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Part 3 of the Schedule outlines practice requirements.

213.     Licensing rules must cover four basic practice requirements:

  • under paragraph 15 a licensed body that is not a company or limited liability partnership with its registered office in England or Wales must have a practising address which is a place in England & Wales where the body carries out some or all of the reserved legal activities for which it is licensed,

  • under paragraph 16 licensed activities may be carried on only by or under the supervision of entitled persons,

  • under paragraph 18 disqualified persons may not work in licensed bodies as employees or officers; and

  • under paragraph 20 clients' money must be accounted for.

214.     Paragraph 17 requires licensing rules to require licensed bodies to have suitable arrangements in place to ensure that:

  • they, and their managers and employees, comply with the duties in clause 177,

  • they, and such of their managers and employees as are authorised persons, maintain the professional principles set out in clause 1; and

  • non-authorised persons subject to the duty in clause 90 comply with it.

215.     Paragraph 19 provides that for the purpose of giving effect to indemnity and compensation arrangements, licensing rules may make provision authorising or requiring funds to be maintained by the licensing authority, insurance to be taken out by the licensing authority, or insurance to be taken out by licensed bodies.

216.     Under paragraph 21 of the Schedule, all licensed bodies must pay periodic licensing fees, although different fees can be set for different kinds of body.

     217.     Part 4 of the Schedule covers a number of areas of regulation of licensed bodies that are described in connection with the relevant clauses to which they relate.

     Clause 84: Application for licence

218.     This clause sets out the way licensing authorities must deal with applications for licences. Licensing authorities must determine applications that come from licensable bodies with the required fee and may not grant an application unless they are satisfied that the body will comply with licensing rules. Under subsection (4) licensing authorities must issue the licence as soon as reasonably practicable after the application has been granted and under subsection (5) the licence has effect from that date. Applications for licences may only be made to the Board (acting in its non- licensing authority capacity) under Schedule 12.

219.     The Schedule deals with the limited circumstances in which licensable bodies can apply to the Board for a licence:

  • there is no competent licensing authority, and none that is potentially competent (paragraph 1(3)) - "competent" and "potentially competent" are defined in paragraphs 5 and 6 as an approved licensing authority that is designated or which the Board anticipates becoming designated in relation to the reserved legal activities that the body proposes to carry out,

  • no licensing authority or potential licensing authority has or plans to have suitable regulatory arrangements (paragraph 1(4)). Licensable bodies can apply to licensing authorities for determinations of this ground under paragraph 3, and paragraph 7 defines the factors to be taken into account in considering whether arrangements are suitable, or

  • if the body is of a kind listed in paragraph 1(6) (not for profit bodies, community interest companies, trade unions and prescribed bodies), no licensing authority has terms that are appropriate to it (paragraph 1(5)).

220.     Paragraph 2 then specifies that the Board must determine whether the licensable body is entitled to apply to it for a licence and give reasons for its decision. Different timescales for the determination apply to each of the grounds (sub-paragraph (2)). The Board is obliged to make rules providing for a review of its decision, in particular for cases where the ground for its decision no longer applies (sub-paragraphs (4) and (5)).

     Clause 85: Terms of licence

221.     This clause prescribes the terms of licences when they are granted. Every licence must specify the reserved legal activities that the licensed body is licensed to carry on, and any conditions attached to the licence, (subsection (1)). Under subsections (4) and (5) one condition is obligatory: that the licensed body or any employee, manager etc., must comply with obligations imposed on them by the licensing rules or in legislation. The licensing authority may impose such other conditions as it considers appropriate (subsection (6)), including conditions as to the non-reserved activities that a licensed body may carry out (subsection (7)). If the body is one for which an order has been made under clause 106, subsection (2) requires the licence also to set out the terms of the order.

     Clause 86: Modification of licence

222.     This clause provides for modification of licences where an application is made in accordance with licensing rules or where licensing rules allow modifications to be made in other circumstances (subsection (1)). Under subsection (3) modifications are made by notice in writing. Under subsection (4) licensing authorities' powers are subject to the constraints as to conditions set out in clause 85 and licensing rules about modification of licences.

