Councils must have ABS to trade reserved services beyond local area: SRA

Local government legal departments which generate extra income by providing ‘reserved legal services’ – including litigation and court advocacy – to other public bodies beyond their local area are only permitted to do so if they use an authorised entity such as an alternative business structure, the Solicitors Regulation Authority has suggested.

The regulator’s views emerged at a recent meeting with the Executive Board of Lawyers in Local Government (LLG) and the Law Society, and have been given further force in a position paper, Looking to the future: Flexibility and public protection – a phased review of our regulatory approach, the SRA issued last week [26 November] on a proposed new approach to regulation.

The SRA's comments are likely to cause significant disquiet amongst a number of local government legal departments who have sought to bring in additional revenue through trading or plan to do so. For now only HB Public Law, Buckinghamshire Law Plus and LGSS Law have ABSs in place, while Essex County Council's Cabinet recently approved plans for Essex Legal Services to obtain a licence.

The background to the issue is that local authority legal departments currently conduct much trading activity – including ‘reserved legal activities’ such as litigation and court advocacy that only those who are 'authorised' can carry on – with other local authorities and public bodies, relying for example on the Local Authorities (Goods and Services) Act 1970.

To do this, local authorities tend to rely on Rule 4.15 in the SRA’s current Handbook, which purports to enable solicitors in local government to act “for another organisation or person to which or to whom the employer is statutorily empowered to provide legal services” subject to conditions (b) to (g) in the rule. The 1970 Act is a key such empowerment statute.

However, the SRA takes the view that the 1970 Act only relates to ‘vires’, the local authority’s ability to act legally within its powers.

Speaking to Local Government Lawyer, Crispin Passmore, the Executive Director with responsibility for policy at the SRA, said: “Local government legislation gives local authorities the vires for all sorts of things – public bodies have to have the vires to do anything. That simply gives them that vires, it doesn’t mean they don’t have to comply with other legal obligations in respect of those services.

“So if they have got the powers as an education authority, they still have to comply with the regulation and law on the provision of education. If they have got power to employ people, they still have to comply with the minimum wage legislation.”

The SRA points out that under section 13 of the Legal Services Act 2007, the question of whether or not someone is authorised to carry out reserved activities is to be determined solely in accordance with the provisions of the 2007 Act.

The regulator says that Rule 4.15 is explicitly subject to Rule 4.1(b) of the Handbook which states: “4.1 If you are a solicitor conducting in-house practice: .....(b) nothing in this rule permits any person to conduct reserved legal activities in circumstances where to do so would require authorisation under the LSA and you must satisfy yourself that any such authorisation is in place before conducting any such activity”.

According to Passmore, “Rule 4 says these are the rules that come in after you have satisfied yourself that you have got the authority to deliver reserved legal services.” (He added that the SRA has given waivers to different parts of its rules, where the law allows it to do so, and some organisations have benefited from this.)

The regulator considers local authority legal departments wishing to undertake reserved legal activities for other public bodies to be governed by section 15(4) of the Legal Services Act 2007. Section 15(4) LSA states: ‘P does not carry on an activity (“the relevant activity”) which is a reserved legal activity by virtue of E carrying it on in E's capacity as an employee of P, unless the provision of relevant services to the public or a section of the public (with or without a view to profit) is part of P's business.’

This raises questions as to (a) whether client public bodies of the local government legal department are members of ‘the public or a section of the public’ and (b) whether the local authority providing the service does so as part of the local authority’s ‘business’.

The SRA’s Passmore told Local Government Lawyer that the issue of what the legislation means when it says delivering services ‘to the public or section of the public’ is ultimately a decision for the courts.

“We can give our view and once we get to a new Handbook it is likely that we would want to show the criteria that we would take into account in assessing whether or not something is provided ‘to the public or a section of the public’,” he said. “I don’t think we can write a rule that definitively states what the public is, and what the public isn't.”

Passmore continued: “There are lots of grey areas with this sort of definition and it will always be very fact sensitive, but examples might be a council saying ‘We want to do a deal with the local health authority and the local fire authority, where we pool resources in lots of different ways because we are all under budget pressure and one of the things the council does is deliver legal services to all in this little group'. To me, that probably isn’t delivering services ‘to the public or a section of a public’, it's to a closed group.

