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SRA comes down on Optima-Capita deal despite leading counsel giving green light to investment strategy
Volume powerhouse Optima Legal Services has been told to sever links with outsourcing giant Capita after the Solicitors Regulation Authority (SRA) found their relationship breached rules governing non-lawyer investment in firms.
Optima had been under investigation by the SRA since May 2007, but was only told at the end of 2009 that it had gone too far in its relationship with Capita and had to reorganise its structure.
Last week the investigation came to a formal end, with Optima’s lead litigation partner Philip Robinson and lead property partner Anthony Ruane being reprimanded by the regulator.
The pair escaped being referred to the Solicitors Disciplinary Tribunal because they took legal advice, including an opinion from a silk, before entering into the arrangement with Capita. In addition, the SRA said the pair had cooperated fully with the investigation.
Capita, meanwhile, has not been investigated because it is not regulated by either the SRA or the FSA in this area.
Optima was found to have set up an alternative business structure (ABS), with Capita providing a series of loans to the firm amounting to £35m. These were used to fund acquisitions, including the buyout of Dickinson Dees’ volume arm D3 Legal in November 2009.
In return for the loan, Optima outsourced its administrative, payroll, HR and IT services to Capita, meaning that 234 staff were effectively employed by the company, which then recovered the cost from Optima.
Capita also entered into a share option agreement to acquire Optima shares when, according to Capita’s 2009 annual report and accounts, “Law Society rules are amended to allow the group to own the shares in this type of legal company”.
“The arrangement was not indicative of an arm’s-length transaction,” the SRA countered in its report.
At the request of the SRA the share option arrangement has been terminated and Optima has agreed to pay back the loan. The 234 staff who moved across to Capita have been transferred back to Optima and members of Capita’s management who sat on Optima’s operational board have resigned.
Robinson said the firm’s clients, which include Barclays, Lloyds Banking Group and RBS, have been informed of the investigation’s outcome. “Tight regulation is the right thing for the profession,” he said. “The role of the lawyer is central and must remain so.”
A statement from Capita said: “The SRA has decided that, though that structure was entered into based on representations and legal advice, including that of leading counsel, it nonetheless went further than its guidelines suggest. Because of this, to cooperate with the SRA, Capita has restructured its part in Optima Legal’s outsourcing and funding arrangements.”
It added: “Optima continues to be a successful business in which we’re comfortable to invest.”
An SRA spokesman said: “This case is a stark warning to any firms that might be tempted to adopt the features of ABSs before the necessary consumer protections are in place. Solicitors who ignore the advice in this agreement do so at their peril. They may well find themselves before the Solicitors Disciplinary Tribunal.”