     Clause 87: Registers of licensed bodies

223.     This clause sets out requirements for registers of licensed bodies. Each licensing authority must keep a register of the names and places of business of all the bodies that it licenses or has licensed (subsection (1)) and must make a note of any suspensions in that register (subsection (2)). The register must be available for inspection free of charge, during office hours (subsection (3)). The Board may make other rules about its own and licensing authorities' registers, in particular about other information that registers should contain (subsections (4) and (5)).

     Clause 88: Evidence of status

224.     Under this clause a signed certificate of a licensing authority stating that a person does or does not, or did or did not, hold a licence granted by the licensing authority, is evidence of those facts unless proved otherwise.

     Clause 89: Ownership of licensed bodies

225.     Schedule 13, introduced by this clause, deals with the ownership of licensed bodies. Clause 105 provides that this Schedule does not apply to trade unions.

226.     Schedule 13 imposes restrictions on the holding of certain types of interests in licensed bodies ("restricted interests") by non-authorised persons. Any non-authorised persons holding, or seeking to hold, restricted interests, must be approved by the licensing authority before the body can be licensed. Once the body is licensed any further acquisition or holding of restricted interests by non-authorised persons must also be approved.

227.     The main type of restricted interest is a material interest (Schedule 13, paragraph 3), which arises when a person:

  • has an interest in at least 10% or more of the shares in it or in its parent company;

  • can exercise or control the exercise of 10% of the voting rights in (or, in some cases, has power to direct the policy of) it or its parent company; or

  • can exercise significant influence over the management of the company or its parent company by virtue of their shareholding or voting power in it.

228.     If they wish, licensing authorities can make licensing rules specifying a lower proportion than 10% for defining material interest (paragraph 3 (2)).

229.     Licensing rules may provide for a second type of restricted interest, a "controlled interest". This is a shareholding in the licensed body or a parent undertaking of a percentage specified in licensing rules, or an entitlement to exercise or control the exercise of voting power in a licensed body or parent undertaking of a percentage specified in licensing rules. Licensing rules may only specify a percentage which exceeds the percentage which constitutes material interest.

230.     For the purposes of deciding whether a person has material interest or a controlled interest in a licensed body, account may be taken of interests held by a person's associates, who are defined in paragraph 5. The Lord Chancellor has power in paragraph 9 to change the definitions of "material interest" and "associate", on the Board's recommendation.

231.     Paragraph 6 sets out the approval requirements. A non-authorised person's holding of a restricted interest will be approved if the licensing authority is satisfied that it would not compromise the regulatory objectives or compliance by the licensed body and such of its managers and employees who are authorised persons with the duties in clause 177. The licensing authority must also be satisfied that the person is a fit and proper person to hold the interest. Licensing rules must include criteria and procedure for making this decision.

232.     Paragraph 7 provides that if a person holds a restricted interest by virtue of holding a certain percentage of a body's shares or controlling a certain percentage of the voting power in a body, any restricted interest held by virtue of a lesser percentage of shares (where the approved interest is in the form of shares) or voting power (where the approved interest is in the form of voting power is also treated as being approved by the licensing authority. For example, If the material interest threshold is a 10% shareholding and the controlled interest threshold is a 20% shareholding, a person who is approved to hold a controlled interest will also be approved in relation to the material interest.

233.     Part 2 covers the identification to licensing authorities of non-authorised persons, and the approval of those persons. At the initial licensing stage, a body seeking a licence must identify any person that it knows holds a restricted interest or expects to hold one when the licence is issued, (paragraph 10(1) and (2)). This includes telling the licensing authority if the identities of such people change after the application has been made (paragraph 10(2)). Failing to do so is an offence, punishable on summary conviction by a fine up to level 5.

