SRA policy

Sole practice: modernising authorisation

Policy statement, April 2014

Introduction

This policy statement outlines the proposed changes for the regulation of sole practitioners, addresses why there is a need for these changes and considers the impact they will have both on the SRA and sole practitioners themselves.

This proposed change is part of the SRA's outcomes-focused, risk-based approach to regulation as well as being part of our Red Tape initiative. This will complete a set of reforms originally envisaged in 2010 and will remove a significant volume of regulatory duplications that are required to operate the current regime.

Our objectives in modernising our regulatory regime include:

  • securing appropriate consumer protection for clients regardless of size, structure, ownership or business model of the firm they engage;
  • applying appropriate standards to all legal services;
  • delivering operational effectiveness and efficiency; and
  • being outcomes focused and risk based in our Handbook requirements and regulatory processes.
  • We are therefore seeking, wherever possible, to achieve harmonisation and simplification of our regulatory processes and requirements.

Background

One type of solicitor's practice is a solicitor's sole practice known under the SRA's rules as a recognised sole practitioner. A solicitor’s sole practice is a firm like any other traditional law firm, except that it has only one principal. There are 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 (some of whom may be solicitors) 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 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 sole trader.

Recognised sole practitioners are governed by the Solicitors Act 1974. Prior to the 2007 Legal Services Act (LSA), The Law Society’s powers to regulate sole practitioner firms were limited to its general powers to regulate all individual solicitors by means of their practising certificates (PCs). The LSA introduced an endorsement procedure for the regulation of sole practitioners’ firms. This means that a solicitor may not practise as a sole practitioner unless they have in force a "sole solicitor endorsement" on their PC, which has to be renewed every year. This is in contrast to other law firms and ABSs who go through a one-off authorisation process on establishment rather than an annual endorsement.

This policy statement is further to a consultation into sole practitioners which was undertaken by the SRA in December 2010. It will be followed by the Legal Services Board’s (LSB) consultation on the section 69 Order. Subject to the outcome of that consultation, the LSB will make a recommendation to the Lord Chancellor proposing an amendment to the current legislation using section 69 of the LSA which allows the Lord Chancellor to modify the functions of approved regulators.

Proposed changes

The proposed changes centre on the mechanism for authorising sole practitioner firms, and the mechanism for taking certain regulatory steps in connection with sole practitioners. This will be done by removing the current annual endorsement on a sole practitioner's PC and replacing it with a certificate of authorisation which does not need to be renewed annually. In practice, this would mean little change for both the SRA and sole practitioners in terms of authorisation and would not lessen consumer protection in any way.

Currently, a recognised sole practitioner is not the equivalent of a recognised body, and as such the SRA cannot regulate these two types of firms in the same way. The proposed changes will allow the SRA to regulate sole practitioners in the same way as recognised bodies.

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); 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.

From the responses received to the consultation undertaken in December 2010, it was noted that all of the respondents were supportive of the change and understood the need for change. Since that consultation closed, we have brought in a number of changes that were detailed in the consultation. We now

  • subject all firms to an appropriate degree of regulatory scrutiny on authorisation or establishment (and on an ongoing basis) in the public interest;
  • request from all firms additional information to that that was previously supplied to us, which informs our risk assessment;
  • require the appointment/designation of a Compliance Officer for Legal Practice (COLP) and a Compliance Officer for Financial Administration (COFA) in all firms.

Need for change

As detailed above, sole practitioners are currently subject to a different statutory regime to all other firms regulated by the SRA. We therefore believe that this needs to be changed, for the reasons listed below:

  • Sole practitioners will be on a level playing field with other firms and ABSs;
  • There will be potential cost and time savings due to the streamlining of the processes;
  • It is a more targeted authorisation process for sole practitioners' firms;
  • The replacement of an annual process with risk-based supervision of sole practitioners is consistent with overall SRA strategy;
  • The annual renewal of the endorsement process can be difficult if a sole practitioner is under investigation, giving rise to potential enforcement problems.

By bringing sole practitioners into the same firm-based regulation as other firms, the SRA is able to target regulation more effectively between the individual solicitor and the firm, which could be particularly significant in the case of very large firms run by a sole practitioner. This is a more proportionate way to regulate compared to the current statutory regime.

Additionally, as this is a deregulatory measure, it will lessen the regulatory burden on sole practitioners as they will not have to apply each year for an endorsement on their PC.

We believe that it is in the interest of the public and consumers that all firms, regardless of practice model or size should be subject to a similar range of regulatory "tools" which are proportionately deployed by the SRA. Under the current statutory regime, any action which needs to be taken against a sole practitioner in order to protect consumers can only be taken against the sole practitioner’s PC, as there is no other authorisation for the firm. This is not always an appropriate response and the proposed changes will enable the SRA to take action in relation to the firm, rather than against the PC of the sole practitioner.

Impact of the changes

Those who are currently sole practitioners would see little substantive change to how they practise or the procedures they currently have to go through. Current sole practitioners will be "passported" on to the new system so no additional fees or administrative burdens would be imposed.

New sole practitioner firms will go through an initial authorisation process and (depending on passing the criteria) be granted an unlimited authorisation. Costs incurred by the SRA will be minimal.