Azhar Ghose examines the reasons for local authority legal departments to establish an alternative business structure, and examines some of the alternatives.
The starting pistol has now been fired for local authority alternative business structures (ABS), with the recent announcements of the first such ABS approvals made by the Solicitors Regulatory Authority for Buckinghamshire Law Plus (run by Buckinghamshire County Council and Buckinghamshire & Milton Keynes Fire Authority) and, the next day, for HB Public Law (the shared legal service for the London boroughs of Harrow and Barnet).
It appears to be an inevitable move for local authority legal services that believe that they need an ABS to survive, be sustainable or to simply expand. It is after all a new public sector landscape in the aftermath of the austerity measures, the ever decreasing budgets and the loss of local authority clients and associated work.
Let us briefly consider some of the practical challenges that have led local authority legal practices to consider the ABS option.
In some cases a local authority may have discovered that they can no longer act for a ‘client’ such as; a former in-house service that had been transformed into a new entity or outsourced, or the establishment of a separate corporate entity by a client public body.
In other cases, an ABS is being viewed as the joint venture vehicle to combine and deliver legal services to disparate public service bodies. Thus for example Fire and Rescue Services and a local authority (LA) may come together for the purposes of joint working or to simply share their legal services. There is the added feature that a LA ABS can make profit on its legal services combining this with the fact that it can also act for other non-public sector clients. It can therefore compete with law firms in the private sector in previously forbidden markets.
The greatest source of restrictions for a LA in delivering legal services are as a direct result of the SRA Codes of Conduct. These rules stipulate that a solicitor in a local government practice as an in-house practice can only act for its employer unless there is an exception in the rules that can be satisfied and which are within its scope of statutory powers. The general powers of competence under the Localism Act 2011 will no doubt become the statutory power of choice for many LA.
The SRA rules have also undergone revisions. Previously the rules restricted the ability for LAs to charge for services to charitable and voluntary organisations. LA lawyers will recall the initial problems of acting for the newly converted academies and having to obtain SRA waivers to act for these charities. However, since 1 April 2013 these restrictions on charging to a charity have been removed from the rules, subject to an area test.
LAs can also act for companies limited by shares or guarantee of which they are members by share ownership or as guarantors to the company.
Another option available to LAs is if they have an employee also acting as an officer of the company. This option is easily overlooked or at the very least does not get the same level of attention.
In real terms what this means is that provided that the LA has a director or it has a company secretary acting for the company then there should be no reason why it cannot still act for the company in question. Very often a LA will have its own members or even officers sitting on the boards of these companies or trusts. For some reason there are restrictions in the Codes of Conduct to charging for services to council members which is ripe for review.
Since 2009 as a local authority solicitor, I have also been appointed to several public sector trading companies in the capacity of a company secretary. These have included LA owned companies, a fire and rescue services trading entity and the recent transfer of the probation service to the special purpose vehicles known as the Community Rehabilitation Companies Ltd (CRC).
This not only created a new source of revenue for company secretarial services for the LA in question but it also ensured that legal services were procured from the relevant LA. The company secretary role therefore provides strategic positioning to the LA and it creates another communication channel between the company and the LA.
If the LA is content with only charging for its legal services in order to recover its actual costs then it would not need to set up an ABS. If however, it did wish to charge to make a profit then it would need to establish a separate legal practice in the form of an ABS which would also incur its own separate running costs and be managed as a business. The recent reported losses of some high profile ABSs demonstrates that the ABS is not an easy option but one that has to be carefully considered, executed and successfully managed.
The growth of alternative public sector delivery and business models is growing and increasing in importance as the financial pressures remain on the public sector. Local authority legal services should be exploring all options available to them in order to secure the means by which they can continue to deliver their legal services. If failing that the legal service does struggle to sustain itself or grow then the ABS will certainly become an option to consider.
Thus a local authority legal service can explore and develop other pathways and it need not think it will be left out in the cold and potentially go ‘bust’ without immediately having their own ABS. With all the costs and risks of an ABS the LA needs to clearly identify and quantify the potential benefits that it can achieve from an ABS before pursuing this option.
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