Commentators have likened Lord Fal-coner’s proposed deregulation of legal services to the ‘Big Bang’ of the 1980s. Although there is an argument for making new choices available to users of legal services, these changes are likely to replace existing choices with a new range of delivery routes.
Lord Falconer has tried to reassure high street practitioners that they will not be put out of business. Regrettably, the analysis provided in the document published by the Department for Constitutional Affairs sounds commercially naive. The department asserts: “Provided high street firms and those in rural communities take steps to improve the quality of the service on offer, the impact on them would likely be lessened.” This ignores the experience of communities where local shops are forced to close once a large retailer opens a new superstore on the edge of town and, while the Government is protecting dispensing pharmacies, high street law firms will be left to fend for themselves. Indeed, Lord Falconer even approved the idea that supermarkets could provide legal services.
While law firms will be free to practise in their current form, new business models will emerge. Multidisciplinary practices (MDPs) may become a reality. In principle, there is no reason why differently qualified professionals should not be separately regulated within MDPs. Solicitors would be regulated by the successor to the Law Society, chartered accountants by the Institiute of Chartered Accountants in England and Wales, and so on.
Concerns about MDPs have been well rehearsed. Based on available experience, it seems that large MDPs may be viable business models (large firms of solicitors taking over accountants and vice versa), as may smaller local practices (with all the advantages for clients of one-stop shopping). However, for medium-sized firms with their blend of skills and size, independence and commercial necessity, the MDP model may be untenable.
The second route – the acquisition of law firms or teams by investment banks, high street banks and supermarkets seems certain to succeed.
For corporate law firms, 2004-06 may be a period of great opportunity and uncertainty, as they position themselves alongside corporate suitors while facing the risk that the bank only intends to acquire a part of the practice. This, in turn, offers the prospect of huge windfall payments for some partners, with significant fragmentation and consolidation among mid-tier law firms. This model also allows the transfer of risk away from individual partners and into the corporate environment.
The third model is the facility for law firms to accept external equity. This opens up a range of possibilities as diverse as private equity investment, a placing on AIM or joining with a professional practice consolidator.
The entry of external equity to law firms – whether through Big Bang-style takeovers by an investment bank or by other means, is an emotive topic for many solicitors who fear that the professional practice of law will be replaced by the commoditisation of legal services. However, inherent in the approach is one further danger. The experience of consolidators in the accounting profession shows that, while the sale of a firm might produce immediate cash and loan stock or shares for partners, they are effectively selling their future earnings for a capital sum. Post-sale partner remuneration levels are likely to fall unless management teams take other steps to drive up profits per partner. Partners who have realised a capital sum on the sale of their old practice but then see their remuneration fall, may be tempted after the lock-in period to return to a conventional professional firm with the expectation of higher remuneration. This could produce major instability in the law firm, which an investment bank had acquired.
It is difficult to escape the impression that, unless regulatory change will cost the Government money, those changes will be advanced without adequate thought as to all the implications. It is a matter of national interest that all those with views should make themselves heard as the legal profession will never be the same again.