The first ABS licence was granted by the SRA in Spring 2012, since when an increasing number of law firms have converted to this model. Sharon Carr, a legal sector manager in accountants Armstrong Watson, explains the pros and cons of an ABS and what is involved in setting one up. (16 March 2023)
What is an Alternative Business Structure (ABS)?
An ABS is a law firm that is licensed to carry on one or more of the specific reserved legal activities under the Legal Services Act 2007. An ABS’s key point of difference is that its owners and/or managers are not all lawyers, although an ABS must provide a legal service.
High profile conversions to the ABS model include Irwin Mitchell, Kennedys, Parabis, Weightmans and Keoghs.
Why would I set up as/convert to an ABS?
An ABS structure is a necessity when a law firm has a non-lawyer(s) in its ownership and management structure. This includes a non-lawyer(s) being appointed as a company director and shareholder, or a partner in a partnership, or a member in a limited liability partnership.
There is a growing appetite for non-lawyers to be involved in the running of firms, not only to assist in the day-to-day operations including (but not limited to) finance and HR, but also to provide oversight, direction and leadership from an external perspective. Having an ABS structure also creates investment opportunities and the ability to benefit from vertical integration.
What are the advantages?
The main potential advantages include:
- Strengthening the firm’s management with a broader range of talent.
- Bringing in equity investment from a bigger pool of potential partners.
- Providing non-legal services to strengthen a firm’s offering, enabling diversification and perhaps turning a firm into more of a one-stop-shop for clients.
- Enabling family share ownership (for example, as part of a tax-planning strategy).
The main potential risks include:
- The impact non-lawyer managers or owners could have on the culture of the firm. This needs careful consideration as part of reviewing the business plan and deciding the future direction of the firm.
- If non-lawyers underestimate the obligations of solicitors, particularly the importance of regulatory compliance.
- An ABS currently requires at least £3 million cover in the event of a claim, whereas a partnership or recognised sole practice that is not an ABS requires only £2 million of cover.
- If you want to provide services through an office overseas, many foreign jurisdictions may not accept an ABS.
- Outside investment comes with risk, especially if the investor can easily sell their interest or withdraw their investment.
- New start-up ABSs that lack a ‘solicitor manager’ can have difficulty recruiting a solicitor to meet this requirement. (A ‘manager’ is a director if your firm is a company, a member if it is an LLP, or a partner if it is a partnership. Managers are expected to be aware of, and be sure the firm complies with, all statutory and regulatory obligations. A new firm seeking authorisation must have at least one manager who is a solicitor, which may be difficult if you’ve not started your recruitment process yet.)
- The application process is a distraction from running a firm and generating fees, so some firms involve a professional adviser from the outset to minimise the time lost.
“We became an ABS to have a leadership team with diverse skill sets, to empower staff, to add associated consultancy services and potentially to attract non-legal investors. We can now react more quickly to technological and other opportunities and deliver unrivalled customer service levels for our conveyancing practice.”
Dan Hickey, managing director, PLS Solicitors
How does a firm set up/convert to an ABS?
Whether you are a new law firm or an existing practice looking to convert to an ABS, the process is broadly the same. An application needs to be made to the SRA via my.sra.org.uk/dashboard, usually using the following forms:
- FA1 – Firm authorisation application.
- FA2 – Individual approval application – separate forms are needed for each of the COLP, COFA and non-lawyer for a conversion with no other changes; otherwise, all managers and owners should also complete a separate form.
- FA3 – Entity manager owner application – where relevant. This form is required if a firm wishes to add another organisation as a manager or owner.
- FA8 – Financial services notification form – where relevant. This form is required for both new firms intending to provide financial services and existing firms converting to an ABS who already offer financial services.
- FA10 – Anti-money laundering authorisation form.
These forms can all be downloaded from the SRA’s website.
Planning ahead for this process is sensible, as a number of documents need to be submitted with the application. These documents include:
- Business plan
- Organisation structure chart
- Business continuity and disaster recovery plan
- Three-year forecasts including profit and loss, balance sheet and cashflow
- Valid PII certificate or offer letter
- A basic disclosure and barring service (DBS) check for each owner and manager
- Certificates of good standing (where applicable)
- Shareholder/Partnership/Members agreement
The DBS checks should not be older than three months old at the time of the application, otherwise this may delay the process. DBS checks are taking the Disclosure and Barring Service up to 8 weeks to process at present.
How long does the process take?
The SRA website states that a decision will be made within three months, but that if there is a suitability issue their decision could take up to 6 months.
Submit the application at least four months ahead of the planned ABS start date to allow time for dealing with any queries the SRA may have, although applications can take as little as one to two months.
The most common causes of delay are DBS checks, which can come back in several batches; and Professional Indemnity insurance, partly depending on the type of work being undertaken.
How much does it cost?
The SRA’s administration fee for processing applications for a recognised body or recognised sole practice is £200.
The fee for a licensed body administration is £2,000, plus £150 for any individual or entity that needs approval.
These costs exclude professional support fees.
An ABS structure is available only for English and Welsh law firms. There are plans for Scottish ABSs, but no timescale yet for this to happen.
ABS set-up top ten
- Understand the reasons why you want to convert to an ABS.
- Determine the ideal conversion date, which usually ties in with a year-end.
- Set aside sufficient time to complete the application forms and additional documents.
- Obtain agreement from all existing shareholders/directors/partners/members; and for new start-up ABSs, recruit a solicitor manager.
- Start discussions with the potential new non-lawyer owner/manager.
- Download the necessary forms from the SRA website.
- Delegate tasks to appropriate people and allocate deadlines.
- Request DBS checks at the right time.
- Write the cover letter referencing all attachments and explaining the background and reasoning.
- Appoint advisors to review the forms before submitting them to the SRA
Why do law firms choose Armstrong Watson?
It’s because this accountancy firm has built an outstanding reputation in the legal sector, working as preferred partner of the Law Society.