234.     Under paragraph 13 the applicant body must also notify the non-authorised persons whom it has identified to the licensing authority. Failure to do this is also an offence, punishable in the same way. The notification must explain the effect of paragraph 14, which enables the licensing authority to seek more information from non-authorised persons who have been identified. The deliberate provision of false or misleading information is an offence, punishable by a fine not exceeding the statutory maximum on summary conviction or by a fine and/or two years in prison on conviction on indictment.

235.     If the licensing authority is satisfied that the non-authorised person meets the approval requirements in paragraph 6, and that the person has not been disqualified, it may grant the application for a licence. The licensing authority may also approve the holding of the interest subject to conditions (paragraphs 17 and 18), or it may object to the holding of the interest (paragraphs 19 and 20).

236.     After a licence has been granted, the acquisition of interests by non-authorised persons is still regulated in the manner set out in Part 3 of the Schedule. Under paragraph 21, if an investor intends to take steps to acquire an interest in a licensed body that would give the investor a restricted interest in it, the investor must notify both the licensed body and the licensing authority. Where the investor acquires an interest without taking steps to do so - for instance, by inheriting it - the investor must give the notifications within a time limit set by the Lord Chancellor on the Board's recommendation. Under paragraphs 22 and 23, failure to give notification is an offence, punishable on summary conviction by a level 5 fine. Taking a proposed acquisition step without obtaining approval from a licensing authority is also an offence, punishable by a fine not exceeding the statutory maximum on summary conviction or by an unlimited fine and/or two years in prison on conviction on indictment (paragraph 24).

237.     Again, the licensing authority may approve the holding of the interest, approve it subject to conditions, or object to it. The procedure and criteria for this are set out in paragraphs 25 to 32. Where the licensing authority approves a proposed interest (with or without conditions) it may specify a period within which the investor must acquire it. If it does not, the period is automatically one year from the date of the approval notice. If the investor does not acquire the interest by the deadline, the approval lapses (paragraph 30).

238.     The licensing authority also has power to impose conditions on, or object to the holding of an interest after it has been acquired. The procedure and criteria for this are set out in paragraphs 33 to 37.

241.     Conditions imposed under either paragraph 28 or paragraph 33 may be varied or waived on application by the investor, (paragraph 35(1)). In addition, the licensing authority may cancel a condition on its own initiative, (paragraph 35(2).

239.     Part 4 of the Schedule enables licensing rules to be made specifying an upper "ceiling" limit for the holders of shares in licensed bodies by a non-authorised person. If such a limit is imposed, no non-authorised person may exceed it, regardless of whether or not they meet the approval requirements at paragraph 6.

240.     Part 5 of the Schedule deals with enforcement. The "divestiture" provisions enable the court, on application of a licensing authority, to order the sale of shares held by a person who holds an interest in a licensed body. This may be done in the following circumstances:

  • where an investor has taken steps to obtain an interest without the licensing authority's approval - this can lead to divestiture even if the investor has not been charged with or convicted of the offence under paragraph 24,

  • where an investor holds a restricted interest in breach of conditions imposed under paragraphs 17, 28 or 33, and

  • where an investor holds an interest to which the licensing authority has objected under paragraphs 31 or 36.

     The court may also order the sale of shares where a non-authorised person's shareholding exceeds any ceiling imposed by licensing rules made under Part 4.

241.     Divestiture is limited by paragraph 41 to licensed bodies that are companies with shares. The number of shares the court may order to be sold is limited - essentially only as many as necessary to ensure that the person is no longer in breach of the requirements of the Schedule (paragraph 46(2) and (3)). If the court orders shares to be sold, it may make whatever other orders it sees fit as to the sale or transfer of the shares (paragraph 46(6)). The proceeds of sale have to be paid into court for the benefit of whomever is beneficially interested in them - usually the investor - and any such person may apply for part or all of the proceeds. The cost of conducting the sale is first deducted from the proceeds (paragraph 47 (7)).

