The Power of Perspectives

The Canadian Bar Association

Jonathan Smithers

Evolution of legal services: The impact of ABS in England & Wales

October 26 2015 26 October 2015

In England and Wales, we’ve had Alternative Business Structures (ABS) operating since 2012. We’re keen to talk about our experience, although it's fair to say that there have not been as many of these structures entering the market as had been originally expected. There are approximately 450 ABSs licensed in a market of 10,500 firms.

Prior to their introduction, many lawyers had concerns that ABSs were not suitable for the provision of legal services and could prove damaging to the legal profession. These concerns are reflected in other jurisdictions that do not permit non-lawyer ownership of law firms.

ABSs were introduced in England and Wales in 2007 by the Legal Services Act, with the first ABS being licensed in 2012. The government’s aim was to promote competition and further innovation in the legal services market, and so reduce legal fees.  A number of different models of ABS were considered with the government ultimately opting for the most liberal form in which legal services could be owned by lawyers and non-lawyers.

The introduction of ABSs polarised opinion. For some it was a game changer; for others it signalled the end of the solicitors' profession. There was recognition of the potential for ABSs to bring additional external capital and investment, thereby creating opportunities to expand into different practice areas in what many perceived as a risk-averse market before liberalisation. There were obvious advantages to permitting firms to recruit non-lawyer partners as practice managers, as solicitors could focus on their legal work unhampered by additional managerial roles. There was also an access to justice consideration. ABSs allowed an ability to leverage the might of corporate giants who could provide high volume, low cost services, thus making legal advice more accessible.

On the other hand, many remained convinced that the regulatory changes would bring about an erosion of professional standards. Concern was expressed that non-lawyer managers would allow those not subject to professional duties to exercise a significant degree of control over the conduct of a legal practice. Moreover, economies of scale of large corporations offering legal services at a lower price could seriously harm sole practitioners and small firms. There were fears that the far-reaching consequences would include a significantly damaged profession and a legal landscape that was forever changed. Some have cited the experience of Quindell as illustrating this point (a large ABS listed on the London Stock Exchange that sold off its legal services provision following public investigations into misleading financial statements), while others have maintained that mismanagement has always occurred in traditional firms and ABSs pose no increased threat.

In practice, and with three years' experience of their impact, the advent of ABS has not led to the radical changes that some envisaged. What is occurring is more an evolution mostly towards digital provision while maintaining the excellent standard of which we are all so proud. Mostly smaller firms have used the ABS model and the commercial freedoms it provides to alter practices and help keep the small and medium-sized 'high street' firm competitive and innovative. The common thread in firms converting to ABS is a desire to re-position themselves with a clear ambition to offer customers multiple services from within the same company.

In England and Wales, the 450 ABSs are made up of:

  • traditional law firms which converted to ABS (the overwhelming majority);
  • new firms that chose the ABS model from the outset but still have the appearance of traditional firms;
  • organisations which had considerable in-house legal expertise already;
  • businesses which previously offered other professional services such as accounting and wanted to expand; and
  • not for profit organisations providing pro bono work.

Last year, the regulatory body for solicitors (Solicitors' Regulation Authority) published a report on the impact of ABSs. The facts and figures reveal a positive experience. Most ABSs are small or medium-sized firms (85 per cent and 11 per cent respectively), the majority of which were existing firms (only around 30 per cent being new entrants). Alterations to the way the firm was financed was a key reason for conversion to ABS and changes to structure and management were the most common modifications following conversion.

The Solicitors Regulation Authority found that the most common use of investment was in new technology, new ways of delivering legal services, and marketing. This ties in with other research, which indicates that the take up of new technology is higher in ABSs than traditional law firms.

ABSs accounted for a third of all turnover in the provision of legal services in the personal injury market. There is also significant turnover in the fields of mental health, consumer, social and non-litigation law. Indeed, ABSs have moved into areas of law associated with lower income clients, suggesting increased competition in areas of law where there may be barriers to access to justice. Initial concerns about the impact ABS could have on legal education and training have been unfounded. The report showed that 43 per cent of firms had no plans to change the number of training contracts they offered, while 18 per cent planned either to introduce or increase numbers of training contracts. 

