Alternative Business Structures or ABSs have been available to permit non-lawyers to own law firms since January 2012. So what have we learned so far? Here are five nuggets gleaned from a year’s practical experience with ABSs:
1. Application processing times are measured in months, not weeks.
The SRA has been heavily criticised for its failure to process applications of all kinds in a timely fashion and the delays to ABS applications are perhaps the longest of all. A six-month application process is realistic, but some applications have taken over a year (sometimes due to the applicant rather than the SRA). One bright spot is that the SRA has recognised this to be an issue and, it is hoped, will deploy more resources to the area over the coming year. The SRA also now has some experience in dealing with ABS applications, which should help both it and applicants to work out what the key issues are. That said, for those for whom ABS status is essential, application processing times remain a real barrier to entry to the market. For example, investors may not be willing to wait six months to invest and will be worried about the prospects for an exit if any potential buyer of their stake has to go through a long and arduous approval process.
2. The stage 1 application form is deceptively simple.
The first application that a firm lodges to begin the ABS process only requires the most basic of details be given about the proposed ABS. However, this first application is only a prompt for the SRA to send out a much longer second application form. As well as being long, this ‘stage 2’ application form must be submitted within 60 days or there is a risk that the firm will have to start the process all over again. The stage 2 form asks detailed questions relating to all aspects of the ABS’s business, including the individuals involved, its business plan and proposed compliance policies, so can be a challenge to prepare in 60 days. The stage 2 application form is supposedly tailored to the applicant, but so far it appears that the SRA is asking essentially the same questions of all applicants.
3. There is no such thing as a ‘standard’ ABS.
We have seen all kinds of potential firms looking at the ABS route. These range from major US firms looking to integrate UK affiliates, to sole practitioners who wish to embed themselves with their primary referrer. Other interested users are personal injury firms looking to deal with the referral fee ban, overseas firms wishing to involve individuals who are considered lawyers in their home territory, but not recognised as such by the SRA and firms who wish to introduce senior management as owners. The ‘Tesco law’ and private-equity focused ABSs are also there, but so far they are in the minority.
4. Firms cannot switch to ABS without substantive (10% or more) non-lawyer ownership.
This precludes firms from prospectively moving to ABS status in order, for example, to facilitate future investment or the future introduction of non-lawyer managers as partners. There seems to be no good reason why this is the case, particularly since regulatory delay and uncertainty is one of the main reasons why ABSs have yet to prove as popular as first thought. It would be a sensible move for the SRA to harmonise ABS and traditional law firm regulation so that firms can seamlessly move between the two regimes, but this seems unlikely to happen in the short term.
5. ABSs have, indirectly, made setting up a ‘traditional’ law firm much harder.
ABSs were the driving force for the move to outcome focused regulation, which has been applied both to ABSs and traditional law firms. The SRA’s approach to implementing outcomes focused regulation has, to date, been to require huge amounts of documentation from applicants, where formerly assumptions were made. Prior to the introduction of outcome focused regulation the application form for approval of a new law firm ran to 14 pages and was straightforward to complete. Now, even for non-trading entities such as corporate members, the application form runs to a minimum of 93 pages and is often much longer than that. Even established law firms find it difficult to complete the new form without external advice. It is hard to believe that just six years ago a firm could be set up without needing any prior regulatory approval.
Although the challenges of 2012 have meant fewer firms taking the ABS route than was first envisaged, 2013 looks set to be the year when ABSs begin to form an important segment of the legal market. The business fundamentals that make ABS an attractive prospect remain strong. With the pioneers having explored some of the terrain, those that were adopting a wait and see approach now seem likely to proceed. The next wave of ABSs seems set to be much larger than in 2012 and we hope that that 2013 will reveal how firms are leveraging ABS status to become bigger players in their chosen market.