Indeed, 30 applicants for prospective BSB-regulated entities were received within five days of the barristers’ regulator opening its doors to applications. However, at the time of writing, just 49 entities have been authorised by the BSB, 41 of which are single person entities – ie having one individual registered as manager, head of legal practice and head of finance and administration.
Although the available statistics suggest that increasing numbers of barristers are working in solicitors’ firms, this group still numbers in the hundreds, and less than 5% of all practising barristers (Barristers’ Working Lives: a second biennial survey of the Bar, 2013). The increase in barristers employed in solicitors’ firms appears to reflect a shift among employed barristers from employment in the public sector (including the CPS) to employment in the private sector. The numbers at the self-employed Bar remain broadly static at around 80% of the total (BSB Practising Barrister Statistics). So why haven’t BSB-regulated entities taken off as expected, and what are the opportunities for practitioners?
The introduction of entity regulation by the BSB took place against the backdrop of wider changes in the legal services market, driven in part by the Legal Services Act. When the draft Legal Services Bill was published nearly ten years ago, alternative business structures (ABS) were said by the government to be a means of increasing competition and choice for the consumer, with different types of lawyers and non-lawyers working together on an equal footing, with the benefit of external investment.
ABSs became a reality four years ago, and there are now over 500 ABSs licensed by the Solicitors Regulation Authority (SRA) and other regulators. These include new market entrants, such as accountants, and existing law firms, including a number of top 50 solicitors’ firms by revenue.
The BSB’s stated policy objective in introducing entity regulation was to provide opportunities for the market to develop, enabling barristers to innovate in ways that are compatible with the regulatory objectives, provided the associated risks are managed effectively and proportionately.
While the legal market has undoubtedly changed over the last ten years, with increased pressure on pricing, a significant reduction in public funding and greater use of technology, one might be forgiven for thinking that the revolution has passed the Bar by.
One of the possible explanations for the low take-up of BSB entity regulation is the limited scope of the current offering:
- Initially ‘lawyer-only’ entities are being regulated, with ownership and management in the hands of barristers, solicitors and other regulated lawyers.
- The BSB is deliberately not competing with the SRA and is focusing on areas it is already experienced in regulating –primarily advocacy, litigation and specialist legal advice.
- The BSB only authorises entities ‘whose structure is simple and transparent, with work being closely overseen by authorised individuals and minimal risk of divergent interests between owners and managers’.
- BSB-regulated entities are not permitted to hold client money, which will restrict their ability to do transactional work on any significant scale, although the ‘BARCO’ escrow service can be used.
- Within the BSB’s entity regulation framework, the focus remains on individual responsibility by authorised persons (ie qualified lawyers).
In many ways the BSB’s approach is understandable: advocacy and litigation by their nature are activities that cannot easily be commoditised, requiring individual lawyers to discharge duties to the court as well as the client.
The BSB’s offering may suit some niche advocacy practices (including those that are solicitor led) as being both more cost effective than SRA entity regulation and providing a more appropriate regulatory regime. However, solicitor-advocates will still be subject to individual regulation by the SRA unless they convert.
Alternative business structures
The BSB does have plans to extend its approach to allow non-lawyer ownership and management. Its application to the Legal Services Board for designation as a licensing authority for ABSs was approved in March, and the BSB plans to begin regulating ABSs from October 2016. The process, which has already been delayed, requires various statutory instruments to be made before it can be finalised. The BSB forecasted 20 applications for ABS authorisation in its first year as a licensing authority, suggesting they will have a minimal impact.
Single person entities
Much of the initial take-up of entity regulation has been by individual barristers wishing to use a company as a vehicle for self-employed practice, rather than the establishment of incorporated chambers to rival solicitors’ firms.
The primary attraction of this approach was expected to be the potential for tax savings. However, the changes to the taxation of dividends which came into effect in April 2016 are likely to make any tax benefits marginal for single member entities.
Although non-lawyer participation in BSB-regulated entities is not currently permitted, in future it may be that two member companies emerge in which an individual barrister’s spouse or civil partner has a significant interest. This would allow the distribution of the company’s income to be spread across the two individuals concerned, which may produce a greater benefit from a tax point of view.
A BSB press release on entity regulation referred to ‘barristers and other advocacy focused lawyers’ being able ‘to pool together resources and share the risks of investing in their own business’.
In principle a corporate structure could facilitate the development of a brand and enable external finance to be secured to invest in development.
However, a significant disadvantage compared with the traditional chambers model is the position in relation to conflicts. The self-employed model enables barristers to maintain sufficient independence to be able to appear on opposite sides of the same case, and many will not want to sacrifice that independence whatever the perceived advantages of a corporate structure.
Practical issues for chambers
The use of single person entities will not fundamentally alter the traditional chambers model: members are simply choosing to conduct their existing practice through a different legal structure. Multi-person entities are likely to prove more controversial.
While a wholesale shift towards incorporated chambers appears unlikely, it may be that a mixed economy develops, with single and multi-person entities co-existing with the traditional chambers model. This raises a host of issues for chambers concerning whether, and how, they are willing to accommodate entities:
- Constitutional arrangements will need to be reviewed to enable corporate vehicles to become members of chambers.
- Personal guarantees may be required from owners and managers in relation to the entity’s financial and other obligations under the constitution.
- Chambers may wish to have control over which individuals become owners or managers of entities which are members of chambers, and specify which individuals can attend chambers meetings and exercise voting rights.
- The events triggering the right to expel members may need to be modified to include events relevant to a company (eg insolvency).
- Modifications may be required in relation to eligibility to stand for elected positions within chambers, where individuals practise through entities which are members.
- The position in respect of chambers leases will need to be considered. In particular it will be necessary to ensure that the leases permit corporate members to occupy the premises.
In addition, various practical matters need to be addressed where services are being offered through an entity: chambers software may need to be updated, contractual terms revised and arrangements put in place to ensure it is clear to third parties that services are being provided through the entity.
At present, it is compulsory for single member BSB-regulated entities to obtain insurance through Bar Mutual, although multi-person entities can obtain cover on the open market.
Innovation v complication
Although BSB entity regulation may provide opportunities for some to innovate, it also brings complications both for individual barristers and for existing chambers which some may feel outweigh any benefits. If take-up to date is anything to go by, the traditional chambers model is likely to endure for many years to come.
Contributors Scott Leonard and Michael Stacey are contributors to John Gould’s The Law of Legal Services