“If on the other hand, the local authority in question decided to market their services to all public bodies around England and Wales, that may well be beyond the small club and that might be you are trying to deliver to a segment of the market, a segment ‘of the public’ and ‘the public’ is institutions as well as individuals. That has gone beyond the sharing of in-house function and that’s where it’s trying to sell services for profit as part of its revenue-raising as a local authority.”

The SRA’s view is that the heart of the issue is not the ethos of what local authorities want to do (trading more widely), but rather what the law allows.

If the SRA is right and that, in carrying out work under the 1970 Act for other public bodies outside the local group in Passmore's example, local authorities are carrying out reserved legal activities for ‘the public or a section of the public’, section 15(4) LSA effectively means local authorities can undertake this ‘reserved’ legal work only if they do so through an authorised entity.

Local authorities are not ‘authorised entities’, however, and so – under the SRA’s interpretation – to carry on providing reserved legal activities to other public bodies more extensively in this way they would have to set up an ABS.

The regulator’s interpretation is reflected in the model approach to regulation set out by the SRA last week in its position paper (see the second bullet point in paragraph 43): “If delivering reserved legal services and related activities to the public or a section of the public, solicitors must do so through an authorised entity.” (See below for the model in full).

It is understood that Rule 4.15 will be removed under the proposed new approach, if adopted post consultation.

The question arises as to whether the SRA’s interpretation equally applies now and local government lawyers providing reserved legal activities beyond a ‘closed group’ should be doing so through an ABS. If they should, all those currently trading would theoretically have to stop providing reserved legal activities on that wider basis until they have an ABS in place. Non-compliance with the Legal Services Act is a criminal offence which carries a fine and/or imprisonment.

However, the SRA’s Passmore said: “We know that local authorities have taken different views in the past, so what would we do if we saw a local authority now, even under the current rules, where we thought they were on the wrong side of their obligations?

“Well we wouldn’t send the police in to arrest them! We’d pick up the phone and say, ‘hang on, we think you probably ought to be authorised for this’. We would have a chat with them and we might reach agreement that they do or they don’t [need to be authorised],” he said.

“I suspect we would reach agreement whether they do or they don’t quite easily but if we couldn’t reach that agreement, then we would have to decide whether or not we want to take action against the individual solicitors and they might decide whether or not they want to challenge that.”

Passmore added that the SRA’s recent position paper had not changed any of that. “It aims to make the rules all a lot easier to understand as they will be a lot simpler, but it doesn’t change the law underneath it about needing to be authorised.”

He also noted that the time it takes to go through the ABS licence application process had been considerably reduced, with most application decisions “now being taken within five weeks”.

The SRA’s Executive Director (Policy) said the regulator recognised that its rules could be complicated and that there were parts that were a hangover from before the Legal Services Act.

“That’s why we want to get this sorted and give people clarity. The whole emphasis in the position paper is on simplicity and flexibility within the legislation,” he continued, urging local government lawyers to take part in the future consultation. “I can’t change the legislation, but within the legislation let’s not go any further than we need to, let’s give solicitors and businesses as much freedom as we can to innovate and do things differently. Local authorities can take part in that as much as they want to.”

Writing recently in her blog following the discussions with the SRA, LLG President Bev Cullen said the impact of the regulator’s views could “potentially be huge” for those local authorities which offer services to other public bodies outside of an ABS.

“Heads of Legal Service need to look out for the SRA consultation on the proposed changes to the Code of Conduct and respond accordingly,” she added.

Nicholas Dobson, LLG Communications Officer and a consultant at Freeths, said the key issue was how the LSA 2007 – and in particular section 15(4) ­– was interpreted. “Local authorities are not ‘in business’ (in the usual sense of engaging in commercial activity (which includes pro bono services as do many law firms, law centres and barristers) – they exist to provide statutory functions,” he argued.

“Therefore providing reserved legal activities to a section of the public surely cannot be part of any authority’s business. For local authority businesses (in the generally accepted sense of the term business as commercial enterprise) have to be operated through separate corporate trading entities.”

Dobson argued that local authority legal departments must also “have a legitimate expectation on which they can rely that the SRA as regulator would not authorise as it does current practice activity outside the scope of the relevant regulatory statute”.

Consequently, he suggested, “although the SRA has indicated that it is in no way changing its position, its new stance does seem to represent a marked change to established practice to the significant detriment of effective, economic and efficient public authority service across the country.

