Part 2

Regulation of legal businesses

Introductory

Overview of Part
38
1
This Part makes provision for category 1 regulators to authorise legal businesses to provide legal services.
2
Section 39—
a
defines what constitutes a legal business (and associated expressions) for the purpose of this Part, and
b
makes it an offence for a legal business to provide legal services without being authorised by the appropriate regulator of that business.
3
Section 40 makes it an offence to pretend, without reasonable excuse, to be an authorised legal business.
4
Sections 41 to 46 require category 1 regulators to prepare and operate rules to authorise and regulate legal businesses.
5
Section 47 deals with how a category 1 regulator is to monitor and investigate the performance of authorised legal businesses.
6
Section 48 and Part 2 of schedule 1 (which amends the 1980 Act)—
a
enable the Law Society to authorise (and regulate) legal businesses,
b
reflect that incorporated practices (within the meaning of section 34 of the 1980 Act) are to be authorised as a type of legal business.
7
Section 49 makes provision for where a body must change its regulatory regime by virtue of changing the manner in which it is owned.

Requirement to be authorised to provide legal services

Requirement for legal businesses to be authorised to provide legal services
39
1
A legal business may provide legal services to the public for fee, gain or reward only if it is authorised to do so by the category 1 regulator that is responsible for the regulation of the owners of the legal business.
2
For the purposes of this Part, a legal business is a business which provides (or offers to provide) legal services to the public for fee, gain or reward that—
a
consists of—
i
a solicitor, or
ii
a qualifying individual, or
b
is wholly owned by—
i
a solicitor or solicitors,
ii
a qualifying individual or individuals, or
iii
a solicitor (or solicitors) and a qualifying individual (or individuals).
3
For the purpose of subsection (2)(b), a business may be wholly owned—
a
directly or through one or more other bodies,
b
partly directly and partly through one or more other bodies.
4
A category 1 regulator is responsible for the regulation of the owner of a legal business if the owner is a member of the regulator or is otherwise subject to its regulation in respect of the legal services the owner provides.
5
It is an offence for a person to own or operate a legal business which provides legal services to the public for fee, gain or reward without that business being authorised in accordance with this Part.
6
A person who commits an offence under this section is liable on summary conviction to a fine not exceeding £20,000.
7
The Scottish Ministers may by regulations amend subsection (6) to substitute a different amount of fine for the one for the time being specified there.
8
Before making regulations under subsection (7), the Scottish Ministers must—
a
consult—
i
the regulatory committee (if any) of each category 1 regulator,
ii
each category 1 regulator that has no functions other than regulatory functions, and
iii
such other person or body as the Scottish Ministers consider appropriate, and
b
publish copies of any written representations received in response to the consultation in such manner as they consider appropriate (having regard to the desirability of the documents being accessible to those likely to have an interest in them).
9
Regulations under subsection (7) are subject to the negative procedure.
10
For the purpose of this section, a “qualifying individual” means an individual, other than a solicitor, whose provision of legal services is regulated by a category 1 regulator.
11
Subsection (12) applies to a legal business—
a
that intends to provide (or offer to provide) legal services to the public for fee gain or reward, and
b
which was immediately before the coming into force of this section—
i
a sole solicitor within the meaning given by section 45(5) of the 1980 Act,
ii
a firm of solicitors within the meaning of that Act,
iii
an incorporated practice within the meaning given by section 34(1A)(c) of that Act, or
iv
a multi-national practice within the meaning given by section 65(1) of that Act.
12
On the coming into force of this section, a legal business to which this subsection applies is to be treated as authorised in accordance with this Part by the Law Society to provide legal services to the public for fee, gain or reward.
13
But the effect of subsection (12) is subject to any alternative provision made by rules approved under section 41.
14
In this Part—
a
a reference to an authorised legal business of a category 1 regulator is a reference to a legal business that is authorised to provide legal services by the relevant regulator,
b
a reference to the relevant category 1 regulator, in relation to an authorised legal business, is a reference to the category 1 regulator which authorises the legal business.

