Sunday, 23 January 2011

Why we should all embrace the Legal Services Act changes


Introduction

The beginning of every year is clearly the ideal time to make resolutions and to do one’s best to stick with them.  For me there can only be one resolution, apart from the obvious of eating and drinking less, and that is to do as much as I can as a partner within a high street practice to make sure that our business makes the most of the opportunity the Legal Services Act will offer when it is fully implemented in October.

There will be no hiding from it.   There was some doubt over whether the remainder of the Act would see daylight.  The Coalition Government as part of its general review of Labour Party introduced legislation was questioning whether the regulation was necessary. It seems however that unlike the infamous HIP regulations, the regulation passed this scrutiny and is now firmly back on course and is to be implemented in full and without revision.   

The question we should all be asking ourselves is whether we should be fearful of this change or whether we should be viewing it as a positive change and one which we should all be embracing.

There are some it must be said grim predictions of carnage in the profession. 

Professor Stephen Mason suggested that one third of the profession might disappear.  This was in an article published in the Times in May 2009.  He said There are currently too many law firms duplicating too many costs...the Legal Services Act will sort this out”.

The opening up of competition will certainly present a challenge to legal practices and no more so than from national corporates.

Tesco has shown little interest so far in providing legal services, unlike the Co-op whose business model appears to be working and indeed growing each year.   I have also read that the CPP Group are in talks with Irwin Mitchell about being able to offer legal services for the price of a pair of shoes! In addition the AA and SAGA have said they will offer legal services to not only their members but also to non-members.

For many firms relying upon conveyancing, Wills, Probate, low value Personal Injury and other types of work that can be commoditised and where there is no emotional involvement or great complexity, there clearly exists a threat from new market entrants offering a cheaper service.  It would be foolish for any of us to ignore this risk.

On the other hand there are many who have already began preparing for the change and who are excited about the opportunities these will introduce in terms of addressing succession concern as well as opening the door to investment offers and cost saving re-structuring options.

This article wishes to review those provisions of the Legal Services Act designed to increase competition in the supply of legal services and to examine and debate both concerns and opportunities.


Background

The origins of the Legal Services Act lie in competition law and the Office of Fair Trading’s Report 2001 entitled “Competition in the Profession”.   In the report, it states:

 “The professions are entrusted with the delivery of services of considerable public importance.  They work within a framework of law, but within that framework, their governing bodies have important degrees of freedom to control rights to enter and practise the relevant professions.  The exercise of these powers can have a significant impact on the economy, on the interests of the consumers, and on society generally, especially where the professions concerned have exclusive rights to provide certain services.  Restrictions on supply in the case of professional services, just as with other goods and services, will tend to drive up costs and prices, limit access of choice and cause customers to receive poorer value for money than they would under properly competitive conditions.  Such restrictions will tend also to inhibit innovation in the supply of services, again to the ultimate detriment to the public.

This was followed in 2003 when the Department for Constitutional Affairs published a document entitled “Competition and Regulation in the Legal Services Market”.

The Government then appointed Sir David Clementi to conduct an independent review of the regulation of legal services. His report was called “Review of the Regulatory Framework for Legal Services in England and Wales” and his foreword set out clearly the three main areas of concerns raised during the consultation process leading up to his report, namely: 

  • current regulatory framework
  • current complaints systems
  • the restrictive nature of the current business structures.

In his report, Clementi states:

I have learnt that certain lawyers dislike being described as part of an industry.  They see a conflict between lawyers as professionals and lawyers as business people.  The idea that there is a major conflict is in my view misplaced.  Access to justice requires not only that the legal advice given is sound, but also the presence of the business skills necessary to provide a cost-effective service in a consumer-friendly way.”

The central thrust of this early material is the emphasis on reducing cost and putting the consumer’s interests at the heart of change.  This is a theme which will be quite familiar to those who have had time to read and digest the recent report from Jackson.  The message that seems to come across loud and clear when one looks at reform in the legal process is the need on the one hand for greater consumer protection, and on the other a drive for further cost reduction. Unfortunately little is said about the difficulty many lawyers have and will continue to face in providing a sound, reliable and consumer friendly service, whilst at the same time making sure that there is enough money in the bank to remain solvent.

I sometimes think the Government would only be completely satisfied if all types of legal advice and services were to be dispensed by bodies like the Consumer Advice Bureau. The reality is that the only reform we seem to be seeing is reform designed with this type of aim very much in mind.

