Considering setting up your own authorised entity?

If you are thinking of setting up your own CILEx authorised entity, then I hope to either reassure you that you are well placed to submit your application or point out one or two areas that you may need to consider in more detail. Before you start completing an application form, can you say ‘yes’ to each of the following questions? Have you:

• developed a strong business plan?
• drafted an Office Manual to guide the firm through its regulatory obligations?
• carefully calculated the setting up and first year’s running costs?
• researched the cost of and types of insurance the firm will need?
• considered who will be the firm’s Compliance Manager and their level of knowledge and experience in practice and accounts management? So, let’s now have a look at some of these areas in more detail.

Developing a strong Business Plan

Whilst a strong Business Plan will of course aid the success of your application, its real strength is making you think about the elements affecting your practice and, thereby, help it to prosper; however, remember the old adage: ‘Quality not quantity’ and make it relevant to the size of your firm.

In developing your Plan, you should demonstrate that you understand:

• the strengths that will provide your firm with the ability to survive in a very competitive market;
• your firm’s weaknesses and how these can best be mitigated;
• the opportunities that are there for your firm to capitalise on; and
• the threats that exist and the actions you can plan to reduce them.

Crucially, focus on marketing. Some applicants produce a separate marketing plan, with a schedule of planned marketing activity, alongside their Business Plan. Whatever your approach, you need to demonstrate how you are going to reach suÿcient clients to make your entity a success.

Drafting an Office Manual

The Office Manual comprises of a set of policies designed to ensure your practice remains compliant with the statutory and regulatory duties placed on it. To be effective, it needs to be accessible, appropriate and actioned by all those working for the practice. It will need to cover a broad range of subjects from ‘Complaints Handling’ through to ‘Anti-money Laundering’ . More detailed advice on the content of the Office Manual can be found in ‘The office manual: still important in an automated world’ (2015) CILExJ October p34.

Setting up and first year running costs

Be accurate with your costs and carefully plan when they will arise. Estimated income must be realistic; it is easy to become overly optimistic. When setting up a firm, there are some key costs that need to be taken into consideration:

• Premises, including storage:
  - Working from home: Many seek to reduce costs by operating from home, but consider if this really suits your needs. Whilst in most cases it will mean you don’t have to pay business rates, it might not always be suitable if you employ staff or receive clients at the premises. Check there aren’t any restrictions on practising from home, in the form of covenants, leasing agreements or in your home insurance.
  - Choosing your premises: Whilst cost will be a key consideration, think about the terms of any lease so you are not locked into using an unsuitable building. What’s suitable now might not be in two years’ time. Location is important not only in terms of accessibility for staff and clients: it can also be an important tool in your marketing plan.
  - Using your premises to promote your firm: If you want a more visible presence in a ‘High Street’ -type setting, then remember ‘Location, location, location’ remains true, but you have to balance the benefits in terms of visibility and client generation with the higher costs in the more prominent location.
• Staffing : As a sole practitioner you will probably fulfil the Compliance Manager role and do your own administrative work. However, do consider how this impacts on your ability to earn fees. Think carefully about the practicality and economic viability of employing someone, even if it is part-time .
• Insurance: This is a necessary but significant expense, so consider carefully the cover you might need, including Professional Indemnity Insurance, Employers’ Liability Insurance, and Buildings and Contents Insurance. Whilst some allow staged payments, this may increase the overall premium, so plan carefully how costs will be factored into your cash flow projection.
• Compensation Fund: As a CILEx Authorised Entity, you will be required to pay up front a contribution to the CILEx Compensation Fund, and subsequently on the anniversary of your firm’s authorisation. This will need to be shown as a cost in the first month of your annual cash flow projection.
• IT and telecommunications: It is important to the operation of your business that you have the right equipment and the relevant maintenance contracts in place to ensure your business operates without interruption. Data security is of paramount importance, so you ensure you can protect the confidential data you hold.
• Office supplies and stationary: These are variable costs which, if managed well, will only increase in line with fee income. Think about ways they can be reduced:
  - Do you need headed paper or is it cheaper to print your own?
  - How can you reduce printing costs but maintain complete files?
  - Can you reduce your postage costs by the different way you communicate with clients? You will need to open your practice with a reasonable cash reserve, and consider how this can be supplemented should the need arise. This is particularly important in the early stages as fee income will take time to grow.

You will need to build a client base, and there may be a lag between incoming work and payment.

Remember also that cash flow can make or break any business, and is a significant risk for any new practice. It is therefore vitally important the information in your cash flow projection is accurate, based on realistic assumptions and scheduled correctly.

Make sure you have the right types of insurance

Protecting your clients: CILEx Regulation requires its regulated entities to have ‘Professional Indemnity Insurance’ (PII) provided by one of the Qualifying insurance providers listed on the CILEx Regulation website. To obtain quotes, please fill out the Professional Indemnity Insurance Application Form once and give this to your broker, they will do the rest. If you currently have PII, but it is not provided through the CILEx-approved insurance scheme, you would need to replace this with qualifying insurance. (See page 13 of this issue.)

Whilst there is no statutory requirement to have Public Liability Insurance, it protects you should a client or member of the public be injured at your premises. Checking the scope and level of cover provided by your Buildings insurance, as it may well be prudent to take out such additional cover. Could your business survive a large personal injury claim?

• Protecting your employees: It is a statutory requirement under the Employers’ Liability (Compulsory Insurance) Act 1969 for you, as an employer, to have ‘Employers’ Liability insurance to cover your employees, including work experience or unpaid volunteers, against relevant work injuries or illness whether these are caused on or off site.
• Protecting your premises: Check if your existing Building and Contents insurance covers you for working from home. However, don’t forget that the cover may need to increase to allow for high-value computer equipment or possibly holding client cash. You may find fitting a burglar alarm or higher grade locks could help keep premiums down. Please also consider if cover is suÿcient to facilitate business continuity should, for example, the premises be rendered unusable due to flood, fire etc.

Having the skills and knowledge to be a Compliance Manager

All CILEx Authorised Entities must have a Compliance Manager who is responsible for managing the practice and its accounts. It may be either one person, who is the Compliance Manager for both practice management and accounts management, or separate Compliance Managers for each area.

Whatever option you choose, please ensure they have the required knowledge, skill and experience to ensure the entity complies with the CILEx rules and regulations, and the statutory obligations of your entity. Make sure they read the Compliance Manager Handbook well in advance so they understand what the role and application process involves, or you risk your Entity application being delayed as you seek to identify a new Compliance Manager.

We trust you are reassured by this article, and we look forward to receiving your application. If you have any further questions, please do not hesitate to contact the Entity Authorisation Team at CILEx Regulation on 01234 845759.