Offence of pretending to be an authorised legal business
40
1
A person commits an offence if the person without reasonable excuse—
a
takes or uses any name, title, addition or description implying that the person is an authorised legal business,
b
otherwise pretends to be an authorised legal business.
2
A person who commits an offence under subsection (1) is liable on summary conviction to a fine not exceeding £20,000.
3
The Scottish Ministers may by regulations amend subsection (2) to substitute a different amount of fine for the one for the time being specified there.
4
Before making regulations under subsection (3), the Scottish Ministers must—
a
consult—
i
the regulatory committee (if any) of each category 1 regulator,
ii
each category 1 regulator that has no functions other than regulatory functions, and
iii
such other person or body as the Scottish Ministers consider appropriate, and
b
publish copies of any written representations received in response to the consultation in such manner as they consider appropriate (having regard to the desirability of the documents being accessible to those likely to have an interest in them).
5
Regulations under subsection (3) are subject to the negative procedure.

Regulation of authorised legal businesses

Rules for authorised legal businesses
41
1
A category 1 regulator must—
a
make rules for authorising and regulating legal businesses (“ALB rules”),
b
apply its ALB rules in relation to the legal businesses for which it is responsible, and
c
publish its ALB rules in a manner that is accessible to the public, free of charge, by such electronic means as the regulator considers appropriate.
2
ALB rules are to—
a
contain—
i
authorisation rules,
ii
practice rules,
b
include provision for reconciling different sets of regulatory rules, and
c
deal with such other regulatory matters as the Scottish Ministers may by regulations specify (and in such manner as the regulations may specify).
3
ALB rules may—
a
relate to—
i
one or more types of legal business,
ii
some or all legal services,
iii
other services (in addition to legal services) that form part of the professional practice of solicitors, or qualifying individuals, within a legal business,
b
make different provision for different cases or types of case.
4
A category 1 regulator may not amend its ALB rules (or any of them) without the prior approval of the Lord President.
5
In making any material amendment of its ALB rules, a category 1 regulator must consult—
a
its members,
b
the Competition and Markets Authority,
c
the Commission,
d
the independent advisory panel of the Commission,
e
Consumer Scotland, and
f
such other persons or bodies it considers appropriate.
6
A category 1 regulator, in submitting an amendment of its ALB rules for approval under subsection (4), must submit copies of any written representations received in response to the consultation under subsection (5).
7
The Scottish Ministers may exercise the power to make regulations under subsection (2)(c) only if they have received a request to exercise the power from—
a
the Lord President,
b
the regulatory committee of a category 1 regulator,
c
a category 1 regulator that has no functions other than regulatory functions, or
d
the independent advisory panel of the Commission.
8
Before making a request under subsection (7), the person making the request (“the requester”) must—
a
consult—
i
the regulatory committee (if any) of each category 1 regulator,
ii
each category 1 regulator that has no functions other than regulatory functions,
iii
the independent advisory panel of the Commission, and
iv
such other person or body as the requester considers appropriate, and
b
except where the requester is the Lord President, secure the Lord President’s agreement to the making of the request.
9
But a body mentioned in subsection (8)(a)(i) to (iii) does not need to be consulted if the body is the requester.
10
For the purpose of seeking the Lord President’s agreement under subsection (8)(b), the requester must provide to the Lord President—
a
a document setting out—
i
an explanation of the change sought by the proposed exercise of the power, and
ii
the reasons for seeking the change,
b
copies of any written representations received in response to the consultation under subsection (8)(a).
11
A request under subsection (7) must include—
a
a document setting out—
i
an explanation of the change sought by the proposed exercise of the power, and
ii
the reasons for seeking the change,
b
copies of any written representations received in response to the consultation under subsection (8)(a), and
c
except where the requester is the Lord President, written confirmation of the Lord President’s agreement to the making of the request.
12
As soon as reasonably practicable after making a request under subsection (7), the requester must publish the documents included with the request in such manner as the requester considers appropriate (having regard to the desirability of the documents being accessible to those likely to have an interest in them).
13
In subsection (3)(a), a “qualifying individual” has the meaning given in section 39(10).
14
Regulations under subsection (2)(c) are subject to the affirmative procedure.

