Firms mull offers as Legal Services Bill gains Royal Assent

“Nobody wants to be the first to set up an alternative business structure,” says Neil Kinsella, chief executive of Russell Jones & Walker.

This may well be true for law firms, but for non-legal businesses the provision for the alternative business structure (ABS) in the Legal Services Act is a very attractive notion.

As a plethora of legal trade bodies line up to welcome the Legal Services Act after it gained Royal Assent last Tuesday (30 October), most firms are still asking what it will mean for them in the long term.

The creation of the Legal Services Bill sparked widespread debate about the future of the legal sector. Allowing non-legal businesses to buy or take a stake in law firms would blow the profession wide open and introduce a level of competition unknown before. Is it any wonder that firms are beginning to assess their options?

“I’m thinking that it is still a few years away,” says Michael Lingens, managing partner of Speechly Bircham. “But we’re still exploring what options will be open to us.”

For firms wary of the changes, the good news is that the options for refinancing are wide and diverse. Firms will be able to float on the stock market to raise additional capital; there is the option of selling a percentage of the firm to private investors; and there is the possibility of merging with non-legal businesses.

Opening up the legal sector is expected to create a two-tier market, with non-legal businesses focusing on commoditised products while traditional firms look to position themselves as niche specialists.

“I have reservations about how much of an inroad non-legal businesses can make into the sector,” says Andrew Holroyd, president of the Law Society. “That is slightly tempered by what happened when the estate agents market opened up and outside investors came a cropper. There will be a clear distinction between commoditisation and commercial law firms.”

Companies that have expressed an interest in an ABS are not averse to taking the bottom end of the market. The Automobile Association (AA) has already launched a website aimed at giving free basic advice to its customers on buying homes, leasing property and writing wills.

“The Safe as Houses website is a venture that is trying to flag up some of the issues around home ownership,” says James Molloy, head of legal services at the AA. “It is us trying to establish our brand in the legal services sector to show that we work beyond motoring, which is what people traditionally associate us with.”

Holroyd says the Law Society successfully lobbied the Ministry of Justice to stop any old tin-pot business from entering the legal sector. “We felt that there shouldn’t be lots of quasi-legal law firms floating around,” he says.

Companies that are given permission to trade as an ABS will have to show that the service is relevant to their business. Co-operative Insurance Services, for example, has expressed an interest in acquiring a legal firm, or at least a percentage stake in one. This, it says, would complement its wider business structure and tie in with its personal lines insurance business.

At the same time, private equity houses are eyeing the sector and flooding it with letters offering investment. Osborne Clarke managing partner Simon Beswick says his firm has received letters, as has Speechly Bircham and Russell Jones & Walker.

It is understood that investors would widen their investment cycle from the traditional three years to seven years to allow firms to grow without encroaching on the business ethos. Lawyers, however, are extremely reluctant to respond immediately.

“I suspect the whole profession will move on before the implications of the Legal Services Act begin to show themselves,” Holroyd says.

The legal sector is divided over what ABS will mean in the long term. It is a first-mover advantage quandary: allow non-legal firms to move in and anticipate the fallout; but wait too long and the surplus capital coming into the sector is likely to dry up.