ABS countdown | Greater competition in legal services?

The perception of the legal profession is that the greatest immediate impact of the Legal Services Act has been the introduction of outcomes focused regulation. This is actually not down to the Act itself but due to the insistence of its creation '“ the Legal Services Board. The concept of regulation which points a direction and permits firms to decide how best to comply, having regard to their own individual circumstances, is alien to many, as is the need for compliance officers. However, despite shortcomings in other departments, this system has worked well for retail firms regulated by the Financial Services Authority over the past 11 years. Given time, it could work equally well for providers of legal services.

The key is to appreciate, that the pre-requisite to compliance is the installation of management systems and controls, and that the regulator looks to the firm's management to ensure compliance and regards the compliance officers to a large extent simply as knowledgeable links between regulator and regulated. Whether lawyers are ready to play along with a system which relies on the 'spirit' of ten principles rather than the letter of regulation remains to be seen.

It was well signalled in advance that nominations for the roles of COLP and COFA had to be made by the end of October, but some 600 firms still failed to nominate in time and will consequently find themselves on the SRA's blacklist as high-risk entities requiring particularly close regulatory attention. There has been some resistance to taking on the roles despite SRA assurances that compliance officers would not be treated as sacrificial lambs, and some have sought indemnity protection or insurance cover, both of which are unknown in the financial services arena and may reflect solicitors' special sensitivity to matters of liability.

The other main issue arising under the Act, that of ABSs, has caused some apprehension within the profession and prompted some to seek the apparent security offered by bulking-up, either by merger or by joining networks. Few firms have considered looking outside the legal silo at possible multi-disciplinary business models, and thereby addressing two fundamental problems with the typical solicitor business model, notably over-dependence on transactional business and the absence of meaningful client databases. Sadly, it may be left to the accountants to exploit the multi-disciplinary opportunity, when the ICAEW gains approval as a licensing body.

Customer databases

ABS applications have fallen into three main groups; law firms taking existing non-lawyer members of staff into equity; law firms, particularly in the PI field, wishing to side-step the impending ban on referral fees; and non-lawyer firms diversifying into legal services to complement their existing services. Leading the way in the latter category is Co-op Legal Services, whose customer database should alarm solicitors still struggling with Excel spreadsheets and basic CRM systems. It has been estimated that between them the Co-op and Saga, another new entrant, have 22 million customers on their databases.

One of the imperatives behind the Legal Services Act was the government's wish to extend the availability of legal services to the 40 per cent of the population who it is estimated have never consulted a solicitor, and it is principally at them that the online legal documentation services of LegalZoom, Rocket Lawyer and DirectLaw are aimed. Again, solicitors' weakness in collecting and managing data about their clients will be exposed.

Commercial expediency

The ABS applicants are of course the first members of the profession to run the gauntlet of demonstrating to the SRA that they have embraced the management systems and controls required by OFR. The concern of the SRA is to ensure that the firms it regulates are commercially viable and will not pose a risk to the Compensation Fund or the reputation of the profession. Clearly these risks are heightened in an ABS, where commercial expediency may override what remains of professional principles (hence the Ministry of Justice decision to maintain the striking disparity between the maximum fine of £250m for ABSs and £2,000 for non-ABS firms). Nevertheless, in the light of the influx of new competitors into the legal market and the predicted consequent substantial number of failures among traditional law firms, the need for a formal organisation structure, business plan, a risk register, a compliance plan and adherence to management disciplines is vital to every firm and will be on the SRA's agenda when it finally clears the backlog of ABS applications and addresses the 400-odd legal disciplinary practices which will need either to dump their non-lawyer owners or managers or to obtain ABS status before the end of April 2014.

The essence of OFR is that compliance should equate to best practice and effective business management, which is exactly what is currently lacking in many law firms. It is salutary to recall the objectives of the Legal Services Board, to encourage greater competition, the development of new and innovative ways of meeting demand, access to justice for all consumers, better empowered consumers, effective redress if things go wrong and greater innovation and partnership between lawyers and other professionals. None of these objectives was designed to make life more comfortable for solicitors. The Legal Services Board perceives itself as primarily an economic regulator, not a legal one. As LSB chair David Edmonds has said on several occasions, 'that's why we have the powers we have'.

The first year of the Legal Services Act revolution may prove to have been relatively calm compared to what is yet to come.