Authorisation rules
42
1
For the purposes of this Part, the authorisation rules are rules about—
a
the procedure for becoming an authorised legal business, including (in particular)—
i
the making of applications,
ii
the criteria to be met by applicants,
iii
the determination of applications,
iv
the grant of authorisation,
b
the terms on which authorisation is granted including, in particular, the imposition of conditions or restrictions,
c
the circumstances in which conditions or restrictions may be imposed, varied or revoked in relation to the existing authorisation of a legal business,
d
the—
i
circumstances in which a legal business’s authorisation may or must be reviewed, suspended or withdrawn,
ii
circumstances in which an authorised legal business may surrender its authorisation,
e
the fees that are (or may be) chargeable by the regulator in connection with authorisation.
2
Rules made in pursuance of subsection (1)(a) to (d) must allow for review by the category 1 regulator of any decision made by it under the rules that materially affects an applicant for authorisation or (as the case may be) an authorised legal business.
3
Authorisation rules must—
a
state that an application for authorisation may be refused on the ground that the applicant appears to be incapable (for any reason) of complying with the regulatory scheme of the regulator,
b
provide for how a licensed provider may become an authorised legal business,
c
provide for grounds for suspension or withdrawal of authorisation where the legal business is breaching (or has breached) the regulatory scheme of the regulator or other rules of professional practice that apply to it,
d
set out how the fees that are chargeable in connection with authorisation are determined (which may be by reference to the financial performance of an authorised legal business or such other criteria as may be specified in the rules).
4
Authorisation rules may make provision about the effect on an authorisation (including a deemed authorisation under section 39(12) issued to a legal business which is a partnership or other unincorporated body of any change in the membership of the legal business.
5
Provision which may be made under subsection (4) includes provision for the authorisation of the legal business to be transferred where the legal business ceases to exist and another legal business succeeds to the whole or substantially the whole of its business.
6
Authorisation rules may include such further rules or arrangements as to authorising legal businesses for which provision is (in the category 1 regulator’s opinion) necessary or expedient.

Appeals in relation to authorisation decisions
43
1
An appeal against a relevant authorisation decision may be made to the sheriff by—
a
an applicant for authorisation under rules made in pursuance of section 42, or
b
an authorised legal business.
2
An appeal under subsection (1) must be made within the period of 3 months beginning with the later of—
a
the day on which the relevant authorisation decision is intimated to the applicant or, as the case may be, authorised legal business, or
b
where the relevant authorisation decision has been the subject of an internal appeal process of the category 1 regulator, the day on which the decision of the internal appeal is intimated to the applicant or, as the case may be, the authorised legal business.
3
A relevant authorisation decision is a decision taken under authorisation rules made in pursuance of this Part to—
a
refuse an application for authorisation of a legal business,
b
impose, vary or revoke conditions or restrictions in relation to its authorisation, or
c
suspend or withdraw its authorisation.
4
In the appeal, the sheriff may—
a
uphold, vary or quash the decision,
b
make such further order (including for the expenses of the parties) as is necessary in the interests of justice.
5
The sheriff’s determination in the appeal is final.

Practice rules
44
1
For the purposes of this Part, the practice rules are rules about—
a
the—
i
operation and administration of authorised legal businesses,
ii
standards to be met by authorised legal businesses,
b
the operational positions within authorised legal businesses,
c
accounting and auditing,
d
professional indemnity,
e
the making and handling of any complaint about an authorised legal business,
f
the measures that may be taken by the regulator, in relation to an authorised legal business, if—
i
there is a breach of the regulatory scheme of the regulator, or
ii
a complaint referred to in paragraph (e) is upheld.
2
Without limit to the generality of subsection (1), practice rules must—
a
require authorised legal businesses to—
i
comply with the regulator’s ALB rules and the terms on which authorisation is granted including, in particular, any conditions or restrictions which have been imposed in relation to the authorisation,
ii
adhere to the professional principles,
iii
have proper accounting and auditing procedures,
iv
have sufficient arrangements for professional indemnity, and
v
co-operate with reviews of, and investigations into, their performance,
b
include provision that it is a breach of the ALB rules for an authorised legal business to fail to comply with—
i
its duties under this Part, and
ii
duties under any other enactment specified in the scheme, and
c
allow an authorised legal business to make representations to the regulator before the regulator takes any of the measures available to it under the rules.
3
Practice rules may include such further arrangements as to the professional practice, conduct or discipline of authorised legal businesses for which provision is (in the regulator’s opinion) necessary or expedient.