In June, the first Chinese-owned ABS was announced in England and Wales. It will partner up with a London-based firm that will provide the back-office support. The stated aim of the business is to capitalise on the increasing investment from China to the UK and use its expertise to better facilitate cross-border trade between the two markets. This sort of inward investment into England and Wales would not have been possible without the availability of the ABS model.

The success of ABS to date indicates that clients are generally not concerned about sourcing their legal services from non-lawyers. Clients still seek quality assurance and efficient delivery. But whether this is achieved via traditional firms or ABS, or even in some cases online solutions, would appear to be of less importance.

Accountancy firms have recognised this trend and are positioning themselves to move into the legal marketplace. Since September 2014, 77 accountancy firms have converted to ABS in order to carry out probate services, a field formerly populated by traditional law firms alone. Although this may appear threatening to solicitors and firms, there is nothing to prevent traditional firms from taking advantage of the ABS model in a similar way to provide additional services and remain competitive. The recent changes by the SRA to the 'separate business rule, also specifically enable the traditional law firm model to do just that in relation to accountancy and other professional and specialist support services, including human resources and recruitment. This is one of the reasons why the Law Society urges solicitors to give proper thought to the liberalisation of the rules and consider how their firm could benefit.

In England and Wales we’ve found that a number of firms have used the ABS model to adapt their businesses in different ways. Research shows that traditional law firms have not been pushed out of the market. Neither have corporate leviathans steamrolled into the sector. The dawn of ABSs may result in increased competition for traditional firms, but the potential benefits to clients in the form of greater choice, lower cost, and increased access to justice, shows their value to the legal world.

Jonathan Smithers is the president of the Law Society of England & Wales and a senior partner at CooperBurnett.

CBA National Magazine covers legal trends and issues. Any opinions expressed are the author’s own.

Comments
Bradley Wright 10/27/2015 11:11:34 AM

Sigh. What the article leaves out is that there really has not been a net benefit to the public as the English Lord Chief Justice and five other experts pointed out earlier this year. The author also forgets that the trend in such irreversible circumstances is for the bigger entities to swallow up more and more smaller entities, or kill them with predatory pricing and then, in a market of greatly reduced competition, gouge the public forevermore. Talk about pandering to the 1% to the detriment of the 99%.

Conveyancing costs in the US would be far lower if 200,000 real estate lawyers had not been replaced by four gigantic, non-competitive behemoths who control 87% of the market and who do not care about the integrity of the real estate system and who have an abysmal record of refusing to pay claims. North American real estate commissions could be at the Scottish level of 1.5% with their plethora of small, locally-owned, non-franchise agencies, instead of 5% if we had more than the handful of large realty companies who still control the lion's share of the market.

Further, once the nonlawyer profit seeking investors feel more secure and too entrenched to care much about what the pliant regulators think, what they will care most about is returns on investments, legal ethos niceties be damned.

Where are the most affordable legal services to be found? In the smaller firms. As you increase the size of the firms, the costs to the public rise. To cite one example, consider what I, as a sole practitioner, charge my clients versus what a lawyer at McCarthys charges their clients. ABS will not improve that; if anything, over time it will make it worse as an extra layer or two of profit seekers are added to the mix.

As for innovation, precisely nothing stops the legal profession from innovating. It can all be done without selling out to nonlawyers. And there is only one access to justice problem higher than mown grass and that is the ruinous time and cost of most litigation - a problem that ABS does nothing about. Access to justice and innovation are smoke-screens to sell out to hydra-headed nonlawyer entities with a few lawyers benefiting and with, over time, the vast majority, not to mention their clients, suffering.

For the umpteenth time I ask, when will the Law Society take seriously the real problem - the time and cost of most litigation - instead of wasting our time figuring out how to sell our souls to profit seekers? When will the LSUC strike a committee to consider and recommend effective steps to (a) bring down those costs and (b) open up barrister services to many more people as a result of those lower per-file costs?

Why are we spending five more minutes on how KPMG or Deloittes or, for that matter, the next Enron/AIG/Arthur Andersen/ Lehmann Brothers/Bear Stearns/Tesco/Volkswagon/Royal Bank of Scotland/Societe General/World Com/Mafia front laundry can own law firms in Canada???



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