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Wider choice and better protection: A consultation paper on the regulation of legal services in Scotland

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Chapter 6: Ownership of legal services

6 This chapter considers how to ensure that owners of alternative business structures ( ABS), who are not themselves legal professionals, do not pose a threat to the core values of the legal profession.

Policy

6.1 Our approach is that there should be no restriction on any particular class of people or organisations who can own an ABS offering legal services - whether as shareholders or principals in the practice.

6.2 Concerns have been raised about the risk that external owners might use their control to influence solicitors to act illegally or unethically.

6.3 The Society considers that this could have implications for obligations under the Money Laundering or Proceeds of Crime legislation and other co-regulatory regimes. 32 However, the Society also points out that existing business structures do not in themselves prevent solicitors succumbing to a range of influences, whether as a result of financial pressures or powerful clients.

Fitness to own

6.4 Nevertheless, we believe that outside ownership should only be permitted where those holding an interest in a legal practice can pass a "fit to own" test and comply with an appropriate code of conduct. Furthermore, regulation should require that there is no conflict of interest, and that there should be a proactive regulatory regime, which will take all reasonable steps to ensure that these requirements are met.

6.5 Having considered the proposals of the Law Society and the provisions in part 5 of the LSA 2007, our proposals are outlined below.

  • Anyone owning all or part of, or operating as a principal in, an ABS, would be required to satisfy the ABS regulator that they pass a "fit to own" test. The details would be specified by the regulator, but the criteria would include:
  • honesty, integrity and reputation;
  • competence and capability; and
  • financial soundness.
  • Where the owner is a corporate body such as a limited company, it would be open to the regulator to require not just that corporate body but those in control of that body to pass such a test.
  • A requirement to demonstrate fitness when requested by the regulator - it would be open at any time for the regulator make such a request and to determine that a person was no longer "fit to own" and to require the interest in the ABS to be given up.
  • It would be possible for the regulator to "passport" classes of persons as automatically deemed "fit to own" - for example, those who have already passed a comparable test in another regulatory regime.
  • Anyone deemed able to be a partner in a legal practice by either the Society or any alternatively approved regulator would be "fit to own" an ABS.
  • The ABS would require to have a Head of Legal Services and Head of Practice, who would respectively be personally responsible for ensuring that the legal service was provided in accordance with ethical standards and that the firm was complying with practice standards (for example, in relation to finance and administration). A possible alternative, on which we would welcome your view, is a Practice Committee whose members would jointly be responsible for such matters. The Head of Practice or Practice Committee would also report to the regulator in respect of owners with control or influence, and consider the continued ability of these individuals to meet the "fit and proper" test.
  • All ABS must provide an indemnity in respect of any loss of clients' monies.
  • An ABS could not take instructions on a case from a client where an outside owner has an adverse influence or conflict of interest in the legal outcome.
  • Outside owners would not be allowed to interfere in individual client cases or have access to client files or other information about individual cases.

Questions

22 Do you agree that there should be a "fit to own" test specified by the ABS regulator which should apply to anyone owning, or acting as a principal in, an ABS as proposed in paragraph 6.5?

23 Do you agree with the details of the test as proposed in paragraph 6.5?

24 Do you agree that the proposals provide sufficient safeguards to ensure that professional principles are not compromised in ABS which are externally owned?

25 Do you have any views on the proposals for a Head of Legal Services and Head of Practice or, alternatively, a Practice Committee for ensuring ethical and practice standards in ABS owned by non-legal owners?