Optima reprimanded by the SRA over Capita investment
SRA comes down on Optima-Capita deal despite leading counsel giving green light to investment strategy
Anthony Ruane
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.”
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Readers' comments (21)
Rhubarb & Custard | 9-Aug-2010 8:58 am
SRA not really on the ball here - attacking a structure that the SRA itself will allow - and help regulate - from Oct 2011, meanwhile allowing law firms such as Halliwells to run riot in terms of how they were managed that did real damage to people and the profession. Seems to me the SRA is more worried about being a jobsworth-style, pedant over timelines than looking at truly negative behaviour of some law firms. Another own goal from the SRA and surely they could have come to a more sensible conclusion than dismantling the whole Optima deal?
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Anonymous | 9-Aug-2010 1:30 pm
So the sum total of this is the the SRA are saying "you cant do this - YET! - but if you wait 14 months you can" At least Optima have the benefit of now being at the forefront of ABS having been through it once.....
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Ex Optima Employee | 9-Aug-2010 1:41 pm
As an ex employee of this firm I can confirm that it did seem to me that Capita were all but running the show and I always had grave doubts as to the legality of the arrangement in the context of the profession as a whole.
This seems to be backed up by the ex CEO of Optima, Adrian Lamb putting in his linkedin profile that his previous employment position was CEO of Capita Group Plc Legal Services Division and with no mention whatsoever of Optima Legal Services.
Knowing what I do about Optima I am disappointed that the SRA only reprimanded the Partners on this occasion.
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Arewesuprised | 9-Aug-2010 1:54 pm
So the whole Optima multimillion pound empire was built on a mountain of debt and breaches of the solicitors rules.
I bet Anthony Ruane & Co must be really upset at the hefty penalty set down on them by the SRA.
Yes the SRA will allow and control ABSs from October 2011 but that is not an excuse for Optima to have run an ABS since 2007 when all the rest of the solicitors firms are trying to stick to the rules. We could all have cheated to build our empires and destroy the competition but some of us have more scruples
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Anonymous | 9-Aug-2010 4:18 pm
If anyone would like to invest £35m in my firm I think I can still scrape together the SRA £7K get out of jail free fee...
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Peter Rouse | 9-Aug-2010 4:18 pm
There is no suggestion it seems of any cause for concern regarding the legal services provided and that is both reassuring and supportive of the notion that such arrangements will soon be not only feasible but also unlikely to do any disservice to clients (there will be mistakes of course because humans are involved...and long may we remain so). Properly funded, properly managed...are these not among the shortcomings of traditional firms that the LSA was intended to address so as to provide a competitive market in which costs can come down without a decline in service?
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Tony Guise | 9-Aug-2010 4:32 pm
The SRA have serious issues to address in establishing a consistent and transparent policy for regulating solicitors firms in the pre-ABS environment. Their starting point that any firm borrowing money to finance itself compromises its indepedence thereby breaching Rule 1 is flawed. Many law firms borrow money, the critcism of this by the SRA overlooks commercial realities. Optima may have over-stepped the mark but many other firms have not and yet still find themselves engaging with the regulator in an unnecessary and costly debate about commercial convenience and professional propriety.
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Anonymous | 9-Aug-2010 4:35 pm
Peter Rouse is missing the point. These people are breaking the rules even before they are permitted to run an ABS. What chance has the public (who the rules are designed to protect) that they will comply with the rules in future?
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Anonymous | 9-Aug-2010 5:48 pm
Optima first came into being in 2006 funded by Capita. This has been going on for four years now. As a direct result of Capita's non arms length investment Optima have now grown to what their ex CEO (who we now find to have been employed for the last four years by Capita as the CEO of their Legal Services Division - (although they don't actually own up to having a Legal Services Division in their annual report)) proudly boasts to be "the largest volume legal services operation in the UK".
Hubris! Presumably Optima must have been made to provide evidence to the SRA of their actual ability to repay the loan to satisfy them of their solvency otherwise we could have another Halliwells scenario on our hands. I am lead to believe that they are already making cutbacks and that they might not be taking any trainees on next year. This is third hand info and as such I can't vouch absolutely as to its veracity.
One thing though, this quote from Capita suggests that they might resume the money drip at a later point “Optima continues to be a successful business in which we’re comfortable to invest.”.....
Lets hope the SRA will be monitoring the situation carefully.
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Anonymous | 9-Aug-2010 7:20 pm
Wasn't that long ago that Ruane was bragging about their set up being the only sustainable business model. Built to last..........we'll see.
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