The Optima-Capita deal: how the SRA arrived at its ‘severe reprimand’
16 August 2010 | By Katy Dowell
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The creation of Optima Legal Services (OLS) in May 2006 marked the entry of the first non-legal services provider into the legal profession.
The decision by outsourcing giant Capita to invest in the firm kickstarted a relationship that was to capture the attention of the Solicitors Regulation Authority (SRA) for going too far, too soon.
The Legal Services Act (LSA), which will allow firms to take external investment to fund growth, will not come into force until at least October 2011. Nevertheless, in 2006 Optima began its venture in the alternative business structure (ABS) world after agreeing to take a series of loans from Capita to fund its growth.
In return OLS agreed to outsource its administrative, payroll, HR and IT services to Capita. That meant 234 staff were, in effect, employed by Capita, which then recovered the salary cost from Optima.
Last week the SRA “severely reprimanded” the firm over its relationship with Capita, stating “the arrangement was not indicative of an arm’s length transaction”. In effect, Optima had become the first ABS in the UK.
The firm was established in May 2006 when Capita supplied the financial backing for the OLS directors to buy the volume property arm of DLA Piper. Over the next three years Capita lent the firm in excess of £35m, enabling it to make a series of acquisitions, including Pathway, the volume legal property services division of Walker Morris in September 2006, and Dickinson Dees’ volume arm D3 Legal in November 2009.
Through its growth the firm built up an impressive list of clients, including Barclays Bank and LloydsTSB Group. At the 2008-09 year-end, OLS made its debut in The Lawyer’s UK 200, with a reported turnover of £30m.
The firm was one of a new breed looking to take advantage of the opportunities presented by the LSA. Getting close to Capita, a company familiar with providing volume outsourced services to major insurance companies and banks, must have seemed logical.
It would give the firm exposure to the technology essential for building a volume powerhouse with a decent profit margin, as well as access to new customers.
Capita, meanwhile, had expressed an interest in providing outsourced legal services since the LSA was debated by parliament. It made no secret of its ambition to invest in a firm and openly stated that it had a relationship with OLS.
Capita’s 2009 annual report clearly states: “The group has entered into an option agreement to acquire the shares of OLS for £1 in the event that the Law Society rules are amended to allow the group to own shares in this type of legal services company.”
The SRA began its investigation into the firm on 14 May 2007 and produced an initial report on its relationship with Capita on 28 May 2007. However, it was not until the end of 2009 that the regulator made clear its intentions on how it wanted the firm to proceed.
The Regulatory Settlement Agreement, which was not posted on the SRA website until 3 August 2010, agreed that the firm would restructure its business model and change its relationship with Capita. Under the terms of the agreement, the share options have been cancelled and OLS has agreed to absorb back into the firm the 234 staff who were outsourced to Capita.
Yet since 2006 the firm has experienced life under a major corporate. For many lawyers the proposition of outside investment is unattractive because it is perceived to dilute control of the firm.
The SRA found that Capita did indeed have too much control over Optima. Its loan facility was too ”onerous” on the firm and OLS’s “extensive” reporting obligations to Capita were in “excess of a normal commercial lender arrangement”. The regulator also found that five of the nine managers on the firm’s operational board, including former chief executive Adrian Lamb, were paid by Capita.
According to a source close to the firm, OLS had managed to build a successful ABS, reaped some reward from having a commercial backer, but also found it difficult to bridge the cultural divide between the firm and the corporate. It was then told to dismantle the ABS.
“If you’re not careful and you have so many people who are actually affiliated with another business, it becomes harder to run the firm,” the source said.
Yet another senior partner, whose firm has ambitions to move into the consumer market after the LSA comes into force, said: “Under the proposed ABS structure they’ve done nothing wrong - the clients haven’t been affected. This is an internal structural issue.
“It does make me more nervous about the next year. Here’s a processing house that’s been allowed to test its systems for three years without being regulated.”
While the firm’s two senior partners, Anthony Ruane and Philip Robinson, have felt the wrath of the SRA, the regulator did not rebuke Capita. SRA head of legal David Middleton said the regulator had the power to take action against non-solicitors such as Capita, but “each case must be tested against the requirements of that section, the seriousness of the alleged behaviour and the public interest”.
Neither Ruane nor Philips will be referred to the Solicitors Disciplinary Tribunal (SDT); instead, the firm has agreed to a Deed of Arrangement with the SRA which, it says, addresses the issues of most concern to the regulator.
Yet Capita has given no indication it is about to back away from the profession. In a statement released to The Lawyer last week, it acknowledged it went further than the rules allowed but added: “Optima continues to be a business in which we’re happy to invest.”
The full impact of the LSA will not be felt until some time until after next October. There is no denying the profession is in a state of change, with many firms considering how best to move forward.
Optima may have breached the rules, but it has gained the experience of working with a non-legal entity, and this will put it in a good position when the act comes into force.