A leap into the unknown

The entire legal landscape of England and Wales is set to change under new legislation unveiled by the Lord Chancellor Lord Falconer last week (24 May).

The Legal Services Bill will radically reform the way lawyers work as it paves the way for both outside investment and multidisciplinary partnerships (MDPs).

As revealed by The Lawyer today (29 May; see page 1), accountants, banks and consultants are beginning to circle firms as managing partners start to weigh up the pros and cons of the opportunities offered by the bill.

But many large firms are still cautious of coming out in support of outside investment or MDPs. DLA Piper Rudnick Gray Cary managing partner Nigel Knowles pointed out: “One of the best things I could do for Nigel Knowles would be to IPO the firm. Would that be good for the firm? No.”

In broad terms, the bill follows the proposals outlined in the October 2005 white paper on the future of legal services. It draws up a blueprint for the establishment of a single umbrella regulator, the Legal Services Board (LSB), and a single complaints handling body, the Office for Legal Complaints (OLC).

The bill also sets out the framework for outside ownership, detailing the rules under which potential investors will have to be authorised by front-line regulators, such as the Law Society or the Bar Council.

However, it will be for the LSB to draw up more structured safeguards. As Lord Falconer put it when announcing details of the bill: “You can’t have Kenneth Noye or [Nicholas Van] Hoogstraten owning a law firm.”

The bill is now subject to detailed scrutiny by a joint committee of the Houses of Parliament, comprising six Law Lords and six MPs. The committee is to be chaired by Lord Hunt of Wirral, the Conservative peer and former senior partner of Beachcroft, and includes Serle Court head Lord Neill of Bladen QC as well as a number of other former barristers and solicitors.

The committee has already met for the first time and will reconvene on 6 June to take evidence from legal services reviewer Sir David Clementi, the Office of Fair Trading, the Law Society and the Bar Council.

Lord Hunt told The Lawyer: “We want to make sure that the highest possible standards of independence and integrity are maintained in the new structure.

“We want evidence from a range of interested parties, who would look to comment on ways in which the Government believes we should reform legal services.”

The committee must report back to the Government by 25 July. By then firms and other organisations will have had a chance to digest the bill’s proposals more thoroughly and begin to make decisions about what it means for them.

One such company is the Co-operative Group, which recently launched Co-op Legal Services.”It’s going to allow us to get on with setting up the full in-house legal service,” said operations director Jonathan Gulliford. “We’re absolutely delighted.”

Mike Armstrong, chair of the Commerce & Industry Group and general counsel at Mount Grace Insurance, said: “There are potential opportunities for in-house counsel to become involved in a new way of putting forward legal services.”

However, Armstrong noted that the possibilities of conflicts of interest will be a major concern.

Advisers see the bill as an opportunity too, although they acknowledge that it may take some time for firms to make any changes.

Grant Thornton head of professional practices Roger Zair said: “I think the signals are mixed at the moment. There are a number of people thinking very carefully about the post-Clementi world.”

Outside investment is likely to be the easier option for law firms, with some precedent for similar businesses. In 2001, patent attorneys Murgitroyd & Company floated on AIM, creating a top company to own the shares of the operating company.

Chief executive Keith Young said the float had been extremely successful, allowing Murgitroyds to use share capital to fund acquisitions and aid the business’s development.

The likelihood is that the first firm to become an MDP, or to be owned by non-lawyers, will be a national practice with some sort of volume business. Whichever firm takes that step into the unknown will be a true trailblazer.

The Office of Fair Trading produces the report ‘Competition in Professions’, which identifies a number of restrictive practices within the legal profession, and recommends a review.

The Department for Constitutional Affairs (DCA) publishes ‘Competition and Regulation in the Legal Services Market’ following a public consultation. The report calls the existing regulatory framework “outdated, inflexible and over-complex” and recommends an independent investigation. Sir David Clementi, chief executive of Prudential, is appointed to carry out the review.

March 2004
Clementi publishes a consultation paper calling for the views of the profession and users of legal services.

Clementi produces his full report, outlining various options for reform of the regulatory structure and the legal complaints handling process.

The DCA sets out its reform agenda with the white paper on the future of legal services, going a step beyond Clementi by recommending that lawyers should be allowed to practise in multidisciplinary practices.

Both the Law Society and the Bar Council split up their regulatory and representative functions.

The draft Legal Services Bill is published, confirming the white paper proposals and setting the stage for radical reform within the legal profession.