold settlement awards, pay disbursements etc. The Bar Council is currently developing plans for such a service, although it would be open to others to do so.

In stage two, and provided all the mandatory conditions are met, the BSB will consider whether the entity is one which it would be appropriate for the BSB to regulate taking into account its analysis of the risks posed, the regulatory objectives of the Legal Services Act 2007 and the published policy objectives of the BSB itself, which are to act as a specialist regulator focusing primarily on the regulation of advocacy and litigation services. Relevant considerations will include whether non-lawyer owner/managers make up no more than 25% of the entity, whether a majority of managers have higher court advocacy rights (ie, are barristers or higher court advocates), and whether a substantial part of the services to be provided will comprise advocacy or litigation services or related advice.

It is unlikely the BSB would exercise its discretion so as to authorise an entity that undertakes primarily transactional services direct to the public with limited advocacy and with a high percentage of non-lawyer owners. Barristers will still be permitted to be managers, owners or employees of such an entity, but the entity itself will need to be regulated by another approved regulator, such as the Solicitors Regulation Authority (SRA).

BSB-regulated entities will generally be permitted to undertake the same services permitted by individual barristers. This will include litigation, provided there is at least one manager in the entity that is authorised to conduct litigation. However, the BSB may impose conditions on the authorisation of any entity.


Code of conduct

The owners and managers of the entity will be individually subject to the code of conduct (the BSB Handbook), as will the entity itself. One of the most significant changes proposed is that all employees must also be appointed under a contract of employment that requires them to comply with the requirements of the code insofar as it is applicable to them and to do nothing which causes or substantially contributes to a breach of the code by the entity or its managers. In the most serious cases, the BSB will have a power to disqualify errant employees from working in other BSB-regulated entities.


Application fee

All BSB-regulated entities will be expected to pay a one off application fee. This sum has not yet been set, but one notes that the SRA charges £2,000 per application and a further £600 per day for applications that take longer that three days to process. Thereafter the BSB (like the SRA) intends to charge an annual fee to each regulated entity, at a level which will probably be linked to turnover. The BSB considered adopting a “polluter pays” or risk-based approach to fees but we do not currently have enough reliable data to make such a model work effectively. The level of fees and method of charging will be kept under constant review.


Timing of the changes

The timings of these changes will follow two tracks. We anticipate submitting both the rule change application (new BSB Handbook) and licensing authority application (alternative business structures (ASBs)) to the Legal Services Board (LSB) in December. Since the statutory process for approving the ABS application is longer than for an ordinary rule change application, the changes will become operational at different times. We anticipate that the new handbook (which will include the introduction of legal disciplinary partnerships, barrister only entities and the right to conduct litigation) should be approved by spring 2013 and will become operational shortly thereafter. There will first be a significant communications campaign to ensure the regulated community is fully aware of the changes. The BSB should be in a position to licence ABSs in early 2014.

Matthew Nicklin is a barrister member of the Bar Standards Board

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