SRA seek to "manage expectations" re ABS applications

Neil Rose, the Editor of Legal Futures, last week published an interesting interview with SRA executive director Samantha Barrass in an attempt to get to the bottom of why there have been only seven alternative business structures (ABS) authorised in more than five months, and whether the critics of the SRA are justified in pointing to this as a failure of process.  

Rose rightly points out that none of the applicants on the waiting list seem to want to put their heads above the parapet, for fear of retribution from the regulator – after all, who in their right mind would want to get on the wrong side of a body which is charged with making hugely important decisions regarding their future?  However, I have spoken to some of those business affected, and although they may prefer not to be publicly named, I can vouch for the frustration that they feel.  It was therefore with some interest that I read Ms Barrass’s comments.

In theory the application process is simple ­- there is an initial stage one expression of interest, and then a stage two application form. The SRA has six months (extendable by a further three months), to decide on an application.  So far, so good.  But what Ms Barrass confirmed in her interview with Rose (and a point I have made in previous blog postings) is that the clock does not start ticking at the point the form is submitted, but rather at the point that the SRA consider they have all of the information they need.  Given that there is not a “standard” set of documents or questions which apply to all cases, some applicants have found themselves on the end of a seemingly endless list of requests for additional information, some of which seem to the applicants to be irrelevant or entirely tangential.  The fact that the SRA has the discretion to decide when it has enough information, whilst understandable in one sense (particularly if the SRA is receiving poorly completed applications), means that in effect the published timetables are fairly meaningless. 

There has also been frustration amongst applicants over the length of time taken to consider whether individuals are suitable persons to be licensed, particularly where they are already licensed by another stringent regulatory body – such as the FSA.  The expectation of applicants is that if the FSA has already licensed someone, then any additional checks required by the SRA should be fairly minimal.  After all, it would be an odd situation if someone who was deemed to be an acceptable person to run an investment or banking business was unacceptable to be involved in a law firm. 

The gap in expectations and understanding of the process has, in Ms Barrass’s view, been one of the key lessons of the first few months, as has the fact that the SRA have received many more complex applications than they were expecting.  Next week the SRA will be publishing revised guidance so as to put more information about the application process in the public domain, in an attempt to close the expectation gap. That is undoubtedly a good thing, but surely the need for better guidance could have been foreseen at an earlier stage - after all, the enabling legislation was hardly through at the last minute.   

Whilst the closing of the expectation gap is surely a helpful step, I can’t help but thinking that there should be an equal amount of focus on actually speeding the process up, rather than simply managing expectations.  I am not for one minute suggesting that the SRA should compromise its standards by rushing applications through, but an application process of 9 months or more seems to me to be unnecessarily drawn-out and surely is susceptible to improvement?  Perhaps, for example, a “lighter touch” regime could be used for approving the involvement in an ABS of individual applicants already currently authorised elsewhere?

Rose points out that the length of time applications are taking is causing problems for companies who have arranged financing in anticipation of a licence. Ms Barrass was decidedly and clearly unapologetic about this in her interview – saying that it is a mistake to put in place financing before talking to the SRA about how long the application will take.  Others might argue that given the lack of any expectation-setting by the SRA at the outset, it was not unreasonable of applicants to have assumed that the 6-9 months specified in the guidance notes was indeed an accurate estimation, and therefore not assumed the need for any further clarification on the topic.  In addition, I have a sneaking suspicion that in practice, if asked, the SRA would not have been able to give a great deal more clarity about the timing in advance, given that it can’t say in advance exactly when it will be happy that the information provided will be sufficiently comprehensive, and it had no past experience by which to be guided.

In my view, the SRA needs to find away of standardising the process more than is currently the case.  This will enable applicants to be better prepared for the process, and for the SRA to be able to process them more efficiently.  I accept that at the beginning there will be a number of different scenarios which need to be accommodated, but it is not beyond the wit of man to cover those. So long as there are bespoke elements of each application and a dearth of guidance, then there is bound to be a lack of clarity around timetables and the prospects of an application succeeding.  The SRA appear to be trying to deal with the guidance issue, but they must also tackle to process efficiency.

There have so far been 230 stage 1 applications, 130 stage 2 and a further 25-30 that are now ‘complete’ – ie there are 25-30 where the clock is running.  Having predicted back in January when the first licences would be granted, and having received a deluge of criticism for then missing the date by a month, Ms Barrass was understandably reluctant to commit to when the next ABS will be approved, but did say that a few are “quite imminent”.

The full article can be read here: http://www.legalfutures.co.uk/legal-services-act/alternative-business-structures/everything-you-wanted-to-know-about-abs-applicatons-but-were-literally-afraid-to-ask