October 2011 is the target date for the full implementation of the Legal Services Act 2007. Part of the wide sweeping possibilities of a brave new legal world began with the introduction of Legal Disciplinary Practices last year allowing ownership of up to 25% of a law firm by non-solicitors. The initial take-up of LDPs has been limited, which is not surprising as the recession forced firms to focus on other issues.
The introduction of alternative business structures (ABSs) is the most radical aspect of the Legal Services Act and it is this which may transform the legal profession over time. Firms will be able to adopt a range of business models in place of their traditional structures and, as well as being able to accept external investment, they will be allowed to go into business with other professionals. The Legal Services Board (LSB) has confirmed that it will be possible to operate as an ABS with effect from October 2011. The LSB is set to publish guidance shortly explaining how approved regulators such as the Solicitors Regulation Authority can apply to become a licensing authority to approve and regulate ABSs.
Despite the many uncertainties, both the legal and national press have recently been full of stories on the seemingly hearty appetite for external investment on the part of law firms and prospective investors. In truth, it is difficult to gauge how many firms will actually raise such funding as soon as it becomes possible. Undoubtedly there are many serious discussions taking place with firms at all levels of the market examining their options. One senses that the recession led to a cooling off on the part of prospective investors, but the proximity of October 2011 has rekindled interest.
Why might law firms want the proceeds of external investment? The most commonly given reasons are to facilitate the acquisition of other practices or recruitment of big-hitting partners, investment in IT and property, reduction in debt and the distribution of accrued profits and, possibly the most contentious, enabling a generation of partners to cash out and retire.
However, for many large international practices, external funding remains unlikely for the foreseeable future because non-lawyer ownership is prohibited in many of the foreign jurisdictions in which they operate. In addition for many such firms, it is probably not necessary because banks will be willing to continue to meet such firms’ funding requirements. This may not be the case for smaller firms which may be one of the reasons for serious consideration of external investment as an alternative source of funding.
Listing on a stock market will also be possible as a consequence of the Legal Services Act. The prospect of flotation may be attractive to firms carrying out high volume, commoditised work such a personal injury cases that can be standardised through investment and technology and processes. Other professional practices such as surveyors and accountants have listed in the recent past with mixed success.
There is much to be done by the regulators within the next 18 months and a number of uncertainties remain including the regulatory framework for ABSs and unresolved issues between the Law Society and the SRA. To complicate matters further, the SRA announced that the Solicitors Code of Conduct will be rewritten with the intention that there is a move away from detailed rules of conduct to what is described as “outcomes focussed regulation”. The new code, which is intended to come into force to coincide with the introduction of ABSs next year, will set out the principles by which firms will be expected to conduct their business and the outcomes they must achieve. Given that the current code was only introduced in 2007, it is little wonder that many in the profession have expressed concern about the latest proposed changes.
For more information on these issues please contact
Fergus Payne
or your usual Lewis Silkin contact