“Local authority lawyers will certainly in the first instance be looking to SRA to provide clarity as to their current position and the apparent change from what has previously always been understood and which seems to be reflected in Rule 4.15 of the current SRA Handbook," Dobson said.

"For although the SRA correctly points out that Rule 4.1(b) provides that: ‘nothing in this rule permits any person to conduct reserved legal activities in circumstances where to do so would require authorisation under the LSA and you must satisfy yourself that any such authorisation is in place before conducting any such activity’, Rule 4.15 (apparently now intended to be removed) does currently allow local authority solicitor employees to act ‘for another organisation or person to which or to whom the employer is statutorily empowered to provide legal services’. The fact that this has existed and been operated by so many local authorities (in some cases) over many years apparently to give professional authorisation to extensive ‘trading’ activities within the overall public sector family without any adverse comment from the SRA would seem to indicate that SRA has never previously seen any regulatory difficulty with such ‘trading’."

Dobson added: "If the SRA had considered such activities to be unlawful they should reasonably have been raising direct concerns previously rather than allowing this issue to surface in this rather oblique manner now. Furthermore, Rule 4.15 regulates ‘in-house’ activity. Clearly, it would be inappropriate for the entire local authority to be authorised so an ‘authorised entity’ would inevitably seem to mean a body separate from the local authority and therefore a private sector body.

“However, if the SRA happens to be right in its apparently new interpretation, then in the interests of economic, efficient and effective management of the wider public sector estate through the provision of cost effective and knowledgeable specialist legal services across the public sector (effectively on a virtual ‘in-house’ basis) it would be reasonable for the SRA to campaign for legislative change to make absolutely clear that local authority in-house lawyers may lawfully provide both reserved and unreserved legal services for other local authorities and public bodies.

“It is understandable that the criminal law regulates unauthorised supply to vulnerable consumers of legal services. However, it does appear most unlikely that the relevant provisions were intended to criminalise reasonable and efficient management of scarce public sector resources.”

The SRA published its Looking to the future position paper as part of plans to move away from prescriptive rules in favour of protecting the public by setting out the principles solicitors should follow. Regulatory measures are to be focused on the areas of greatest risk, while firms are meanwhile to be given greater flexibility to adapt and innovate in order to compete.

The regulator said it was committed to further simplifying its approach and the 600-page Handbook. The latter, the SRA said, was large and complex in its scope and applicability, and needed regular amendment “just to stand still”.

In its position paper the SRA summarised its proposed model of regulation as follows:

• “All solicitors will be subject to the core professional principles and our code of conduct, ensuring core public protection.
• Solicitors must deliver reserved legal services to the public through an authorised (a regulated) organisation, such as a law firm.
• If individual solicitors deliver non-reserved services to the public through an unauthorised organisation, protections, such as access to the Legal Ombudsman will remain. Depending on the circumstances, we will also for example:

- impose restrictions around holding client money;

- put in place personal responsibilities around professional indemnity insurance; and

- limit access to our compensation fund.

• An organisation authorised to deliver reserved services will not need to do so at any particular point in time to retain authorisation – giving flexibility to provide such services if needed.
• Any organisation authorised by us (delivering reserved or non-reserved services):

- must have appropriate indemnity insurance;

- may hold client money if proper systems are in place;

- will have obligations and protections under our compensation arrangements.”

Under this approach solicitors would be free to practise in the wider legal services market, delivering non-reserved legal services to the public outside of firms that the SRA regulates. The SRA insisted that this did not represent “in any way a reduction or ‘watering down’ of the solicitor brand”.

The position paper meanwhile suggested that restrictions affecting membership organisations, charities and local authorities were “no longer fit for purpose” as they might prevent such bodies “providing legal advice to the public at an affordable price”.

Paul Philip, the SRA’s CEO, said at the time of paper’s publication: "We are looking to the future and sharing our plans to review our regulatory model and our Handbook. At the heart of this is the goal of protecting the public and encouraging a vibrant, competitive legal market.

"The legal services market is developing at an unprecedented rate and the expected review of the Legal Services Act may bring further changes. We have to design an up-to-date and fit-for-purpose approach that will protect the public and give flexibility to the profession.”

A formal consultation on the proposed changes will be launched in spring next year. There will be further consultations as part of a phased review over the next 18 months, the SRA said, adding that it expected it to be Spring 2017, at the earliest, before any changes came into force.