It was not too long ago that City firms threatened to cut themselves off from the Solicitors Regulation Authority (SRA) in favour of a more robust regulatory regime
But last week the SRA moved a step closer to becoming the chosen watchdog for alternative business structures (ABSs).
The implementation of the Legal Services Act (LSA) in October 2011 is expected to bring about a slow-burning revolution as non-legal entities enter the profession.
The SRA has a stated objective to be the regulator of choice for the enlarged profession, although that is not guaranteed. To make it a certainty the SRA must demonstrate that it is fit for purpose in its current state, and to do that it must have the confidence of the City.
In October 2008 the Law Society commissioned former Ministry of Justice civil servant Nick Smedley to review the profession’s regulatory framework. When he reported back in March 2009 Smedley recommended that the
SRA should establish a corporate group that would specifically govern major firms with corporate client bases.
The regulator hired Charles Plant as its chair in August 2009, the appointment marking a change in direction for the watchdog, with greater consideration being given to the City.
The Law Society was heavily involved in the choice and Plant’s stated objective when he joined the SRA was to heal rifts with the profession’s representative body.
Plant spent 29 years as a litigation partner with Herbert Smith and remains a consultant to the firm. His background as a City lawyer is seen as essential if the SRA is to engage with more commercial firms at the top end of the sector.
Since he joined the SRA Plant has been on a mission to wake the City up to how the LSA could affect legal businesses. While the high street has some serious reservations about the new competition on its doorstep, commercial firms have been less vocal.
Speaking at The Lawyer’s ABS conference last week (8 November), Plant urged firms to shake off their apathy towards the legislation.
He told the audience: “There are those who regard the introduction of ABSs as at best a challenge and at worst a threat, but I do hope the majority of our profession will welcome ABSs for the opportunities they offer.
“I’d like to encourage you all to begin to consider how you’ll respond to the ABS challenges and opportunities. There is, after all, nothing wrong with being prepared.”
Yet a panel discussion between leading City lawyers revealed that doubts remain over how ABSs can be applied to the partnership model.
Making his feelings clear on the subject, Travers Smith senior partner Chris Carroll said: “The one bit I missed is that nobody ever points to a structure. The first thing you need to think about when talking about private investment is what you do with it. How would you use the money and how would you grow over the next, say, five years?
“The second problems is, how do you reconstitute the capital structure with partners if you go down this route? No one will want to divide up their capital.”
Partners should be the first port of call for finance, Carroll argued.
Berwin Leighton Paisner (BLP) managing partner Neville Eisenberg stressed that there could be advantages to taking outside investment.
“In some ways I feel schizophrenic about the issues that ABSs produce,” he told the conference. “When thinking about ABSs the starting point should be the client. There’s been a lot of pressure from clients in the past few years to think about how they run their models and we’ve had internal dialogue about how to do more for less. It may well be that ABSs provide the opportunity to support a new way of thinking.”
For commercial firms at least, the blatant obstacle to outside investment is partners themselves. Giving away equity to a non-legal company that demands a high return is a risky business. Lawyers are not going to be swayed easily.
That said, the panel suggested that capital injections could be advantageous for specific projects, such as funding the growth of a certain practice.
“You shouldn’t ignore the benefits it could have for the core business,” Eisenberg cautioned. “Let’s say a firm has three core businesses and wants to grow in a new area, and it plans to do that within two years. The only way to do that is to bring in the right people, and to do that you need money.
“If I can sort out the other issues [surrounding external funding] it may be seen as an aggressive strategy, but at least it’s a clear plan.”
One particular practice that could be ripe for investment, said Eisenberg, is BLP’s Lawyers on Demand service, which was launched in 2007 as a supplier of locum lawyers to in-house departments.
“It’s not a traditional service, but it’s growing rapidly,” Eisenberg commented. “It might reach a point where we think about spinning it out and getting some financing in another way.”
Yet DLA Piper managing partner Janet Legrand insisted that the legislation was much more pertinent to the high street than the City.
“It’s not a client issue,” she stressed. “Given our journey over the past 10 years, we could have done with the cash, but we financed ourselves. It strikes me it’s a model that’s better suited to a firm that has to worry about the Co-op or claims consultants.”
A raft of firms with overlapping consumer and commercial practices are already considering the benefits investment could bring.
After suffering a turbulent start to the 2000s, Russell Jones & Walker (RJW) has spent the past five years rebuilding its brand across three revenue streams. Claims Direct is a firm subsidiary dealing with volume personal injury work.
Above that sits 4Legal, which services mid-tier work, while overarching both is the firm’s private practice.
Chief executive Neil Kinsella thinks using external investment to fund one of those revenue streams is attractive – particularly at the volume end.
“Becoming an ABS will give us the tools that will enable us to compete,” he said, anticipating a slew of new entrants to the sector. “An ABS can at least give us the capital to invest in the RJW model. It creates opportunities for us to grow in certain sectors. If you simply want to cash out you need to be careful.”
Clarke Willmott’s former managing partner David Sedgwick, who is now a consultant to the firm, agreed.
“For a firm like mine it’s a double-edged sword,” Sedgwick told the conference. “We do work for high-net-worth individuals and in the agriculture sector. We still make a lot of money from Middle England, but ABSs will pick up a lot of work that would otherwise have come to us.”
The LSA, he added, presents a real opportunity for a firm that struggles to keep a lot of models under one roof. “You could hive off the separate volume model, equitise it and unencumber the rest of the firm from those difficulties,” he said.
At the high street level there has been plenty of talk about the need for a level playing field between traditional firms and new entrants. The SRA, if it were to become the chosen regulator, would be essential to this. Yet its definition of a level playing field may differ slightly from that of the lawyers it regulates.
Plant told the conference: “The level playing field is just that – level. Traditional law firms have never had to justify their entry into the market on economic grounds or assess the effect of their entry on competitors. It would be illogical and impractical to expect ABSs to do so.
“It’s not our responsibility as a regulator to protect certain sectors of the profession from competition. Nor is it our job to second guess consumer preferences. Our job is to ensure the right safeguards are in place to protect clients and the public.”
The Law Society wants the regulator to be able to brandish the stick when necessary and it needs the support of all its members – commercial, consumer and potentially ABSs – if this is going to happen.
Plant’s tough talking at the conference was intended to encourage all levels of the profession to engage in a more lively debate about the future of the sector.
Less than two years ago questions were raised about whether the SRA was the right regulator for the profession in its entirety. The prospect of major change brought about by the LSA has given the regulator the impetus to embrace those changes.
The challenge now is for it to persuade the commercial profession that it must consider the onset of greater competition and react with gusto.