Once your firm is accredited to carry out probate work, it is essential to undertake a review of your firm’s eligibility on a regular basis.
Our quality assurance team which monitors probate accredited firms, has identified that the majority of non-compliance issues with the Probate Regulations relate to the eligibility of firms to carry out probate work. These non-compliance issues include:
- changes to the structure of a firm;
- appointing new principals; or
- changes in shareholders/shareholdings.
You must notify us of any changes to the structure of your firm within 10 business days. The annual return cannot be used for this purpose. It is a requirement of the Probate Regulations (Regulation 2.7) to inform ICAEW of any changes within this time period. This includes changes relating to the structure of the practice, the principals, the HOLP, HOFA, shareholders and non-authorised persons. It is also the role of the firm to ensure all required application forms are submitted appropriately when they are required.
If your firm is considering the appointment of a new principal, incorporating the firm, or changing the structure and or ownership of the firm, it could have an impact on eligibility. Please discuss the implications of any intended changes with our regulatory support team regulatorysupport@icaew.com.
For probate work, it is important to remember these points. Please review your eligibility against these on a regular basis.
- In a probate authorised firm, all the principals and owners of the firm are individually authorised to carry out probate work.
- In a licensed firm (also known as an alternative business structure or ABS), not all principals or owners are authorised for probate. Although at least one principal, either an individual or a corporate entity, must be authorised.
Authorised firms must ensure:
- all principals and/or shareholders are authorised to conduct probate work; and
- non-authorised persons do not control 10% or more of the voting rights of the company/LLP/other body.
Licensed firms must:
- appoint a Head of Finance and Administration (HoFA) and/or a Head of Legal Practice (HoLP) – if the individual who holds this role is changed then an application form must be submitted prior to the appointment of the new role holder;
- ensure principals hold probate affiliate status if they are not an accredited probate firm, a registered auditor, a DPB (Investment Business) licensed firm, an ICAEW member, ICAS member, CAI member, member of another approved regulator or already hold affiliate status under the Audit, DPB, Insolvency, Lisenced Practice or PA Regulations;
- ensure only principals and employees of a firm are authorised individuals. We can’t licence sub-contractors or consultants; and
- ensure all non-authorised persons holding a material interest under Probate regulation 6.2 have been approved by ICAEW prior to the interest being obtained (this includes a person holding at least 10% of the shares in a parent body of the regulated firm).
- When considering large or investment structures, please see further information in our guidance on probate investment structures.
Note, the below case studies only consider a firm’s probate eligibility. Changes in structures could have other eligibility considerations (eg, audit, DPB, member firm status and use of the Chartered Accountants description). Please contact our regulatory support team, regulatorysupport@icaew.com to discuss the implications of any intended changes to your firm’s structure.
Case studies
Joint shareholders
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Example
A principal in a probate firm holds his shares jointly with his wife. He is the first named shareholder. His wife is not a non-authorised owner (NAO).
Both named shareholders are deemed to hold the shares jointly. If the shareholding is 10% or more, both joint shareholders will be considered as having a material interest. The principal’s wife, in this scenario, would need to apply to be a NAO in order for the firm to remain eligible to provide probate services.
Who needs NAO status in a holding company?
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Example 1
The firm submitted an application for probate authorisation dated 9 December 2015, which referred to there being three shareholders, each holding 1/3 of the voting rights. The firm has two directors who are both authorised individuals.
On 6 April 2016, while the application was still in progress, the firm lodged a Confirmation Statement with Companies House showing a transfer of shares so that one individual held 50%, with the other 50% held by a limited company. The limited company has one director and the shareholding is split equally between the director and four other family members (20% each). Each family member therefore indirectly has a 10% shareholding (a material interest) in the probate firm.
The share transfer resulted in a non-authorised person having 10% or more of the voting rights in the probate entity. It was concluded that the firm was not eligible to be authorised.
The proposed resolution
The limited company promptly passed a special resolution to restrict the voting rights to ICAEW probate authorised individuals on 15 March 2019.
This was initially deemed acceptable on the basis that regulation 2.2b states ‘in the case of a corporate body (other than a limited liability partnership) each person who has an interest in the firm is an authorised person (authorised by ICAEW under these regulations or by another approved regulator) and if another body has an interest in the firm, non-authorised persons are entitled to exercise, or control the exercise of, less than 10% of the voting rights in that other body.’
The special resolution passed following the visit, therefore seemed to ensure that non-authorised persons are entitled to exercise, or control the exercise of less than 10% of the voting rights in that other body. In fact they control 0% of the voting rights with all voting rights in the hands of the two AIs.
The complication
Definition of a ‘person’ under the Legal Services Act 2007
‘Person’ includes a body of persons (corporate or unincorporate)
Following legal advice, Probate Regulation 2.2 reflects the eligibility criteria set out for ABS/licensed firms in s72 of the Legal Services Act 2007 in reverse/mirror form. The LSA 2007 defines a ‘person’ as including a body of persons (corporate or unincorporate). As such, if all ‘persons’ in an authorised firm have to be authorised, the limited company would need to be authorised in order for the Probate firm to be authorised.
