3 Jul 2012

A viable alternative

The grouping of accountancy and legal services is an obvious step, and many practices are taking the chance to become an alternative business structure. But, asks Julia Irvine, how long will it be before ICAEW can regulate these firms?

Over the next few months, a number of accountancy firms are likely to gain approval either to become an alternative business structure (ABS) under the Legal Services Act 2007 or to set up one as a subsidiary.

In order to do so, they have had to apply to one of the two existing approved licensing authorities – the Solicitors’ Regulatory Authority (SRA) and the Council for Licensed Conveyancers (CLC) – rather than to their own alma mater.

It does make sense for ICAEW to become an approved regulator

Peter James

It’s something that ICAEW is keen to rectify, despite having initially decided that there were too many difficulties in trying to become an approved regulator and licensing authority under the Act. But the interest from the profession in using the ABS structure to form a multidisciplinary practice with lawyers, together with the number of firms needing to be authorised to carry out probate activities (which is a reserved legal service under the Act), has led to a change of heart.

"It does make sense for ICAEW to become an approved regulator," says Peter James, ICAEW head of regulatory policy. "We will be able to combine the monitoring process with our other regulatory visits to firms, which will save them time and the cost of having to deal with the demands of two separate regulators."

It will also deal with the problem of the Separate Business Rule in the SRA’s code of conduct, which prevents accountancy firms from owning an ABS as a subsidiary unless they are granted a waiver by the SRA.

Expressions of interest

It is not clear how many accountancy firms have already applied to become an ABS. Commercial sensitivities means that they are reluctant to discuss the issue publicly and the SRA won’t reveal how many applications it has received from accountants.

By the end of April, it had had more than 200 expressions of interest from firms, 74 of which had progressed to "stage 2" and five law firms – including Co-operative Legal Services, which is part of the Co-operative Group – had become ABSs. The CLC has only licensed one firm, Premier Property Lawyers, so far.

But as the advantages of becoming an ABS become clear, ICAEW anticipates that the number of firms expressing interest will increase. According to ICAEW lawyer Imelda Moffat, there are cogent reasons for wanting to become a multidisciplinary practice. "When firms employ solicitors, they are not allowed to call themselves solicitors and advise clients directly," she says.

"This has led to absurd arrangements where an accountant and a solicitor both attend a client meeting together but only the accountant can give advice. The solicitor is considered to be advising the firm. So even if the advice that the client receives comes from the solicitor, it does not attract legal privilege. Had the solicitor been working for a law firm, that same advice would be covered by legal privilege."

Firms can get round these problems as an ABS, she points out. Not only do they offer solicitors and accountants the possibility of genuinely being in partnership, but they also enable lawyers both to call themselves solicitors and to act directly for clients within a multidisciplinary practice.

"Whether you set up a brand new multidisciplinary practice or reconfigure your existing firm, once your solicitors start delivering client services, they can potentially be generating legal privilege. And depending how the practice is structured, that legal privilege will also apply to accountants’ advice if it is delivered to the client at the direction of or under the supervision of a solicitor within that firm," says Moffat.

Whether you set up a brand new multidisciplinary practice or reconfigure your existing firm, once your solicitors start delivering client services, they can potentially be generating legal privilege

Imelda Moffat

Legal privilege

The institute has long argued that legal privilege should apply to chartered accountants as well as lawyers when delivering legal advice, particularly in contentious areas such as tax. Which is why it has backed the Supreme Court appeal in Prudential v HMRC, to be heard in November, in the hope that the court will recommend a root and branch review of legal privilege.

ABSs will also be of interest to smaller accountancy firms on the high street that are interested in joining up with other professional firms. The obvious example would be a one-stop finance and conveyancing shop run by accountants, lawyers and estate agents. Another might be a partnership of lawyers and accountants specialising in probate services and estate administration.

Probate activities are one of the six areas designated as reserved services under the Legal Services Act. This means that firms and individuals engaging in "the preparation of probate papers for the purposes of the law or in relation to any proceedings in England and Wales" will also need to be monitored by an approved regulator.

Bearing in mind the number of its members involved in this area, ICAEW is applying to the Legal Services Board to become an approved regulator and licensing authority for probate purposes. This will allow it to license accountants who wish to add reserved probate services to their existing business offering without forming a multidisciplinary practice with lawyers.

However, the scope of the Institute’s application will be restricted to applications for a grant of probate or letters of administration (in other words, non-contentious probate work). It will not be seeking authority to accredit firms wishing to oppose a grant of probate or letters of administration.

With encouragement from the Legal Services Board, ICAEW has also considered whether or not to extend the application of the probate oversight arrangements to estate administration, in the light of moves by the Board and the Legal Services Consumer Panel to recommend making will-writing and estate administration become reserved activities.

However, it has decided to defer any decision until it knows the outcome of the Legal Services Board consultation on will-writing and estate administration, which was launched at the end of April. The deadline for comment is not until mid-July, after which there would be another consultation period in the autumn and, if the Board decides to go ahead, a final report in the winter recommending that the Lord Chancellor amends the list of reserved activities.

Gaining approval

Instead, ICAEW will move to the next stage in the approval process for ABSs and probate, and launch a consultation with members and stakeholders on the draft regulatory framework for probate. Details will appear online shortly.

For the most part, the new framework will apply equally to firms whether they are seeking to become an ABS or to do probate work. Members who wish to conduct or supervise probate work will have to apply to become authorised individuals and will need to meet various conditions, including appropriate probate qualifications or experience.

For the most part, ICAEW’s proposed monitoring of probate will take much the same form as in other regulated areas – monitoring visits and annual returns giving details specific to practitioners’ probate practice. ICAEW would aim to visit most firms in the first year of accreditation: thereafter, visits would be carried out in tandem with the Practice Assurance scheme where possible.

Accredited probate firms would also have to make special compensation and professional indemnity insurance arrangements.

Reaching this point has been a long and painful process, James says. "It has taken a year just to put our application together. Not only is the Act very complex, weakly written and open to interpretation, but we had to ensure that the new rules are consistent with those ICAEW has in place for its other regulatory activities. We have had to take legal advice every step of the way."

Ideally, ICAEW would like to be up and running as a regulator by early 2013 but it is aware that the timing may slip due to forces beyond its control. Its own consultation will last for eight weeks and then, once any consequential changes are made, the application will go to the Legal Services Board.

Under the Act, the Board has to consult with the Office of Fair Trading, the Legal Services Consumer Panel and the Lord Chief Justice before making recommendations to the Lord Chancellor. Then, provided everything has gone according to plan, a draft statutory instrument will be presented to Parliament for debate in both houses.

How long that will take with the demands on Parliamentary time is anyone’s guess.

Members who would like to register an early interest in gaining accreditation should email abs@icaew.com