Only a matter of time until the “club of five' takes hold

The table of profits published last month in The Lawyer underlined the massive and growing difference in size, income and profits between the top five UK firms and the rest.

There has long been a Big Six group of accountancy firms that dominate the audit market. It has now become the Big Five. There is growing justification for using capital letters to describe the Big Five law firms that dominate the English legal advice market.

Five accountancy firms, the authorities believe, is just enough to give companies a reasonable choice of adviser without running into conflicts.

But it is not just a problem of conflicts. With so few firms controlling the market for blue chip company advice, there is an obvious temptation for them to co-operate in some areas.

The Big Five are now allegedly forcing clients to sign contracts limiting liability to negligence in due diligence work. Could the Big Five City law firms use their power in similar ways?

They are a long way from global dominance. But in the field of M&A advice involving at least one UK company, the biggest deals are dominated by four firms – Clifford Chance, Slaughter and May, Freshfields and Linklaters.

Each big deal requires four legal advisers – one for each company and one for the financial adviser on each side. This means that it is almost inevitable that every time a big UK merger comes along, all four of these firms will get a slice of the action.

What a temptation it must be for these firms to co-operate. They already meet secretly to compare notes on management issues. They and other top firms are in a group once known as the “Club of Nine”. The group has expelled at least one of the smaller members and one wonders how long it will be before they make themselves the Club of Five.

The item on the top of the agenda for the five is likely to be how they can respond to the accountants' move to limit liability. If accountants' liability is capped in due diligence advice, more risk will fall on the law firms. The law firms will also want due diligence clients to start signing liability capping contracts.

The temptation is there for the emerging legal Big Five to co-operate on this. If they do there is a danger that clients will start using the word “cartel” – and in conversation with the regulators.