For the purpose of Probate Regulation 2.2(b), the reference to ‘less than 10% of voting rights in that other body’ is a reference to the voting rights in the limited company as shareholder, rather than the probate firm.
The outcome
The probate firm is not eligible for authorisation and needs to reapply for a licence. This is on the basis that 80% of the shares held in its shareholder company, are held by non-authorised persons (NAPs) contrary to Probate Regulation 2.2(b).
The limited company shareholder needs to apply to be a non-authorised owner of that licenced body.
Employee authorised individuals
The Probate Regulations stipulate that only principals and employees of a firm are eligible to become ‘authorised individuals’, not subcontractors or consultants. The regulations go on to define an employee as ‘Anyone who carries out work for an accredited probate firm, but excluding a principal, a subcontractor or a consultant.’
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Example 1
Firm A sub-contracts with an ex-principal for the provision of probate services. On the application the firm states that there will be two AIs, one principal and one employee. The firm never gets round to issuing the sub-contractor with a contract of employment and as such the individual was not eligible to undertake probate services.
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Example 2
Firm B sets up a separate limited company in which to undertake regulated probate work. The probate entity has one principal (an AI) and has one ‘employee’ AI. Firm B employs all staff, with staff utilised for the provision of services across both the main firm (firm B) and the probate entity.
In this instance the employee AI met the definition of an employee because they carried out work for an accredited probate firm and were not a subcontractor or a consultant.
In such a situation, it is recommended that a services agreement be put in place between Firm B and the probate entity which sets out responsibilities etc. (although the firm should speak to a lawyer about what such an agreement needs to say to ensure the individuals don’t fall foul of employment law issues).
Licenced or authorised?
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Example 1
A limited company with a sole director/shareholder was authorised by ICAEW for the provision of probate services in 2017.
In 2019 we identified the principal had changed the shareholding, giving 25% to his wife, who has no accountancy background and no active involvement in the day to day business of the firm.
Since an authorised firm requires all principals and/or shareholders to be authorised to conduct probate work, the firm ceased to be eligible following the share transfer. The firm needs to either:
- remove the shares from the non-authorised shareholder;
- the shareholder needs to obtain a probate qualification and become authorised;
- or the firm needs to reapply as a licenced firm, with the shareholder, in this instance, applying as a NAO, due to holding a material interest.
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Example 2
A limited company with a sole director/shareholder was authorised by ICAEW for the provision of probate services in 2016.
In 2018 we identified that an additional director had been appointed six months after the firms became authorised. The new director also held 5% of the shares/voting rights.
Since an authorised firm requires all principals and/or shareholders to be authorised to conduct probate work, the firm ceased to be eligible following the appointment of the new director. The new director either needs to obtain a probate qualification and become authorised or the firm needs to reapply as a licenced firm. In this instance the new director would not need to apply for NAO status, as they do not hold a material interest.
Dual registration
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Example
Firm A advised they are to be regulated by ACCA. Under Probate Regulation 2.2(b), a firm can only be authorised by a single regulator, therefore their registration with ICAEW would cease as soon as another licensing authority licenses the firm.
In this situation Firm A needs to consider the implications for any active probate clients and the potential need to reissue terms of engagement to appropriately address their requirements to notify clients of matters such as their complaints procedures and details of their registration under the Provision of Services Regulations.
Voting vs non-voting shares
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Example
Directors who own the company’s 300 voting shares control a licensed firm. In addition to this, following the firm’s application, the firm issued 110,000 non-redeemable preference shares to two other non-member owners.
The firm needs to apply for these two non-member owners to be NAOs as the regulation 6.2 states ‘A person holds a material interest in a body (B) if the person:
- holds at least 10% of the shares in B;
- is able to exercise significant influence over B’s management by virtue of the person’s shareholding in B;
- holds at least 10% of the shares in a parent undertaking (P) of B;
- is able to exercise significant influence over P’s management by virtue of the person’s shareholding in P;
- is entitled to exercise, or control the exercise of, voting power in B which, if it consists of voting rights, constitutes at least 10% of the voting rights in B;
- is able to exercise significant influence over B’s management by virtue of the person’s entitlement to exercise, or control the exercise of, voting rights in B;
- is entitled to exercise, or control the exercise of, voting power in P which, if it consists of voting rights, constitutes at least 10% of the voting rights in P; or
- is able to exercise significant influence over P’s management by virtue of the person’s entitlement to exercise, or control the exercise of, voting rights in P.
In this example, the firm will need NAO applications for the two new shareholders. It will need to apply to ICAEW for a Practice Assurance contract so that ICAEW continues to be the firm’s AML supervisor. This is because it no longer meets the member firm definition.
It will also need to cease using the Chartered Accountants description because, in both instances, the members and chartered accountants respectively hold less than 50% of the aggregate in nominal value of the voting and non-voting shares.