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City firms pose little regulatory concern

27 September 2011

City and larger firms serving a corporate client base are not a major regulatory concern, the Legal Services Board has acknowledged.

These firms were “likely to pose relatively few of the traditional regulatory risks”, said LSB chief executive Chris Kenny, with regulatory concerns “more likely to focus on the broader public interest concerns outlined by the regulatory objectives set out in the [Legal Services] Act”.

Kenny was writing in the foreword to a report the super-regulator commissioned from research company Charles Rivers Associates – which has produced a number of reports for the LSB – on the benchmarking of the supply of legal services by City law firms.

“The results support the view of a relatively strong correlation between the shorthand ‘city firms’ and a market segment focused on the legal needs of large corporates,” Kenny continued. “The clients of this segment have a greater capacity to use knowledge and buying power to make informed purchasing decisions.”

But, he added: “Regulators will also need to be mindful of the effect of their actions on competitiveness – both of the larger firms discussed here and of the corporate clients which they serve.”

The research canvassed 21 firms in the top 200 firms by turnover, including the UK operations of three US firms.

The report found – unsurprisingly – that charge-out rates at City firms with the best reputation were higher than in other City firms and “multiples” of those charged outside the City.

More importantly, it also confirmed that while fee-earning work at City firms still tended to be carried out by qualified specialist lawyers, the recession had led firms outsourcing or offshoring some of their technical work in a drive to reduce costs in response to client pressure.

In addition, more litigators were now seeking to gain advocacy qualifications. “Although currently used mainly for early stages of cases with external barristers appointed for the rest, it is expected that the amount of advocacy done in house will increase over time,” the report said.

Interviewees were also asked whether they would consider opening their capital to external investors and convert to alternative business structures.

The overall response reflected current expectations that the ABS model would not be attractive to City firms.

The main reason cited was that this would result in ceding control of the firm and that there was no need for external funding to start with.

There was also little appetite for funding as a means of offering a wider range of services because City firms see themselves as specialists who could bring in other experts in house as and when needed anyway.

However, the report also indicated that mid-tier City firms seeking more rapid growth may consider pursuing the ABS model to help fund acquisitions.

There was also good news for the Solicitors Regulation Authority, with the report quoting firms as “generally in favour of being regulated and the role the SRA could play in encouraging best practice in respect of regulation and risk”.

City firms represent only two per cent of the total number of firms in England and Wales, but they employ about 40 per cent of all solicitors and account for a similar proportion of the overall sector revenue.

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