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When firms are not firms

BIScom Subsection: 
Jefferson Galt

It all began when financial services regulation became trendy. In the good old days (which were in fact the bad old days in so many ways) language was used accurately. But some twit decided that precision in language in some way excluded hoi poloi. We are now some twenty years into a process by which imprecision has become the norm and therefore confusion and expense the inevitable result. One of the terms that first fell to this idiotic process is "firm."

It is now common for legislation and those who work under it to refer to any business entity as a "firm." But the term "firm," correctly used, has a very precise meaning. It is a partnership and that means that it is not, by definition, a company.

In the UK's Financial Services Act 1986, commonly considered the origins of the UK's "Big Bang" in deregulation of financial services, the terms used are "individual, body corporate, partnership or unincorporated association." Later, under the Blair-Brown government, the Financial Services and Markets Act 2000, which legalised the administrative and arguably unlawful creation of the Financial Services Authority some years earlier, and regulations made under it, referred to all regulated entities as "firms." This inaccuracy may not have started there. It is difficult to tell exactly who starts many of the linguistic failures that permeate all levels of government and those who work in regulatory fields. But certainly the fact that the UK's regulatory regime, particularly that of having a unified regulator (now abandoned) was highly visible and influenced many others writing law and regulation.

And so it is that we see, for example, in documents issued by Australia's ASIC the use of this sloppy language: a recent media release says " than 300 licensed financial firms..." We hear of investment bank corporations referred to as "firms," (historically, many of them were actually firms, not companies) and law corporations are habitually referred to as "firms."

The difference is not academic. It's legal, although it is a legal difference that has been blurred by other issues.

A partnership is a venture undertaken by two or more persons with a view to profit in which the partners are jointly and severally liable for liabilities to the full extent of their assets. This is very different from a corporation where the subscribers to a company are liable only to the extent of their contributions, either already made or promised.

In between, there are muddied waters. For example, limited liability partnerships are not partnerships at all but rather a form of company which has been allowed the tax status of a partnership. It's a sales device by governments to attract certain types of business. There are many LLPs in financial and professional services. In the USA, auditors working in partnerships and LLPs (or similar structures) have been allowed to create a silo into which a single audit partner's business can be put, so preventing action against that partner's conduct (or misconduct) spilling over into the rest of the partnership, etc.

The fact that the liability of a partnership is different to those of other business structures is what makes partnerships special. That is why the term "firm" matters. It matters even more now that social use of the word "partnership" has become so corrupted and tied in not with business but with personal relationships.

There are alternatives: it is interesting and perhaps ironic that, as the failure to differentiate has become more common, a new portmanteau term has emerged. Now the term for the global population of relevant organisations is "business entity." The fact is that the term "entity" can be used everywhere that "firm" is misused. We can talk about "licensed entities," "regulated entities," and so on. But we don't need to refer to "corporate entities" because we need only to say "companies" and, equally importantly, we can say "firm" and use it in its correct context of "partnership."

Further Reading: https://www.legislation.gov.uk...