Indeed, Clementi was then followed by the publication of a White Paper entitled “Putting the Consumer First” with proposed introduced reforms along the lines which Clementi had recognised.  In this Paper it states:
 We will create a Legal Services Board, an Office for Legal Complaints, and will take steps to enable firms to provide services under alternative business structures to those presently available’. 

This then led on to the draft Legal Services Bill in May 2006 with the Bill receiving publication on 24 November 2006.  It passed through Parliament and was received Royal Assent on 13 October 2007. 

Alternative Business Structures

From about October 2011, “alternative business structures” (ABSs) will be permitted under Part 5 of the Legal Services Act, allowing participation by a larger proportion of individual non-lawyers in a firm, as well as external ownership or part ownership of law firms, and the possibility of firms providing new and novel combinations of legal and non-legal services. The SRA aims to have rules in place to govern the conditions under which ABSs will be permitted as and when the legislation allows.

There is nothing to prevent legal firms from preparing to set up an ABS;  indeed the SRA encourages the preparation of the setting up of ABSs and these can include for example, a discussion with potential business partners, a non-binding arrangement with a potential business partners for the setting up of an ABS (that is “subject to contract”), registration of company names, acquisition of domain names, an agreement to enter into exclusive negotiations with a potential business partner, or certain conditional contractual arrangements to be activated once the regulatory requirements have been relaxed and all the necessary approvals granted- e.g., an agreement to accept non-lawyers, or an outside investor into the partnership.

ABSs cannot be authorised until the Legal Services Board has finalised the detail of the new licensing scheme so that regulators, such as the Solicitors Regulatory Authority can prepare their own licensing regulations and apply to the LSB to become licensing authorities for the purposes of regulating ABSs.

The SRA has already begun work on the project.  The process will involve consultation and formation of new policies, rules and procedures.  Assuming the LSB approves the SRA’s application, secondary legislation will be needed to give the SRA the necessary powers.

Further information can be found at www.sra.org.uk

What options will the introduction of ABSs present?

The options these changes present to solicitors practices gives rise to many issues and ones which should already without doubt be occupying the minds of practitioners.  I suspect there are not that many firms however, who have begun such considerations. 

The impact of the LSA depends very much on where the legal practice is positioned in the market.  It goes without saying the challenges for a large London based legal firm is going to be completely different to that of a High Street sole practitioner.

            As mentioned above the big question to be answered is whether the ‘High Street’ firms will disappear overnight or whether they will they be able to reinvent themselves and move more effectively within the market than larger firms? 

Furthermore does the LSB spell the end of generalists?  Is the way forward with specialists or will generalists merge with say, accountants to offer a one-stop shop? What about seeking outside investment opportunities?

So what should a Practitioner be doing now in preparation for these changes?

As the above questions suggest, it very much depends on the circumstances in which your practice operates.

I foresee that the larger legal practices based mainly in main financial centres will begin, as they are already doing, to merge with each other and could very well become PLCs.

For those smaller practices like my own where we undertake different types of ‘High Street’ work, but are quite niche in the areas of the law in which we practice, there could very well be a number of favourable opportunities.

There will be a new regulatory structure with the Legal Services Board sitting at the top and with other existing regulatory bodies sitting underneath it.  These include the SRA, the BSB, ILEX, CLC, CIPA and the Faculty Office.  Running alongside all these regulatory bodies it was the plan at one time for there to be a ‘Consumer Panel’ to deal with complaints.  It seems however that this idea has fallen foul of of the Government’s Quango cleansing operation.  The present talk is about merging the consumer panel concept with the CAB.  I am not quite sure whether this would be a perfect marriage given the CAB exists to represent the interests of its clients and is not necessarily the best body to deal with complaints.

This new regulatory structure will present certain opportunities.  In my practice, we undertake both litigation and non contentious work.  We are already giving thought to separating these two disciplines of work and setting up limited companies to act as vehicles for their future operation.  This will then give us the opportunity once the 2007 Act is fully implemented to ‘shop’ and select for each different company which of the regulators we wish to be governed by. There may be some advantage for example for choosing as our conveyancing regulator, the Council of Licensed Conveyancers.  They operate less stringent rules on referrals. We may also witness a ‘costs war’ between each of the regulators in an effort to try and attract new members. 

