Getting in on the act

Aspiring lawyers should be aware that they could well be entering a much-altered profession once the Legal Services Act comes into force next year. Katy Dowell reports on what’s in store

The Legal Services Act (LSA), dubbed the ’Tesco law’ by lawyers, is expected to bring about the biggest shake-up of the profession for decades. Its implementation in October 2011 will mean that for the first time English and Welsh law firms will be able to take investment from non-legal entities.

“Every graduate going for interviews should be asking what the firm is doing about the LSA,” states Beachcroft partner Matthew Rutter, “and perhaps more importantly, be prepared to answer questions on how they think firms should be reacting to it.”

The LSA aims, primarily, to introduce greater competition to the profession. “The main intention behind the LSA,” according to Law Society president Linda Lee, “was the previous government’s desire to reform the regulation of legal services to put consumers first.”

The LSA has its roots in the 2001 Office of Fair Trading report ’Competition in the Professions’, which concluded that the current framework for regulating the profession was “outdated, inflexible, over-complex and insufficiently accountable”.

The government acted on this when in 2003 it commissioned Sir David Clementi, former deputy governor of the Bank of England, to produce an independent review of the ­profession’s regulatory framework.

Clementi’s report, which was published in 2004, agreed that the profession was suffering because of a lack of competition and that the overarching regulatory structure was too ­complex. Clementi called for action to promote innovation and competition.

The Legal Services Bill passed its final legislative hurdle on 30 October 2007 when it received Royal Assent. Key measures include the introduction of a single supervisory body, the Legal Services Board (LSB), to oversee all regulators, including the Solicitors Regulation Authority (SRA); the creation of the Office of Legal Complaints (OLC) to provide a single point of contact for consumer complaints; and the introduction of alternative business structures (ABSs) which allow lawyers to form partnerships with non-lawyers or accept external investment.

Firms across the country are considering what impact the LSA will have on their business models. The first phase of the act was introduced earlier this year after the SRA changed its
code of conduct to lift the ban on non-lawyers joining partnerships.
Irwin Mitchell was among the first firms to convert to a legal ­disciplinary partnership (LDP) when it promoted finance director Mark Dakin and costs manager Steven Green to its equity partnership in May (The Lawyer, 28 May). Managing partner John Pickering said at the time: “The legal ­market’s changing all the time and the promotion of two non-lawyers for the first time to equity status is important.”

The firm has been at the forefront of lobbying in support of the LSA. It is keeping tight-lipped about exactly what it has in store post-2011, but partners are believed to be examining all opportunities. Next on the agenda was the Legal Services Board (LSB), which came into being in early January. It is sponsored by the Ministry of Justice but paid for by the profession, and its job is to monitor the SRA and the Bar ­Standards Board (BSB) and ensure consumer rights come first.

The LSB’s business plan for 2010-11 states: “Our goal is simple and clear – to reform and modernise the legal services marketplace in the interests of consumers, enhancing quality, ensuring value for money and improving access to justice across England and Wales.”

There are still doubts over exactly how the LSB will work in harmony with the SRA, but so far it appears to be a hands-off regulator. That said, the LSB has until October to see that the profession and its relevant watchdog are ready for the LSA. The LSB was also responsible for the creation of the OLC, which came into existence on 1 July. The OLC is effectively the board of the legal ombudsman and has the task of improving consumer complaints handling. The profession’s record on dealing with complaints could hardly be called stellar. In 2004 ­consumer body Which? said the ­continuing failure to deal with unhappy clients was “the greatest threat to self-regulation”.

The situation has improved significantly since then, but the new ombudsman has been given powers to take things a step further. It is a single ombudsman scheme that will cover consumer complaints about all solicitors, ­barristers and legal executives. It anticipates dealing with more the 100,000 calls, emails and letters annually, resulting in between 15,000 and 20,000 investigations, some of which will proceed to arbitration-style settlements. Others will be referred to the ombudsman for full reports. For those failing to provide a good standard of consumer services, the ombudsman can order a firm to ­provide a settlement of up to £30,000.

