Changing Regulators

Over the past year we have seen an increased number of firms considering changing their regulator, from the Solicitors Regulation Authority to the Council of Licenced Conveyancers.

The key drivers for change appear to be:

– Conveyancing specific regulation
– Competitive PII renewal premiums
– Moving away from CQS and annual re-accreditation
– Commercial viability relating to commissions/referrals from third parties provided they are fully disclosed to clients
– Business Planning

The areas of most concern for firms appears to be:

– Lender panels and the affect a change would have on panel status
– The practical implications:

– Office space
– Data Security and confidentiality
– Service Agreements, including accounts staff and IT systems

– Approval from all partners of the business (in particular non conveyancing equity partners)
– Resources to deal with the application and practical implementation
– Understanding the key differences between the regulations and the impact on client care information, internal policies and procedures
– Whether the change impact how the firm will be perceived by competitors following the change

Many of the firms that we have discussed this area with indicated that conveyancing accounts for over 75% of their business. So the starting point for firms once they have decided to make the change is to consider;

  1. If they will continue dealing with non conveyancing work and,
  2. If so, how they intend to separate the business into two component parts; conveyancing and non-conveyancing;
  3. Whether the non-conveyancing part of the business can survive without the cash-flow generated by the “bread and butter” of the law firm, if conveyancing is sectioned off into a CLC regulated entity.

Subject to the firm’s decision to retain or close the non conveyancing related part of the business, partners of the firm will need to consider their roles and involvements in one or both of the firms. We are seeing that typically conveyancing partners do not wish to be involved with the SRA regulated side of the business which no longer conducts conveyancing and likewise, non conveyancing partners no longer wish to be involved with the “riskier” conveyancing work.

If the firm decides to deal with both components of the business, their next step would be to consider which business activity will be converted and which will form part of a new entity.

For example, if the firm decide that their non-conveyancing business would remain under the current, SRA regulated entity, they would need to apply to the CLC for the formation of a new CLC regulated firm for new conveyancing work. Therefore, the continuing SRA regulated firm could finalise any on-going conveyancing matters, rather than have to deal with the transfer of files and authority letters, as only new work would be directly absorbed by the new CLC entity. Both SRA and CLC regulated practices could be used to deal with conveyancing matters in this instance as a means of contingency whilst all formalities with the conversion are concluded, with the SRA entity eventually closing off their conveyancing files and not taking on any new matters.

However, if the firm decide that they wish for the non conveyancing work to be undertaken under a new, SRA entity, they will need to apply for authorisation of a new SRA entity first to enable the non property work to be transferred to the new business. The firm would also be required to apply for the conversion of the remaining (conveyancing business) with the CLC. If the firm dealing with the conveyancing itself is not changing, the firm could continue to deal with on-going and new client matters. However, it should be noted that clients and third parties (including lenders) would need to be informed of any change of name (e.g. removing solicitors from any CLC regulated practice) and details of any change to their authorising regulator.

Depending on how firms wish to proceed, practical consideration will need to be given to office space, confidentiality, data protection, resources and the general sharing of systems and data as well. Some firms have proceeded by having service agreements in place for their personnel and IT providers to overcome difficulties with data protection and confidentiality.

It is also advisable for firms to discuss potential changes with lenders in advance of implementation, to mitigate the risk of adverse affects to panel status and onward financial implications.

We have seen some firms really struggle with appointment to lender panels, through acquisitions and mergers, and whilst it is not clear whether there is any correlation between panel status and volume of work, if a new entity were to apply for membership to a panel they may not have the perceived “volumes” required by the lenders, which is one of the main reasons why we have seen firms wishing to convert regulators, are opting to strip out the non Conveyancing work to a new SRA entity and convert the remaining practice to a CLC regulation because the structure, history and volume which lenders may recognise is already in place and can be evidenced, unlike that of a new entity.

We are in on-going discussions with firms seriously considering this change, which we expect will gain momentum in the new year as the holiday season is fast approaching and exchange and completion deadlines loom for conveyancing departments in a busy property market.

For firms considering the change, there are guidance notes available on both the CLC and SRA websites to assist firms with their internal consultations as well.

Priya Anand Patel
Head of Compliance and Risk Management
Legal Eye Limited (subsidiary of ULS Group)

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