The choice of regulator and the separation of litigation from non contentious work may also have some beneficial impact upon future legal indemnity premiums.  It may be an ideal opportunity to shop for insurance without the baggage of the whole practice’s claim record.

By restructuring a legal practice and separating the entities of work within it may also make separate parts of the business more attractive to outside investors or at the very least to those new entrants who may be looking to “buy up” existing legal practices. 

One of the main players in the market is the insurer DAS which underwrites over 300,000 legal policies each year and who have already declared an intention to come into the market and offer legal services.  It could very well be looking to expand through the acquisition of existing litigation practices.  By making sure your firm is structured in such a way that perhaps separates litigation from other areas in the practice, and is then able to demonstrate that the separate entity generates a profit, may very well make that entity easier and more attractive to ‘sell’ or merge. 


In my own practice we have a succession problem and one which I am certain is common to many other partnerships.  The ability to separate entities within the practice, to set up corporate vehicles for future delivery of services, and the ability to sell these separately presents a fantastic exit plan and one that ought to be explored by those firms that are facing a succession problem.

It will be possible to sell 100% of the legal practice to a non legal lawyer owner when ABSs are permitted.  As mentioned, there is nothing to prevent legal firms to exploring possible commercial arrangements at this stage.  Firms should be aware of jumping the gun however and should consult the guidance on alternative business structures which can be found on the SRA website. 

Cost Reduction Options

Other options open to legal practices that may be looking to become more competitive so as to be more attractive to outside investment, are the business models that already exist, such as the Keystone Virtual Legal Practice.  Keystones operate from a base in Mayfair in London which is used as a meeting point and a hub for administration.  All of the fee earners working within the firm are known as ‘partners’  and are engaged as consultants.  They all operate from home using the support provided by the administrative hub.  They retain 75% of the profit costs they generate with the other 25% going into a pot.  They are described as the fastest growing legal practice in England and Wales.

The other option is outsourcing.  Kerry Underwood’s firm, Underwoods, presently outsources its RTA portal work to a company in South Africa.  Other legal practices also have invested as we have in digital dictation software which again lays the foundation for outsourcing of typing and support staff.  We should be asking ourselves is it really necessary to operate out of expensive High Street offices, when as some of us already do, work from home. 

There is also the initiative taken by Quality Solicitors who are looking to offer firms  the benefit of adopting their national branding, in the hope that this brand will then be able to compete with the likes of the Co-Op and other new ‘brand recognised’ entrants.  One problem I foresee with the Quality Solicitor model, however, is that what happens if one of these Quality Solicitor firms finds itself on the front page of a national newspaper because of a major failing.  Such publicity is clearly going to have an adverse impact upon the brand as a whole and could lead to the whole thing falling over.  There is also a funding concern when comparing the probable size of their marketing budget with that of the likes of Tesco and the Co-Op. I may be wrong but I do not see how they can sustain a national marketing campaign without having to call upon members firms to contribute large sums of money each year.

So to recap, the options open to small and mid-size legal practices, are to either ‘take the bull by the horns’ and embrace these changes, to take steps to restructure with a view to selling businesses on or to merge, or to look at cost saving structures, such as loose associations between firms whereby a service company is established to provide services to four or five firms so the cost of those services can be shared and reduced.  This is very similar to what is already happening in London where we have seen certain of the Borough Councils joining forces in an effort to reduce overheads.

Our firm has already looked at the idea of forming arrangements with other firms to share referrals, and has recently launched an online referral and tracking  scheme for fee sharing on clinical negligence, RTA portal cases and other areas of law.  We see this as a building block for the creation of a network of smaller and mid-sized firms and to then explore cost sharing initiatives

The other option is to promote and emphasise when publicising business the fact that cheap is not always best.

This can be demonstrated by the fact that not all people, for example, are interested in purchasing the basic product line that Tesco and other supermarkets offer.  These products may appeal to a certain part of the community but are not everybody’s cup of tea.  There will always remain a place for a legal practice that can offer a competitively priced service but one that is based on good and sound principles of service and reliability. The only reservation I have about this is that even though you may be provide very reliable and quality service to clients, unless you have the marketing clout of Tescos or other similar companies, it may be difficult to get your message out to the public as a whole. 

Do something, because simply sitting back and doing nothing would clearly be the wrong thing to do and could very well be the final nail in the coffin.  Do what we have done and take advice from your accountants.  See what they have to say about restructuring.  

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