242.     Where the conditions for divestiture are satisfied, paragraph 45 allows the licensing authority to issue a restriction notice imposing certain restrictions on share. It is expected that a restriction notice will be issued when the licensing authority believes that it must act as a matter or urgency before an application for divestiture to the High Court. The restrictions which may be imposed are:

  • any transfer of the shares or agreement to transfer them is void (including transfer of the right to receive unissued shares),

  • the shares' voting rights cannot be exercised,

  • no further shares can be issued to the investor, or

  • the investor cannot be paid any sums due on the shares (dividends etc), unless the company goes into liquidation.

243.     A restriction notice ceased on a High Court order (the court may make such an order on an application for sale of the shares), the expiry of a period prescribed in rules of when the licensed body ceases to be licensed.

244.     The court may also remove any restrictions imposed under paragraph 45, set out in paragraph 46(4).

245.     Divestiture will not always be possible. Paragraph 47 provides an alternative mechanism for enforcement in a case where a person holds a restricted interest in breach of any conditions imposed on the holding of that interest. The licensing authority may apply to the High Court for an order enforcing the conditions.

246.     Paragraphs 48 to 51 provide for the Board to be notified of decisions under this Schedule to object to a person holding an interest, or to impose conditions on their holding it. Paragraph 52 requires the Board to maintain lists of persons who have been subject to objections and conditions, which will be available to licensing authorities and, will enable them to make informed regulatory decisions.

Clause 90: Duties of non-authorised persons

Clause 177: Duties of regulated persons

247.     Clause 90 imposes a duty on non-authorised persons who are employees or managers of, or have certain interests in, a licensed body, not to do anything that would cause or substantially contribute to a breach by the licensed body or an authorised person within it of the duties on clause 177. Clause 177 requires persons regulated by an approved regulator to comply with the regulatory arrangements of that regulator.

Clause 91: Duties of Head of Legal Practice

Clause 92: Duties of Head of Finance and Administration

248.     Clauses 91 and 92 describe the duties of the HoLP and HoFA respectively, further provision about these roles is made in Schedule 11. The HoLP must take all reasonable steps to ensure compliance with the terms of the licensed body's licence, and that the licensed body and employees or managers of the body who are subject to the duties under clause 177 comply with them, and to ensure that non-authorised persons comply with the duty under clause 90. The HoLP must report any failures to do so to the licensing authority as soon as reasonably practicable.

249.     The HoFA's duty under clause 92 is to ensure that the licensed body complies with the accounts rules in the licensing rules; they must, like the HoLP, report failures to do as soon as practicable. Subsection (2) of clause 91 therefore excludes accounts rules from the HoLP's responsibilities.

Clause 93: Information

Clause 94: Enforcement of notices under section 93

250.     These clauses deal with the information that a licensing authority may require from a licensed body and others to determine whether the terms of its licence are being complied with. The licensing authority may require information or documents (clause 93(1)) from the body itself and any manager, officer or employee, and from any non-authorised person who holds a material interest in the body, (subsection (2)). Requests for information are made by notice, which can specify the form in which the information is to be provided and set a deadline for doing so, and also inform the provider of the information to whom it must be provided, as set out in subsection (3).

251.     The licensing authority can require those persons, or a representative, to give an explanation of that material (subsection (4)). It may pay reasonable expenses to cover the cost of providing information and of attending to provide an explanation (subsection (5)). It may also copy or take extracts from any documents it receives (subsection (6)).

252.     If persons asked for information under clause 91 cannot provide it, they must give the licensing authority an explanation (clause 92, subsection (1)). If a person fails to comply with a request, the licensing authority may apply to the High Court for an order compelling that person to comply (subsection (2)).

     Clause 95: Financial penalties

253.     This clause allows licensing authorities to impose financial penalties for breaches of licences, up to a maximum set by the Board in rules made with the Lord Chancellor's consent. Penalties are payable to the licensing authority. Under paragraph 22 of Schedule 11, licensing rules must make provision as to the acts and omissions in respect of which the licensing authority may impose a penalty, and the criteria and procedure to be applied.