Financial sanctions
45
1
Practice rules made in pursuance of section 44(1)(f) may provide for—
a
the imposition of a financial penalty,
b
the withdrawal of the imposition of a financial penalty if the regulator considers that it would not be reasonable to seek (or to continue to seek) payment of the financial penalty.
2
The Scottish Ministers may by regulations specify the maximum amount of a financial penalty that may be imposed by virtue of subsection (1).
3
A financial penalty imposed by virtue of this section is payable to the Scottish Ministers (but the regulator may collect it on their behalf).
4
Where a regulator collects a financial penalty imposed on an authorised legal business under subsection (3), the regulator may—
a
retain a sum to be deducted from the amount payable to the Scottish Ministers under subsection (3) in respect of any expenditure reasonably incurred by the regulator in collecting the penalty, or
b
recover from the authorised legal business any expenditure reasonably incurred by the regulator in collecting the penalty.
5
At any time a regulator may discontinue collection of a financial penalty imposed by virtue of this section where the regulator considers it would not be reasonable in the circumstances for the regulator to attempt or continue to attempt collection.
6
Subsection (5) does not prevent the regulator from, in circumstances where it has discontinued attempts to collect a financial penalty, resuming such attempts where the regulator considers it is reasonable in the circumstances to do so.
7
An authorised legal business may appeal against a financial penalty (or the amount of a financial penalty) imposed on it by virtue of this section—
a
to the sheriff,
b
within the period of 3 months beginning with the date on which the penalty is intimated to it.
8
Where an appeal is made under subsection (7), no part of the penalty requires to be paid before the appeal is determined or withdrawn.
9
In the appeal, the sheriff may—
a
uphold, vary or quash the decision,
b
make such further order (including for the expenses of the parties) as is necessary in the interests of justice.
10
The sheriff’s determination in the appeal is final.
11
Before making regulations under subsection (2), the Scottish Ministers must—
a
consult—
i
the regulatory committee (if any) of each category 1 regulator,
ii
each category 1 regulator that has no functions other than regulatory functions, and
iii
such other person or body as the Scottish Ministers consider appropriate, and
b
publish copies of any written representations received in response to the consultation in such manner as they consider appropriate (having regard to the desirability of the documents being accessible to those likely to have an interest in them).
12
Regulations under subsection (2)—
a
are subject to the negative procedure, and
b
may not be made without the agreement of the Lord President.

Reconciling different rules
46
1
The provision required by section 41(2)(b) to be in the ALB rules is such provision as is reasonably practicable (and appropriate in the circumstances) for—
a
preventing or resolving regulatory conflicts, and
b
avoiding unnecessary duplication of regulatory rules (for example, by applying existing regulatory rules in so far as possible).
2
For the purposes of this section, a regulatory conflict is a conflict between (any of)—
a
the ALB rules of a category 1 regulator,
b
any other professional or regulatory rules made by the regulator in respect of the persons who provide legal services that it regulates, and
c
any professional or regulatory rules made by any other body which regulates the provision of legal or other services by the persons regulated by the category 1 regulator.
3
The Scottish Ministers may by regulations make further provision about regulatory conflicts (such as may involve a category 1 regulator).
4
The Scottish Ministers may exercise the power to make regulations under subsection (3) only if they have received a request from—
a
the Lord President,
b
the regulatory committee of a category 1 regulator,
c
a category 1 regulator that has no functions other than regulatory functions, or
d
the independent advisory panel of the Commission.
5
Before making a request under subsection (4), the person making the request (“the requester”) must—
a
consult—
i
the regulatory committee (if any) of each category 1 regulator,
ii
each category 1 regulator that has no functions other than regulatory functions,
iii
the independent advisory panel of the Commission, and
iv
such other person or body as the requester considers appropriate, and
b
except where the requester is the Lord President, secure the Lord President’s agreement to the making of the request.
6
But a body mentioned in subsection (5)(a)(i) to (iii) does not need to be consulted if the body is the requester.
7
For the purpose of seeking the Lord President’s agreement under subsection (5)(b), the requester must provide to the Lord President—
a
a document setting out—
i
an explanation of the change sought by the proposed exercise of the power, and
ii
the reasons for seeking the change,
b
copies of any written representations received in response to the consultation under subsection (5)(a).
8
A request under subsection (4) must include—
a
a document setting out—
i
an explanation of the change sought by the proposed exercise of the power, and
ii
the reasons for seeking the change,
b
copies of any written representations received in response to the consultation under subsection (5)(a), and
c
except where the requester is the Lord President, written confirmation of the Lord President’s agreement to the making of the request.
9
As soon as reasonably practicable after making a request under subsection (4), the requester must publish the documents included with the request in such manner as the requester considers appropriate (having regard to the desirability of the documents being accessible to those likely to have an interest in them).
10
Regulations under subsection (3) are subject to the negative procedure.