The outsiders
The LSB and OLC will feel the first stress test when the LSA comes into being. As it stands, commentators believe the appetite for outside investment is tepid.

“It will be evolution, not revolution,” says Beachcroft’s Rutter. “The main attraction of being a partner is that you control your business.”
Many partners are concerned about giving financial control to a third party. “Two or three years ago there were a lot of venture capitalists looking at this market,” comments one. “It was seen as inefficient in terms of IT and outsourcing, but highly profitable. If you improve the process you maximise profitability, and that’s attractive.

“But then they look a little closer and realise they’re dealing with partnerships. Do you start a new business with a group of non-lawyers in management who are willing to invest in new processes, or is it possible for the old guard to reinvent the wheel?”

Rutter agrees that there are cultural issues for non-legal investors looking to make a quick financial return. “You’re only as good as the people you employ and you have to be able to keep them in the firm,” he warns. “The IP is in the heads of the lawyers and if they suddenly leave external investors are left with nothing.”

Nevertheless, the Law Society says all firms need to consider the impact the LSA will have on their models, particularly new entrants.

“Firms not interested in an ABS will still have to review their business model and strategy, as the legal services market may change significantly,” says Lee. “The Law ­Society intends to be the leading source of advice and practical help on matters related to ABSs.”

As the lawyers’ representative body, the Law Society will have to fight tooth and nail to help its smaller members survive greater competition.

Adapt to survive

The LSA will be most relevant to volume firms in practice areas where many high street firms specialise: personal injury, conveyancing and will writing. These areas suit the bulk volume business because, if IT is used effectively, profitability can be extremely high. Take Optima Legal Services. The firm was rapped on the knuckles by the SRA earlier this year because it went too far in its relationship with outsourcing giant Capita. In 2006 Optima began its venture in the ABS world after agreeing to take a series of loans from Capita to fund its growth. In return Optima 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.

In August the firm was severely ­reprimanded over the relationship, although in effect it had been working with Capita since 2006, borrowing in excess of £35m to fund its growth. At the 2008-09 year-end Optima made its debut in The Lawyer’s UK 200 with a turnover of £30m.

Not only did the firm have access to the cash to grow, but it was also exposed to the technology essential for building a volume powerhouse with a decent profit
margin, as well as access to new customers.

This is the same type of IT new market entrants are investing in today. The Co-operative Group is one example. It has shown strong interest in the legal profession and built a legal capability of 330 people ready to provide legal solutions when the LSA comes into force. Commentators say the Co-op, like the AA or Halifax, is well-placed to enter the market on a big scale. Through the Co-operative Funeralcare business it can offer will writing services, while its banking arm, Co-operative Bank, provides a route to ­market in conveyancing.

Lee says the profession is responding

to increased competition by being more ­innovative and claims that the unique legal knowledge of high street lawyers will keep them competitive. “Solicitors are adaptable and they’ve modified their practices greatly over the years to provide tailored services,” she tells Lawyer 2B. “It’s always been a competitive market and the economic downturn has already affected the business environment.

“Clients have become more concerned about cost and comparing services providers. Firms have had to be flexible, innovative and above all business-minded to compete, survive and prosper. Solicitors, and the firms they practise in, constantly prove they can compete in a changing marketplace.”

The outlook for graduates wanting to take the traditional route to the top of the hierarchy is under threat. The profession is set to shrink by 10 per cent in the next decade and every year sees fewer lawyers make it into equity partnerships. Meanwhile, the number of places ­available is falling, while the number of people entering the profession is on the rise.

So graduates are entering a profession in the midst of change. Even magic circle firms are likely to be affected by the ripple effect of the LSA, although precisely how remains to be seen. Many newly qualified lawyers could end up cutting their teeth in the volume arena or being asked to join firms that have unique structures.

The profession is already starting to see new networks and alliances, such as online legal supermarket Quality Solicitors – the brainchild of barrister Craig Holt. This aims to give high street firms a post-LSA lifeline. The onset of the LSA will bring about monumental, albeit slow-paced, change, and graduates entering this brave new world should be aware of both the threats and opportunities before them.