Clause 96: Appeals against financial penalties

254.     Licensed bodies may appeal to the relevant appellate body (defined in clause 111) against financial penalties. Appeals have to be made within a deadline set by the Board in rules. There are limited grounds for appeal, (subsection (2):

  • that the imposition of the penalty was unreasonable in the circumstances;

  • that the amount of the penalty was unreasonable; and

  • that the payment timetable was unreasonable.

255.     The appellate body can quash the penalty, reduce it, or change the payment timetable (subsection (3)). If it reduces the penalty or changes the timetable, it may add interest to the whole of the penalty or part of it (subsections (4) and (5)). Further appeals to the High Court on a point of law are possible under subsection (6), and the High Court can then make any order it thinks fit (subsection (7)). Subsection (8) prevents penalties being challenged by any other means.

     Clause 97: Recovery of financial penalties

256.     This clause describes the process for recovering financial penalties that have not been paid on time. In general, if a payment is late, and so long as no appeal is pending, it is recoverable as a civil debt under subsection (24). Interest is added automatically under subsection (1) and can be recovered alongside the basic penalty. All recovered penalties have to be paid into the Consolidated Fund (subsection (3)).

Clause 98: Referral of employees etc to appropriate regulator

257.     This clause allows licensing authorities to refer the conduct of licensed bodies' employees, managers, HoLPs and HOFAs to appropriate regulators - any relevant approved regulators for authorised persons, and any other regulator for persons who are not. The licensing authority may also refer such conduct matters to the Board.

     Clause 99: Disqualification

258.     This clause provides that people can be disqualified from being employees, or managers of licensed bodies, or from holding the HoLP or HoFA posts, if they breach the duties that the Bill places on them or cause or contribute to breaches of the body's licence.

259.     Under paragraph 23 of Schedule 11, licensing authorities must have rules about the criteria and procedure to be used when considering whether to disqualify someone under this clause. This includes rules for reviewing disqualifications and how to determine whether they should cease to have effect.

     Clause 100: Lists of disqualified persons

260.     This clause requires the Board to keep lists of persons who are disqualified under section 99 and whose disqualifications remains in force. Subsection (3) provides that a disqualification will no longer be in force if the appropriate licensing authority determines that it should not be, whether after a review or otherwise. If a person was disqualified by a regulator that is no longer a licensing authority, a successor authority can decide that the disqualification is no longer in force (subsection (4)). Under subsection (5), the successor authority is either the licensing authority that currently licenses the body where the disqualified person was working, or (if that is impossible) another authority designated for the purpose by the Board on the disqualified person's application. Subsection (6) requires the Board to publish the lists.

     Clause 101: Suspension and revocation of licence

261.     This clause provides that a licensing authority can suspend or revoke any licensed body's licence. Paragraph 24 of Schedule 11 requires licensing rules to empower the licensing authority to do this in the following circumstances:

  • paragraph 24, (3): if a body is no longer a licensable body,

  • paragraph 24, sub-paragraph (4): where the licensed body fails to comply with licensing rules, under paragraph 160 Schedule 11 (reserved legal activities must be carried on through an entitled person),

  • paragraph 24, (5): where non-authorised persons hold interest in licensed bodies in breach of Schedule 13,

  • paragraph 24(6): where a non-authorised person breaches the duties in clause 90,

  • paragraph 24(7): where an employee or manager who is an authorised person fails to comply with the duties under clause 177,

  • paragraph 24(8): where a licensed body has a manager or employee who was disqualified from acting a manager or employee, on specified grounds, and

  • paragraph 24, sub-paragraph (9): where a licensed body is unable to comply with the licensing rules about the HoLP or HoFA.

262.     A licensing authority must give at least 28 days notice of its intention to suspend or revoke a licence, in accordance with paragraph 24 (10) and (11).

263.     Paragraph 25 allows licensing authorities to make rules about other circumstances in which it may suspend or revoke a licence.

264.     Under paragraph 26 licensing rules must also include provisions about the criteria and procedure to be used when deciding on any suspension or revocation under paragraphs 24 or 25, and must provide for a review of that decision.

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Prepared: 18 May 2007