Monitoring of performance of authorised legal businesses
47
1
A category 1 regulator is to carry out a review of the performance of an authorised legal business—
a
at such time or in such circumstances as the regulator considers appropriate, or
b
when requested to do so by the Lord President.
2
A review under this section may (in particular) examine—
a
the authorised legal business’s compliance with—
i
its duties under this Act and any other enactment,
ii
the terms on which its authorisation is granted including any conditions or restrictions imposed in relation to the authorisation,
b
the financial sustainability of the business,
c
such other matters as the regulator considers appropriate.
3
A request for the review of an authorised legal business under subsection (1)(b) must—
a
set out, by reference to the matters that may be reviewed, why the Lord President considers a review appropriate, and
b
be copied to the authorised legal business which is to be reviewed.
4
When conducting a review of an authorised legal business, a category 1 regulator may—
a
require the business to produce any relevant document or other information (either at the business’s premises or otherwise),
b
interview any person who owns, is employed by, or is otherwise involved with the business.
5
Following a review, the category 1 regulator must—
a
prepare a report on its review, and
b
send a copy of its report to—
i
the authorised legal business, and
ii
if the review was requested under subsection (1)(b), the Lord President.
6
Before finalising the report, the category 1 regulator must—
a
send a draft of the report to the authorised legal business, and
b
give it a reasonable opportunity to make representations about—
i
the findings of the report, and
ii
any action the business may be required to take or steps that may be taken by the regulator as a result of the review.

Miscellaneous

Law Society of Scotland
48
1
The Law Society must prepare its ALB rules in accordance with section 41 within such period (not exceeding 3 years from the date on which this section comes into force) as it may agree with the Lord President.
2
But the Law Society’s ALB rules are invalid unless they have the prior approval of the Lord President.
3
The Law Society may use its powers to make rules under the 1980 Act to make the rules necessary to comply with its duties as a category 1 regulator under this Part.
4
Part 2 of schedule 1 contains provision amending the 1980 Act in respect of the Law Society’s functions of authorising and regulating legal businesses.

Entities changing regulatory regime
49
1
Subsection (2) applies where a licensed provider becomes an authorised legal business.
2
The licensed provider is deemed, by virtue of this subsection, to continue to be so licensed from that time until the earliest of the following events—
a
the end of the period of 90 days beginning with the day on which that time falls,
b
the time from which the relevant category 1 regulator determines this subsection is to cease to apply to the provider, or
c
the time when the provider ceases to be an authorised legal business.
3
Subsection (4) applies where an authorised legal business becomes a licensed provider.
4
The authorised legal business is deemed, by virtue of this subsection, to continue to be so authorised from that time until the earliest of the following events—
a
the end of the period of 90 days beginning with the day on which that time falls,
b
the time from which the approved regulator that regulates (or regulated) the licensed provider determines this subsection is to cease to apply to the authorised legal business, or
c
the time when the authorised legal business ceases to be a licensed provider.
S. 38 not in force at Royal Assent, see s. 103(3)
S. 39 not in force at Royal Assent, see s. 103(3)
S. 40 not in force at Royal Assent, see s. 103(3)
S. 41 not in force at Royal Assent, see s. 103(3)
S. 42 not in force at Royal Assent, see s. 103(3)
S. 43 not in force at Royal Assent, see s. 103(3)
S. 44 not in force at Royal Assent, see s. 103(3)
S. 45 not in force at Royal Assent, see s. 103(3)
S. 46 not in force at Royal Assent, see s. 103(3)
S. 47 not in force at Royal Assent, see s. 103(3)
S. 48 not in force at Royal Assent, see s. 103(3)
S. 49 not in force at Royal Assent, see s. 103(3)